Commonwealth Bank of Australia t/as Bankwest v Khoury

Summary judgment 8UCPR 14.28(1) 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. 9UCPR 14.28(2) provides that the court may receive evidence on the hearing of an application for an order under subrule (1). 10Recently, in O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71 the Court of Appeal applied the High Court decision of Spencer v Commonwealth [2010] HCA 28; (2010) 241 CLR 118. In Spencer the High Court was concerned with s 31A(2) of the Federal Court Act 1976 (Cth) but the following principles are of general application: (a) On a summary judgment application, the real issue is whether there is an underlying cause of action or defence, not simply whether one is pleaded (at [23]). (b) The critical question can be expressed as whether there is more than a "fanciful" prospect of success (at [25]) per French CJ and Gummow J) or whether the outcome is so certain that it would be an abuse of the process of the court to allow the action to go forward (at [54]). Demonstration of the outcome of the litigation is required, not an assessment of the prospect of its success. 11Powers to summarily terminate proceedings must be exercised with exceptional caution (at [55]; see also French CJ and Gummow J at [24]).

The pleadings 12The plaintiff claims that between the period 7 April 2005 and 25 May 2006 CBA entered into agreements with Mr and Mrs Khoury pursuant to which CBA agreed to provide credit to Mr and Mrs Khoury by way of various facilities (as varied from time to time) ([7] S/C). The facilities are (a) written agreement for Gold Equity Release Home Loan dated 7 April 2005 with a credit limited of $100,000; (b) a written agreement for Gold Equity Release Home Loan dated 7 April 2005 with a credit limited of $675,000; (c) written agreement for Temporary Overdraft Facility dated 7 April 2005 with a credit limit of $400,000; (d) written agreement for Commercial Advance Facility dated 43 March 2006 with a credit limit of $3,425,000 with variations dated 4 April 2008 and 9 October 2009; (e) written agreement for Gold Equity Release Home Loan dated 25 May 2006 with a credit limit of $100,000; and (f) written agreement for Business Overdraft Facility dated 25 May 2006 with a credit limited of $30,000 with variation dated 4 April 2008 (together the loan agreements). Other than denying that they have any debt owing to Mr and Mrs Khoury do not say whether or not they signed these agreements. It is alleged that Mr and Mrs Khoury have defaulted in making repayments in accordance with the loan agreements. 13On 4 May 2005, Mr and Mrs Khoury granted to CBA a registered mortgage over the property at Dural that secured Mrs and Mrs Khoury's obligations under the loan agreements to CBA by registered mortgage number ABXXXX incorporating mortgage memorandum 2560622. (S/C [10]) 14CBA seeks possession of the property that is the Khourys' residential home.

