IN THE COURT OF APPEAL OF SOLOMON ISLANDS

Civil Appeal Number 005 of 2003
(High Court Case No. 28 of 2002)

BETWEEN:

SHELL COMPANY (PACIFIC ISLANDS) LIMITED
Appellant

AND:

WAYNE FREDERICK MORRIS AND BENJAMIN ST. GILES PRINCE
(AS TRUSTEES OF THE ESTATE OF REX FERA [A BANKRUPT])
Respondents

CORAM: Lord Slynn of Hadley (President), McPherson J. A., Ward J. A.

HEARING: 3rd September 2003
JUDGMENT: Read by Registrar of the High Court on 02/08/04

JUDGMENT

This is an appeal, or alternatively an application for leave to appeal, against a judgment that was given in favour of the plaintiffs, who are the respondents in this Court, against the appellant defendant on 4 December 2002 in default of its compliance with an order made by Kabui J in the High Court by consent of the parties on 12 November 2002. The order required the defendant to file and serve its affidavit of documents in the action within 14 days, in default of which its defence would be struck out and judgment entered against it as if no defence had been filed.

It was pursuant to this self-executing or "guillotine" order that on 4 December 2002 Kabui J gave judgment against the defendant in default of compliance. The affidavit of documents had been due from the defendant on 26 November 2002, but was not filed until 27 November, nor was it served until 2 December 2002. On any view of it, the judgment was entered regularly, so that the principal question both on the application to set it aside and on this appeal is whether the defendant has disclosed a defence to the action. The Court has an undoubted discretion to set it aside; but it is clear from the authorities in Solomon Islands as well as abroad that there must be an affidavit of merit, as it was described in Kayken Pacific Limited v Harper [1987] SILR 54, at 58, disclosing a prima facie defence to the action, which as Muria CJ remarked in Ross Mining (SI) Ltd v Slater & Gordon [1998] HC-CC 230 (judgment 28 March 2001) must be one:

"that is more than just showing an arguable defence on the face of the materials before the Court. It must show a defence which is viable and has some degree of conviction, so that unless displaced, it will stand. This clearly entails that the prima facie defence must be more than just an arguable defence."

The plaintiffs in this action are the trustees in bankruptcy appointed to the estate of Rex Fera under s 24 of the Bankruptcy Act (cap 3) on 13 June 2001, which was the date on which he was made bankrupt on a petition filed on 24 November 2000. The action in which judgment was entered in favour of the plaintiffs was commenced by specially indorsed writ for the recovery of $2,049,913.66 representing the total of nine payments in varying amounts alleged in para 7 of the statement of claim to have been made by Fera to the defendant in circumstances rendering them a fraudulent preference in terms of s 50 of the Bankruptcy Act. The nine payments are admitted in the defence to have been made on dates between 9 June 2000 and 31 October 2000, which is within the statutory preference period of six months before presentation of the petition on 24 November 2000. It is also admitted that the defendant was, together with others, a creditor of Fera; that in March 1998 it had agreed to provide him, trading as Ta'as Marketing, with a credit faculty limited to $200,000 on 35 day terms to purchase fuel and other petroleum products from the defendant; and that the credit facility, guaranteed by the bank, commenced in June 1998.

The critical allegation is in para 8 of the statement of claim, which is designed to invite the inference that the payments amounted to a fraudulent preference or preferences within s 50 and were consequently voidable and recoverable by the trustees. The allegations contained in that paragraph, which are "not admitted" in the defence, are as follows:

"8. As at the date of each such payment, the Defendant by its then manager, Carson Korowa ("Korowa"), well knew that Fera was in financial difficulty and could not pay his debts from his own moneys as they fell due, that he was being pursued [by] other creditors for substantial debts and that receipt of such payments would give the Defendant a substantial preference over other creditors.”

