Capital Finance Australia Limited v Smith and Anor

CATCHWORDS : PROCEDURE - miscellaneous procedural matters - other matters - notice of motions - leave sought to file further amended defence - set off claims - plaintiff seeking summary judgment - whether there is no defence to action - plaintiff's motion declined - leave granted to file further amended defence - costs

Australian Securities and Investment Commission Act 2001 (Cth) Civil Procedure Act 2005 LEGISLATION CITED : Conveyancing Act 1919 Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005

Brimson v Rocla Concrete Pipes Ltd [1982] 2 NSWLR 937 Dennis v Australian Broadcasting Corporation [2008] NSWCA 37 Demagogue Pty Ltd v Ramensky and Another (1992) 39 FCR 31 CASES CITED : Dey v Victorian Railway Commissioners (1949) 78 CLR 62 Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 Gatward v Kleem (1955) 72 WN (NSW) 354 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125

Capital Finance Australia Limited - Plaintiff PARTIES : David Anthony Smith - First Defendant Kenneth Ian Davidson - Second Defendant

COUNSEL : Mr P Newton - Plaintiff Ms E Beilby - Defendants

SOLICITORS : Kemp Strang - Plaintiff The Law Company - Defendants

• 9 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

10391/08 CAPITAL FINANCE AUSTRALIA LIMITED v SMITH AND ORS

JUDGMENT 1 HER HONOUR: By motion of 12 September 2008, the plaintiff seeks summary judgment under Rule 13.1 of the Uniform Civil Procedure Rules 2005 against the first and third defendants. By motion of 25 November 2008, the first and third defendants seek leave to file a further amended defence. The matter has not yet been programmed for hearing. 2 The proceedings were commenced by statement of claim filed in January 2008. The plaintiff seeks orders that the defendants pay it some $11 million, including interest and costs, alleging default under a facility agreement by failure to pay interest and the debt, despite demand for repayment being made. The first and third defendants filed a defence to the claim in March 2008 and an amended defence in August. The second defendant has not filed any defence. 3 The plaintiff claims that the purpose of the facility agreement was to refinance land and construct apartments at Pennant Hills. The borrower under the agreement, the registered proprietor of the land, was Lifestyle Retirement Projects No 2 Pty Ltd in its own right and as trustee of the Lifestyle Retirement Projects Unit No 2 Trust. The defendants jointly and severally guaranteed the payment of the borrower's debt. 4 By the proposed further amended defence the defendants seek to raise claims that the plaintiff and its appointed receiver breached their obligations under s 420A of the Corporations Act 2001 (Cth), in failing to exercise reasonable care in enforcement of the security and in failing to exercise the powers granted under the mortgage documentation and guarantee by way of long term lease. The defendants also raise alleged misrepresentation in breach of the Trade Practices Act 1974 (Cth) or the Australian Securities and Investment Commission Act 2001 (Cth), thereby claiming a set off of all monies payable by the defendants. 5 The debt, the mortgage and the guarantee are not in issue. Nor is it in issue that the plaintiff demanded payment of what was due and that the borrower and the defendants failed to comply with the demands. In November 2007, the plaintiff appointed a receiver, with power of sale of the property and assets of the borrower. Some of the twenty one apartments have since been sold by the receiver. 6 The plaintiff's case was that it is entitled to judgment on the amended defence and that leave to further amend the defence would not be granted, the defences sought to be raised not being arguable. The plaintiff relied on the terms of the mortgage, a fixed and floating charge and a deed of guarantee and indemnity, as providing a complete answer to the allegations made in the amended defence. 7 The plaintiff argued that as guarantors, the defendants have a current and principal obligation to pay the debt to the plaintiff; they are not entitled to an order for account. The borrower, which is not a party to the proceedings, also has no right to such an order. The debt remains outstanding and unpaid and no offer to redeem the mortgage has been made. 8 It was also argued that allegations that the borrower and the first and second defendants have suffered damage as the result of the receiver's conduct, which is sought to be raised by the further amended defence, can lead to no relief in these proceedings. While the receiver is obliged to take instructions from the plaintiff, the receiver is the borrower's agent and the borrower has agreed to indemnify the plaintiff in respect of any loss or damage caused by the receiver. In any event, the defendants have an independent obligation to the plaintiff under the guarantee. 9 As to the misrepresentation claim, it was argued to have no foundation. The defendants sought to raise promises or representations that if the plaintiff were to exercise its power of sale, it would only do so by way of long term lease, rather than by any other means. No express oral representations were relied on. There was claimed to be a representation by silence. The principles relevant to a determination of such a claim were discussed by Black CJ in Demagogue Pty Ltd v Ramensky and Another (1992) 39 FCR 31 at 32. It was argued that the evidence relied on did not support the allegations and the terms of the mortgage, the fixed and floating charge, the deed of guarantee and indemnity and various correspondence and other documents all showed that the plaintiff's rights under the security was not restricted as claimed. 