The Commonwealth of Australia v Verwayen

IN THE FEDERAL COURT OF AUSTRALIA) ) SOUTH AUSTRALIA DISTRICT REGISTRY) ) GENERAL DIVISION ) No. SN 267 of 1995 ) BANKRUPTCY DISTRICT OF THE ) ) STATE OF SOUTH AUSTRALIA ) BETWEEN: Re: DONALD BRUCE McLEOD and LOIS MARGARET McLEOD

• and - Ex parte:BENEFICIAL FINANCE CORPORATION LIMITED REASONS FOR JUDGMENT CORAM: Branson J PLACE: Adelaide DATE: 5 October 1995 The applicants, Donald Bruce McLeod and Lois Margaret McLeod, have applied to set aside a bankruptcy notice served on each of them on 5 May 1995. The recital of the bankruptcy notice, so far as is here relevant, is in the following terms:- "WHEREAS BENEFICIAL FINANCE CORPORATION LIMITED of 91 King William Street, Adelaide in the State of South Australia (hereinafter referred to as "the Judgment Creditor") has claimed that the sum of $3,063,619.47 is due by you to the Judgment Creditor being the sum of $2,518,445.10 under a final judgment obtained by the Judgment Creditor against you in the Supreme Court of New South Wales on the 19th day of April 1993 being a judgment the execution of which has not been stayed ....."

The case of the applicants as argued was that the judgment against them referred to in the bankruptcy notice was a judgment which has been stayed. The office copy of the judgment of the Supreme Court of New South Wales which is annexed to the application for the issue of the bankruptcy notice is a single judgment against the applicants ordering them to pay to Beneficial Finance Corporation Limited ("BFC") $2,518,445.10 plus costs. The circumstances in which the applicants came to be indebted to BFC, then a wholly owned subsidiary of the State Bank of South Australia ("the Bank"), are not in dispute. Mr Mcleod borrowed monies from BFC to finance the purchase of certain land and the construction thereon of an office building. Mrs McLeod (then the wife of Mr McLeod) did not herself borrow any monies from BFC. Mrs McLeod guaranteed the payment of monies owing to BFC by Mr McLeod. Such monies were not repaid in full, apparently by reason of a decline in the value of the property, and, as stated above, a judgment against the applicants was eventually obtained by BFC following proceedings in the Supreme Court of New South Wales ("the Supreme Court proceedings"). The applicants have given evidence that until the service of the bankruptcy notice on them neither of them believed that BFC would take enforcement action against them. At a time before the service of the originating process in the Supreme Court proceedings an employee of the Bank having the conduct on behalf of BFC of the relationship between the applicants and BFC said to Mr McLeod "it is not the bank's policy to proceed to bankruptcy if nothing was to be had" or words to that effect. Subsequently Mr McLeod had dealings with other officers of the Bank. He formed the view that they were being "very difficult" in their dealings with him. On 25 March 1993 at about 8.00 pm Mr McLeod telephoned Group Asset Management ("GAM") a body charged with managing certain former assets of the Bank, and was put in contact with a Mr Winter, solicitor, General Counsel to GAM. Mr McLeod's description of his own state of mind at that time was that he was "off the planet, lost the plot". Mr McLeod's understanding of what Mr Winter said to him on that occasion was that:- (a) if the applicants allowed BFC to obtain judgment in the Supreme Court proceedings; and (b) completed a standard questionnaire as to their means; and (c) discussed the contents of such questionnaire at a meeting with Mr Winter, with the result that Mr Winter was satisfied that the applicants were without means;

then Mr Winter would place a submission before the GAM Board of Directors and the applicants would get favourable consideration from GAM on the question of the enforcement of any judgment obtained by BFC in the Supreme Court proceedings. Mr McLeod agreed that a letter sent to him by Mr Winter the next day reflected the terms of the conversation between him and Mr Winter. The relevant part of the letter is in the following terms:- "I confirm that we have instructed our solicitors Baskin & Lewis to continue to prosecute the action in the Supreme Court of New South Wales for the purposes of obtaining a judgment against both yourself and your wife. However, before such judgment is executed, and subject to your full co-operation in the matter, we will, with your help, formulate a submission for consideration by the Group Asset Management Board of Directors, as to whether, in all of the circumstances, it is appropriate, having regard to our policy on such matters, to grant you a release from your indebtedness." On 26 July 1993 Mr McLeod received a letter from an officer of GAM in the following terms:- "I refer to previous correspondence and particularly the letter from General Counsel, Mr Nigel Winter dated 26 March 1993. In that letter Mr Winter advised that before judgment is executed against you Group Asset Management would consider your position. I note that you attended to completion of the Statement of Affairs Questionnaire and Group Asset Management has now completed a review of those documents. It has been decided to take no further action against you to enforce the judgment at this time. However, it should be stressed this does not operate as a release from liability on the guarantee and if it comes to our attention that assets have been gained from some source we reserve our right to enforce the judgment or to request that you make a compromise with Beneficial Finance Corporation Limited." It would seem that the author of this letter assumed, wrongly, that both Mr & Mrs McLeod were liable on a guarantee.

