Bank of Western Australia Limited v Usalj

CATCHWORDS : STRIKE OUT CROSS CLAIM - Guarantor - s 420A Forporations Act 2001 (Cth)

Contract Review Act 1980 LEGISLATION CITED : Uniform Civil Procedure Rules 2005 Corporations Act 2001 (Cth)

Air Services Australia v Zarb (Court of Appeal, 26 August 1998, unreported) Commonwealth of Australia v Griffiths & Anor [2007] NSWCA 370; (2007) 70 NSWLR 268 Dey v Victorian Railway Commissioners [1949] HCA 1; (1949) 78 CLR 62 Florgale Uniforms Pty ltd v Orders [2004] VSC 65; (2004) 11 VCR 54 Fortson Pty Ltd v Commonwealth Bank of Australia (2008) 100 SASR 162 GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 CASES CITED : General Steel Industries Inc v Commissioner for Railways (NSW) & Ors [1964] HCA 69; (1964) 112 CLR 125 Investec Bank (Australia) Ltd v Glodale Pty Ltd & Ors [2009] VSCA 97; (2009) 256 ALR 104 Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570 Kyuss Express Ltd v Sellers [2001] VSC 10 Permanent Custodians Ltd v AGB Developments Pty Ltd [2010] NSWSC 540 Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 Webster & Anor v Lampard [1993] HCA 57; (1993) 177 CLR 598

Bank of Western Australia Limited (Plaintiff/First Cross Defendant) Simon Robert Usalj (First Defendant) PARTIES : Domenic Hason Usalj (Second Defendant/Cross claimant) Joseph Usalj also known as Josip Usalj (Third Defendant) Craig Michael Frankland (Fourth Defendant)

COUNSEL : S Ipp ((Plaintiff/ First Cross Defendant) R Gration (Second Defendant/Cross Claimant)

SOLICITORS : Henry Davis York (Plaintiff/First Cross Defendant) Clamenz Corporate Lawyers (Second Defendant/Cross Claimant)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST

2009/295421 BANK OF WESTERN AUSTRALIA LIMITED v SIMON ROBERT USALJ & ORS

JUDGMENT (Strike out cross claim - guarantor s 420A Corporations Act 2001 (Cth)) 1 HER HONOUR: By notice of motion filed 14 July 2010 the plaintiff seeks firstly, an order that the first cross claim ("the cross claim") filed on 17 April 2010 be dismissed pursuant to rule 13.4 of the Uniform Civil Procedure Rules 2005; secondly, in the alternative, that the whole of the cross claim be struck out pursuant to rules 4.15, 13.4 and 14.28 of the Uniform Civil Procedure Rules; and thirdly, in the alternative, that paragraphs 7, 8, 9, 17 and 18 of the cross claim be struck out pursuant to rules 4.15 and 14.28 of the Uniform Civil Procedure Rules. 2 The plaintiff/first cross defendant is the Bank of Western Australia ("the Bank"). The first defendant is Simon Robert Usalj. The second defendant/cross claimant is Domenic Jason Usalj ("Domenic Usalj"). The third defendant is Joseph Usalj also known as Josip Usalj. The fourth defendant is Craig Michael Frankland. Background 3 On 20 July 2009, the Bank filed a statement of claim seeking judgment against the Domenic Usalj in the amount of $3,148,504. The claim against Domenic Usalj is made on the basis that he is a guarantor of amounts owing by Woolpak Hotel Operations Pty Limited (Receiver & Manager Appointed) ("Woolpak"). 4 On 22 June 2006, Woolpak entered into a loan agreement with the Bank whereby the Bank agreed to advance funds pursuant to three loan facilities to Woolpak. On 11 August 2006, Domenic Usalj executed a guarantee in favour of the Bank whereby he guaranteed moneys owing by Wookpak to the Bank up to a limit of $4,550,000. On 15 December 2008, the Bank appointed Quentin Olde ("Mr Olde") and Matt John Adams as joint and several receivers and managers to the assets and undertaking of Woolpak. The assets of Woolpak have been sold. 5 By notice of demand dated 7 January 2009, the Bank made demand on Domenic Usalj for payment of the moneys secured by the guarantee. 6 Default judgment has been entered against Craig Frankland and Simon Usalj. Domenic Usalj and Josip Usalj have filed defences that raise the Contracts Review Act 1980. Only Domenic Usalj has filed a cross claim, which I shall refer to in more detail later in this judgment.