The defence 15The portions of the defence that the plaintiff seeks to strike excise and out are as follows. 16Paragraph [2] of the defence where it relevantly pleads: 2 In answer to paragraph 2 and the whole of the statement of claim and say that the receivers have been validly appointed for the reasons set out in case number 2013/107109 [Khoury v Commonwealth Bank of Australia Limited] and this defence, namely (a) ... (b) ... (b) if the first plaintiff CBA has suffered no loss, there is no debt to be recovered by the Receivers. [the no-loss issue] 17At paragraph [3] of the defence Mr and Mrs Khoury say: (a) ... (b) ... (c) The Loan Agreements were excluded from the purchase price paid by CBA to Bank WA for the purchase of the Bank WA trading as Bankwest loan portfolio as they were identified by CBA as not meeting the CBA prudential or lending criteria (the Carve-Out); (d) Following CBA's conduct of 'Project Magellan' and other audits and assessments of the Bank WA trading as Bankwest loan portfolio, CBA identified certain loans including the said Loan Agreements, as being non-performing loans or loans which otherwise did not meet CBA's lending or prudential criteria, and as a consequence, the Loan Agreements were the subject of a price adjustment or credit allowed to CBA by Bank WA (the Claw-back). 18Paragraphs [4] and [5] of the defence relevantly plead: 4 In answer to paragraph 6 and the whole of the statement of claim Mr and Mrs Khoury deny that the said APRA Transfer Certificate applies to the Loan Agreements for the reasons set out in the preceding paragraph. 5 ... (a) CBA acquired the interest of Bank WA in the Loan Agreements whether by the said APRA Transfer Certificate or otherwise. ... 19Finally, paragraphs [11] and [12] of the defence plead: 11 In further answer to the whole of the statement of claim Mr and Mrs Khoury say that if, which is denied, they have any obligation to CBA arising from the alleged facts and circumstances, the fact is that CBA has suffered no loss. Particulars (a) The said Loan Agreements were excluded from the business acquired by CBA from Bank WA trading as Bankwest, as a result of the Carve-out; (b) If despite the Carve-out, CBA paid any sum to Bank WA which included acquisition of the Loan Agreements, which is not admitted, CBA received the benefit of the Claw-back; (c) If CBA did not receive the Claw-back, which is not admitted, CBA has claimed, received or is entitled to at a deduction equivalent to the principal and accumulated interest amounts claimed from Mr and Mrs Khoury. 12 Further, and as a consequence of the aforesaid matters, Mr and Mrs Khoury say in answer to the whole of the statement of claim, that if the CBA has acquired an interest by way of transfer of the Bank WA and Bankwest loan portfolio by reason of the said APRA Transfer Certificate, which is denied, CBA will be unjustly enriched if it recovers the debt claimed against Mr and Mrs Khoury. Particulars Mr and Mrs Khoury rely on: (a) the Carve-out; (b) the Claw-back; (c) the tax deduction benefit to CBA; (d) the public statements made by CBA its servants and agents concerning the under market cost of its acquisition of the business of Bank WA trading as Bankwest at a substantial discount to market value; (e) all the facts and circumstances of the agreements, arrangements and understandings between: (i) CBA and Bank WA; and (ii) Bank WA and APRA; and (iii) CBA and APRA; for acquisition of the business of Bank WA trading as Bankwest. Further particulars may be provided after discovery and or interrogatories. 20In essence, the portions of the defence that are sought to be excised and struck out raise two main issues, the carve out and claw back and that there was no loss suffered by CBA. 21Overall, counsel for CBA submitted the above matters pleaded in the defence are without appropriate particulars, the factual and legal basis for these two issues have not been articulated and are therefore embarrassing. Further, it is not possible for CBA to understand the basis of the defence, nor is there reasonable basis for these claims. 22It should be borne in mind that the function of pleadings is to state, with sufficient clarity, the case that has to be met by the plaintiffs. In this way, pleadings serve to define the issues for decision and ensure the basic requirement of procedural fairness that is, a party should have the opportunity of meeting the case against him or her: Banque Commerciale SA En Liquidation v Akhill Holdings Ltd [1990] HCA 11; (1990) 179 CLR 279 at 286-296 and 302-3.

(i) Carve out and claw back 23This part of the defence relates to CBA's purchase of the 100 percent share capital of Bankwest and the legislature effect of the transfer. 24In 2008, CBA bought 100 percent of the share capital of Bankwest. On 19 December 2008, CBA completed the acquisition of the Bankwest and St Andrew's Australia Bank Pty Limited (see Exs A and B). 25On 7 September 2012, the Australian Prudential Regulation Authority issued CBA a certificate of transfer under s 18 of the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth) (see Annexure A to affidavit of Ms Britton 20/8/13). The transfer certificate provided that the Bankwest was the transferring body under the Act; CBA was the receiving body under the Act; the total voluntary transfer of the Bank of Western Australia to CBA pursuant to the Act and was to take effect; and the transfer certificate came into force on 1 October 2012.