On 30 July 1993 Mr McLeod spoke to the author of the above letter. He asked, "How long does the judgment remain enforceable?" He received the reply, "The whole of your life." There was a general discussion between the two at that time as to the terms of a possible compromise but no agreement resulted. On 8 November 1994 Mr McLeod, and apparently also Mrs McLeod, received a letter from South Australian Asset Management Corporation ("SAAMC"), for present purposes the successor of GAM, which, so far as is here relevant, is in the following terms:- "As you are aware judgment has been awarded against yourself ..... in the sum of $2,746,201.52 plus costs, less sale proceeds of $999,000. The debt inclusive of interest now stands at $2,981,658.98. We require details of your intention's with respect to repayment of the above amount. Any offer to compromise this debt should be submitted in writing within seven (7) days of the date of this letter. Failure to respond to this request will leave us with no alternative but to investigate further legal proceedings. If you wish to discuss this matter in more detail feel free to contact the writer .....". On 14 November 1994 Mr McLeod, on behalf of himself and Mrs McLeod, responded to the letter from SAAMC of 8 November 1994 by writing to its General Manager. He asserted that neither he nor Mrs McLeod was "in a position to offer a compromise in the sense of a lump sum or regular payment". He went on to say:- "Following the Court Order of the 19th April 1993 your Group Asset Management advised by letter of 26 July 1993 that no further action would be taken to enforce the judgment unless some assets were gained from some source ..... As previously stated, this has not happened. I am therefore at a loss to understand why the Corporation has chosen to act contrary to such undertakings for no benefit and at additional cost. I therefore ask the Corporation to reconsider its indicated course of action and to close the file on this unfortunate case." SAAMC by letter dated 23 November 1994 indicated that it was not prepared to reconsider its position. On 30 November 1994 Mr McLeod made an offer to compromise his debt to BFC by the payment of "$5.00 per week for, say three (3) years". There was no further contact between the parties until the service of the bankruptcy notice. As mentioned above, it is submitted on behalf of the applicants that no act of bankruptcy within the meaning of s40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act") has been committed by either of them because the judgment of the Supreme Court of New South Wales has been stayed and consequently BFC was not entitled to serve on them, or either of them, a bankruptcy notice. I accept that execution of a judgment may be stayed within the meaning of s40(1)(g) of the Act other than by a stay order of a court (Re Seers 17 ABC 11 at 13; Re Williams; Ex parte General Credits Ltd (1983) 68 FLR 202 at 206). It is contended on behalf of the applicants in this case that the judgment of the Supreme Court of New South Wales has, in effect, been stayed either by agreement between the parties, or alternatively by an intervening equitable right in the applicants. I turn first to the question of whether there is a relevant agreement between the parties. Mr Stevens, counsel for the applicants, submitted that the evidence established a contract made between BFC on the one hand and the applicants on the other. The offer of BFC, it is argued, was made by Mr Winter on 25 March 1993 and was accepted by the applicants either when the applicants allowed judgment to be entered against them without opposition or when GAM wrote to Mr McLeod on 26 July 1993. The precise terms of the contract which it is asserted resulted from the applicant's acceptance of the offer of BFC are not easily identified. Mr Stevens, counsel for the applicant put his submission as follows:- "The facts that I would ask your Honour to find are that there was a contract between Beneficial Finance and Mr McLeod and Mrs McLeod, that the contract was an oral contract and it was essentially that Mr McLeod would desist from further action in the New South Wales Supreme Court matter, that he would not oppose the application to strike out the defence counter claim and that the New South Wales court could then proceed to a judgment. It was also a condition of the contract that Mr Winter would send to Mr McLeod a statement of position and that Mr McLeod would return that statement of position and that Mr McLeod and Mr Winter would meet at some stage in Sydney, although that did not occur, for the purposes of preparing a written submission to the Group Asset Management Board. That submission was prepared and it was also one of the terms that Mr Winter would, in that submission, recommend that no further action could be taken. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [T]he contract was to make the submission and if the submission was made it could be accepted at any subsequent time as long as Mr McLeod continued to perform his obligations. Maybe I should rephrase that. That the offer is made on the 25th and ..... the acceptance whereby the parties become bound is when Mr McLeod in anticipation of that does not proceed on the judgment or alternatively at its latest acceptance is when Group Asset Management wrote to Mr McLeod on 26 July 1993 in which they stated in that letter, which is exhibit C to the same affidavit: It has been decided to take no further action against you to enforce the judgment at this time." In my view there are numerous difficulties in the way of a finding in favour of such a contract. Principal amongst them are the absence of any indication of an intention in the parties to enter into a legally binding arrangement and the failure of the evidence to support the suggested terms. I conclude that there was no agreement between the parties of the kind contended for on behalf of the applicants. I turn to consider whether the applicants have established any equitable grounds for relief amounting, in effect, to a stay of the Supreme Court judgment. The case for the applicants was put as follows:- "The proposition that we contend for is that the provisions of the Bankruptcy Act and the entitlement to proceed to a bankruptcy within a period of six years of the date of judgment can be waived either contractually or by some estoppel arising in the intervening period. With respect to the time delay here, we would submit that, taken in the context of the conversations which transpired, the undertakings given and the assumptions of the parties as to what would happen, that a two year period from the date of execution to the date of the bankruptcy notice is a sufficient period to constitute a bar to the claim because it is a confirmation of the actions and understandings of the parties." I have already found that there was no agreement between the parties that the judgment would not be executed. I am not satisfied that any delay on the part of BFC has been such as to make it inequitable for it now to issue a bankruptcy notice, or ultimately, should it establish its entitlement to do so, to seek sequestration orders with respect to the respective estates of the applicants. Nor do I consider that any delay on the part of BFC has been such as to denote an intention never to enforce its rights under the Supreme Court judgment. The submissions of the applicants with respect to laches must fail. It was submitted in the alternative that BFC is estopped from seeking to execute the judgment, or estopped from doing so without giving reasonable notice of its intended departure from an earlier assumed state of affairs. As is set out above, by letter dated 26 July 1993 Mr McLeod was advised by an officer of GAM that "[i]t has been decided to take no further action against you to enforce the judgment at this time." The letter went on, "it should be stressed that this does not operate as a release from liability on the guarantee and if it comes to our attention that assets have been gained from some source we reserve our right to enforce the judgment or to request that you make a compromise with Beneficial Finance Corporation Limited." The letter from GAM dated 26 July 1993 reserved the rights of BFC should it learn that the applicants had gained assets from some source. The evidence before me is not sufficient to establish that the applicants, or one or other of them, has not gained assets from some source later than 26 July 1993. Evidence that they have asserted to BFC that they have not gained assets does not amount to evidence in these proceedings that they have not gained assets. The onus of establishing the alleged unconscionability of the conduct of BFC lay on them and in my view they have not made it out. If I am wrong in respect of the above issue, it seems to me that in the absence of evidence of the applicants having taken any action in reliance upon the state of affairs assumed by them to exist by reason of the contents of the letter of 26 July 1993, any equity in the applicants to preclude departure by BFC from the assumed state of affairs must, in my view, be limited. Assuming, as I do simply for the purpose of considering this argument, that departure by BFC from the assumed state of affairs would be unconscionable, such unconscionability in the circumstances of this case would only, in my view, extend to a departure from the assumed state of affairs without reasonable notice (see The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 particularly per Deane J at p436).

