Wharton, Stephen Lynne v Household Financial Services Ltd [1995] FCA 875

CATCHWORDS Bankruptcy - Proceedings in connection with sequestration - Bankruptcy notice - Final order alleged to have been obtained in respect of a contract rendered unenforceable by statute - Non-compliance an act of bankruptcy. Bankruptcy - Proceedings in connection with sequestration - Hearing of creditor's petition - Going behind judgment - Factors relevant to exercise of discretionary power considered.

Bankruptcy Act 1966 (Cth) ss 40(1)(g), 52(1) Hire-Purchase Act 1959 (Vic.) s 7 Re Vella; Ex parte Seymour (1983) 67 F.L.R. 287; 48 A.L.R. 420 appr. Re Hayes; Ex parte Thomas Borthwick & sons (A/Asia) Ltd. (1970) 18 F.L.R. 216 foll. STEPHEN LYNNE WHARTON v. HOUSEHOLD FINANCIAL SERVICES LIMITED VG438 of 1994 Jenkinson, Ryan and Lee JJ. Melbourne 3 November, 1995

IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) No. VG438 of 1994 GENERAL DIVISION )

On Appeal from a Single Judge of the Federal Court of Australia BETWEEN: STEPHEN LYNNE WHARTON Appellant AND: HOUSEHOLD FINANCIAL SERVICES LIMITED Respondent CORAM: Jenkinson, Ryan and Lee JJ. PLACE: Melbourne DATE: 3 November, 1995 MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The appeal be dismissed. 2. The respondent's costs of the appeal be taxed and be costs of the petitioning creditor in the application of s.109 of the Bankruptcy Act 1966. (Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.)

IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) No. VG438 of 1994 GENERAL DIVISION )

On Appeal from a Single Judge of the Federal Court of Australia BETWEEN: STEPHEN LYNNE WHARTON Appellant AND: HOUSEHOLD FINANCIAL SERVICES LIMITED Respondent CORAM: Jenkinson, Ryan and Lee JJ. PLACE: Melbourne DATE: 3 November, 1995 REASONS FOR JUDGMENT

JENKINSON J. Appeal from an order that a sequestration order be made against the estate of the appellant. The petition was founded on an act of bankruptcy alleged to have been committed on 23 March 1994, by virtue of the appellant's failure to comply on or before that date with the requirements of a bankruptcy notice founded on a final order of the Magistrates' Court of Victoria at Melbourne, which was made on 10 December 1993. One ground of opposition to the petition, and a ground of this appeal, was that no debt underlay the order. The causes of action upon which the order was based were for breach by the appellant of each of three contracts of guarantee between the appellant and the respondent, each of a hire-purchase agreement between the respondent as owner and Seventeenth Febtor Pty. Ltd. as hirer. The hire-purchase agreements were said, and may be assumed, to be agreements to which the Hire-Purchase Act 1959 (Vic.) applies. Section 7 of that Act provides: "(1)At any time before the final payment has been made under a hire-purchase agreement the owner shall, within fourteen days after he has received a request in writing from the hirer, send to the hirer a copy of the agreement, together with a statement signed by the owner or his agent showing - (a)the amount paid to the owner by or on behalf of the hirer; (b)the amount which has become due under the agreement but remains unpaid; and (c)the amount which is to become payable under the agreement - but an owner shall not be obliged to comply with such a request if he has sent the hirer a copy of the agreement and a statement within the period of three months immediately preceding the receipt of the request. (2) If an owner contravenes the last preceding sub-section by failing to comply with a request made pursuant to the last preceding sub-section he shall be guilty of an offence and liable to a penalty not exceeding 10 penalty units and, until the default is remedied - (a)the owner shall not be entitled to enforce - (i) the agreement against the hirer; (ii) any right to recover the goods from the hirer; or

