BMG Poseidon Corp Pty Ltd v Adelaide Bank Limited; In the Matter of BMG Poseidon Corp Pty Ltd

The Relevant Facts 8 The property was purchased by BMG at auction in December 2003 for a purchase price of $1,060,000. The property was purchased as an investment. Apparently, BMG intended to develop the property and resell it at a profit. 9 Settlement of the purchase occurred in mid 2004. In addition to the funds borrowed from Adelaide Bank, BMG borrowed an amount of $150,000 from a gentleman called Zabiullah Khorram in order to assist with the purchase of the property. 10 BMG entered into two Home Loan Contracts with Adelaide Bank (the loan agreements). The first was dated 11 February 2004 and signed by BMG on 19 February 2004. The second was dated 30 June 2004 and signed by BMG on 2 July 2004. Each Home Loan Contract was in substantially the same terms. Under the first Home Loan Contract, Adelaide Bank advanced $848,000 to BMG. Under the second Home Loan Contract, Adelaide Bank advanced $152,000 to BMG. The term of each loan was 25 years. Each Home Loan Contract provided for the payment of late charge fees, break costs fees, enforcement expenses and default interest in the circumstances set out therein. 11 The purpose of the loans is described in each Home Loan Contract as "Investment Purchase". Each Contract provided that the loan would be secured by a mortgage of the property and supported by the guarantee and indemnity of each of Mr Watts and Mrs Watts. 12 It is apparent from the evidence that the total borrowings made by BMG for the purpose of acquiring the property exceeded $1,150,000, although the purchase price itself was $1,060,000. Thus, the total funds borrowed for the purpose of the acquisition exceeded by a substantial amount the purchase price of the property. 13 BMG defaulted under the first Home Loan Contract by failing to make the payments due on 25 February, 29 March and 26 April 2005. It also defaulted under the second Home Loan Contract by failing to make the payment due on 12 April 2005. 14 On 11 May 2005, Gadens Lawyers (Gadens), acting on behalf of Adelaide Bank, served on BMG a Notice Pursuant to Section 57(2)(b) of the Real Property Act 1900 (NSW) in which it claimed the amount of $6,174.20, being the total amount of the overdue payments as at that date. 15 BMG did not remedy the defaults referred to in that s 57(2)(b) Notice by 11 June 2005, the time limited by the Notice for the remedying of those defaults. 16 In those circumstances, it was open to Adelaide Bank to call up the full amount owing under the loan agreements. In a letter dated 11 May 2005 from Gadens to BMG under cover of which the s 57(2)(b) Notice was sent, Gadens informed BMG that, if it failed to comply with the s 57(2)(b) Notice within the time stipulated for compliance, Adelaide Bank automatically demanded the immediate repayment of all sums due and owing under the loan agreements. 17 In a letter from Gadens to BMG dated 19 July 2005, Gadens informed BMG and Mr and Mrs Watts that Adelaide Bank proposed to commence proceedings against BMG and Mr and Mrs Watts in respect of the then extant defaults under the loan agreements. In the same letter, Adelaide Bank indicated that it may be prepared to consider deferring legal action provided that a number of conditions were met. One of those conditions was that BMG and Mr and Mrs Watts make themselves available for service of the Statement of Claim, filing of which had been foreshadowed in the same letter. 18 On 22 July 2005, Adelaide Bank commenced proceedings in the Possession List of the Common Law Division of the Supreme Court of New South Wales (No SC13204 of 2005) (the Supreme Court proceedings) against BMG, as principal debtor, and against Mr and Mrs Watts, as guarantors of BMG's debt. The Statement of Claim filed in the Supreme Court proceedings is not in evidence before me. However, I think I can safely infer from other evidence and from the amount of the judgment that, in that pleading, Adelaide Bank claimed possession of the property and judgment for all amounts then due under the loan agreements (being the principal sums, interest, late charge fees, enforcement expenses and costs). The Statement of Claim was served on BMG and on Mrs Watts on 26 July 2005 and on Mr Watts on 3 August 2005. No Notices of Appearance were filed by any of the defendants in the Supreme Court proceedings until late 2007 and no steps were taken in those proceedings by any of those defendants until late 2007. 19 On 24 March 2006, Adelaide Bank made application to the Supreme Court that judgment be entered against BMG, Mr Watts and Mrs Watts by default. 20 On 3 April 2006, the Supreme Court entered the following judgment by default, namely that: (1) Adelaide Bank be given possession of the property; and (2) BMG, Mr Watts and Mrs Watts pay to Adelaide Bank the sum of $1,028,725.29. 21 On 16 May 2006, Adelaide Bank made application to the Supreme Court for the issue of a Writ of Possession in respect of the property. On or about 22 May 2006, a Writ of Possession in respect of the property was issued by the Supreme Court. On 1 June 2006, the Sheriff issued a Notice to Vacate in respect of the property and scheduled an eviction for 15 June 2006. By this time, BMG, Mr Watts and Mrs Watts were aware of the existence of the judgment. 22 At the request of Mr Watts, Adelaide Bank refrained from taking further steps to execute the Writ of Possession in order to enable BMG to attempt to sell the property at auction on 1 July 2006. An auction was held on 1 July 2006. No bids were made at the auction and the property was passed in. 23 On 1 November 2006, Adelaide Bank took possession of the property. 24 By early November 2006, BMG was asserting that it had procured a sale of the property to Mr Glenn Campbell for a price of $1,075,000. 25 Various communications took place between BMG and Adelaide Bank in the period from mid 2006 to late 2006. Some of these communications were without prejudice. It is clear from the correspondence which is in evidence that, had BMG been able to exchange an unconditional contract for sale in respect of the property by 15 October 2006 for a purchase price of $1,075,000, Adelaide Bank would very likely have been content to forbear taking further action pending settlement of such a sale. However, no such sale was effected. 26 By Without Prejudice email sent on 11 September 2006, Mr Mills, of Adelaide Bank, said: The Bank has considered your request for continued support and has agreed to defer repossession action over the Company's property situated at 68 Lyons Rd Drummoyne NSW subject to the following conditions:

