Commonwealth Development Bank v Windermere Pastoral

Introduction 1 By a Statement of Claim issued on 30 November 1998 the plaintiff, Commonwealth Development Bank of Australia Limited, for which Mr A.G. Bell of Counsel appeared, sued the defendant, Windermere Pastoral Co Pty Limited, for which Mr I.E. Davidson of Counsel appeared, seeking a monetary judgment of $1,929,598.43, together with interest thereon, and possession of the whole of the land contained in Certificates of Title Folio Identifiers 1/126006 and 1/126009 and known as "Windermere", Currawang Road, Collector in the State of New South Wales. 2 The Statement of Claim alleged that on or about 18 March 1992 the defendant granted a mortgage, registered number E677085, to the plaintiff over the second mentioned piece of land, which mortgage incorporated the provisions of a Memorandum, registered number T340042; and that on or about 15 July 1992 the defendant granted a mortgage, registered number E677084, to the plaintiff over the first mentioned piece of land, which mortgage incorporated the provisions of a Memorandum, registered number E212677. The Memoranda set out the detailed terms and conditions. It was pleaded that the mortgages were executed in consideration of certain advances and accommodation granted or to be granted by the plaintiff to Presswood (Aust) Pty Limited, which was referred to in the mortgages as, and to which I shall refer as, "the debtor". None of these assertions, including the terms of the mortgages, was in issue. 3 The plaintiff alleged it provided financial accommodation to the debtor, which was not substantially in issue, although the amounts claimed were not admitted. However, on the application before me there was evidence of the amounts which, subject to any defences and cross-claim, are owing.

The Defence and Cross-Claim 4 The Defence pleaded:- "7. It was an implied term of the execution of the security provided by the defendant that the plaintiff, its servants or agents, would not act in a manner likely to cause damage to the defendant. 8. In breach of the implied term the plaintiff, by its servants or agents, caused Presswood (Aust) Pty Ltd ('Presswood') to suffer loss and damage and otherwise to act to its detriment for the benefit of the plaintiff. 9. Further, and in the alternative, the security documents executed by the defendant did not permit the plaintiff to make further advances without the consent of the defendant. 10. In breach of the said agreement between the plaintiff and the defendant the plaintiff advanced further sums to Presswood and otherwise controlled the financial dealings of Presswood as a result of which Presswood suffered loss which the plaintiff now seeks to recover from the defendant. 11. The defendant denies that it is indebted to the plaintiff." 5 By its Cross-Claim the defendant alleged that in 1990 the plaintiff offered to provide capital and loan funds to the debtor in consideration of an agreement whereby the debtor would accept capital and loan funds from the plaintiff and otherwise be subject to its direction. The plaintiff advanced $600,000 as capital, and $1,360,000 by way of loan. It was pleaded that in consideration of the representations and encouragement by the plaintiff the debtor closed its Goulburn premises and invested money in land and buildings to erect a factory at Tumut, and that it was a term and condition of the advance of funds by the plaintiff that it would become "an equitable owner" in the debtor's business, and that in about 1992 the plaintiff acquired 46.7% of the issued capital of the debtor. 6 It was pleaded that in 1994 the plaintiff appointed Mr Peter Thomas, one of its senior managers, to act as a director of the debtor and, thereby, exercised control and influence in the decisions of the debtor as he was acting as agent for the plaintiff; and that Mr Thomas gave advice as to the manner in which the debtor should conduct its financial dealings, collected invoices and made decisions as to the advance of funds to the debtor. 7 The pleading continued that in about 1992 the debtor received a request from a purchaser in Korea for the supply of wood product, which necessitated the investment by it in a further mill in its plant at Tumut; that the financial and investment advice of the debtor was effectively controlled by Mr Thomas, who represented to the debtor that the second mill should be installed and funded from reserves and, if needed, with further funds from the plaintiff. It was pleaded that Mr Thomas assumed responsibility for the negotiation and advice to the plaintiff in relation to the financial circumstances of the debtor, and that it was reasonably possible for the debtor to repay its indebtedness to the plaintiff, but that the plaintiff changed a policy in relation to advances and the status of its equity division and, thereby, withdrew financial support to the debtor. 8 It was pleaded that the plaintiff issued a demand for the repayment of funds to the Tumut premises of the debtor when it knew, or should have known, that the factory was closed for the Christmas vacation; that it refused, neglected or failed to entertain discussions with the remaining directors of the debtor; that Mr Thomas resigned as a director of the debtor on 4 April 1996; that his resignation was shortly prior to the issue of a demand or notice by the plaintiff for the payment of money alleged to be due; that the plaintiff advised the debtor that the financial affairs of the plaintiff had been "handed over" to the Commonwealth Bank of Australia; that the defendant does not know the relationship between the plaintiff and the Commonwealth Bank of Australia in regard to the transfer of the debtor's financial affairs; and that the plaintiff appointed a Receiver to the debtor's business when there was no compliance with its demand for payment. 9 It was further pleaded that Mr Thomas was at all times acting as an agent of the plaintiff and, further or in the alternative, was under a fiduciary duty to the debtor not to cause its financial dealings to be intermingled with the financial dealings of the plaintiff. It was pleaded that he failed or neglected to act in accordance with his fiduciary duty to the debtor and preferred to act for the benefit of the plaintiff; that the debtor is not indebted to the plaintiff in the sum alleged to be owing "and this sum is not properly due to the plaintiff"; that the plaintiff now seeks to recover the amount advanced by it to the debtor from the defendant; and, further and in the alternative, the defendant is entitled to be indemnified by the plaintiff in relation to any sum found to be due to it. 10 The Cross-Claim continued:- "29. The cross-defendant is estopped from seeking recovery from the cross-claimant because of the actions of the cross-defendant, its servants or agents. 30. The security documents referred to in paragraphs 4 and 7 of the Statement of Claim executed by the cross-claimant are in the nature of a guarantee for the debts of Presswood. 31. The security documents referred to in paragraph 30 hereof were executed in circumstances which were harsh and unconscionable and should be set aside." 11 The Cross-Claim sought declarations that Mr Thomas acted as agent for the plaintiff, was in breach of his fiduciary duty to the debtor and intermingled the affairs of the defendant and the debtor. Judgment was sought against the plaintiff in the sum now claimed by it, as was an indemnification for any amount due by the debtor to the plaintiff. Declarations were also sought that the plaintiff is estopped from seeking any orders or judgments against the defendant, and that the security documents be set aside.