(iii) any contract of guarantee relating to the agreement; and (b) any security given by the hirer in respect of money payable under the agreement or given by a guarantor shall not be enforceable against the hirer or the guarantor by any holder thereof." Evidence was adduced on the hearing of the petition to show that the respondent had failed to comply with a request in writing by the hirer pursuant to sub-section 7(1) in respect of each hire-purchase agreement and that the defaults had not been remedied. The learned trial judge held that the proceeding by petition for a sequestration order did not constitute enforcement of any contract of guarantee relating to a hire-purchase agreement. That conclusion was in my opinion correct. It was submitted to the learned trial judge, and on the appeal, that the court should go behind the order of the Magistrates' Court and enquire into the validity of the three debts. The evidence did not support a conclusion that in each case a substantial indebtedness did not exist : the evidence merely tended to show that identification of the precise amount of each debt might be difficult. In those circumstances the exercise of the power to enquire whether there was in truth and reality a debt of the required amount due to the petitioning creditor would provide no basis for dismissing the petition. There was on the evidence clearly such a debt and no occasion for the exercise of the power arose. It was submitted to the learned trial judge, and on the appeal, that sufficient cause to dismiss the petition was shown by the prosecution of the proceeding in the Magistrates' Court to final order in contravention of the prohibition of enforcement of the contracts of guarantee expressed in paragraph 7(2)(a)(iii) of the Hire-Purchase Act 1959. But the Magistrates' Court had on 4 November 1994 refused the appellant's application for an order that the final order be set aside, finding that there had been compliance with the requirements of sub-section 7(1) in respect of the three agreements. The submission was made that, notwithstanding that circumstance, the learned trial judge erred in failing either to consider for himself whether the respondent's prosecution of the proceeding in the Magistrates' Court had contravened the prohibition in paragraph 7(2)(a)(iii) or to grant an adjournment of the hearing of the petition until a judicial review of the order made on 4 November 1994 had been instituted, heard and determined in the Supreme Court of Victoria. The hearing of the petition took place on 16 November 1994. The final order of the Magistrates' Court, which was grounded on a default of appearance on the part of the appellant, was made on 10 December 1993. The appellant was informed on 14 December 1993 that the final order had been made and that bankruptcy proceedings would be founded on it. The bankruptcy notice was served on 9 March 1994 and the petition was presented on 5 July 1994. Not until 9 October 1994 was an application for the setting aside of the final order filed in the Magistrates' Court. When the petition came on for hearing on 16 November 1994 no proceeding for judicial review had been instituted. The appellant was at material times a practising accountant. In those circumstances no error is in my opinion discernible in the learned trial judge's refusal either to consider whether the order made on 4 November 1994 was correct or to adjourn the hearing of the petition. The enquiry it was submitted that he should undertake, or permit to be undertaken in the Supreme Court, would have revealed only whether the indebtedness was enforceable, not whether it existed. If it were held to be unenforceable until the defaults to which sub-section 7(2) refers were remedied and the final order of the Magistrates' Court were set aside by the Supreme Court of Victoria, that would not necessarily require that the petition be dismissed. The final order was effective to justify the issue of the bankruptcy notice and an act of bankruptcy was committed on 23 March 1994. It might be said that the setting aside of the final order might produce the result that the appellant would be able, when the hearing of the adjourned petition was held, to satisfy the court that he was then able to pay his debts. But I think not. Those three debts exist, notwithstanding that the precise amounts may not be certainly known and notwithstanding that payment of none of them would be enforceable if the default had not been remedied. And, if the court were not satisfied that the appellant was solvent, the circumstances deriving from the operation of s.7 of the Hire-Purchase Act 1959 might not be considered "other sufficient cause" within the meaning of paragraph 52(2)(b) of the Bankruptcy Act 1966. The learned trial judge did not err in proceeding to a sequestration order, in my opinion. Counsel for the appellant addressed submissions to the learned trial judge for about 30 minutes. His Honour then said: "I have got constraints of time. I can allow you 10 more minutes and then you must stop. You do not need to go the 10 minutes." When a further five minutes had passed his Honour informed counsel : "You have got five minutes". After a further five minutes his Honour informed counsel that his time had expired. It was a ground of the appeal that the learned judge had "erred in law by failing to give a reasonable time to the Appellant to present his submissions fully". The transcript of the hearing shows that at no time did counsel for the appellant suggest that the time proposed by the judge for completion of his submissions was inadequate, nor did counsel seek his Honour's leave to make further submissions in writing. There is in my opinion no substance in this ground. The appeal should in my opinion be dismissed, and an order made that the respondent's costs of the appeal be costs of the petitioning creditor in the application of s.109 of the Bankruptcy Act 1966.