• Re-commencement of normal monthly instalments on YX01 & YX02 in September 2006 (11th & 8th respectively). These payments are now over due and payable within 7 days. - Monthly payments $5124 & $1098 respectively to be maintained thereafter - No arrears on related loan 37198272 Watts - Executed copy of the purchase contract evidencing legitimacy of the sale contract within 42 days - Regular monthly reports as to status of DA approval commencing 1 October 2006 - Company Debts to be repaid in full by June 2007 from sale of secured property.

Failure to comply with any of the above conditions will result in the immediate re-instatement of recovery/possession action.

Please sign below acknowledging the above conditions and return by fax within 7 days together with evidence September 2006 payments have been made.

Do not hesitate to contact me should any matter require further clarification. 27 Both Mr and Mrs Watts signified their acceptance of the proposal made by Adelaide Bank in that email by signing a copy of the printout of that email. Adelaide Bank subsequently extended the time within which the executed copy of a purchase contract was to be provided to it to 15 October 2006. 28 Several of the conditions in the email dated 11 September 2006 from Adelaide Bank to Mr Watts were not met. The most conspicuous of these was the requirement that an executed copy of a purchase contract be provided by 15 October 2006. 29 One final opportunity to get its affairs in order was afforded by Adelaide Bank to BMG in a letter sent by email to BMG on 17 January 2007. That letter was in the following terms (omitting formal parts): Re: BMG Poseidon Corp Pty Ltd Account 37198256 YXO1 & YXO2 Property 68 Lyons Road Drummoyne NSW 2047

I am writing in response to your letters addressed to Mr Barry Fitzpatrick and Mr Jamie McPhee dated 27 November 2007 [sic].

Adelaide Bank Limited has subsequently sought and received further information from you to assist in an extensive review of this file.

Any allegations that Adelaide Bank Limited has acted otherwise than appropriately in relation to this matter are rejected.

We note you have undertaken numerous strategies over an extended period without maintaining consistent payment, nor have you delivered an acceptable, unconditional, clearance arrangement. The total arrears position is currently $93,839.71.

The Bank will not agree to refund any interest or charges on the basis that these amounts have been applied consistent with the terms of the loan agreement and mortgage.

Please be informed that Adelaide Bank Limited intends to proceed with exercising its power of sale over the property at 68 Lyons Road, Drummoyne NSW 2047. Adelaide Bank Limited will be instructing its Lawyer to prepare a contract for the sale of the property for $1,075,000.00, which we anticipate will be finalised by 1 February 2007.

However, as a gesture of goodwill, the Bank will allow you one final opportunity to refinance the total debt as requested in your email dated 11 January 2007. On a without prejudice basis, Adelaide Bank Limited is prepared to withhold from entering into a sale contract of the security property on the following conditions:

1. By 31 January 2007 you must provide Adelaide Bank Limited with:

(a) a copy of an unconditional refinance approval, in a form acceptable to the Bank, for an amount of $1,075,000.00; and (b) satisfactory evidence that arrangements are in place with the caveator to enable the refinance to proceed. 2. By 15 February 2007 settlement of the refinance must take place and $1,075,000.00 applied to loan accounts 37198256 YXOI and YX02.

If you do not comply with these refinance conditions, Adelaide Bank Limited will proceed to enter into a contract of sale of the security property without further notice.

The total debt is currently $1,092,224.88 plus legal costs. As a gesture of goodwill, should the refinance option or sale for $1,075,000.00 proceed, Adelaide Bank Limited will not pursue reimbursement of the shortfall from BMG Poseidon Corp Pty Limited.

Adelaide Bank Limited reserves its rights generally, including under the judgement [sic], the mortgage and the loan agreement. Should the option to refinance or sale for $1,075,000.00 not proceed, Adelaide Bank Limited reserves the right to enter into a revised sale contract, and reassess its position in recovery of any additional shortfall from BMG Poseidon Corp Pty Limited. 30 The conditions laid down in this letter were not met by BMG. 31 On 14 March 2007, a further exchange of emails took place. In the first of these, Adelaide Bank informed BMG that it proposed to market and sell the property in light of the fact that the purchaser apparently located by BMG, Mr Campbell, had not yet signed an unconditional contract for the sum of $1,075,000. In response to that email, Mr Watts informed Adelaide Bank that he had procured refinancing up to an amount of $970,000. The last email sent on that day was from Adelaide Bank to Mr Watts. That email was in the following terms (omitting formal parts): You have given numerous advices stating that you will refinance the debt but none have come to fruition.