The Present Notice Of Motion 12 By a Notice of Motion filed on 21 May 1999 the plaintiff sought orders that the Defence and Cross-Claim be struck out, on the basis that they failed to disclose any defence or reasonable cause of action, and for summary judgment. It sought other relief with which, for the moment, it is unnecessary to deal. The Notice of Motion was supported by the affidavit of Mr Michael Patrick Quinn, a manager of credit management, sworn 21 May 1999, and to which the various security documents and statements of the defendant's indebtedness as at 19 May 1999 were annexed. 13 The plaintiff's case is that the defendant, as in effect a guarantor, cannot, conformably with authority, rely on a defence, set-off or cross-claim to the claims against it under the mortgages, which defence, set-off or cross-claim would arguably be available to the debtor if it were sued. Part of this submission involves the proposition that the terms of the mortgages, on their proper construction, preclude such reliance by the defendant by making it liable for the full amount claimed from the debtor without deduction, and not merely for the amount that the debtor is obliged to pay to the plaintiff after any deductions flowing, for example, from a successful defence or cross-claim. 14 The defendant submitted that a proper construction did not lead to the conclusion for which the plaintiff contended; that the line of authority on which the plaintiff relied did not have the result of precluding the defence, set-off and cross-claim in the circumstances of this case; that the particular relationship between the parties gave rise to obligations which were enforceable by the defendant in all the circumstances of this case; and that it was inappropriate, at this stage, to strike out the defence and cross-claim.

