Smith v Abbott Stillman & Wilson

9 His Honour noted in his reasons for judgment at [1] that; '… there is in substance no challenge to the validity of the petition, service and the like, although I have granted leave for a minor error as to the date of the commission of the act of bankruptcy to be amended.' and, after recounting the appellant's evidence at [7], the learned Federal Magistrate observed, at [8]; 'Unfortunately for him, however, Mr Smith agreed to terms of settlement offered by Abbott Stillman and Wilson in the Magistrates Court proceeding.' His Honour went on, at [9] to point out that; '… it seems quite clear that he made the decision to enter into the terms of settlement voluntarily in the sense that it was not coerced, as coercion is known to the law, nor was he otherwise overborne as to his will at the time.' Accordingly, this conclusion was reached, at [11]; 'There is nothing in the materials that suggest that the settlement was not bonafide and the judgements that sprang from it, albeit that they arrived in a procedurally most unfortunate way, cannot really be impugned, in my opinion. However inappropriate the procedure, the basis for judgment in the Magistrates Court, namely the failure to pay the terms agreed to be paid in the terms of settlement, is sound even on Mr Smith's own account.'

The appellant's submissions 10 The appellant appeals from the whole of the orders made by Burchardt FM on 25 September 2006. His grounds of appeal are; '1. Agreement: The fact there was no Agreement between Abbot Stillman Wilson & T Smith. There was only a verbal Agreement with National Café Pty Ltd. 2. ASW withheld documents requested under disclosure laws which was breaking the disclosure law as under Victorian Magistrates Court Civil Procedure Rules 1999 and Lawyers Practice Manual. 3. The monies ASW are seeking from T Smith are in fact the same monies recovered by National Café Pty Ltd in Supreme Court Case 9210/2003. 4. Separate Intellectual Property Pending Patent Claim Lodged of Which This School Canteen Business is a Component. 11 Although it is not expressly claimed in his notice of appeal, the appellant indicated in his oral submissions at the hearing before this Court that he seeks an order setting aside the sequestration order made 25 September 2006. In support of the appeal he contended that the bankruptcy notice which was the foundation of the sequestration order made against him should have been set aside because of flaws in the underlying claim and the subsequent judgment which had been entered in the Magistrates Court. 12 The appellant pointed out that the invoices claiming moneys due to the respondent firm had not been addressed to him personally, but to two companies, National Group (Australia) Pty Ltd and National Café Pty Ltd of which he had been a director. He further contended that debts allegedly due to the respondent from those companies had been the subject of litigation in the Supreme Court of Victoria. He also disputed the claim which had been advanced by the respondent in the Victorian Magistrates Court that there had been a signed costs agreement between himself and the respondent. The only purported costs agreement, he said, was an unsigned document which the respondent, despite requests from the appellant and his solicitor, had failed to discover in the course of the proceedings in the Victorian Magistrates Court. 13 The appellant claimed that he would not have entered into the terms of settlement had he been aware that the costs agreement was unsigned and that the only enforceable agreement had been between the respondent and the two companies. He further contended that he had ceased to make payments pursuant to the terms of settlement once he became aware that the costs agreement on which he was purportedly liable had not been signed and that the respondent ought to have produced it to him in discharge of its obligation to provide full discovery. He also submitted further, or in the alternative, that he had only signed the terms of settlement because of duress to which he had been subjected by the respondent and his own solicitor. 14 The appellant contended that much of the material that was collected in the respondent's affidavit of documents in the Victorian Magistrates Court was in respect of work done by the respondent for the companies, National Group (Australia) Pty Ltd and National Café Pty Ltd, and was not related in any way to the sale of shares agreement or the shareholders agreement which, presumably, were for the benefit of the appellant personally. 15 In relation to the orders made by the Magistrates Court on 13 April 2006, the appellant submitted that there had been a failure by that Court on at least two occasions to record his new address and, as a result, he had not been notified of the date on which the respondent was to move for judgment. He contended that, at the hearing on 12 May 2006 of the application to set aside the orders made by default on 13 April 2006, he had not been able to present evidence to the Court to support his claim that the foundation of the respondent's claim and of the judgment debt was flawed.