PARTICULARS

(a) From at least early 2000 until about July 2000 or later (the Plaintiffs cannot presently give better particulars of dates) Korowa attended meetings of creditors of Fera (including representatives of Mobil Oil Australia Pty Limited and Solomon Breweries Limited to discuss Fera's worsening financial position, his failure to pay creditors and strategies for creditors to recover payment of outstanding debts;

(b) Korowa at all material times well knew that Fera was trading outside the terms of the Facility and had stopped paying other creditors;

(c) Korowa at all material times was kept informed by other creditors of litigation against Fera by other creditors, including the fact that some had obtained judgment against him and that bankruptcy proceedings were being contemplated;

(d) Korowa at all material times well knew that Fera was trading beyond the terms of the Facility;

(e) Korowa and Fera met on several occasions from mid 2000 throughout the period covered by the said payments (the Plaintiffs cannot better particularise the dates) discussed Fera's financial position on several occasions, at which Fera informed Korowa to the effect that he could not pay his debts and Korowa nevertheless agreed to allow Fera to continue to trade with the Defendant."

Under the bankruptcy law of England and Solomon Island, the onus is, as Lord Tomlin said in Peat v Gresham Trust Ltd [1934] AC 252:

"…on those who claim to avoid the transaction to establish what the debtor really intended, and that the real intention was, to prefer. The onus is only discharged when the court upon a review of all the circumstances is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but where there is no direct evidence, and there is room for more than one explanation, it is not enough to say that there being no direct evidence, the intent to prefer must be inferred."

That represents the rule that would be applied if this action were to be tried. In the present instance, however, where the question is whether the default judgment should be set aside and there should now be a trial at all, the question is whether or not the defendant has put forward sufficient material to show, within the terms of Lord Tomlin's statement, that there is "room for more than one explanation" than that in receiving the nine payments its real intention was to gain a preference by payment of its own claims over those of other creditors of Fera. That is what is meant in the context of an application like this by saying that a prima facie defence must be shown that is more than just arguable:

Order 23, r 23 of the High Court Rules provides that whenever it is material to allege an intention or a condition of mind of a person, it is sufficient to allege it as a fact without setting out the circumstances from which it into be inferred. An intent to prefer is an intention or state of mind. It would therefore have been sufficient for the plaintiffs to have alleged such an intent on the part of the defendant. But although it would have been sufficient in terms of O 22, r 23, it did not prevent the plaintiffs from alleging particulars from which the requisite intention to prefer might be inferred. This it did in para 8 of the statement of claim, asserting matters and circumstances from which it might reasonably be concluded that the defendant through "its then manager" Mr Carsen Korowa knew of Fera's dire financial position. It was that he could not pay his debts as they fell due, but was paying the defendant in particular large sums of money at monthly intervals throughout the relevant period of six months while leaving other creditors unpaid. The inference that the defendant was aware of these matters through Mr Korowa's attendance at creditors' meetings is so compelling as to leave no other reasonable explanation than that the defendant was exerting pressure on Fera to pay it ahead of all other creditors. No doubt the bank facility alleged in para 6, and the defendant's relation to the credit facility in para 5, both of which are admitted in the defence, gave the defendant the power to exert pressure of that kind over Mr Fera's affairs.

What then is the defendant's defence to the claim that the inference ought to be drawn that an intention to prefer the defendant is the only proper explanation for Fera's conduct in making the payments? The defence that is pleaded is contained in para 3 of the notice of defence.

It is that:

"The Defendant states that it received the payments in the ordinary course of business uninfluenced by any belief that Mr Fera was having financial difficulties. Mr Korowa also states that he did not know that Mr Fera was in financial difficulties and unable to pay his debts from his moneys as they fell due. He further states that he did not know that receipt of such payments would give the Defendant a substantial preference over other creditors."

Given Mr Korowa's presence at the creditors' meetings as alleged as well as the matters claimed to have been disclosed there, it is quite impossible to allow credence to any of the three matters alleged in para 3 by way of defence. It is not suggested that Mr Korowa was mentally incapacitated at the time, or that there was some other explanation why the inevitable inference should not be drawn against the defendant that it through him was well aware of what was taking place and of the financial position Mr Fera was in at the time.