Some Preliminary Matters 15 Mr Bell agreed that in this application the plaintiff must accept the truth of the matters pleaded in the pleadings sought to be struck out. I have set out the terms of the Cross-Claim and, in due course, it will be necessary to look at what the evidence established was the relationship between the plaintiff and the debtor. However, for present purposes, Mr Bell's concession led to an acceptance of the following:- (a) The plaintiff exercised control and influence in the decisions of the debtor; (b) Mr Thomas was a director of the debtor and was acting as the plaintiff's agent; (c) Mr Thomas gave advice to the debtor as to how it should conduct its financial affairs and dealings; (d) Mr Thomas effectively controlled the financial and investment advice of the debtor; (e) Mr Thomas assumed responsibility for the negotiation and advice to the plaintiff in relation to the financial circumstances of the debtor; and (f) the plaintiff changed its policy in relation to advances and changed the status of its equity division and "thereby withdrew financial support to" the debtor. 16 It is clear from these matters that the plaintiff, through Mr Thomas, exercised substantial, if not complete, control over the financial fortunes of the debtor and, to that extent, was in a position, at least prima facie, to regulate its indebtedness and, therefore, the amount for which the defendant could ultimately become liable. This was obviously done in circumstances where Mr Thomas understood that the debtor's indebtedness to the plaintiff was supported by the defendant's mortgages. The potential for conflict of interest must have been clear. 17 The onus upon the plaintiff to obtain the relief it sought was not in issue. In Air Services Australia v Zarb (Court of Appeal - 26 August 1998 - unreported) I gathered various judgments in which the relevant principles have been enunciated: Dey v Victorian Railway Commissioners (1948-1949) 78 CLR 62 at p.91; General Steel Industries Inc v Commissioner for Railways (NSW) & Ors (1964) 112 CLR 125; Webster & Anor v Lampard (1993) 177 CLR 598; Wickstead & Ors v Browne (1992) 30 NSWLR 1; Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241 and NRMA Insurance Limited v A.W. Edwards Pty Limited (Court of Appeal - 11 November 1994 - unreported). 18 In Zarb, which was an appeal from a refusal to strike out a Statement of Claim, the Court was considering a potentially expanding or changing area of the law of negligence in relation to whether a duty of care was owed by the defendant to the plaintiff in the circumstances of that case. The defendant relied upon portion of the decision of the High Court in Sutherland Shire Council v Heyman (1985) 157 CLR 425, but it appeared to me, and to Priestley JA who agreed with my decision, that the decisions of the High Court in Pyrenees Shire Council v Day (1998) 72 ALJR 152 and Romeo v Conservation Commission of the Northern Territory (1998) 72 ALJR 208 may require that decision to be revisited, at least in so far as the point at issue in Zarb was concerned. Even if that were not so those decisions provided support for the basic proposition that the plaintiff may have a good cause of action when all the facts were found. That was sufficient to cause Priestley JA and me to dismiss the appeal. 19 Powell JA dissented. His Honour was of the view that the plaintiff's case was so weak that it almost certainly would fail, and pointed out various difficulties which led him to that conclusion. An application for special leave to appeal to the High Court was refused. 20 The plaintiff must therefore meet the onerous test which applies to a strike out application, in circumstances where the defendant is relying on an equitable set-off and a claim for damages for breach of fiduciary duty in the particular factual situation presented by this case. There is a similarity with Zarb in that the legal considerations applicable to the existence of a fiduciary duty, when it may be breached and the consequences of such a breach is a developing area of the law. Further, questions of equitable set-off depend on the particular circumstances of each case. 21 In Beach Petroleum NL v Abbott Tout Russell Kennedy (1997) 26 ACSR 114 I gathered a number of the authorities dealing with fiduciary duties, including Commonwealth Bank of Australia & Anor v Smith (1991) 102 ALR 453, which dealt directly with the fiduciary duty owed, or potentially owed, by a bank to a customer. It may be said that this raises a somewhat different issue from that presently before me. On the other hand it may not because the defendant seeks to rely on an equitable set-off or cross-claim derivatively. Further, this case may depend on the correct legal and/or equitable characterisation of the position of Mr Thomas and a working out of the potential conflicts of interest to which I referred. 22 In any event, the extent of fiduciary duty and the obligations it imposes is the subject of continuing development. The decisions of the High Court in Maguire & Anor v Makaronis & Anor (1997) 188 CLR 449 and O'Halloran v R.T. Thomas & Family Pty Limited (1998) 45 NSWLR 262, in my respectful opinion, make this clear, and the Court of Appeal has reserved its decision in the appeal from my decision in Beach Petroleum. In the circumstances, and faced with the prima facie factual situation to which I have referred, I consider that it would be a bold statement to assert that the defendant's defence and cross-claim sank to the level of the strike out tests.

23 In the present case it will be necessary to determine whether the authorities upon which Mr Bell has relied are so clear as to overcome the view I have just expressed.

The Deed Of 18 March 1992 24 On 18 March 1992 the debtor entered into a Deed, Exhibit 2 on the application, which recited that it, its directors and shareholders had invited the plaintiff to subscribe for shares, which the plaintiff had agreed to do, on the terms and conditions and subject to the representations and warranties set out in the Deed. A number of the Deed's provisions placed the financial position of the debtor under the control of the plaintiff. 25 Clause 7 provided for the appointment of a director by the plaintiff and stated, inter alia:- "It is expressly acknowledged by the parties hereto that any such director is or will be appointed as the representative of CDB and shall be entitled, subject to law, to vote at any meeting of the Board of Directors of the Company or such Subsidiary (as the case may be) in the manner directed by CDB and in the interests of CDB."