The respondent's submissions 16 For the respondent it was submitted that the creditor's petition was founded on an act of bankruptcy committed by the appellant being his failure to comply with the bankruptcy notice, or to otherwise satisfy the Court pursuant to s 40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act") that he had an appropriate counter-claim, set-off or cross demand equal to, or exceeding, the amount of the judgment debt. The respondent contended that each of the requirements of s 52 of the Act had been satisfied, and that, as the appellant had not raised any legitimate countervailing consideration, it had been open to the learned Federal Magistrate to make a sequestration order as contemplated by s 52(1) of the Act. 17 According to Counsel for the respondent, the appellant was effectively inviting this Court to conclude that "for some other good cause a sequestration order should not be made" and, more particularly, to go behind the judgment debt upon which the bankruptcy notice had been based. Although he acknowledged that the Court has a discretion to go behind a judgment for the purpose of satisfying itself that a debt is actually due and owing to the petitioning creditor, it should only do so where a prima facie case of fraud, collusion or miscarriage of justice has been established; see Corney v Brien (1951) 84 CLR 343, at 356-7 ("Corney"). 18 Mr Waldren for the respondent further submitted that, on the hearing of a creditor's petition, the Court has a discretion to look past evidence of a judgment as proof of the foundational debt where there are "substantial reasons" given which question whether there was "in truth and reality" a debt due to the petitioner; see Wren v Mahoney (1972) 126 CLR 212 ("Wren"), per Barwick CJ, at 225. However, Counsel for the respondent contended that the debtor bears an onus of establishing "substantial reason"; see Joose v Deputy Commissioner of Taxation (2004) 137 FCR 576 at 579 [6], per North and Finkelstein JJ, and that the Court must also be satisfied of the existence of special circumstances before it goes behind a judgment; see Wren 126 CLR at 224. Further, it was contended, in a case like the present where the judgment arose out of a compromise, it must be shown that there was some unfairness or impropriety sufficient to warrant the Court's inquiring into the consideration for the debt or the propriety of the compromise; see Re Longo; Ex parte Longo (1995) 57 FCR 523 per Cooper J, at 529; Corney 84 CLR 343 at 347-8. 19 It was also submitted of behalf of the respondent that it is not sufficient that the debtor had been pressed by his lawyers to enter into the compromise or consent to judgment or has been under commercial pressure to avoid legal costs, especially if the creditor was not implicated in applying that pressure; see Tresize v National Australia Bank Ltd (1994) 50 FCR 134, at 148-9; Harrison v Charalambous [1999] FCA 902, at [11]-[12] per Finkelstein J. 20 The remaining submissions on behalf of the respondent were encapsulated as follows at par 37 of its written outline; 'a. there is no allegation of undue pressure being placed on the appellant to enter into the compromise reflected by the Terms; b. in particular, there is no allegation of the respondent applying any such pressure; c. the Terms reflected a commercial settlement of the matter and (in so far as they were to be performed) a genuine negotiated compromise of the respondent's claim against the appellant through his solicitor; d. the [sic: scil "terms were"] performed by the appellant for a number of months; e. the default by the appellant coincided with a larger payment falling due under the negotiated repayment schedule; f. judgment has been entered in accordance with the Terms for the amount agreed; g. the appellant has applied unsuccessfully for a re-hearing; h. the appellant has made no application to set aside the bankruptcy notice served upon him on 3 June 2006; and i. the appellant conceded before Federal Magistrate Burchardt that he had entered into the Terms on advice and without what the law would recognise as coercion from any person.' 21 In the light of those contentions, it was argued that the appellant, in essence, was asking the Court to re-hear the underlying dispute which had been litigated in the Victorian Magistrates Court and resolved by terms of settlement which the Magistrates Court had declined to re-open or examine. 22 In the alternative, Counsel for the respondent contended that if, contrary to his primary submission, this Court were persuaded to go behind the judgment of the Magistrates Court, there was nothing in the material in support of the appeal which could justify a finding that the appellant had entered into the terms of settlement as a result of duress, pressure or undue influence by the respondent. 23 As to the first ground of appeal related to the costs agreement between the appellant and the respondent, Mr Waldren argued that the debt arose from the signed terms of settlement in which the underlying dispute and competing contentions of the parties had merged. 24 In relation to the second ground of appeal focused on the withholding of discoverable documents, the respondent disputed the allegation and said that, in any event, the appellant had been in receipt of advice from a legal practitioner at the time when he signed the terms of settlement. Had the alleged deficiency in discovery been seen as a barrier to entering into the terms of settlement, the appellant should have been advised to that effect and could have sought an order from the Magistrates Court for further and better discovery. 25 In response to the third ground of appeal asserting that the judgment debt had been the subject of separate orders in the Supreme Court of Victoria, the respondent pointed to its amended complaint dated 7 February 2005 in the Magistrates Court which claimed costs related to a sale agreement and a shareholders' agreement and unrelated to the separate costs which had been claimed in the proceeding in the Supreme Court of Victoria. 26 No substantive response was made on behalf of the respondent to the fourth ground in the notice of appeal which, it was said, raised irrelevant matters and did not impugn the decision of Burchardt FM.