The marketing of the property will continue as stated. However, if you can provide me by close of business Monday 19 March 2007 (1) with a letter from a recognised financial institution stating you have unconditional financial approval of $970,000 and (2)a commitment that institution will refinance the debt of $970,000 by close of business Monday 26 March 2007 and (3) definitive evidence on how the shortfall will be repaid in full by Monday 26 March 2007 then I will withdraw the auction. These terms are not negotiable.

The offer stands in my email dated 17 January 2007 below should this institution (only) require access to the property. (Original emphasis.) 32 BMG was unable to procure the refinancing which had been foreshadowed in Mr Watts' email of 14 March 2007. 33 In those circumstances, on 2 April 2007 Adelaide Bank entered into a Contract for the Sale of Land in respect of the property with Mr Campbell for the sale price of $1,000,000, that being the maximum amount Mr Campbell was then prepared to pay for the property. 34 Prior to entering into that contract for sale, Adelaide Bank had obtained three valuations of the property. These were: (1) A valuation of $900,000 as at 17 July 2006 made by Ms Wickham and Mr Moutsos of Megaw & Hogg, National Valuers; (2) A valuation in the range between $750,000 and $800,000 as at 7 November 2006 by VJ Lupton of Alcorn Lupton and Associates Pty Limited; and (3) A valuation in the range of $780,000 to $850,000 as at 3 January 2007 by Mr Woodham of WBP Property Group Pty Limited. 35 Each of those valuations was tendered in evidence before me. BMG did not call expert evidence as to the valuation of the property as at late 2006 and early 2007. However, Mr Watts had informed Adelaide Bank in July 2006 that, on or about 1 July 2006, BMG had received a "casual offer" for the purchase of the property at a figure of $850,000. There was also evidence to the effect that, by 17 May 2005, the property was in poor condition. It seems that it was vacant at that time and remained vacant thereafter. 36 The Contract for Sale between Adelaide Bank and Mr Campbell was completed on 24 May 2007. The net proceeds received by Adelaide Bank after the deduction of all appropriate fees and expenses were either $990,950.54 or $993,480.86. Adelaide Bank has used $993,480.86 in its reconciliation calculations. For the purposes of these proceedings, I will accept the larger figure, viz $993,480.86. 37 On 27 August 2007 the Statutory Demand was served on BMG. On 11 September 2007, BMG commenced the current proceedings. 38 On 4 October 2007, BMG, Mr Watts and Mrs Watts filed in the Supreme Court an application to set aside the judgment. This application was filed approximately 18 months after judgment was entered and a long time after BMG, Mr Watts and Mrs Watts first became aware of the judgment. 39 That application was heard on 7 February 2008 by McCallum J. 40 On 12 February 2008, her Honour dismissed the application. 41 In support of their application to set aside the judgment, BMG, Mr Watts and Mrs Watts filed and served an affidavit sworn by Gambhir Watts on 4 October 2007. The contents of that affidavit are identical to the contents of Mr Watts' affidavit sworn on 11 September 2007 and filed in these proceedings. 42 The arguments advanced by BMG and the other defendants in the Supreme Court in support of their application to have the judgment set aside may be summarised as follows: (a) The judgment should be set aside because it was obtained clandestinely by misrepresentation of facts and by keeping BMG, Mr Watts and Mrs Watts in the dark, without serving them or informing them of any documents after the service of the Statement of Claim. In those circumstances, so it was submitted, the defendants were denied natural justice; (b) In addition, it was said that an arrangement had been entered into between BMG and Adelaide Bank through an employee of the second defendant, as agent for Adelaide Bank, that Adelaide Bank would not proceed with any legal action. Reliance was placed upon the letter from Gadens to BMG dated 19 July 2005; and (c) Adelaide Bank had dealt with the defendants harshly and unfairly by strictly invoking the provisions of an unreasonable contract. 43 McCallum J rejected all of the arguments advanced on behalf of the defendants in the Supreme Court proceedings. Her Honour concluded that the defendants had failed to establish any arguable defence to the claims made by Adelaide Bank in the Supreme Court proceedings. 44 On 13 May 2008, a Summons was filed in the NSW Court of Appeal by BMG, Mr Watts and Mrs Watts in which they sought leave to appeal from the decision of McCallum J refusing to set aside the judgment. That Summons was heard on 6 August 2008. On 6 August 2008, the Court of Appeal dismissed that Summons with costs. On that occasion, the Court of Appeal gave brief reasons for its decision. 45 At [13] of the Reasons for Judgment of Allsop P (with whom Campbell JA agreed), his Honour said: The rights of the parties to be let in to defend the case depend upon the merits brought forward on the application, which inevitably involves displaying that there is an arguable defence. Her Honour indicated her reasons for coming to the view that there was no apparent arguable defence in a manner which I do not find in any way undermined by the reassertions in the submissions of the kinds of considerations dealt with by her Honour. 46 At [14] and [15], his Honour went on to remark as follows: 14 There were also some matters raised in the written submissions as to a potential cross-claim which is asserted in para 6(d) of the submissions that the respondent bank had prevented the appellants from refinancing the loan by demanding exorbitant break costs and fees, thus illegally and irregularly causing irreparable hardship. 15 I do not see from her Honour's reasons that that matter was raised before her Honour in those terms. However, even if it had been, it lacks any detail. It does not on its face disclose a defence to the claim and at most may, if properly articulated as it is not at the moment, form the basis of some claim against the bank. 47 His Honour went on to hold that this last point had not been raised before McCallum J or dealt with by her. His Honour also held that, in any event, it would not be a matter amounting to an arguable defence. 48 On 11 September 2008, BMG, Mr Watts and Mrs Watts sought to apply for Special Leave to Appeal from the whole of the judgment of the NSW Court of Appeal in which that Court upheld the decision of McCallum J. That application was made out of time. 49 The High Court treated that application as an application for an order dispensing with the requirement to comply with the time limits set out in r 41.02.1 of the High Court Rules, which rule requires that an Application for Special Leave to Appeal to the High Court must be filed within 28 days after the judgment below was pronounced. 50 On 11 February 2009, the High Court dismissed that application and also dismissed the Application for Special Leave to Appeal to the High Court filed on 11 September 2008. The High Court published brief reasons in support of the orders which it made on that occasion. 51 After briefly referring to the course of events in the courts below, Gummow and Kiefel JJ said (at [4]): The applicants have not advanced any question of law that would justify a grant of Special Leave to Appeal. This matter concerns the application of settled principle on an issue of practice and procedure, and there is no reason to doubt the correctness of the decisions below. 52 In a calculation made for the purposes of the current proceedings, Adelaide Bank asserted that the total amount actually due to it from BMG as at 21 August 2007 was $178,640.30.