I consider that such notice was given to the applicants by the letter from SAAMC dated 8 November 1994 and confirmed by the letter from SAAMC dated 23 November 1994. Were it not for the issue concerning the asset position of the applicants, equity might in the circumstances have required some adjustment to the amount of interest recoverable by BFC on the outstanding judgment sum so as to avoid the recovery by BFC of interest during any period of time in which it was not free to enforce the judgment. My above findings make it unnecessary for me to consider this issue further. It was also contended on behalf of the applicants that BFC had waived its rights to enforce the Supreme Court judgment. It has not been suggested that BFC has at any time made an election between mutually exclusive alternatives, or otherwise renunciated its right to enforce the judgment. The evidence shows that it has in fact insisted on the maintenance of its rights to enforce the judgment. In such circumstances no distinction in principle can be drawn between waiver and estoppel (see The Commonwealth of Australia v Verwayen particularly per Dawson J at p451 and Gaudron J at p481). The applicants' argument with respect to waiver must fall with their argument as to estoppel. I find that the judgment the subject of the bankruptcy notice has not been stayed. Following the close of argument in this matter I drew counsels' attention to the decision of O'Loughlin J in Re Neate; Ex Parte Pegasus Leasing Limited (an unreported decision of the Federal Court, 13 March 1995) and invited them to file written submission as to its relevance in the circumstances of this case. They each did so. In Neate's Case his Honour set aside a bankruptcy notice on the ground that the judgment upon which the bankruptcy notice was based was flawed. His Honour concluded that since the liabilities of a principal debtor and a guarantor were several rather than joint, separate judgments against them were required. As is mentioned above, a single judgment against the applicants was obtained by BFC in the Supreme Court proceedings. It is acknowledged by counsel for BFC that prior to such judgment the applicants were not jointly indebted to BFC: the causes of action against them respectively in the Supreme Court proceedings were not the same. Is this finding fatal to the validity of the bankruptcy notice in this case? Section 46(1) of the Act authorises a creditor's petition to be presented against two or more joint debtors, whether partners or not, but the Act does not authorise a creditor's petition to be presented against several debtors. Prior to s46(1) being enacted a petition against two or more joint debtors was required to be dismissed against all but one of them (Re Myers; Ex parte Mulholland (1932) 5 ABC 128 and Re Meiklejohn & Anor; Ex parte Barnard [1961] Qd R 70). In my view the right to issue a bankruptcy notice cannot be wider than the right to present a creditor's petition - i.e. a single bankruptcy notice may not, in my view, issue against several debtors. The bankruptcy notice in this case asserts joint liability in the applicants based upon the single judgment obtained against them in the Supreme Court proceedings. As was pointed out by Fullagar J in Corney v Brien (1951) 84 CLR 343 at 353-354:- "Generally speaking, a judgment at law for a sum of money creates an obligation of its own force. The pre-existing obligation, which the judgment is intended to enforce, merges in the new obligation so created and, for most purposes as between the parties, it is conclusive evidence of the existence of the obligation which it creates. It may in some circumstances be set aside by the court which entered it, but, unless and until it is set aside that is, generally speaking, its effect. It has, however, been well settled for very many years that in a court having jurisdiction in bankruptcy a judgment has no such conclusive effect. The court will in many cases, as it is commonly said, "go behind" the judgment and inquire into the existence of the debt upon which it is said to be founded." Barwick CJ put the matter this way in Wren v Mahony (1972) 126 CLR 212 at 224:- "The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment."