This was the provision pursuant to which Mr Thomas was appointed, and it defined his role. 26 Mr Davidson also relied upon the General Negative Covenants set forth in clause 6.02, whereby the debtor covenanted and agreed with the plaintiff that it "shall not at any time … without the prior written consent of" the plaintiff do various things including borrowing or raising any money; encumbering the whole or any part of its assets; purchasing or acquiring assets having a market value in excess of that specified; entering into any long term contract or contracts containing onerous or unusual provisions having regard to its customary business; and making certain payments. The purpose of these references was to show the extent to which the debtor was under the financial control of the plaintiff, which is consistent with the acceptance of the truth of the facts pleaded. 27 The Deed and the affidavit of a director of the defendant, Mr Leon William Reardon, sworn 26 May 1999, upon which the defendant relied, showed another relationship between the defendant and the debtor. The Deed disclosed that Mr Reardon was a director and shareholder of the debtor. In paragraph 8 of his affidavit, Mr Reardon deposed:- "The plaintiff placed itself in a position of control of voting of the business of Presswood and controlled the flow of funds to Presswood by loans and decision making. The plaintiff appointed a representative to the Board of Presswood and exercised control. The plaintiff withdrew funding causing Presswood to suffer financial hardship. The plaintiff appointed a Receiver to Presswood and subsequently sold its businesses. The plaintiff's representative resigned from the Board of Presswood. In so doing the plaintiff caused Presswood to be in a position where it was unable to pay its debts. The plaintiff seeks to recover the debts of Presswood from Windermere following breach of the plaintiff's fiduciary duty to Presswood. The defendant has a valid and legitimate issue to be tried."

Although I only admitted most of paragraph 8 on the basis that it contained assertions, a number of these matters were established by other evidence or conceded as being true on the pleadings and, of course, only for present purposes.

The Terms Of The Mortgages 28 Mr Bell submitted that the mortgages, on their proper construction, did not permit the defendant to rely upon either a cross-claim or an equitable set-off, which may be available to the debtor, in answer to the claims by the plaintiff. He referred to the provisions in the mortgage of 18 March 1992, particularly arising from the memorandum incorporated in it, which provided that the defendant was liable for all moneys payable by the debtor whether as principal or surety; and, in particular, for all moneys the plaintiff lent, paid or became liable to lend or pay or may have advanced or may advance to the debtor. He relied in particular upon clauses 24 and 25 of the memorandum, which provide:- "24. As a separate and independent stipulation the mortgagor hereby agrees and declares that all or any sums of money which may not be recoverable from the mortgagor on the footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the debtor or any other mortgagor if there are more than one or any other fact or circumstance and whether known to the Bank or not shall nevertheless be recoverable from the mortgagor as sole or principal debtor in respect thereof and shall be paid by the mortgagor on demand together with interest at the rate or rates charged or chargeable by the Bank in respect of the moneys hereby secured immediately prior to the making of such demand from the date of demand until payment. 25. The Bank is under no obligation to hold or take any other or further security or guarantee for the payment of the moneys hereby secured and this mortgage shall be in addition to and independent of and shall not affect or be affected by any other or further security or guarantee now or hereafter held or taken by the Bank or by any arrangement or transaction between the Bank and the debtor or any other person or by any loss release discharge abandonment or transfer either in whole or in part and either with or without consideration of any other security or guarantee now or hereafter held by the Bank from the debtor or from any other person or by any act forbearance or omission by the Bank or by any other act matter or thing whereby the mortgagor if surety for the debtor might be released or discharged from liability under these presents ." (My emphasis.) 29 The memorandum incorporated in the mortgage of 15 July 1992 contained similar provisions and, in clause 9.6, provided that as a separate and independent stipulation the defendant agreed and declared that all or any money which may not be recoverable from it on the footing of a guarantee for various reasons was, nevertheless, recoverable from it as sole or principal debtor. Clause 9.7 stated that the plaintiff was under no obligation to take any further or other security or guarantee nor, under clause 9.8, to resort to any which it may have taken.

