Wren v Mahony

Wren v Mahony - [1972] HCA 5 - HCA 1972 case summary — Zoe

[49]

It seems to me that the question is, not so much what is the right of the debtor, or what the conduct of the debtor or of the creditor has been, but rather whether the Court ought to exercise this great power, which deals not only with the particular debt of the petitioning creditor, but with the whole class of the creditors of the debtor, including the petitioning creditor, - whether the Court of Bankruptcy ought to exercise its power and authority when there are the strongest grounds for believing that there is no petitioning creditor's debt upon which it can be put in motion, and the whole foundation upon which the Court is authorized and empowered to do such a strong thing as to make a receiving order, or to declare a man a bankrupt, is that a petitioning creditor's debt exists. On the following page his Lordship said [3] : It is not denied that Ex parte Kibble [4] is a direct decision of the Court of Appeal that, under some circumstances, a judgment debt may be inquired into, and the circumstances under which the judgment was given investigated, at the instance of the debtor himself, when he is disputing whether an adjudication ought to be made against him. And, for the reasons which I have endeavoured to express, not only do I think that that case is a binding authority upon us, but I think that it was rightly decided upon principle, the principle being that the Court of Bankruptcy is entitled to see that it is not put in motion without foundation, when there is no petitioning creditor's debt at all. The Court has that right independently of the conduct of the debtor or of the creditor or of anyone else. In an appeal against a refusal to make a receiving order, the power of the Bankruptcy Court to "go behind a judgment and inquire into the validity of the debt" was affirmed: In re Fraser; Ex parte Central Bank of London [1] . There an application to set aside the judgment had failed as had an appeal against the refusal of the application. Lord Esher M.R. said [2] : The Court of Bankruptcy can go behind the judgment, and can inquire whether, notwithstanding the judgment, there was a good debt. In so doing, the Court of Bankruptcy does not set aside the judgment. If I may use the expression, the Court goes round the judgment, and inquires into the subject matter. Referring to Ex parte Lennox; In re Lennox [3] his Lordship said [4] : The decision is based upon the highest ground - viz., that in making a receiving order, the Court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the Court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning creditor. The existence of the judgment is no doubt prima facie evidence of a debt; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor. Kay L.J. said [5] : In Ex parte Bryant [6] Lord Eldon said: "Proof upon a judgment will not stand merely upon that, if there is not a debt due in " truth and reality ", for which the consideration must be looked to." But, it has been made clear that the Bankruptcy Court will not as a matter of course inquire into the validity of a judgment debt: In re Flatau; Ex parte Scotch Whisky Distillers Ltd. [1] . In that case the judgment followed a trial of an action with a jury. Circumstances tending to show fraud or collusion or miscarriage of justice or that a compromise was not a fair and reasonable one, in the sense that even if not fraudulent it was foolish, absurd and improper, or resulted from an unequal position of the parties (see In re Hawkins; Ex parte Troup [2] ) offer occasions for the exercise by the Court of Bankruptcy of its power to inquire into the consideration for the judgment. In giving judgment in the last-mentioned case Lord Esher, M.R. said [3] : We have said that the Court will go behind the judgment, and I think the cases shew that the Court will go behind a judgment by consent. I am also of opinion that a judgment obtained by a compromise does not of itself stop the Court from going behind it. We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it is fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning creditor, should have a receiving order made against him. In the same way, when a creditor comes to prove in bankruptcy the Court will go behind the judgment, and inquire into the whole transaction which preceded it. To make a man a bankrupt is obviously a strong interference with the rights of the general body of his creditors. Each creditor is materially affected to the extent that he cannot by his own diligence get the whole of his debt. From the moment of bankruptcy, though he be the most diligent of the creditors, he has to go into equal competition with the most idle. Reference can also be made to the decision of this Court in Corney v. Brien [4] and the cases there cited. 1. (1885) 16 Q.B.D. 315. 2. (1885) 16 Q.B.D., at p. 321. 3. (1885) 16 Q.B.D., at p. 322. 4. (1875) L.R. 10 Ch. 373. 5. [1892] 2 Q.B. 633. 6. [1892] 2 Q.B., at p. 636. 7. (1885) 16 Q.B.D. 315. 8. [1892] 2 Q.B., at pp. 636-637. 9. [1892] 2 Q.B., at pp. 637-638. 10. (1813) 1 Ves. & B. 211, at p. 214 [35 E.R. 83, at p. 84]. 11. (1888) 22 Q.B.D. 83. 12. [1895] 1 Q.B. 404, at p. 409. 13. [1895] 1 Q.B., at pp. 408-409. 14. (1951) 84 C.L.R. 343.