BMG's Contentions 53 Mr Watts submitted on behalf of BMG that I should be satisfied that: (a) There is a genuine dispute between BMG and Adelaide Bank about the existence and the amount of the debt to which the Statutory Demand relates (see s 459H(1)(a) of the Act); (b) BMG has an offsetting claim equal to or exceeding the amount claimed in the Statutory Demand (see s 459H(1)(b) of the Act); and (c) The Statutory Demand should be set aside because of a defect in the Demand or for some other reason (see s 459J of the Act).

The Section 459H(1)(a) Ground 54 It was submitted on behalf of BMG that: (a) No moneys were due from BMG to Adelaide Bank; or (b) Alternatively, if any moneys were due, the amount was considerably less than the amount claimed in the Statutory Demand. 55 These submissions essentially gave rise to competing contentions as to the correct amount due (if any) from BMG to Adelaide Bank as at 21 August 2007. BMG also relied upon some of the matters advanced by it in respect of grounds (b) and (c) referred to in [53] above. A number of the matters relied upon by BMG were said to support more than one ground

The Section 459H(1)(b) Ground 56 Mr Watts submitted that BMG had the following claims against Adelaide Bank: (a) A claim that the bank had breached its duties as mortgagee in possession by selling the property at an undervalue; (b) A claim that the bank breached binding arrangements which it had made with BMG on several occasions to the effect that it would refrain or forbear from taking or pursuing steps to enforce its rights under the loan agreements and under the mortgage in return for certain promises and actions which BMG bound itself to perform; and (c) A claim more generally expressed to the effect that the bank had dealt with BMG and with Mr and Mrs Watts harshly and unfairly thereby undermining BMG's capacity to refinance the loans or sell the property. 57 Mr Watts submitted that these claims all sounded in damages or compensation the amount of which was much greater than the amount claimed by Adelaide Bank in the Statutory Demand. 58 Accordingly, it was submitted by Mr Watts that BMG had offsetting claims within the meaning of s 459H of the Act which exceeded the amount of the debt claimed by Adelaide Bank.

The Section 459J Grounds 59 Three grounds under this section were advanced. These were: (a) The Statutory Demand was not made in compliance with s 459E of the Act because it was not in the prescribed form (see s 459E(2)(e) of the Act) and was not accompanied by an affidavit that: (i) Verified that the claimed debt was due and payable by BMG as at 21 August 2007; and (ii) Complied with the Rules of Court. (see s 459E(3) of the Act). The alleged non-compliance with each of the provisions referred to above was said to be constituted by the failure on the part of Adelaide Bank to verify the Statutory Demand or otherwise include in the affidavits read in support of its case on the present Application a statement by an appropriately qualified witness to the following effect: I believe there is no genuine dispute about the existence or amount of the debt. In support of these contentions, Mr Watts relied upon the decision of Tamberlin J in IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Company Ltd [2003] FCA 533. (b) The Statutory Demand was issued for an improper purpose. That purpose was said to be the purpose of preventing or delaying BMG, Mr Watts and Mrs Watts from taking action against Adelaide Bank for damages or compensation by reason of the bank's conduct in allegedly dishonouring various alleged agreements and arrangements and in taking possession of the property and in taking steps to sell it as mortgagee in possession; and (c) The amount of the debt claimed in the Statutory Demand was misstated. At the hearing on 10 December 2008, Mr Watts conceded that there was in existence as at 21 August 2007 a debt due from BMG to Adelaide Bank but submitted that the correct amount of the debt due from BMG to Adelaide Bank at that time was $16,281.29. Subsequently, in a submission which I allowed Mr Watts to advance as a result of my decision made on 21 April 2009 (see BMG Poseidon Corp Pty Ltd v Adelaide Bank Limited; In the Matter of BMG Poseidon Corp Pty Ltd [2009] FCA 389), Mr Watts submitted that no moneys were due from BMG to Adelaide Bank and that Adelaide Bank had an obligation to account to BMG for surplus funds of approximately $86,286.32.