Summary judgment 7 Rule 13.4(1) of the Uniform Civil Procedure Rules provides that the court may dismiss proceedings generally, or in relation to any claim for relief, in three circumstances. These are, if the proceedings are frivolous or vexatious, or if no reasonable cause of action is disclosed, or if the proceedings are an abuse of the process of the court. 8 Rule 14.28(1) of the Uniform Civil Procedure Rules provides that the court may at any stage of the proceedings order that the whole or any part of a pleading be struck out if the pleading firstly, discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading, secondly, has a tendency to cause prejudice, embarrassment or delay in the proceedings, or thirdly, is otherwise an abuse of the process of the court. 9 Rule 14.28(2) provides that the court may receive evidence on the hearing of an application for an order under subrule (1). 10 In Commonwealth of Australia v Griffiths & Anor [2007] NSWCA 370; (2007) 70 NSWLR 268 Beazley JA (with whom Mason agreed) said at [11] - [12]: "11 The general principles relating to the summary disposal of proceedings are well-known: see General Steel Industries Inc v Commissioner for Railways (NSW) & Ors [1964] HCA 69; (1964) 112 CLR 125 at 129. If it is demonstrated that there is a real question to be tried, the matter is inappropriate for the entry of summary judgment: Dey v Victorian Railway Commissioners [1949] HCA 1; (1949) 78 CLR 62. The tests stated in the authorities as to whether it is appropriate that a case be disposed of by the entry of summary judgment include statements such as that the matter is "so obviously untenable that it cannot possibly succeed"; "manifestly groundless" or "would involve useless expense": see General Steel Industries at 129.

12 The summary disposal of proceedings or part thereof deprives a party of the right to a contested hearing. For that reason it is said that the requirement for establishing that there is no triable issue is demanding: Air Services Australia v Zarb (Court of Appeal, 26 August 1998, unreported). In Webster & Anor v Lampard [1993] HCA 57; (1993) 177 CLR 598, Mason CJ, Deane and Dawson JJ said at 602: '… the issue before the learned Master on the application for summary judgment was not whether [the plaintiffs] would probably succeed in their action against [the defendant]. It was whether the material before the Master demonstrated that that action should not be permitted to go to trial in the ordinary way because it was apparent that it must fail. The power to order summary judgment must be exercised with 'exceptional caution' and 'should never be exercised unless it is clear that there is no real question to be tried.' (Citations omitted)"

The cross claim 11 On 17 April 2010, Domenic Usalj filed a cross claim seeking damages. The first cross defendant is the Bank. The second cross defendant is Mr Olde. Relevantly this cross claim pleads: "10. The First Cross Defendant had a duty to the Cross Claimant in so far as he is a guarantor to act in good faith to the Cross Claimant by achieving market value.

The Second Cross Defendant also had a duty to the Cross Claimant and the company, Woolpak, pursuant to section 420A of the Corporations Act 2001 to realise the assets for market value or otherwise for the best price that was reasonably obtainable, having regard to the circumstances existing when the property was sold.

The market value of assets of Woolpak was in the range of $6.5 million and $7.2 million.

The First Cross Defendant knew of this market value.

The receiver realised the assets below market value with the consent of the First Cross Defendant.

The First Cross Defendant knew or should have known that the Second Cross Defendant sold the assets for below market value.

As a result, in the alternative that the Cross Claimant is found to be a guarantor of Woolpak's loans from the First Cross Defendant, the Cross Claimant has suffered loss and damage to the extent of the difference in proceeds between market value and the price the receiver has sold the assets for.

The First Cross Defendant is liable to the Cross Claimant in the amount of the damages for appointing the Second Cross Defendant and providing consent to the Second Cross Defendant to sell the assets below market value.