The relevant legislation 26Sections 18 and 22 of the Financial Sector (Business Transfer and Group Restructure) Act 1999 ("the Transfer Act") relevantly read: 18. Certificate of transfer (1) If APRA: (a) has made a voluntary transfer approval; and (b) considers that all conditions of a kind referred to in paragraph 16(1)(a) that are imposed by the approval have been complied with; and (c) ... (d) ... APRA must, in writing, issue a certificate (a certificate of transfer) stating that the transfer is to take effect. (2) The certificate must: (a) include the names of the transferring body and the receiving body; and (b) state whether the transfer is a total transfer or a partial transfer; and (c) ... (d) subject to subsection (3), state when the certificate is to come into force (either by specifying a date as the date it comes into force, or by specifying that the date it comes into force is a date worked out in accordance with provisions of the certificate); and (e) be signed by an authorised APRA officer. (3) APRA must, in deciding when the certificate is to come into force, take into account the wishes of the transferring body and the receiving body. (4) The certificate comes into force in accordance with the statement included in the certificate as required by paragraph (2)(d). 22 Time and effect of voluntary transfer (1) When the certificate of transfer comes into force, the receiving body becomes the successor in law of the transferring body, to the extent of the transfer. In particular: (a) if the transfer is a total transfer-all the assets and liabilities of the transferring body, wherever those assets and liabilities are located, become (respectively) assets and liabilities of the receiving body without any transfer, conveyance or assignment; and (b) .. (c) to the extent of the transfer, the duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. (2) ... (3) Subject to subsection (2), if: (a) the transfer is a total transfer; and (b) immediately before the certificate comes into force, proceedings (including arbitration proceedings) to which the transferring body was a party were pending or existing in any court or tribunal; the receiving body is, on and after the day when the certificate comes into force, substituted for the transferring body as a party to the proceedings and has the same rights in the proceedings as the transferring body had. 27In these proceedings, the Khourys contend that the debt claimed by CBA was not part of the "business" transferred by the Bankwest to CBA because Bankwest and CBA excluded the Khourys' debt from the transaction first, in the initial purchase price (carve out); or second, in the price adjustment (claw back). 28Counsel for the plaintiff submitted that the allegation that the Certificate of Transfer issued by the Australian Prudential Regulatory Authority on 7 September 2012 is or was ineffective to transfer all the assets and liabilities of the Bankwest to CBA would appear to misconstrue the effect of the legislation as effecting a transfer conveyance or assignment. A certificate of transfer has effect to make CBA the successor in law of the Bankwest irrespective of transfer conveyance or assignment: s 22(1)(a) of the Transfer Act. 29Taking the Khourys' pleading at its highest, they say that the loan agreements were excluded from the purchase of the shares transaction between CBA to Bankwest. Alternatively, the Khourys say that because their loan agreements were identified by CBA as not meeting the CBA prudential or lending criteria (the carve out); and following CBA's conduct of "Project Magellan" and other audits and assessments of Bankwest's loan portfolio and (more details are provided in a schedule set out in the Khourys' written submission but it is not necessary to reproduce them here) CBA identified certain loans (including the Khourys' loan agreements) as being non-performing loans or loans which otherwise did not meet CBA's lending or prudential criteria and as a consequence, the loan agreements, were the subject of a price adjustment or credit allowed to CBA by Bankwest on the purchase price of the sale of shares (the Claw-back). This means that CBA did not acquire the Khourys loan agreements on "just terms" and hence the reference to the Constitution. 30According to counsel for CBA, the problem that arises with this contention might be usefully identified by asking the obvious question: if the Certificate of Transfer was ineffective as alleged, it must follow that the defendants remain contractually bound to pay the Bankwest. That being so, how is it that the defendants are not liable to honour their payment obligations to the successor in law of the Bankwest, namely, the plaintiff? 31While I remind myself that this Court should not stifle any novel arguments by summarily throwing them out when there is a reasonable possibility that if will be found, in the development of law, still embryonic, that a cause of action does lie, this case is not one of them. These pleadings excised parts of the defence and fall into the creative category: see Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365 per Master Allen (as he then was) quoted with approval by Badgery-Parker J in Gibson v Parkes District Hospital (1991) 26 NSWLR 9 at 35. 32The wording of s 22(1) of the Transfer Act is clear. The transfer was a total transfer. The certificate of transfer came into force on 1 October 2012. Hence, on 1 October 2012 CBA became the successor in law of Bankwest and all the assets and liabilities became the assets and liabilities of CBA without any transfer, conveyance or assignment by virtue of the operation of s 22(1). It is clear that none of the assets or liabilities of Bankwest were excluded from the transfer. The overall purchase price paid for the transfer of shares, does not impact upon specific agreements that were in place between Bankwest and the Khourys. It is my view that this claim is hopeless and should be struck out.