Consideration 60 In the period from September 2007 until late 2008, these proceedings were held in abeyance pending the final disposition of the application by the defendants in the Supreme Court proceedings to set aside the judgment. That application has now run its course and been finally determined. 61 The fact that BMG, Mr Watts and Mrs Watts sought to set aside the judgment in the Supreme Court and has failed to do so are relevant matters in the present proceedings. Further, in my consideration of the case which BMG seeks to make in the present proceedings, I am entitled to and should have regard to the grounds and contentions relied upon by BMG in support of the application to set aside the judgment made by the defendants in the Supreme Court proceedings. 62 Section 459H and s 459J of the Act are in the following terms: 459H Determination of application where there is a dispute or offsetting claim

(1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following: (a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates; (b) that the company has an offsetting claim. (2) The Court must calculate the substantiated amount of the demand in accordance with the formula: Admitted total - offsetting total

(a) the admitted amount of the debt; or (b) the total of the respective admitted amounts of the debts; as the case requires, to which the demand relates.

(a) if the Court is satisfied that the company has only one offsetting claim - the amount of that claim; or (b) if the Court is satisfied that the company has 2 or more offsetting claims - the total of the amounts of those claims; or (c) otherwise - a nil amount.

(3) If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand. (4) If the substantiated amount is at least as great as the statutory minimum, the Court may make an order: (a) varying the demand as specified in the order; and (b) declaring the demand to have had effect, as so varied, as from when the demand was served on the company. (5) In this section: admitted amount, in relation to a debt, means:

(a) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt - a nil amount; or (b) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute; or (c) otherwise - the amount of the debt. offsetting claim means a genuine claim that the company has against the respondent by way of counterclaim, set off or cross demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

respondent means the person who served the demand on the company.

(6) This section has effect subject to section 459J. 459J Setting aside demand on other grounds

(1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. (2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

The Section 459H(1)(a) Ground 63 For s 459H(1)(a) to be engaged, the Court must be satisfied that there is a genuine dispute about the existence or about the amount of the debt. In order for a dispute of that kind to be raised, there must be more than the mere assertion of a dispute or the mere making of a claim (per Lindgren J in Rohalo Pharmaceutical Pty Ltd v RP Scherer SpA & Pharmagel SpA (1994) 15 ACSR 347, (1994) 13 ACLC 94 at 352/30-354/15, esp at 353/20-25). 64 The dispute must have an objective existence the genuineness of which is capable of being assessed (Rohalo 15 ACSR 347, 13 ACLC 94 at 353/17-25). The test has been equated with the test as to whether the creditor would be entitled to summary judgment on the claim (Rohalo 15 ACSR 347, 13 ACLC 94 at 353/42-354/8). 65 In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787-788, (1994) 12 ACLC 669, McLelland CJ in Eq said: It is, however, necessary to consider the meaning of the expression "genuine dispute" where it occurs in s 450H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the "serious question to be tried" criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit "however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be" not having "sufficient prima facie plausibility to merit further investigation as to [its] truth" (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or "a patently feeble legal argument or an assertion of facts unsupported by evidence": cf South Australia v Wall (1980) 24 SASR 189 at 194.

But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at 366-7) Hayne J said, after referring to the state of the law prior to the enactment of Div 3 of Pt 5.4 of the Corporations Law, and to the terms of Div 3:

These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.

In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605 Thomas J said:

There is little doubt that Div 3 … prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a "genuine dispute" and whether there is a "genuine claim".

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it), the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.

The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).