10 The defendants had received independent legal advice in the transaction. There was no term of any of the documents involved in the transaction which could have given rise to any misunderstanding on the defendants' part, that the plaintiff would exercise its power of sale only on the basis of a long term lease. To the contrary, the documents clearly showed the plaintiff's unfettered right of sale in the event of default. It followed that the defence sought to be raised had no possible foundation and that the amendment sought in this respect would be refused. 11 It was conceded, however, that the claims raised in the further amended defence that the plaintiff had breached its duties as mortgagee to prevent the unnecessary accruing of interest, did raise a triable issue. It was argued, nevertheless, that the proper course in the face of that concession was to give the plaintiff summary judgment in relation to the principal (a sum of some $8 million) and only to allow the amendment of the defence in relation to the interest part of the plaintiff's claim. 12 The defendants' case was that judgment should not be given and that leave to further amend the defence should be granted. The case was not appropriate for summary judgment, given the issues of fact raised by the proposed amendment. The defence sought to be raised was not beyond argument, as the plaintiff submitted (see General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; Dey v Victorian Railway Commissioners (1949) 78 CLR 62 at 91). 13 Three serious questions were said to be raised by the further amended defence. Firstly, whether the plaintiff or its agent, Mr Mizzi, engaged in misleading or deceptive conduct by silence, sufficient to void the guarantee. Secondly, whether the plaintiff, by its agent, Mr Mizzi, is estopped from resiling from the defendants' assumed state of affairs. Thirdly, whether the plaintiff breached its duties as mortgagee. It was conceded that the third question went to quantum, not liability. The plaintiff's concession as to the third issue meant, however, that the matter would have to go to hearing. In the circumstances, the defendants ought not to be estopped from litigating the entirety of their defence. 14 The order for summary judgment required the amended defence to be struck out under Rule 14.28 of the Uniform Civil Procedure Rules. Such an order would only be made if the pleading was 'so bad that no legitimate amendment could cure the defect' (see Brimson v Rocla Concrete Pipes Ltd [1982] 2 NSWLR 937 at 942). 15 The defendants' case was supported by various affidavits. That evidence seeks to establish that moneys had been loaned by the plaintiff to the borrower for the purpose of the construction of a retirement village development, with sale of apartment accommodation to retirees on long term lease, in accordance with the terms of a trust deed. The land was restricted to such a use. This allowed the unit holders to retain strata ownership of the apartments. The loan was pursued for the purpose of such a development, as evidenced by application documents, including those initially made to St George Bank, where Mr Mizzi was then employed, as well as the borrower's Investment Memorandum and Trust Deed. 16 When Mr Mizzi became an employee of the plaintiff, the borrower and the defendants were invited to make an application for finance. That application was made to and assessed by the plaintiff on the basis that the apartments were to be sold on long term lease. It was the defendants' case that they had not understood that the loan was only approved by the plaintiff on the basis of the strata sale of the apartments. That had never been communicated to the defendants by Mr Mizzi or in the loan documentation. 17 The defendants had always assumed that the approval had been given on the basis requested in the borrower's application. Approval on the basis of strata sale would not have been in accordance with the legislative scheme applying to the development, or with the terms of the applicable trust deed. If it had been understood that approval was provided on such a basis, it would have meant that the facility agreement would have had to have been put to the unit holders for approval, before the facility was accepted. On the basis of a strata sale, the defendants would not have given the guarantee. 18 The defendants also claimed that the strata basis on which the plaintiff acted to sell the apartments resulted in a lower return than what would have been achieved by way of sale by long term lease. They seek to rely on expert evidence to advance this claim. 19 It was argued that the proposed defences raised issues of fact which clearly required the Court's determination. The evidence of Mr Mizzi would be relevant to the resolution of the question of whether there had been any representations made as to the basis on which the loan had been advanced and whether there was any basis for the beliefs to which the defendants deposed. There was clearly a triable issue as to the misrepresentation case which the defendants wished to advance. They ought not to be deprived of the ordinary opportunity to establish that case. 20 For the plaintiff, it was argued that the defendants' submission, in reality, acknowledged that there were no provisions of the relevant documents on which the alleged misrepresentation rested. The documents all established the plaintiff's entitlement to repayment of the principal; the claimed defences had no foundation and so the leave sought would be refused and judgment on the principal would be given in favour of the plaintiff.