The Submissions On Behalf Of The Plaintiff 30 Mr Bell submitted that the defendant cannot rely upon damages arising from breaches of fiduciary duty owed to the debtor either as an equitable set-off against its obligations to the plaintiff under the mortgages, or by way of cross-claim; and that reliance could not be placed upon allegations that implied and/or express terms of the mortgages were breached; nor upon an allegation that the mortgages are harsh and unconscionable. His submissions continued that the terms of the mortgages do not permit the defendant to raise such defences and cross-claims available to the debtor, which position would not be cured by the joinder of the debtor as a defendant. He relied on the provisions of the mortgages and what he described as a line of authority commencing with Cellulose Products Pty Limited v Truda & Ors (1970) 92 WN 561. In my opinion, there is no consistency in the various decisions to which he referred. 31 In Cellulose Products the directors of a purchaser company guaranteed its obligations to a vendor to it of certain goods and, in response to a claim by the vendor against them, raised breaches by the plaintiff vendor of warranties given to the purchaser company pursuant to the Sale of Goods Act 1923. The plaintiff sought an order striking out these pleadings "as being clearly demurrable". Two of the defendants sought leave to file additional pleas by way of cross-action at common law claiming damages for breach of warranties, and defences of set-off or cross-action on equitable grounds claiming breaches of warranty in various terms. It was held that a surety cannot defend an action on a guarantee by claiming by way of set-off or cross-action, whether at common law or in equity, unliquidated damages resulting either from a breach of contract between the principal debtor and the creditor, or arising out of any other claim for unliquidated damages which the principal debtor may have against the creditor. 32 Much of the judgment in that case, as one would anticipate, was directed to the precise point in issue, namely the rights a party has in respect of a breach of warranty under that Act and the true characterisation of damages under s.54 of it. Isaacs J drew together his conclusions on these points at pp.570-571. He referred to certain American authorities and, at p.577, dealt with a "set-off", which he defined as one in respect of a claim for a liquidated sum arising out of the same transaction, the claim of the plaintiff being also for a liquidated sum. 33 His Honour came to the view, p.585, that a certain passage in Halsbury was not authority for the statement in the text. He distinguished the position on the following bases:- "In the first place, all the parties were before the Court, so that if the surety did have a right of exoneration by the principal, that right was able to be enforced in the proceedings. Secondly, the liquidation of the company raised a special equity because, as is seen from the last portion of the judgment of Stirling J, if the course there taken was not followed the contractors might recover fully against the trustee company (guarantor) and the latter could only prove in the liquidation for a dividend. This and similar cases which deal with a state of affairs where a debtor is insolvent, are of no value or assistance, except perhaps to demonstrate that such cases are exceptions to the general rule that a guarantor cannot avail himself of the remedies which otherwise may be open to the principal debtor as against the creditor. Thirdly, it will be recalled that there were special circumstances in Bechervais v Lewis which required a particular sum to be taken into account. The debtor had, as previously stated, purchased certain debts due to the creditor and the purchase price was guaranteed by the defendant in the action. The arrangement between the creditor and debtor was that the creditor was to collect the debts, although the purchaser had paid for them, and that prior to the action being brought by the creditor against the guarantor, the creditor had actually collected some of the debts, but nevertheless failed to give the debtor credit for them and sued the guarantor for the full amount. In these circumstances it may be correct to say, as did Stirling J, 'in that particular case the set-off arose out of the same transaction as that out of which the suretyship arose', but as I have already pointed out, this case is merely illustrative of the general rule that the surety when sued can always show that the amount of the debt for which he is sued has been in fact reduced by the principal debtor, either by a direct payment or by receipt of moneys by the creditor on the debtor's account and for which the debtor is entitled to be credited."

I refer to this part of his Honour's judgment to show his recognition that in circumstances other than those before him, the situation may be different. 34 The facts of the present case are, of course, far removed from those with which Isaacs J was concerned. 35 In Langford Concrete Pty Limited v Finlay [1978] 1 NSWLR 14 a director of a company guaranteed its performance of a contract into which the company entered for the supply of concrete from the plaintiff. The company went into liquidation and the plaintiff sued the guarantor and recovered judgment by default in the District Court. An application to set aside the judgment and for leave to defend was refused on the basis that the appellant did not have an arguable defence, and reliance was placed upon Cellulose Products at first instance. 36 The Court of Appeal was of the view that the application to the District Court was in an unsatisfactory state, there being no precise formulation of the defences, nor evidence of the terms of the contract between the debtor and the respondent. 37 The Court of Appeal dealt with the matter on the basis that it had to be satisfied that the appellant was, as a matter of law, entitled to have the cross-claim, which could have been brought by the debtor, raised before he could be let in to defend. Their Honours noted that the substantial issue in the appeal was whether a guarantor could take advantage of the reduction in the price to be paid by the debtor by reason of defective work, it being clear that the debtor could have set up the defective work in diminution of the contract price. Their Honours were of the view that not every type of cross-claim can be utilised to diminish a debt connected with the same transaction. Further, they were concerned with whether the terms of the guarantee allowed the guarantor to assert that he was only obliged to pay the amount payable by the debtor, and they concluded that it was not a guarantee to pay the price, or the price without deduction, but to pay only what the debtor could have been compelled to pay. 38 As I understand it their Honours, in having regard to the case before them, did not accept all of the reasoning in Cellulose. And, at p.18, they said:- "No cross-claim or set-off can directly reduce the debt concerned and, if the principle were rigidly adhered to, it would mean that, in no case, could a guarantor take advantage of a set-off or cross-claim, except where the debtor is before the Court. This is not consistent with authority: see Murphy v Glass a decision of the Privy Council on appeal from the Supreme Court of Victoria. It does, therefore, appear that the rigidity of principle has been adjusted on certain occasions to remit the litigation of these issues without the presence of all parties concerned." 39 They turned to consider a suggested exception where the debtor is insolvent and, at p.19, rejected it stating:- "The principle that the guarantor should not be allowed to raise a defence by way of cross-action, unless the debtor is a party, is one for the benefit of the creditor; and this principle can be of no practical benefit to him where the debtor is in liquidation or insolvent. If he wishes to have the debtor bound, he is equally able to have it joined in the proceedings. Despite the theoretical difficulties involved, it seems to us that the guarantor should be allowed to raise this defence, and that the appeal should be allowed."