I certify that this and the 6 preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Jenkinson.

Associate Dated: 3 November, 1995

IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) No VG 438 of 1994 ) GENERAL DIVISION )

BETWEEN: STEPHEN LYNNE WHARTON Appellant AND: HOUSEHOLD FINANCIAL SERVICES LIMITED Respondent CORAM: JENKINSON, RYAN & LEE JJ PLACE: MELBOURNE DATE: 3 NOVEMBER 1995

REASONS FOR JUDGMENT RYAN and LEE JJ: This is an appeal from a sequestration order pronounced on 16 November 1994 and based on an act of bankruptcy consisting of non-compliance with a bankruptcy notice served on 9 March 1994. That bankruptcy notice relied on a judgment debt arising from a default order made in the Magistrates' Court on 10 December 1993 whereby judgment was entered by default against the debtor in the sum of $26,499.23. That judgment was apparently entered against the debtor as guarantor of the liabilities of a hirer under a hire purchase agreement governed by the Hire Purchase Act 1959 (Vic). Before the hearing of the bankruptcy petition, the debtor had sought, unsuccessfully, in the Magistrates' Court to have the default judgment set aside. It was intimated to the judge hearing the petition that the debtor desired to seek judicial review in the Supreme Court of Victoria of the refusal by the Magistrates' Court to set aside the default judgment. The learned primary judge declined to go behind the judgment of the Magistrates' Court, saying: "It was next argued that, in any event, the Court should go behind the judgment of the Magistrate and look at the material in the affidavit, which it is suggested, shows that the figures claimed by the judgment creditor are of necessity wrong. Assuming that those facts are established, nevertheless the Court in this case does not propose to go behind the judgment debt found by the Magistrate. At the very most, that is a discretionary matter. In a case like this where the debtor has applied to the Court to have the judgment set aside and has failed, because as was said in the evidence before me, it was satisfied that the requirements of section 7 of the Hire Purchase Act had been complied with, this Court should not go into it again to determine whether the Magistrate was right or wrong."

The reference to s 7 of the Hire Purchase Act was necessary because the debtor contended both before this Court and the Magistrates' Court that the petitioning creditor was precluded by that section from enforcing the principal liability or the debtor's collateral liability as guarantor. Section 7 provides: "7. Hirer entitled to copy of agreement (1) At any time before the final payment has been made under a hire-purchase agreement the owner shall, within fourteen days after he has received a request in writing from the hirer, send to the hirer a copy of the agreement, together with a statement signed by the owner or his agent showing - (a) the amount paid to the owner by or on behalf of the hirer; (b) the amount which has become due under the agreement but remains unpaid; and (c) the amount which is to become payable under the agreement - but an owner shall not be obliged to comply with such a request if he has sent the hirer a copy of the agreement and a statement within the period of three months immediately preceding the receipt of the request. (2) If an owner contravenes the last preceding sub-section by failing to comply with a request made pursuant to the last preceding sub-section he shall be guilty of an offence and liable to a penalty not exceeding 10 penalty units and, until the default is remedied -

(a) the owner shall not be entitled to enforce - (i) the agreement against the hirer; (ii) any right to recover the goods from the hirer; or (iii) any contract of guarantee relating to the agreement; and (b) any security given by the hirer in respect of money payable under the agreement or given by a guarantor shall not be enforceable against the hirer or the guarantor by any holder thereof."

There was evidence before the Court that on 21 July 1993 Wharton & Co, a firm of chartered accountants controlled by the debtor and owned by the hirer, Seventeenth Febtor Pty Ltd, as trustee of the S L Wharton Family Trust, sent a facsimile message to the petitioning creditor in these terms: "MESSAGE: SEVENTEENTH FEBTOR PTY LTD Hire Purchase Contracts RE: 2005 4352, 4360, 4050 Jon In reference to our discussion today and to assist us with the proposal in relation to the equipment could you please provide the following 1/ Copy of each contract for our record. 2/ Contract arrears. 3/ Payout value of each contract and detail of interest rebate on payment. 4/ Schedule of payments on each contract. 5/ On 1/6/92 we paid $2000. Please advise how this amount was applied against contracts. 6/ Who do you usually use as valuers."