Consideration 21 The defendants seek to amend their further amended defence to raise various other matters, including a set off in relation to the misrepresentation they allege. The plaintiff's case is that there is no proper foundation for the amendments proposed, given the terms of the guarantee, the borrower's indemnity of the receiver under the mortgage and what the proposed defences actually seek to raise, other than in relation to interest. The result is that the plaintiff is entitled to summary judgment as to the principal of the loan in question and that there should be a trial only in respect of the interest component of the plaintiff's claim. 22 It follows from the plaintiff's concession that leave to amend the further amended defence in that respect, at least, must be given. Should leave to amend otherwise be refused and judgment for the principal amount be given in favour of the plaintiff, as it pressed? 23 That can only result if it may properly be concluded, at this stage of the proceedings, that the misrepresentation case which the defendants wish to advance is such that it must inevitably fail. In Gatward v Kleem (1955) 72 WN (NSW) 354, Walsh J observed at 357-8:

There is no doubt that there is jurisdiction to strike out pleas if they are clearly bad in law or if, although not clearly demurrable, it appears to be certain, having regard to facts as to which there can be no dispute, that the pleas cannot be supported and must inevitably fail when the action comes on for trial. The jurisdiction is one which must be exercised with great caution, and a defendant is not to be deprived by means of a summary procedure, of the opportunity of litigating his case in the ordinary way before the ordinary tribunal if there is any chance that he may be able to provide evidence, which, if accepted, will have the result that the plaintiff's claim will be defeated in whole or in part, or that the defendant will establish a right to some set-off against the plaintiff's claim or to recover some amount from the plaintiff; see Dey v Victorian Railway Commissioners (1949) 78 CLR 62 at pp 91, 92). But if it appears quite clear that the defendant cannot succeed and that there is no substantial question to be tried, then the pleas may be struck out to avoid the expense and delay which would be involved in matters being tried in the ordinary way. If the circumstances are such that the judge is required to decide questions of law in order to ascertain whether there is any chance of the defendant succeeding, it does not necessarily follow that he should refuse the application, if he, in his discretion, thinks it proper to dispose of those questions of law upon such an application; cf. Goddard v Polar Cream Pty Ltd (1946) 47 SR (NSW) 154, at pp 156, 157).

24 I am satisfied that on the material presently before the Court, it cannot be concluded that the defendants cannot conceivably succeed on the misrepresentation claim which they wish to advance, or that there is no substantial question to be tried in relation to that claim. Nor could it be concluded that this claim is false or even improbable. That would require an investigation of factual matters which the authorities warn against at this stage of the proceedings and which the parties have not attempted. 25 The plaintiff's resistance to the amendment in relation to the claimed misrepresentation rests on an analysis of the various contractual and other documents, which it is claimed make clear the plaintiff's right to exercise the power of sale in the event of default on terms other than those claimed by the defendants. That, I accept, appears to be a strongly arguable case. The claim that nevertheless, there was misrepresentation by the plaintiff, or by Mr Mizzi on its behalf, in the course of their dealings with the defendants which resulted in the giving of the guarantee on which the plaintiff relies, must be considered in the way discussed by Black CJ in Demagogue Pty Ltd. This requires a consideration of whether, in all of the circumstances, a reasonable expectation arose on the defendants' part and that by silence, there has been conduct by the plaintiff which was misleading or deceptive, as the defendants claim. 26 In my view, on what is presently before the Court, the plaintiff's case is not so clear that it may be concluded that the defendants do not have any chance of establishing a misrepresentation case. As an applicant for summary judgment, the onus falls on the plaintiff to show that what the defendants wish to advance has no conceivable foundation. I have referred shortly to the evidentiary case which the defendants seek to advance. The plaintiff has not as yet met that evidence. At this stage of the proceedings the defendants' evidence has not been challenged and must be taken at its highest. The onus which the plaintiff has to meet in the face of that evidence is a very high one. I am unable to comfortably conclude that it is one which the plaintiff has met. As the High Court observed in Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 at 99:

The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried: see Clarke v. Union Bank of Australia Ltd. [1917] HCA 19; (1917) 23 CLR 5 ; Jones v. Stone (1894) AC 122 ; Jacobs v. Booth's Distillery Co . (1901) 85 LT 262 . In our view, it is not possible to say without doubt, on the whole of the material, that there is no question to be tried concerning the payment of the deposits by the appellants. The facts which are established are inconclusive, but the respondent, as well as the appellants, was in a position to establish conclusively the payment of the deposits if that fact could be established and, given the opportunity, it did not do so. That leaves, we think, a question to be tried and, although the appellants have not succeeded in positively establishing a defence, they should not in the circumstances be debarred from defending the action. 27 In the face of the defendants' evidence, I am unable to conclude, without doubt, that there is no question to be tried concerning the misrepresentation which they allege. 28 Consideration must also be given to the provisions of ss 56, 57, 58 and 64 of the Civil Procedure Act 2005, which require that the discretions here in question are exercised by the Court 'in accordance with the dictates of justice' and that the overriding purpose of the Act and of the Rules, namely, 'the just, quick and cheap resolution of the real issues in the proceedings' is facilitated. Regard must also be had to the approach of the Court of Appeal in Dennis v Australian Broadcasting Corporation [2008] NSWCA 37 at [28] - [29]. 29 In the circumstances, I am satisfied that justice requires that the plaintiff's application for summary judgment must be refused and that the defendants must be given leave to further amend their defence. Justice does not permit that these defendants be deprived of the ordinary opportunity to litigate their case.

Orders 30 For the reasons given, I order that the plaintiff's motion is declined; that the defendants are granted leave to file the proposed further amended defence and that the plaintiff pay the defendants' costs of the motions, as agreed or assessed.

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