I respectfully agree with those statements. 66 In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452at 461-464 a Full Court of this Court discussed the relevant principles by reference to a number of the relevant authorities. At 464F-G the Court said: In our view a "genuine" dispute requires that: • the dispute be bona fide and truly exist in fact; • the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived. 67 In her Reasons for Judgment published on 12 February 2008, McCallum J recorded the following (at [12]): Mr Watts does not dispute that there were defaults in the two loan agreements, nor that the penalty charges incurred as a consequence were calculated in accordance with the two loan agreements. 68 In this Court, Mr Watts did not take a different position. In particular, he made no submission to the effect that the various components making up the judgment debt of $1,028,725.29 had not been charged in accordance with the terms of the loan agreements. His attack on the judgment was more fundamental. It was Mr Watts' submission that the penalty charges and fees levied against BMG by Adelaide Bank ought to be disregarded entirely, that the costs incurred by Adelaide Bank in selling the property ought to be disregarded entirely and that BMG should get the benefit of the higher purchase price (viz $1,075,000) apparently negotiated by Mr Watts with Mr Campbell. These views or submissions are reflected in the calculation which I allowed Mr Watts to advance by way of submission earlier this week. 69 It seems to me that these contentions made by Mr Watts on behalf of BMG are really nothing more than repetitions of contentions advanced by him in support of the other grounds relied upon by him. In essence, Mr Watts contended that Adelaide Bank had wrongly calculated the amount due, had sold the property at an undervalue and had otherwise dealt with BMG in such a fashion as to give rise to a claim for damages which could be offset against the amount of any debt properly due from BMG to Adelaide Bank. 70 For reasons which will become apparent when I come to deal with the other grounds and contentions advanced by BMG, I am not satisfied that there is a genuine dispute between BMG and Adelaide Bank about the existence or the amount of the judgment debt or the part thereof which was claimed in the Statutory Demand. The points made on behalf of BMG do not rise above the mere assertion of a dispute. 71 It was submitted on behalf of Adelaide Bank in support of a contention that no genuine dispute existed that, by reason of the application of the principles articulated by the High Court in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, BMG was estopped from arguing that there was any dispute in respect of the judgment and, further, was estopped from arguing in the present proceedings any matter which was in fact raised by it, or could have been raised by it, in support of the application made by it, Mr Watts and Mrs Watts in the Supreme Court to set aside the judgment. 72 I do not think that these propositions are correct. There has been no adjudication on the merits and no occasion calling for such an adjudication. The exercise of considering and determining an application to set aside a default judgment involves the application of very different principles from those which would ordinarily be in play on a final hearing on the merits. 73 In my opinion, this Court has the power to go behind a judgment in appropriate circumstances, even if the judgment was obtained by default and even if the debtors have unsuccessfully made application to set the judgment aside. This much is made clear in the Reasons for Judgment of Gibbs J in Re Johnson & Mann; Ex parte Greendale Engineering & Cables Ltd [1968] ALR 408, (1967) 11 FLR 335 at 341. It may be thought that certain observations made by Beaumont J in Olivieri v Stafford (1989) 24 FCR 413 are authority for the contrary proposition. In that case, his Honour said (at 424): As has been said, a court of bankruptcy is concerned to inquire into the "reality" of the matter in hand. Here the "reality" of the matter is that the merits of the respondents' claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that Court has declined to disturb the judgment. As a matter of substance, it is appropriate, in all the circumstances, for a court of bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents' claim. That is to say, a court of bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue. 74 In my view, notwithstanding these remarks, his Honour nonetheless recognised that the Court retained a discretion to go behind a default judgment in an appropriate case even where attempts to set aside that judgment had failed. There is no principle which denies the existence of that discretion. In Olivieri 24 FCR 413, a judgment had been obtained in the District Court by default and two attempts to have it set aside had failed. The approach of Beaumont J was to look at the reality of the matter. In his Honour's view, by the time that the case before him had reached this Court, there was no reason for this Court to examine yet again the underlying basis for the judgment. . 75 In the same case, Gummow J reached the same result through a different process of reasoning with which, with respect, I agree. 76 The natural justice arguments advanced by BMG in support of its application to set aside the judgment made in the Supreme Court cannot constitute a defence to the claim of Adelaide Bank for repayment of its loans and other moneys due under the loan agreements. The remaining two broad grounds relied upon by BMG in the Supreme Court (as to which see 42 and (c) above) are reminiscent of contentions advanced on behalf of BMG in the present proceedings. 77 In the Supreme Court, McCallum J held that neither of these broad contentions constituted an arguable defence. In my view, in the case before me, BMG was also unable to support either of these contentions with any evidence or any persuasive argument. 78 The fact that BMG was unable to satisfy the Supreme Court that it had an arguable case based upon the two broad contentions now under consideration is a matter relevant to my consideration of whether or not there is a genuine dispute in respect of the balance of the judgment debt now claimed by Adelaide Bank. 79 With the exception perhaps of its contentions concerning the events of July 2005, BMG's case in the present proceedings is essentially directed to events which occurred after 3 April 2006 (the date when the judgment was entered) and, in particular, to the conduct of Adelaide Bank in administering the loans - especially during the time when BMG was in default of its obligations under the loan agreements and under the mortgage. 80 In reality, my consideration of the question of whether I should be satisfied that there is a genuine dispute of the relevant kind between BMG and Adelaide Bank in the present case begins with the fact that Adelaide Bank is the judgment creditor under the judgment and the fact that the judgment has not been set aside despite the judgment debtor's best efforts to have it set aside. The reality of the matter is that the Supreme Court at two levels has decided that BMG had no arguable defence to the claims of Adelaide Bank made in that Court and that some of the unsuccessful contentions and arguments made by BMG in the Supreme Court have been reasserted here in precisely the same way as they were asserted in that Court.