(ii) No-loss 33This pleading is not clear but doing the best I can to understand it, I think that the Khourys contend that if their loans formed part of the business before the transfer took place there was a price adjustment favourable to CBA because of the portfolio of non performing loans and upon transfer CBA benefited from tax deductions such that it offset any loss suffered by CBA the Khourys defaulting in repayment of their loan agreements. 34In other words, the Khourys argue that if their loan formed part of the "business", CBA has suffered no loss as it received an amount, by deduction, from Bankwest equivalent to the debt. According to the Khourys, CBA by accepting the deduction and seeking to enforce the loan agreements offends the universal rule against double satisfaction. Also, they say s 43 of the Transfer Act provides that certain other laws are preserved and the common law is not displaced. 35Counsel for the Khourys further submitted that the certificate of transfer is not unlimited in its operation or effect because it issued under the Transfer Act and the Transfer Act is based on the Commonwealth Constitution paragraph 51(xx) and the Corporations power, and 51(xxxi) and acquisition of property on just terms which are referred to in ss 3 and 44(3) of the Transfer Act. There is no basis to allege that the transfer of the Khourys' loan agreements that retained exactly the same terms and conditions upon the transfer was not made on "just terms". 36Counsel for the plaintiffs understood the defendants' pleading a little differently. Counsel for the plaintiffs submitted that the no loss contention raises a manifest defect because the plaintiffs' monetary claim is self-evidently claim for debt and the plaintiff has not claimed any loss or damage. According to CBA there is no reason to displace the classical analysis of a debt claim as not only a breach of contract but as an unlawful detention of money and well established authority renders matters such as mitigation of loss and proof of loss or damage entirely irrelevant. Further, the plaintiffs says that the notion that a borrower might escape repayment obligations because the lender might enjoy a tax saving in the event of non-payment is a pleading tantamount to closing the barn gate after the cart has bolted. 37If the defendants' argument is actually that outlined by the plaintiffs, I agree that CBA's claim is not one for loss or damage. It is for possession. The basis that gives rise to that claim is the Khourys had defaulted in payment of the loan agreements so the plaintiff seeks to enforce the mortgage provisions that allows it to sell that property. I have already addressed the tax benefit component of this contention. 38It is my view that this claim is hopeless.

Prejudice 39Counsel for CBA submitted that the costs of discovery would be great because it would be required to produce all the documents relating to the pre-purchase audits and assessments conducted by CBA include Project Magellan and the documents that show how the loans identified were treated. The task is not that huge if the documents permitted on discovery are only those that relate to the Khourys and their specific loan facilities file with Bankwest. 40It is my view that the pleadings in paragraphs 2(b), 3(c), 3(d), 4, 5(a), 11 and 12 do not disclose reasonable causes of action. No amendments were foreshadowed by the defendants' counsel that may overcome the defects in the pleading of these paragraphs of the defence. In these circumstances, in the exercise of my discretion, I would not grant leave to replead them. 41Costs are discretionary. Costs usually follow the event. The defendants are to pay the plaintiffs' costs as assessed or agreed.

The Court orders that: (1) Paragraphs 2(b), 3(c), 3(d), 4, 5(a), 11 and 12 of the defence filed 5 July 2013 are struck out. (2) The defendants are to pay the plaintiffs' costs as assessed or agreed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 December 2013