By letter, also dated 21 July 1993, the petitioning creditor had written to Seventeenth Febtor Pty Ltd in these terms: "RE: HIRE PURCHASE AGREEMENT NO: 20054352 DATED: 27/6/90 We refer to previous correspondence concerning your Hire Purchase Agreement with us. We have now terminated the agreement and we have made reasonable attempts to mitigate the loss we have suffered by reason of your repudiation of the agreement. We now demand the sum of $18,751.42 in accordance with clause 13 of the Agreement, particulars of that amount are set out in the attachment of this letter. Unless you pay the sum of $18,751.42 to us within fourteen (14) days of the date of this latter, we will commence legal proceedings for recovery of that amount together with interest and costs."

Letters of demand, also dated the 21 July 1993, were sent by the petitioning creditor to Seventeenth Febtor Pty Ltd in respect of the other hire purchase agreements numbered 20054360 and 20054050. On 22 July 1993 the petitioning creditor wrote the following reply to the facsimile message sent to it from Wharton & Co: "RE: ACCOUNT NO'S: 20054352, 20054360, 20054050 Please find enclosed all details you have requested on your facsimile dated 21/7/93. Phone Carpet Paintings etc 20054352 20054360 20054050 Arrears @ 22/7/93: $9,159.40 $1,877.44 $2,506.80 Due date: 27th monthly 20th monthly 11th monthly Payout figure: $19,477.44 $2,298.98 $2,986.05 Valid to: 27/7/93 20/8/93 11/8/93 Rebate to 27/7/93: $635.41 N/A N/A You will notice that two contracts are not applicable for rebate due to the fact that they have matured. In regard to the $2,000 on the 1/6/92 it was allocated to 20054360 $997.28 (carpet), and 20054050 $1002.72 (paintings). If you wish to have the equipment valued our panel valuer is Taylor Wood Valuers. Please contact Neil Schiller on 646-2499 in relation to this. Should you have any further questions please contact John Alamanas on 521-7011."

Enclosed with that letter were a schedule of payments made between 12 July 1990 and 15 July 1993 and copies of what appear to be extracts from or schedules to hire purchase agreements including the guarantees executed by the debtor. The extracts identified the goods which were the subject of each agreement, their cash price, the terms charges and the amount of monthly instalments payable under each agreement. For the appellant it was contended that the learned primary judge should have exercised his discretion by going behind the judgment of the Magistrates' Court as affirmed by the decision of that Court on 4 November 1994 not to set aside that judgment. Indeed, this contention was put so high as to submit that, because the judgment in the Magistrates' Court had been entered by default, this Court was "bound" to consider whether the allegations in the petition could and did establish a debt due to the petitioning creditor. In an oft-quoted passage from Wren v Mahony (1972) 126 CLR 212, Barwick CJ observed, at 224: "Lord Esher in emphasizing that the Bankruptcy Court did not go behind a judgment as a matter of course but only if appropriate circumstances were shown to exist, said in Re Flatau; Ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD at pp 85-86: "There is no statute which imposes any such obligation on the Court of Bankruptcy. Section 7 [of which s 52(1) is a counterpart] does no more than give a discretion." 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 petition. 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 (1951) 84 CLR 343 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."