Apart from the decision of O'Loughlin J in Neate's Case, I am aware of no decision in which a Court has gone behind a judgment not for the purpose of satisfying itself of the existence of the debt upon which it is said to be founded, but rather to satisfy itself that the judgment is in proper form. In Re Ferguson; Ex parte E.N. Thorne & Co Pty Ltd (In Liq) (1969) 14 FLR 311 at 320 Gibbs J stated:- "The reason why a court having jurisdiction in bankruptcy will go behind a judgment has been discussed in a number of cases, of which Corney v. Brien is perhaps the most important. 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 ..... The object of going behind a judgment is not to inquire whether the proper procedure was followed to obtain it, but to determine whether the debtor in reality owed to the creditor the moneys which the judgment held that be owed. ..... I say nothing as to the case in which, although the existence of a real debt is established, it is shown that the court which gave the judgment had no jurisdiction to pronounce it. The Supreme Court of New South Wales had jurisdiction to give judgment for the company for the amount which it claimed, even if the form of the action and the form of the judgment should have been different. However, once the existence of the debt is found, it cannot be sufficient cause for refusing to make a sequestration order that a judgment for the correct amount, given by a court having jurisdiction, was obtained by the wrong procedure or given in the wrong form." Gibbs J in the above case was not required to consider whether his attitude would have been different had the form of the judgment been such as to represent as a joint debt "real" debts which were in fact several.

The judgment of the Supreme Court of New South Wales, a superior court of record, is valid unless and until set aside. The liability of the applicants pursuant to such judgment is joint. It is accepted that the judgment is based upon real debts, and as to each of the applicants is in the correct amount and was given by a court having appropriate jurisdiction. May BFC rely on the judgment to avoid the restriction that a single bankruptcy notice can not issue against several debtors? In my view the authorities show that this Court in its bankruptcy jurisdiction is concerned with the reality of the debtor/creditor relationship between the parties, as to which it may, but need not, accept a judgment as conclusive. In this case the reality as to the underlying debtor/creditor relationships between BFC and the applicants respectively is not in dispute. It is that the liabilities of the applicants respectively to BFC arose from different causes of action with the consequence that their respective underlying liabilities to BFC were several. In such circumstance I do not consider that I should accept the judgment of the Supreme Court of New South Wales as conclusive as to the debtor/creditor relationships between the parties. I conclude that BFC was not entitled to issue a single bankruptcy notice against the applicants. With some hesitation I have reached the view that the appropriate course to follow here is not to set aside the bankruptcy notice but rather to adopt the course followed by Macrossan SPJ in Re Myers; Ex parte Mulholland and by Stable J in Re Meiklejohn & Anor; Ex parte Barnard. BFC must elect as to which of the applicants they propose to proceed against. The bankruptcy notice will be set aside against the other of the applicants. I will hear from counsel for BFC further in this regard. I certify that this and the preceding pages are a true copy of the Reasons for Judgment of Justice Branson. Associate: Dated: Counsel for the Applicants : Mr G Stevens Solicitors for the Applicants : Brown & Partners Counsel for the Respondent : Mr M Durrant Solicitors for the Respondent : Kelly & Co. Hearing Dates : 28 July 1995 and 4 August 1995