[53]

His Lordship, in using this expression, was not intending, in my opinion, to weaken the emphasis he had always placed on the need for the Court of Bankruptcy to be satisfied of the existence of the petitioning creditor's debt. Rather, if one reads all his expressions in the several cases I have cited, he was pointing out that the Bankruptcy Court could in general accept a judgment debt as sufficient proof of that debt particularly where it resulted from a fully heard contest between parties but that it always had the power to go behind the judgment and if the case was a proper one, should do so. 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. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v. Brien [2] lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. 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.

[94]

It is the settled rule of the Court of Bankruptcy, on which we have always acted, that the Court of Bankruptcy can inquire into the consideration for a judgment debt. There are obviously strong reasons for this, because the object of the bankruptcy laws is to procure the distribution of a debtor's goods among his just creditors. If a judgment were conclusive, a man might allow any number of judgments to be obtained by default against him by his friends or relations without any debt being due on them at all; it is therefore necessary that the consideration of the judgment should be liable to investigation. This rule is applied most readily where judgment has gone by default: Petrie v. Redmond [1] . It can, no doubt, be applied in other circumstances but it has been repeatedly said that, when a judgment has been given in open court against a person who is represented, it is only in exceptional cases that the Court of Bankruptcy should exercise its discretionary power. See for instance In re Flatau; Ex parte Scotch Whisky Distillers Ltd. [2] and In re Howell [3] . In the former case Lord Esher M.R. said [4] : It is not necessary now to repeat that, when an issue has been determined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to shew that there has been fraud, or collusion, or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to inquire into the validity of the debt. But that the Court of Bankruptcy is bound in every case as a matter of course to go behind a judgment is a preposterous proposition. Fry L.J. said [5] : The second ground is, that there is a "sufficient cause" within sub-s. 3 why a receiving order should not be made. It is suggested that some of the issues which were tried before Mathew J., were wrongly decided, and that the registrar was bound to try them over again. In my opinion there was no such obligation. It is true that in some cases the Court of Bankruptcy has gone behind a judgment, when it has been obtained by fraud, collusion, or mistake. But this power has never, so far as I am aware, been extended to cases in which a judgment has been obtained after issues have been tried out before a court. 1. (1875) 10 Ch. App. 373, at pp. 376-377. 2. (1942) 13 A.B.C. 44. 3. (1888) 22 Q.B.D. 83. 4. (1915) 84 L.J.K.B. 1399. 5. (1888) 22 Q.B.D., at p. 85. 6. (1888) 22 Q.B.D., at p. 86.

[96]