The Section 451H(1)(b) Ground 81 The expression offsetting claim is defined in s 459H(5). 82 Although the expression may well include an unliquidated claim, that claim must be capable of being quantified as an amount of money (Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd (1995) 17 ACSR 128 at 135). 83 The claim must exist at the time at which the statutory demand is made ie in this case as at 21 August or perhaps 27 August 2007. 84 By reason of the terms of the definition of offsetting claim, the claim must be genuine. The concept of genuineness gives rise to the same considerations as those with which I have dealt in respect of the s 459H(1)(a) ground. 85 The first contention relied upon by BMG in support of this ground is that Adelaide Bank sold the property at an undervalue. This allegation amounts to an allegation that the bank breached the duty owed by it to BMG as mortgagee in possession when exercising its power of sale. 86 In Upton v Tasmanian Perpetual Trustees Ltd (2007) 158 FCR 118 at [86]-[90] (pp 138-143) a Full Court of this Court summarised various propositions that may be drawn from the relevant decisions of the High Court as to the content of the duty of good faith owed by a mortgagee to a mortgagor in the context of the exercise of a mortgagee's power of sale. In the passages referred to, the Full Court held that a mortgagee is entitled to exercise the power of sale for its own benefit but must take reasonable steps to obtain a fair price which in turn will involve taking reasonable steps to ascertain the value before selling. 87 Further, the position in Australia remains that there is no common law duty in negligence by which a mortgagee can be found liable for damages if it fails to obtain a good price or the best price upon the sale of a mortgaged property (as to which see Fisher and Lightwood's Law of Mortgage, (2nd Australian edition, 2005) at 496-497 [20.21]). The duty of the mortgagee is one of good faith. That duty requires the mortgagee not to act fraudulently or wilfully or recklessly or to recklessly sacrifice the interests of the mortgagor (Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 at 680). 88 BMG tendered no evidence to support its contention that the property was sold at an undervalue. Adelaide Bank, on the other hand, tendered the three valuations which it had obtained. The valuers were not cross-examined. Their opinions were not challenged at all. In addition, Mr Watts' anecdotal recounting of the casual offer made to BMG in mid 1996 of $850,000 tended to support the valuations which Adelaide Bank had obtained. 89 Furthermore, the obvious difficulties which BMG had encountered in selling the property in 2006 and early 2007 and in procuring sufficient funds to refinance its debts to Adelaide Bank in the same period provide additional support for the conclusion that the property was not likely to have commanded a price much above $850,000-$900,000 viewed from the perspective of a seller looking forward in late 2006 and early 2007. 90 In my view, there is nothing to support the contention of BMG that the property was sold at an undervalue. 91 The second contention made by BMG in support of this ground was that Adelaide Bank had breached arrangements to forbear or refrain from taking enforcement action under the loan agreements and the mortgage and had thereby thus caused loss to BMG. In particular, it was submitted that certain realistic opportunities for BMG to refinance were torpedoed by Adelaide Bank. 92 The events of July 2005 were only faintly relied upon by Mr Watts. They were comprehensively dealt with in the judgment of McCallum J at [10]-[14] of her Honour's Reasons in support of her Honour's rejection of the proposition that those events gave rise to any defence to the Supreme Court proceedings. My own consideration of the relevant facts leads me to conclude that nothing that occurred in July 2005 gave rise to any arrangement or commitment to forbear of the kind alleged. Even if such an arrangement could be teased out of the communications passing between the parties at that time, it was one which was, at best, temporary and was able to be departed from upon reasonable notice being given. 93 The other relevant circumstances occurred in the period from September to December 2006. 94 In my view, Adelaide Bank did agree to defer taking possession of the property when it sent its email to Mr Watts of 11 September 2006. However, its agreement was subject to the conditions set out in that email. A number of those conditions were not complied with. In particular, no contract for sale was exchanged within the time limited in that email or within the further time allowed by Adelaide Bank. 95 The non-fulfilment of the conditions upon which the agreement was made meant that Adelaide Bank was free to pursue its full remedies should it so desire. 96 I have extracted at [29] and [31] above the communications passing between BMG and Adelaide Bank in January and March 2007. In my opinion, nothing in those communications could conceivably give rise to a conclusion that some arrangement of the kind alleged by BMG was made. Those communications contained proposals which never came into effect. The conditions set out therein were never met. 97 There was no other evidence before me that could conceivably support the second contention relied upon by BMG in support of this ground. 98 The more general and vague claim floated by Mr Watts on behalf of BMG and referred to at [42(c)] above was not articulated with any precision and was unsupported by any evidence or argument. It is fair to say that Adelaide Bank has exercised its rights to the full but the mere fact that it has done so does not give rise to any cause of action. No case was sought to be advanced either in evidence or argument that the loan agreements themselves or the mortgage should somehow or another be attacked or set aside. 99 For the above reasons, I am of the opinion that BMG has failed to make out that it has an offsetting claim against Adelaide Bank within the meaning of s 459H of the Act.