Of course, it would not ordinarily be correct to draw inferences whether in favour of or against the plaintiff or the defendant from a series of unproved allegations in the pleadings. Such matters, if put in issue, are for the judge at trial to draw if he will. But here the position is different because judgment in default has been given against the defendant and the onus lies on it to establish that it has a plausible defence to the claim against it. One would expect it to deny Mr Korowa's presence at the meetings and to do so on oath. Nothing of that kind is put forward in para 3 of the defence or elsewhere in the material. Indeed, the form of the first of the sentences quoted from the defence in para 3 suggests that it has simply been lifted from a standard textbook on insolvency, and an Australian one at that. Speaking of the expression "in the ordinary course of business" in s 122 of the Australian Bankruptcy Act 1966, or of its predecessor in the Act of 1924, Sir Dudley Williams J in Downs Distributing Co v Associated Blue Star Stores Ltd (1948) 76 CLR 463, 480, said it referred to a transaction "into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent". This is strikingly similar to the first of the three matters pleaded in para 3 of the defence; but it is material only to s 122(2)(c) of the Australian Act, which has no analogue in the English or in s 50 of Solomon Islands bankruptcy legislation, in which the relevant criterion is an actual intent to prefer. Indeed, it would be odd to speak of a series of payments as "a transaction" at all.

One thing that may with confidence be predicted is that, if the action is permitted to go to trial, it will not be defended on the basis of the matters pleaded in para 3. Mr Korowa is not at all likely to be a witness to the assertions in those allegations. Indeed, he appears, so far as the Court is informed, to have disappeared without trace both from the office of manager, and from the defendant's later material in support of the application to set aside the judgment. The affidavit of Mr Ai Noka, who is described as now being the general manager of the defendant, says that his "involvement in the proceedings" was "very minimal", and that it was being dealt with by a Mr Makaen in the Papua New Guinea head office. Mr Makaen's employment with the defendant has since been terminated and he has not ventured to provide an affidavit. There is, in any event, nothing to show that his "involvement" extended to the circumstances of payments by Fera, as distinct from giving instructions to the defendant's solicitors in Honiara to file the affidavit of documents, which is what Mr Noka's affidavit is all about. On the subject specifically of the plaintiffs' claim, Mr Noka has said in his affidavit (para 11) no more than that he believes that the defendant's defence "clearly showed that the issues in dispute are serious and require full and proper investigation by the Court at trial". It is true that the amount involved of over $2 million is large; but the law is the same whether the amount sued for is large or small; and if the preference is set aside the defendant will receive a dividend on its claim for $2 million from the bankrupt's estate which will be swollen by repayment of the preference amount.

Whether or not the issues in dispute (whatever they are) are serious and require investigation is the very issue on this appeal, as to which Mr Noka's comment adds nothing pertinent in law or admissible in evidence. The affidavit of Mr Hapa, as barrister and solicitor, is concerned exclusively with the circumstances leading to the default judgment and the events involved in trying to avoid it or set it aside. It does nothing to address the question of a defence on the merits to the preference claim. In these circumstances, I find it impossible to disagree with the reasons of Kabui J when, in dismissing the application to set aside the default judgment, his Lordship said:

"I have read the affidavits filed by Mr Hapa and Mr Noka respectively and come to the conclusion that each of them lacks the necessary facts to support a defence on the merits. Paragraph 11 of Mr Noka's affidavit simply refers to the defence filed on 19th March 2002 as showing serious issues in dispute. A copy of the filed defence was not even attached to Mr Noka's affidavit. This is a case where the defence had been struck out and to reinstate it would be an uphill process for the Defendant. That is why according to the authorities cited above, the Defendant needs to do more than just producing a copy of the struck out defence. That is why the burden is heavier than in the case of seeking to defend in a summary judgment situation. I find that the Defendant has failed to show by any evidence that it has an arguable defence to the point of conviction."