Once again it is necessary to take the case in the context of the issues before the Court and having regard to the submissions made. However, there is sufficient there, in my respectful opinion, to suggest the absence of any absolute rule. 40 In Covino & Anor v Bandag Manufacturing Pty Limited [1983] 1 NSWLR 237 it was held that a guarantor, under a guarantee which made him liable without more for the full indebtedness of the debtor for goods supplied, could not rely on a cross-claim for damages which may be available to the debtor as against the creditor in reduction of his liability under the guarantee, nor could he raise as a defence to his indebtedness a cross-claim for damages available to the debtor as against the creditor. Cellulose was followed expressly by Glass JA, although it was not considered by Hutley and Mahoney JJA. 41 In that case, notwithstanding the finding, Hutley JA, at p.238, said:- "Where it is necessary to rely upon a true set-off or cross-claim to diminish a debt, it only operates so to do upon judgment. The legal position resulting from the repeal of the Statutes of Set-off in this State was analysed in this Court in Stehar Knitting Mills Pty Limited v Southern Textile Converters Pty Limited [1980] 2 NSWLR 514. Except in cases of equitable set-off, set-off and cross-claim do not extinguish debts until converted into judgments in proceedings in which they are pleaded as such."

Subsequently his Honour said that any basis for an equitable counter-claim must go to the root of the plaintiff's title. 42 Glass JA was of the view that the matter was covered by the decision in Cellulose. Mahoney JA considered that the orders made at first instance were of a discretionary nature, as undoubtedly they were, and that whether or not the guarantors would have been entitled to set up the cross-claim, had they done so in the ordinary course of pleading, was not to the point, the question being whether the discretion had been exercised properly. 43 It cannot, in my respectful opinion, be said that there was a conclusive statement that reliance could not be placed on at least an equitable set-off provided it was pleaded in a timely fashion. 44 In Indrisie v General Credits Limited [1985] VR 251 the Full Court of the Supreme Court of Victoria was concerned with the position of a guarantor under a guarantee, which made him liable "without more for the full indebtedness of the debtor". It held that the guarantor could not rely upon a cross-claim for damages which may have been available to the principal debtor as against the creditor in reduction of, or as a defence to, his liability under the guarantee. Reliance was placed upon Cellulose and Covino. The Court also held that to rely upon a cross-claim as an equitable set-off necessitated such a nexus between the claim and the cross-claim that the latter could be said to impeach the plaintiff's claim, and that such a cross-claim could be availed of only by the cross-claimant himself and not by the guarantor. This was a succinct judgment of the Court, which followed Covino in so far as Covino relied upon Cellulose, held that the right to an equitable set-off depended on the matters to which I have referred, and stated that a formidable obstacle was that any right to an equitable set-off would vest in the principal debtor and not the guarantors. Their Honours continued, p.254:- "There is no authority to which the Court was referred in which there was acknowledged the right to any such transference of an alien claim to meet an obligation by way of equitable set-off. Nor, in our opinion, should the Court as a matter of principle now take the step hitherto not taken of extending to a stranger to the cross-claim any right that properly should be that of the cross-claimant alone. In any event for such a step to be taken the company would have to be before the Court as a party: see Wilson v Mitchell [1939] 2 KB 869." 45 It does not appear that their Honours were referred to the Court of Appeal's decision in Langford Concrete, which, as I have said, held that Wilson v Mitchell, or at least the dictum in it, did not deal with the case of an insolvent co-surety. Their Honours said this in Langford Concrete in the context that it appeared that the rigidity of the principle requiring the debtor to be before the Court had been adjusted on certain occasions to permit the litigation of issues without the presence of all parties concerned. 46 In Re Kleiss & Anor ex parte Kleiss & Anor v Capt'n Snooze Pty Limited (1996) 61 FCR 436 debtors filed an application seeking to set aside a bankruptcy notice on the basis of a set-off or cross-demand of the type referred to in s.40(1)(g) of the Bankruptcy Act 1966. 47 At p.438 Drummond J posed the question:- "Can a guarantor rely on a set-off available to the principal debtor?"