In the present case it was argued that the operation of s 7 of the Hire Purchase Act in the circumstances surrounding the request made by facsimile of the petitioning creditor on 21 July 1993 and the deficiencies in the response to that request provided good reason for questioning whether, as consideration for the judgment, there was in truth and reality a debt due to the petitioning creditor. Rather than denying the existence of the contract, the debtor in the Magistrates' Court invoked s 7 of the Hire Purchase Act the effect of which is to suspend the enforceability of a debt arising out of a hire purchase agreement or of a guarantee of the performance of the hirer's obligations thereunder. The section does not defer the time at which those obligations are to be performed. However, by contrast with Corney v Brien (supra) it could not be asserted that the evidence did not establish the existence of any hire purchase agreement between Seventeenth Febtor Pty Ltd and the petitioning creditor. Thus, if the learned primary judge in the present case had been persuaded to look behind the judgment of Magistrates' Court, he would have found in truth and reality a debt due to the petitioning creditor, but one which, if the appellant's argument be correct, would have been unenforceable until the petitioning creditor had remedied its default in complying with s 7 of the Hire Purchase Act. That finding would not have precluded the debtor's non-compliance with the bankruptcy notice from being an available act of bankruptcy, even though the judgment on which it was based remained liable to be set aside: see Re Vella; ex parte Seymour (1983) 67 FLR 287 applying Re Handby; ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 and Re Hayes; ex parte Thomas Borthwick & Sons (Australasia) Ltd (1970) 18 FLR 216. Seen in this light, the fact that s 7 of the Hire Purchase Act was arguably or actually available to sustain an application to set aside the petitioning creditor's judgment was merely one of a complex of factors to be weighed by the primary judge in exercising the wide discretion to make or to decline to make a sequestration order which is conferred by s 52(1) of the Bankruptcy Act. The width of that discretion was impliedly recognized by the reliance placed by Counsel for the appellant on Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137. However, by contrast with that case and Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 which followed Ahern, there was no application at first instance on behalf of the present appellant for the hearing of the petition against him to be adjourned pending the hearing and determination of the application to the Supreme Court for review of the decision of the Magistrates' Court not to set aside the default judgment. The attention of his Honour at first instance was distracted from the complex of factors to which we have just referred because Counsel for the debtor argued, principally, if not entirely, that the proceedings by way of petition were themselves proceedings to enforce a guarantee, and so precluded by s 7 of the Hire Purchase Act. Counsel for the appellant (who did not appear below) conceded that argument to be misconceived and abandoned Ground 1 of the Notice of Appeal which is in these terms: "The learned Judge erred in finding that the proceedings under the Bankruptcy Act were not proceedings to enforce a guarantee pursuant to s 7 of the Hire Purchase Act."

The failure of Counsel for the debtor to address even some of the factors relevant to the discretion which the learned primary judge was required to exercise leads to consideration of the contention that a reasonable opportunity to present his case was not afforded to the debtor at first instance. The facts on which that contention has been based are fully set out in the reasons for judgment of Jenkinson J. They need not be repeated here. We agree that those facts do not disclose a denial of natural justice. It is significant that, before he was stopped, Counsel for the debtor made no complaint, and gave no indication, that there were other matters which he wished to put but had been precluded from canvassing. In particular, nothing was directed to the other debts of the debtor which amounted to $39,647 in excess of the debt of approximately $25,000 under the hire purchase agreement. The Court was in no position to assess whether those liabilities could be discharged from the proceeds of uncollected fees and "sub-tenants recoveries" shown as assets of the accountancy practice. The amount of time to be allowed to Counsel for submissions is essentially a matter of practice and procedure for the trial judge. By analogy with the reasoning of the High Court in Bloch v Bloch (1981) 55 ALJR 701 at 703, in the absence of any attempt to direct the submissions below to some new matter, this Court cannot find that any injustice was worked of a kind which would warrant appellate interference with the trial Judge's order. Our conclusion on this point is reinforced by the absence of any evidence before this Court from either Counsel who appeared below, or his instructing solicitor, to indicate the nature of any submissions which were not made by reason of the imposition of the time limit. For these reasons, we would dismiss the appeal and order that the respondent's costs of the appeal be taxed and paid out of the estate of the bankrupt with the same priority as its costs of and incidental to the petition. I certify that this and the preceding nine (9) pages are a true copy of the reasons for judgment of their Honours Justice Ryan and Justice Lee Associate: Date: 3 November, 1995

Counsel for the appellant: Mr A K Panna Solicitors for the appellant: Oakley Thompson & Co

Counsel for the respondent: Mr S P Gardiner Solicitors for the respondent: Home Wilkinson & Lowry

Hearing date: 15 June 1995