In short, the defendant has nowhere sworn to the defence alleged in para 3, or to any other defence it might have if the default judgment were to be set aside and the action were to be allowed to go to trial.

Whether or not a judgment in default is set aside is, as I have said, a matter for the discretion of the judge who hears such an application. I can identify no error in the exercise by Kabui J of that discretion in the reasons his Lordship gave on 24 January 2003. The decision delivered that day was given on an application by summons filed by the defendant on 17 December 2002, which is in the appeal record at page 25. It seeks only an order that the default judgment on 4 December 2002 be set aside and that the defendant be at a liberty to defend the action. Somewhat unexpectedly, therefore, the reasons of his Lordship begin by saying that the application before him was to set aside the directions order made on 12 November 2002 under which the self-executing or "guillotine" order was made on 12 November 2002 that led the judgment being given in default on 4 December 2002. I can see nothing in the summons of 17 December 2002 which asked for relief of that kind. It must have evolved out of submissions of counsel before him that the order on 12 November 2002 was a consent order, which could only be set aside on grounds that would vitiate any other contract. Quite apart from that, however, the first step was to have the default judgment of 4 December 2002 set aside. Unless and until that was done, the judgment of that date would stand regardless of the fate of the "guillotine" order made on 12 November 2002. The only relevance which that order could have would be if the default judgment were set aside: unless the guillotine order were discharged, it would presumably be open to the plaintiffs to apply again at a later time for judgment in default based on the defendant's failure before 27 November to file or before 2 December 2002 to serve its affidavit of documents. But we are concerned now not with that order, but with the question whether or not a defence has been raised which ought to be sent to trial by setting aside the default judgment.

Because I consider that the learned primary judge made no error in refusing to set aside the default judgment of 4 December 2002, there is no purpose in investigating the question whether or not that order of 12 November 2002 can, or could or should, now be set aside or varied. Mr Hapa submitted in effect that that order was intended not as a consent order or contract but simply as an order that was "not opposed". The problem is that the formal order was signed by solicitors for each parties as having been consented to by both of them, and Mr Hapa does not suggest that his firm was tricked into signing it in that form.

Nor, for the same reason, do I think it necessary to consider in detail the failure of the defendant to file its affidavit of documents on or before 26 November 2002, which led to the default judgment being entered on 2 or 4 December 2002. If it were necessary to do so, I would expect a more compelling explanation of the delay than that given by Mr Noka in his affidavit in support of the summons to set aside the judgment. According to Mr Hapa the affidavit was ready for execution by 18 November 2002, but Mr Noka was not due back from Papua New Guinea until 21 November. When he tried to contact him on 22 November and on 25 November, Mr Noka was "busy". When Mr Hapa attempted to do so again on 26 November (which was the last day for compliance with the order), he was told that Mr Noka was in a meeting and would see him later in the afternoon. The possibility was canvassed that the defendant's Administrative Supervisor Mr Watepuru might execute the affidavit; but it was, in the end, left that Mr Noka would come and swear the affidavit that afternoon; by then the High Court Registry was closed and the affidavit could not be or was not filed that day, which was the last day for compliance with the guillotine order. For my part I would have expected some explanation of why Mr Noka did not respond earlier to the request to execute the affidavit; or that (if it was the case) he was not aware of it or of its urgency. Nothing to that effect is deposed to anywhere in the affidavit material before us, so that the delay in executing the affidavit is left entirely unexplained. That is capable of being regarded as another consideration against exercising the discretion to set aside the default judgment.

As I have said, however, the real question is whether the defendant has a defence on the merits which it should be allowed to pursue at a trial, and this it has failed to establish. In so far as it is necessary to form an opinion on the subject, I strongly incline to the view that the appeal in the present case is interlocutory. See Carr v Finance Corporation of Australia (1981) 147 CLR 246, 248; but whether or not it is interlocutory, the application for leave to appeal or the appeal (if that is what it is ), should in my opinion and for the reasons I have given, be dismissed with costs.

B.H. McPherson J.A.
G. Ward J.A.