His Honour said:- "This point is of relevance only to the Kleiss' case that they can, in defending the creditor's claim on the guarantee, rely on an answer to the creditor's claim available to the principal debtor: it is of no relevance to the Kleiss' claim to have the guarantee set aside. I do not regard the authorities relied on by Capt'n Snooze as establishing the existence of a general rule that a guarantor is, as a matter of legal principle, not entitled to rely on a set-off available to the principal debtor to answer a claim on a guarantee. I have already set out the relevant provisions of the guarantee. It is not a guarantee which would, as a matter of construction, deny the guarantors' entitlement to rely on a set-off available to the principal debtor against a demand made by the creditor on it, in answer to a demand made on the guarantee." 48 In considering Covino his Honour said:- "Two members of the Court did not dispute that (in the absence of something in the wording of the guarantee preventing it) an equitable set-off available to the principal debtor could be relied on by the guarantor, at least if the debtor was joined as a party in the action between creditor and guarantor." 49 In considering Indrisie his Honour noted that the Full Court's approval of Covino was confined to the judgment of Glass JA. His Honour continued, pp.439-440:- "I do not regard Indrisie v General Credits Limited , as an authority that a guarantor can never rely on an equitable set-off available to the principal debtor to meet a claim by Capt'n Snooze on a guarantee." 50 His Honour then referred to the decision in Australia and New Zealand Banking Group Limited v Harvey [1994] ATPR 53640. In that case Cox J was concerned with a number of issues, including a defence by way of equitable set-off. His Honour, at p.53643, said:- "An equitable set-off may be available to a defendant where he has a cross-demand against the plaintiff. The Statutes of Set-off were confined to mutual debts but equitable set-off may be available notwithstanding that one of the demands is for unliquidated damages ( Derham, Recent Issues in Relation to Set-Off (1994) 68 ALJ 331 at 332 and see also the authorities gathered by Crawford by in Zeecap (No 47) Pty Limited v Anitam Pty Limited v Foster 26/1989). However, for there to be an equitable set-off, cross-demands must be between the same parties." (His Honour's emphasis.)

Cox J set forth the terms of the mortgage. He considered that based upon Cellulose and Indrisie the mortgage, on its proper construction, made provision for the payment of the full indebtedness, and, therefore, precluded a set-off. 51 Drummond J noted this point and then considered Langford. He said, p.440:- "This decision is authority that, provided the wording of the guarantee is such as to permit the guarantor to answer a claim on the guarantee by raising a set-off or cross-claim available to the principal debtor against the creditor, that course is open to the guarantor; but the principal debtor must be joined in the proceedings between creditor and guarantor, unless that is unnecessary e.g. because of the principal debtor's insolvency. There is a substantial body of authority, including authority of considerable antiquity, to the effect that it is a consequence of the guarantor's entitlement to be exonerated by the principal debtor that he can rely on an equitable set-off available to the principal debtor against the creditor in answering the creditor's demand on the guarantee .. In my opinion, on the authority of Langford Concrete Pty Limited v Finlay and quite apart from the consequences that flow from a guarantor's right of exoneration by the principal debtor, since the Kleisses here, on the true construction of their guarantee, only promise to guarantee the due payment of all moneys by Sheracove, they were entitled to rely upon an equitable set-off available to Sheracove, as against Capt'n Snooze, in answer to a demand made by Capt'n Snooze on them as guarantors."

Conclusions From The Authorities On Which The Plaintiff Relied 52 In considering the memorandum incorporated in the mortgage of 18 March 1992 I do not think0 it is possible, at least at this stage, to say that the Court must find that the extent of the guarantee is to all moneys "without deduction". In Part A reference is made to all moneys, which may become payable in the circumstances stated. However this does not mean, as a matter of construction, that the issue as to the amount payable is foreclosed to the debtor. This is somewhat highlighted by clause E17, which makes a statement in writing "prima facie evidence" only of an amount owing, therefore allowing the defendant to challenge the amount claimed, presumably on any available grounds. Many such clauses provide that the certificate shall be "conclusive" evidence, which would be more consistent with the stance that the defendant is obliged to pay the amount certified without deduction. 53 Clause E24, which I have cited, does not exclude sums which may not be recoverable on the footing that the principal debtor has a cross-claim, unless the words "or any other fact or circumstance" give rise to that conclusion. That raises a question as to whether those words should be read ejusdem generis with the words "legal limitation disability or incapacity" and, if they should not, how they are to be reconciled with the provisions that the amount recoverable is the amount payable by the debtor, which, prima facie, is the amount properly so payable and without deduction. 54 Similarly in the memorandum incorporated in the mortgage of 15 July 1992 the all moneys clause is in essentially the same terms, and clause 7.12 makes a statement in writing prima facie evidence only of the amount owing. 55 Clause 7.2 makes the "Secured Moneys" immediately payable, and clause 7.3 gives the plaintiff the power to set-off. If that were to occur the guarantor, at least arguably, should be able to take advantage of it. 56 Clause 9.6 is in the same, or essentially the same, terms as clause E24. Once again it is to be noted that there is no provision in that clause for the recovery "without deduction". Further, those clauses are directed to moneys which may not be recoverable from the debtor, rather than to the right of the debtor to set-off moneys against the former moneys. 57 Clause 25, which I have quoted, and its counterpart in the second Memorandum are arguably referring to circumstances entitling the defendant, as in effect a surety, to avoid its obligations as such. The clause seeks to prevent that. But the clause does not point inevitably to the enforceability of the mortgages for all amounts said to be owing without deduction. This is particularly so when the clauses are read with all the terms of the mortgages. In the result I am not satisfied that the proper interpretation of the mortgages necessarily leads to the conclusions for which Mr Bell contended, nor, in any event, that that would be the situation if an equitable set-off or a claim for damages for breach of fiduciary duty is available in the circumstances of this case.

