Bankruptcy - bankruptcy notice founded on judgment in default - originating proceedings not served - whether judgment must be treated as a nullity - whether "sufficient cause" not to make a sequestration order.

Bankruptcy Act 1966, ss.14(5), 52(2)(b)

The sequestration order made 22 March 1991 be set aside.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

This is an application for review of a sequestration order made by a Deputy District Registrar ("the Registrar"). That order was based upon an act of bankruptcy consisting in non-compliance with a bankruptcy notice founded on a District Court judgment.

2. The grounds of the application to review the Registrar's decision are that the District Court plaint was never served on the debtors and that they had a good defence to that suit.

3. Section 14(5) of the Bankruptcy Act 1966 ("the Act") permits review of an order of a Registrar or Deputy Registrar "on summary application to the Court". It has been held that on an application for review, the Judge may consider evidence of matters additional to those considered by the Registrar: Re Greenhill; Ex parte Pook (1988) 83 ALR 295, and I respectfully agree with that view.

4. In outline, the case is of this kind: the facts placed before me on the two issues - service of the plaint and validity of the creditor's claim - are rather similar to those placed before the Registrar. However, two events which, at least in a practical sense, are important have occurred since the Registrar made the sequestration order: the instructions of the solicitors for the petitioning creditor have been withdrawn and the judgment on which the bankruptcy notice was based has been set aside by the District Court. As to the former point, no submissions were made by or on behalf of the petitioning creditor on the application to review, but that does not necessarily produce the result that the application must succeed. As to the latter point, the setting aside of the judgment seems to me irrelevant, as it was not suggested that evidence was placed before the District Court Judge of any facts not sworn to in this Court.

5. Although the Court is, of course, not bound by the Registrar's conclusions as to the facts, it is desirable to state in summary what those conclusions were.

6. The Registrar gave two sets of reasons. In the former, he dealt with the question of service of the District Court plaint. He referred to the debtors' denial that a plaint had been served and to the creditor's evidence on that point. The latter evidence was contradictory in that one version, consisting in endorsements on the plaint, said the debtors were served at a certain address, and the other, consisting in an affidavit of service, said that they were served at quite a different address. On that material, the Registrar held that the debtors had not been served and the papers before me throw no doubt upon that conclusion.

7. The Registrar held that there was reason to go behind the judgment and conducted a hearing for that purpose, at which the debtors did not attend. They say that they did not receive notice from the Court of the adjourned hearing date - that being the one at which the question of the validity of the creditor's claim was considered. In the Registrar's second set of reasons, he referred to the evidence and declared himself satisfied that a debt "is owed as claimed by the creditor".

8. Before me, the applicant debtors relied upon affidavit evidence which was filed, and also gave oral evidence. I did not find the oral evidence which was adduced on behalf of the applicants impressive, but there is an initial question and that is whether a sequestration order based on a bankruptcy notice of the present kind can stand. It is not clear whether the Court should make a sequestration order on proof of non-compliance with a bankruptcy notice, where it appears that the originating process in the Court in which judgment was obtained has not been served.

9. Gibbs J. gave two decisions which bear upon this point. In Re Bedford; Ex Parte H.C. Sleigh (Queensland) Pty. Limited (1967) 9 FLR 497, his Honour held that a sequestration order might be made on the basis of a judgment entered for an amount greater than that actually due. His Honour said the judgment was not null. In Re Ferguson; Ex Parte E.N. Thorne and Co. Pty. Ltd. (1969) 14 FLR 311, his Honour answered a contention that a judgment relied on to found a bankruptcy notice should have been obtained by proceedings in equity rather than at common law by saying:

"The court will go behind the judgment for the purpose of considering

whether it was founded on a real debt. The fact that the judgment may

be irregular or wrong in form is no sufficient reason for dismissing the

petition ..." (320).

10. His Honour referred to his own decision in Re Bedford and also to In Re Beauchamp (1904) 1 KB 572. In the latter case, the objection was one as to form only. None of these cases deals with a judgment given in proceedings where the writ had not been served.

11. From a practical point of view, the awkwardness about bankruptcy proceedings based on such a judgment is that the question whether or not there is a true debt may be fought out for the first time in the bankruptcy proceedings. From a legal point of view, the question is whether or not there is any judgment on which a bankruptcy notice can be founded.

12. In Crawford v Fisher (1907) 24 WN (N.S.W.) 102, it was held that a judgment of that kind is not a nullity, but is merely irregular. However, a contrary view was expressed in the English Court of Appeal in Craig v Kanssen (1943) KB 256. There, Lord Greene M.R. said at p 262:

"In my opinion, it is beyond question that failure to serve process where

service of process is required goes to the root of our conceptions of

the proper procedure in litigation. Apart from proper ex parte

proceedings, the idea that an order can validly be made against a man

who has had no notification of any intention to apply for it has never

been adopted in this country".

The cases were reviewed in another decision of the English Court of Appeal in In Re Pritchard; Ex Parte Pritchard v Deacon (1963) Ch 502, in which a decision consistent with Craig v Kanssen was arrived at.

13. Lastly, it should be mentioned that the decision in Craig v Kanssen has been referred to by the Privy Council with apparent approval: MacFoy v United Africa Co. Ltd. (1962) AC 152 at 160.

14. One difficulty in applying the doctrine of Craig v Kanssen is that rules providing for judgment in default of appearance do not ordinarily stipulate actual service as an express condition of the right to enter judgment. For example, the Rules of the Supreme Court of Victoria require an affidavit proving service: Order 21.01, and those of the Queensland District Court are similarly expressed: Rule 146. This gives rise to the argument that if there is an affidavit of service, even if it is false, the judgment is not a nullity; but it appears to me that the weight of authority is in favour of the other view. I am of opinion that if a bankruptcy notice is founded on a judgment in default and it is proved or admitted that the originating proceedings were simply not served (I leave aside the case of defective service), the judgment must generally be treated as a nullity; I say "generally" because of the possibility that a statute or rule might provide otherwise.

15. If the view just expressed is not correct, still in my opinion on its being shown that a default judgment (founding the bankruptcy motion) was entered although the proceedings were not served, the Court should not, in the exercise of its discretion, make a sequestration order. I think proof or admission of non-service of the originating proceedings would be "sufficient cause" not to make an order within the meaning of s.52(2)(b) of the Act. It may be that, in practice, if the judgment debtor claims not to have been served, the Registrar might choose to adjourn the petition to allow the question to be tested by an application to the Court in which judgment was entered; but where the Federal Court has found that there was simply no service of originating process, that would appear to be a sufficient cause for declining to make a sequestration order.

16. The result is one which is not necessarily satisfactory in the present case, because I am by no means convinced of the correctness of the applicants' case on the substantial question of whether money is due. In my opinion, however, the judgment relied on was a nullity and the application for review must succeed. The sequestration order will be set aside.