Disposition of the appeal 27 The appellant has not identified in his written or oral submissions any factual or legal error by the learned Federal Magistrate in the reasons for decision dated 25 September 2006. Rather, the thrust of his case has been that his Honour's discretion miscarried when he declined to go behind the judgment which gave rise to the debt on which the bankruptcy notice and subsequent sequestration order were founded. The question before this Court, therefore, is whether that exercise of discretion was attended by error of a kind which would require it to be exercised again. Upon demonstration of such an error, it would be for this Court to consider whether to go behind the judgment in the Victorian Magistrates Court for the purpose of satisfying itself that a debt is actually due from the appellant to the respondent. 28 In Wren 126 CLR at 224, Barwick CJ, with whom Windeyer and Owen JJ agreed, said that where reason is shown for questioning whether there was in truth and reality a debt due to the petitioning creditor, the Court has a discretion not to accept the judgment as satisfactory proof of the debt. At 224-225 his Honour stated; 'The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.' 29 In Joose v Deputy Commissioner of Taxation 137 FCR at 519 [6], North and Finkelstein JJ described the onus on a debtor in the position of the present appellant as being only one of showing that there is substantial reason for questioning whether there was a debt. 30 In Corney, Fullagar J observed, at 356-7, that if a judgment has followed a full investigation at trial, at which both parties appeared; '… the court will not reopen the matter unless a prima-facie case of fraud or collusion or miscarriage of justice is made out.' 31 In the present case, there was no full investigation and hearing of the matter on its merits by the Magistrates Court, as the parties compromised their dispute by entering into a terms of settlement. It was pursuant to those terms of settlement, and the appellant's default in making a payment thereunder that judgment was entered against him. There is no evidence that the respondent exercised any duress or coercion to compel the appellant to execute the terms of settlement, and it appears that he did so with the benefit of independent legal advice. 32 Those circumstances make relevant these remarks of Fullagar J in Corney 84 CLR at 357; 'Where judgment has been entered in pursuance of a compromise, ground must be shown for challenging the compromise as such before the subject matter of the judgment will be reopened. But in In re Hawkins; Ex Parte Troup (1895) 1 QB 404, it was held that such a judgment should be reopened in circumstances which fell far short of fraud and merely persuaded the court that the compromise was unfair and unreasonable because one party knew certain relevant facts of which the other was ignorant.' 33 The appellant has submitted that, at the time of signing the terms of settlement, he had not been provided with full discovery by the respondent, and, therefore, was not in possession of relevant documents. He further submitted that, had he been in possession of those documents, he would not have entered into the terms of settlement. However, the appellant was aware of the existence of the costs agreement on which he was being sued in the Magistrates Court, and entered into the terms of settlement with the benefit of legal advice. Further, he partly performed the terms of settlement by making some of the payments stipulated in the Schedule thereto. In Re Longo 57 FCR, Cooper J said, at 529; 'Before a court will look behind a judgment based on a compromise there must be shown in the circumstances of the compromise "such suspicion of unfairness or impropriety as to justify [the] Court in looking behind the judgment to inquire into the consideration for the debt or the propriety of the compromise" per Astbury J with whom Clauson J concurred in Re A Debtor [1929] 1 Ch 125 at 127.' 34 There is nothing in the evidence before the learned Federal Magistrate or this Court which has the effect of raising "such suspicion of unfairness or impropriety" on the part of the respondent at the time when the parties entered into the terms of settlement, to justify an exercise of the discretion to go behind the judgment. Although the respondent, a firm of solicitors, allegedly failed to comply with its obligations to give full discovery in the Victorian Magistrates Court, the appellant could have applied to that Court to compel the provision of proper discovery. Nor has it been shown that the terms of settlement were unfair or unreasonable because the respondent knew of relevant facts of which the appellant was ignorant. On the contrary, the appellant had been aware of the existence of the costs agreement at the time when he executed the terms of settlement. It follows that, both in the Federal Magistrates Court and on appeal, the appellant has failed to make out a "prima facie case of fraud, collusion or miscarriage of justice" as required by the principles which can be distilled from Corney and the other authorities canvassed above. 35 I am therefore not persuaded that substantial reasons have been established in this Court to warrant the exercise of the undoubted discretion to go behind the judgment of the Victorian Magistrates Court. Even if the appellant had succeeded in showing that the judgment itself had been irregularly entered by, for example, demonstrating that he had been denied procedural fairness at the time when the default judgment was entered, the terms of settlement present an insuperable obstacle to his successfully maintaining that a substantial debt was not in truth and reality due from him to the respondent.

Conclusion 36 For the reasons which I have endeavoured to explain, the appeal must be dismissed with costs. I shall order that the respondent's costs of the appeal form part of the petitioning creditor's costs in the bankruptcy. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.

Counsel for the Appellant: The appellant appeared in person

Solicitor for the Respondent: Dibbs Abbott Stillman