Further or in the alternative, the Second Cross Defendant is liable to the Cross Claimant for damages, either at common law and/or pursuant to Section 423 and/or Section 1324(10) of the Corporations Act 2001 . " 12 There is no attack made upon paragraph 10 of the cross claim where it is pleaded that the Bank had a duty to Domenic Usalj, in so far as he is a guarantor, to act in good faith by achieving market value. This issue remains one to be determined at trial. 13 The Bank's main submission is that Domenic Usalj as guarantor has no standing to bring a claim under s 420A of the Corporations Act 2001 (Cth). Counsel for Domenic Usalj submitted that the area of law surrounding s 420A of the Corporations Act is in a constant state of flux and therefore it is inappropriate to strike out this pleading in the cross claim on a summary basis. 14 The Bank referred to GE Capital Australia v Davis & Ors [2002] NSWSC 1146; (2002) 180 FLR 250 and Permanent Custodians Ltd v AGB Developments Pty Ltd [2010] NSWSC 540. 15 In GE Capital Australia v Davis the guarantors submitted that they had a private right to bring an action for damages for breach of statutory duty created by s 420A of the Corporations Act. Bryson J (as he then was) did not agree and stated at [45] and [56]: "[45] … There is nothing in the terms of s 420A, or elsewhere in the Corporations Act, which indicates that it was enacted for the protection of persons who do not have interests in the property of the corporation, such as guarantors who incur obligations by reference to the obligations of the corporation. Their obligations are not obligations to the corporation, they do not have an interest in its relevant property and they have not entered into any relevant contractual relationship with the corporation, in respect of its property or otherwise; they have guaranteed an obligation of the corporation to a third party. There is in my opinion no basis for the view that s 420A, alone or with the aid of context, operates or was intended to operate so as to confer a right to recover damages or any other right to a remedy on guarantors. The subsection speaks with Delphic simplicity and exemption from interrogation by saying what the controller must do without referring to consequences of failure to comply. [56] In my view there is nothing to indicate that it was the intention of the legislature that subs 420A(1) should confer any right or remedy on guarantors or other persons who involve themselves contractually in consequences of the exercise of the power of sale, but the guarantor is entitled to rely on the availability to the mortgagor of a remedy, whether the remedy was that previously established by Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 or is now the remedy available to the mortgagor on breach of the duty declared by subs 420A(1); the guarantor is entitled to have an equitable remedy on the basis that the mortgage accounts are taken on whatever may be the principle truly applicable to taking mortgage accounts. In my opinion the equitable remedies which in an earlier state of the law were available to a guarantor where there was a breach of the mortgagee's duty to a mortgagor corporation are now to be tested by reference to whether there was a breach of the duty stated in subs 420A(1)." 16 GE Capital Australia v Davis has been followed by Young CJ in Eq (as he then was) in Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114 (2004) 60 NSWLR 646 at [87] and [94] and by Dodds-Streeton J in Florgale Uniforms Pty Ltd v Orders [2004] VSC 65; (2004) 11 VCR 54 at [388]. It has most recently been followed in Permanent Custodians Ltd v AGB Developments Pty Ltd where Davies J refused leave for a guarantor to a file a cross claim that pleaded a breach of s 420A of the Corporations Act. 17 Counsel for Domenic Usalj also referred to GE Capital Australia v Davis where Bryson J stated at [83]: "[83] … In my opinion and subject to the terms of the guarantee, the guarantor is entitled to have the correct amount of any credit ascertained and brought into account in calculating the amount of the liability of the principal debtor which in its turn determines the amount of the liability of the guarantor. If the mortgagor is entitled to have a further credit brought into account on taking the mortgage accounts, the guarantor can get the benefit of the credit by relying on an equitable set-off against the creditor's demand. To do so is to rely on an entitlement of the mortgagor to set-off that credit on taking the mortgage accounts. The substance of what the guarantor does by relying on a set-off is establishing the true amount of his own liability by showing that the debtor is entitled to a set-off. Allowing this course tends to avoid multiplicity of proceedings and to deal as far as possible with all matters in controversy, as required by s 63 of the Supreme Court Act 1970. The defendants have in my opinion no right to sue under s 420A themselves, the credit is equitable in its nature, and unless they are allowed to rely on it as a set-off, their claimed right to have regard paid to it will not be recognised in these proceedings. In these circumstances they ought in my opinion to be allowed to raise it by way of set-off; subject however to the terms of the Guarantee and Indemnity. The procedural difficulties which prevent a party from raising a cross-claim and putting forward a claim to which someone else was entitled but the cross-claimant was not, which are central to the decisions in Cellulose and Covino , do not stand in the cross-claimants' way in this case." 18 At [85] to [92] Bryson J set out the equitable remedies there are available to the guarantors in their own right. 