The Section 459J Grounds 100 In IFA Homeware Imports Pty Ltd [2003] FCA 533, Tamberlin J held that, in circumstances where the Act, Rules of Court and the Regulations made under the Act required a statement to the effect that the creditor believed that there was no genuine dispute about the existence or the amount of the debt to be made as part of the evidentiary requirements supporting a creditor's statutory demand, the failure on the part of the creditor to make such a statement on oath was fatal to the validity of the statutory demand. 101 In my opinion, however, the circumstances of the present case are quite different from those in play in IFA Homeware Imports Pty Ltd [2003] FCA 533. In my view, Adelaide Bank was not required to verify the Statutory Demand at all and was not required to include a statement in the form urged by Mr Watts. 102 Section 459E(3) of the Act is in the following terms: (3) Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that: (a) verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and (b) complies with the rules. 103 In the present case, the amount asserted to be due from BMG to Adelaide Bank in the Statutory Demand is the balance of a judgment debt. Thus, the foundation for the claimed debt in the present case is the judgment, not the loan agreements or the mortgage security. That being so, in my view, the Statutory Demand was not required to be accompanied by an affidavit that complied with s 459E(3) of the Act. It is only if such an affidavit were required that consideration needs to be given to the requirements of the Rules. It is only when those requirements are brought into play that the reasoning of Tamberlin J in IFA Homeware Imports Pty Ltd [2003] FCA 533 is apt. 104 I reject the first contention made by BMG in support of this ground. 105 The second contention advanced by BMG in support of this ground has not been supported by any evidence or argument. It too is rejected. 106 The third contention involves an assertion that the amount of the debt stated in the Statutory Demand was overstated. 107 It will be remembered that the amount of the debt stated in the Statutory Demand was $122,570.17. At the hearing before me, Adelaide Bank asserted that the correct amount owed by BMG at the time of the service of the Statutory Demand was $178,640.30. However, Adelaide Bank did not seek to vary the amount of the Statutory Demand and informed me that it intended to proceed upon the basis of the amount set out in the Statutory Demand. Thus, for BMG to succeed with this contention, it must demonstrate that the amount actually due from BMG to Adelaide Bank as at 27 August 2007 was less than $122,570.17 and that substantial injustice will be caused unless the Statutory Demand is set aside. 108 Mr Watts' arguments in support of this contention involved assertions made by him to the effect of those summarised at [59(c)] above. For these assertions to be made good, substantive reasons for disregarding the late charges and penalty charges levied against BMG would need to have been advanced and BMG would need to have satisfied me that it had an arguable case that the property had been sold at an undervalue. None of these matters have been established. 109 However, it is apparent from the calculations propounded by Adelaide Bank in support of its primary contention that the amount due from BMG to it as at 27 August 2007 was $178,640.30, that it is Adelaide Bank's case that it can continue to levy late payment charges and other expenses against BMG based upon the covenants in the loan agreements after the date when it obtained judgment ie after 3 April 2006. 110 Mr Watts did not argue that the entitlements to such charges had become merged in the judgment. However, I consider that it is open to me to take into account an argument that merger has occurred given that the amount said to be due was clearly in dispute. 111 The loan agreements included the following provision (cl 11.7): If any amount you must pay under this contract becomes merged in a court order, you must pay interest on that amount as a separate obligation. The rate is the applicable annual percentage rate applying under this contract. The interest is payable from the date we first you for the amount until that amount is paid. This obligation is not affected by the court order. (Original emphasis.) 112 Whilst it seems to me that the provisions of cl 11.7 would entitle Adelaide Bank to charge interest at the contractual rate after judgment, the terms of that clause do not authorise the continued charging after judgment of late payment fees and penalty charges in accordance with other provisions of the loan agreements. Whatever rights Adelaide Bank had to levy such fees and charges under the covenants in the loan agreements were merged in the judgment which it obtained on 3 April 2006. After 3 April 2006 its rights were confined to recovering the amount of the judgment plus interest, albeit levied at the contractual rate if it so desired and its rights under its securities (see Economic Life Assurance Society v Usborne [1902] AC 147; and Elders Trustee & Executor Co Ltd v Eagle Star Nominees Ltd (1986) 4 BPR 9205, [1987] ANZ ConvR 14, (1987) NSW ConvR 55-333). A complete copy of the relevant mortgage was not tendered in evidence before me. I will therefore assume that, prior to 3 April 2006, Adelaide Bank's rights in respect of interest and other charges were confined to the personal covenants in the loan agreements. In that event, those rights were merged in the judgment and ceased to exist after 3 April 2006. 113 In fact, Adelaide Bank has levied interest after 3 April 2006 at the Court rate allowed in the Supreme Court. This basis of charging interest was open to Adelaide Bank. 114 It is necessary for me to decide what is the correct amount that was actually due as between BMG and Adelaide Bank as at 27 August 2007. 115 According to the evidence, the total amount of interest on the amount of the judgment debt at the rates applicable from time to time in the period from 3 April 2006 up to and including 24 May 2007 was $109,286.62. In that period BMG made two payments, each of $6,222. The total of those payments (viz $12,444) should be deducted from the total amount of interest levied in that period. If that deduction is made, as at 24 May 2007, the amount due from BMG to Adelaide Bank was $1,028,725.29 (the amount of the judgment debt) plus $96,842.62 (being the total amount of interest due in respect of the relevant period less the total sums paid in that period). Thus, the amount due from BMG to Adelaide Bank immediately before completion of the sale of the property on 24 May 2007 was $1,125,567.91. On 24 May 2007, Adelaide Bank received $993,480.86 from the sale proceeds. Thus, the balance due from BMG to Adelaide Bank as at 24 May 2007 was $132,087.05. Interest became payable in respect of the period from 24 May 2007 to 27 August 2007. 116 Thus, in my view, the amount properly due from BMG to Adelaide Bank as at 21 August 2007 was an amount of $135,000 (approximately). This amount is more than the amount claimed in the Statutory Demand (viz $122,570.17). 117 For these reasons, whilst I find that the amount stated in the Statutory Demand was misstated, I do not think that it can sensibly be said that substantial injustice will be caused if the Statutory Demand is not set aside. The amount claimed in the Statutory Demand is less than the amount that was properly due to the creditor as at the date the demand was made. Further, at least for present purposes, the creditor relies upon the lesser amount. 118 I do not think that BMG has advanced or made out any other reason justifying the setting aside of the Statutory Demand. 119 For these reasons, I am of the opinion that the s 459J grounds have not been made out.

The Claims Against all Defendants for Damages or Compensation 120 BMG did not make any attempt to establish an entitlement to the damages which it seeks against all defendants. Indeed, it seemed to me that BMG did not seriously attempt to make a case that damages should be paid but rather sought to establish that, one way or another, no moneys were due to it from Adelaide Bank. 121 Nonetheless, in form at least, BMG sought an order that the defendants pay damages or compensation in the amount set out in para 2 of its Application. It has failed to establish any entitlement to that relief against any defendant. 122 Accordingly, I propose to dismiss BMG's Application in its entirety with costs. I certify that the preceding one hundred and twenty-two (122) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

There was no appearance either by or on behalf of the Second and Third Defendants

Date of Hearing: 10 December 2008