Section 56 (2) (a) of the Bankruptcy Act 1924-1950 Cth provides that the court at the hearing shall require proof of the debt of the petitioning creditor. Under this provision the Court of Bankruptcy has undoubted jurisdiction to go behind a judgment obtained by default or compromise or where fraud or collusion is alleged and inquire whether the judgment is founded on a real debt. In that case it was decided that it was clear that there was no consideration for a judgment debt. Fullagar J., in a separate concurring judgment, stated the rule and considered the various English authorities relating to it. The starting point of his Honour's judgment was that "a judgment at law for a sum of money creates an obligation of its own force" [2] . His Honour went on to point out that it had been well settled for many years "that in a court having jurisdiction in bankruptcy a judgment has no such conclusive effect" [2] . Later his Honour quoted [3] Lord Esher M.R. in In re Fraser; Ex parte Central Bank of London [4] , referring to Ex parte Lennox; In re Lennox [5] , as follows: The decision is based upon the highest ground - viz., that in making a receiving order, the court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning creditor. The existence of the judgment is no doubt prima facie evidence of a debt; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor. His Honour added that " an enquiry into what lies behind a judgment may be undertaken either on the petition for sequestration or when, after sequestration, a judgment creditor comes in to prove a debt: see, e.g. Ex parte Revell; In re Tollemache [6] ." In In re Fraser; Ex parte Central Bank of London [7] the "debtor" had entered an appearance to a specially endorsed writ but did not appear and judgment was given against him. He applied to have the judgment set aside but his application was dismissed. He appealed to the Court of Appeal but his appeal was dismissed. His Honour said [8] : It was nevertheless held by the Court of Appeal that a creditor's petition for sequestration was rightly dismissed because, on a reopening of the matter, it appeared that the "debtor" was not in law indebted and the judgment was not soundly based in law. His Honour's comment was "This case perhaps goes as far as any". His Honour's conclusion was that: wherever the judgment in question is a judgment by default, it appears that the court will always "go behind" the judgment if there is what it regards as a bona-fide allegation that no real debt "lay behind" the judgment. [1] 1. (1951) 84 C.L.R. 343. 2. (1965) 39 A.L.J.R. 49. 3. (1951) 84 C.L.R., at p. 347. 4. (1951) 84 C.L.R., at p. 353. 5. (1951) 84 C.L.R., at p. 353. 6. (1951) 84 C.L.R., at pp. 355-356. 7. [1892] 2 Q.B. 633, at pp. 636-637. 8. (1885) 16 Q.B.D. 315. 9. (1884) 13 Q.B.D. 720. 10. [1892] 2 Q.B. 633. 11. (1951) 84 C.L.R., at p. 357. 12. (1951) 84 C.L.R., at pp. 357-358.

[99]

It seems to me that if the Court of Bankruptcy here had acceded to the contention of the present appellant and had proceeded to determine for itself whether the judgment of the Supreme Court of New South Wales was correct, it would have been going beyond any of the decided cases and would have opened the door to review by any judge exercising bankruptcy jurisdiction of any decision of any Supreme Court upon the submission that the judgment establishing the debt was clearly wrong. Here there was a judgment of the Supreme Court of New South Wales based upon leave granted after a contested application in which the very point that is now raised was considered and decided. An appeal could have been taken to the Court of Appeal or to this Court. There was no such appeal but the Court of Bankruptcy was invited to disagree with the Supreme Court. I cannot accept the contention that, in refusing to do so, there was a wrongful exercise of discretion by the Court. See Lovell v. Lovell [1] . Accordingly, in my view the result of this appeal cannot be made to depend upon whether or not this Court comes to the conclusion that Collins J. was in error in deciding as he did. What may appear to this Court as a wrong decision of the Supreme Court may not have that aspect to a judge sitting in Bankruptcy who is invited to exercise what I regard as a delicate discretion. The discretion, however, is his, not ours. The decision of the Court of Bankruptcy not to go behind the judgment of the Supreme Court in a contested proceeding is not invalidated because this Court considers that the judgment was in error. The real problem is whether or not it was open to the Court of Bankruptcy to decline to review the judgment of the Supreme Court obtained in the circumstances stated. I think it was. I do not go so far as to say that s. 118 of the Constitution precludes the Federal Bankruptcy Court from examining a judgment of a Supreme Court of a State, not to ascertain whether it creates a debt, but, whether a sequestration order should be made upon the debt to which the judgment unquestionably gives rise. In the case of a judgment debt, inquiry is not as to the existence of a debt but as to the consideration for it. It would, I think, be unconstitutional for a federal court to decide that the judgment of the Supreme Court of a State did not create a judgment debt.

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Judgment (108 paragraphs)

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