19 Counsel for Domenic Usalj also relied upon Investec Bank (Australia) Ltd v Glodale Pty Ltd & Ors [2009] VSCA 97; (2009) 256 ALR 104. In that case there was an appeal against a decision of judge as to whether a mortgagee in possession sold two holiday apartments in Port Douglas, Queensland, at market value or at a undervalue and as to a counterclaim by the mortgagee for interest owed because the security property failed to cover the amount borrowed. This case did not involve a guarantor seeking to invoke s 420A of the Corporations Act. However the Victoria Court of Appeal stated at [102]: "[102] The question then remains as to whether his Honour should have, in all the circumstances, ordered a taking of accounts, rather than an award of damages. Section 85(3) specifically provides for an award of damages (s 85(3). Whilst s 420A does not specify the nature of the remedy, the common approach, as we have said, has been for a court to determine compensation based upon the loss occasioned from the breach of duty. It is, as Mandie J noted in Kyuss Express Ltd v Sellers [2001] 10 (at [102]) a question of what loss flows from the breach. In Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570 the majority of the Full Court of South Australia held that the duty imposed by s 420A did not sound in damages, but that the remedy was in equity. Compensation was explained subsequently in Fortson Pty Ltd v Commonwealth Bank of Australia (2008) 100 SASR 162 at [11]; see also [28] as "the difference, if any, between the price obtained and the market value". In this case given that there was a claim by the respondents under s 85(3) of the PLA which specifically provided for damages, whether the loss was categorised as equitable compensation or as damages, the method of calculation remained the same. The approach taken by the trial judge therefore was, in the circumstances of this case, correct. There was no sound reason to adopt an alternative mode of assessment." [Footnotes inserted] 20 In my view, it is clear that s 420A(1) does not confer any right or remedy on guarantors and paragraph 11 of the cross claim should be struck out pursuant to rule 14.28. 21 Domenic Usalj submitted that if Woolpak's assets were sold under market value and he was obliged to pay out the balance owing under the guarantee, and if Woolpak succeeded in its claim that the assets were sold for undervalue, then he is entitled to an equitable set off. This, in my view, is an arguable proposition. 22 Paragraph 18 of the cross claim seeks damages including common law damages against Mr Olde, the receiver, in respect of an alleged failure to comply with s 420A. Counsel for the Bank submitted that there is no factual basis pleaded which would justify the award of common law damages. Bryson J in GE Capital Australia v Davis at [55] stated, "There is no context of an existing entitlement under Common Law to damages …". The pleading in paragraph 18 so far as it pleads an entitlement to common law damages should be struck out pursuant to rule 14.28. 23 Paragraph 18 of the cross claim also seeks damages pursuant to s 423 of the Corporations Act against Mr Olde, the receiver, with respect to an alleged failure to comply with s 420A. In GE Capital Australia v Davis Bryson J held at [63]; "[T]he discretion to award a remedy under s423 should only be acted on where an inquiry into the conduct of the controller has revealed the existence of a liability which can be established simply and is not open to any substantial dispute." 24 Counsel for the Bank submitted that the pleading is defective because it fails to lay any basis for there to be an inquiry into the conduct of Mr Olde. Until the basis of an inquiry is put forward the allegation that Mr Olde's conduct somehow gives rise to a liability must be presumed to be the subject of a substantial dispute. The conditions precedent to the exercise of judicial discretion in s 423 have not been met and accordingly paragraph 18 of the cross claim of an entitlement to the remedy of damages pursuant to s 423 should be struck out pursuant to rule 14.28. 25 Paragraph 18 also seeks damages on a third basis, namely pursuant to s 1324(10) of the Corporations Act against Mr Olde in respect of an alleged failure to comply with s 420A. 26 In GE Capital Australia v Davis Bryson J stated at [61]: "Where there is simply no prospect of the grant of an injunction there is no room under subs (10) for ordering payment of damages." 27 Counsel for the Bank submitted that there is no prospect of an injunction being ordered to restrain a breach of s 420A as all the events relating to the exercise of the power of sale have been completed and there is no prospect that conduct relating to exercise of the power of sale will be repeated or continued. This submission should be accepted. Paragraph 18 of the cross claim for an entitlement to the remedy of damages pursuant to s 1324(1) should be struck out. 28 It is my view that paragraphs 11 and 14 to 18 of the cross claim, as currently pleaded, are doomed to failure and should be struck out. The earlier paragraphs provide such as paragraphs 1 to 6 and 8 to 10 provide background facts and should survive. In the exercise of my discretion, the cross claimant should be given a further opportunity to replead his cross claim raising equitable remedies. To avoid confusion, the whole of the cross claim should be repleaded. I grant leave to the cross claimant to file and serve an amended cross claim within 14 days. The matter is listed for a status conference on 28 September 2010 at 9.00 am before the Registrar. Costs are reserved.

(1) Paragraphs 11 and 14 to 18 of the cross claim filed 17 April 2010 are struck out.

(2) Grant leave to the cross claimant to file and serve an amended cross claim within 14 days.

(3) The matter is listed for a status conference on 28 September 2010 at 9.00 am before the Registrar.

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