Equitable Set-Off 58 In AWA Limited v Exicom Australia Pty Limited (1990) 19 NSWLR 705 Giles J gave a wider operation to an equitable set-off or equitable defence. His Honour made clear that in each case one must look at the particular facts to determine whether it would be unjust or inequitable for the plaintiff to be permitted to proceed with its claim without making allowance for the cross-demand and, in doing that, all the circumstances of the case must be considered. His Honour came to a similar decision in Murphy & Anor v Zamonex Pty Limited & Ors (1993) 31 NSWLR 439, stating, at p.465:- "Equitable set-off is available where the defendant establishes an equitable ground for being protected from the plaintiff's claim. That has been expressed in language to the effect that the defendant's set-off goes to the root of or impeaches the title of the plaintiff's claim, but also in language to the effect that the counter-claim is so directly connected with the claim that it would be unjust to allow the plaintiff to recover without taking into account the defendant's counter-claim. It is sufficient to refer to AWA .., James v Commonwealth Bank of Australia (1992) 37 FCR 445 .. and the discussion in Meagher, Gummow & Lehane , paras 3709-3710 at 817-823, without going into whether the latter approach is an illicit departure from principle and authority." 59 The issues concerning equitable set-off have since been considered in Direct Acceptance Corporation Limited (In Liquidation) v Lord (1993) 31 NSWLR 439 and, on appeal, (1993) 32 NSWLR 362, and by me in Coles Myer Limited v Liverpool Growers (Australasia) Pty Limited (24 September 1993 - unreported); Westpac Banking Corporation v Nalty (8 October 1993 - unreported); and Algons Engineering Pty Limited v Abigroup Contractors Pty Limited (1 August 1997 - unreported). All these decisions make clear that the Court must look at the particular circumstances of each case. This may mean that the ultimate question as to the right to a set-off may not depend on the construction of the security document alone. 60 In Tooth & Co Limited v Rosier (Wood J - 7 June 1985 - unreported) there was an application for summary judgment. In the course of considering it his Honour dealt with a defence of set-off, considered cases such as Cellulose, Langford and Covino, and said:- "That the ultimate question might not always turn on the construction of the guarantee alone, is however suggested by the passages in the judgments of Isaacs J in Cellulose Products , and of Hutley JA in Covino , to which reference has been made."

His Honour cited from the decision of Clarke J in Tooth & Company Limited v Smith (5 September 1984 - unreported), where his Honour, in considering the circumstances in which an equitable set-off may arise, said:- "No general rule can be laid down except by stating that such a set-off will arise when there exists circumstances which make it unjust or inequitable that a plaintiff should be permitted to proceed with his claim."

Wood J continued:- "As presently advised, I do not see any fault in this test. No doubt where an equitable counter-claim was pleaded the fact that the transactions concerned were separate will always be a powerful consideration. However, at this stage of the proceedings, I am not clearly satisfied that the facts alleged would not give rise to an equitable defence."

The Position In The Present Case 61 The present case introduces facts of some novelty, in the sense that there is the close inter-relationship, at a financial level, between the plaintiff, the defendant and the debtor, which enabled the plaintiff to have and exercise substantial financial control over the affairs of the debtor by virtue of the Deed made on 18 March 1992 and thus, one may infer, simultaneously with the first mortgage and prior to the second mortgage. The relationship between the parties i.e. the plaintiff and the debtor, therefore, at least arguably, gave rise to a situation from which the causes of action raised by the cross-claim could come about in circumstances giving rise to an equitable set-off. The further questions are then whether that is a claim of which the defendant can take advantage in circumstances where the reasonable inference is that the debtor is either in real financial difficulty or insolvent, and, if it can, whether there is any provision in the security documents precluding its doing so. 62 When all these matters are considered in the light of the principles governing summary judgment applications, it seems to me that it is not possible to say that the defendant's case is not one where there is not a real question to be determined upon which the rights of the parties depend, nor that it is one which is "so obviously untenable that it cannot possibly succeed", nor "manifestly groundless", nor one disclosing "no real question to be tried". It is a case, to use the words in Webster v Lampard, at p.611, where the material before me is "clearly not such as to justify a finding that the proceedings against … are 'hopeless' in that they will inevitably fail if allowed to proceed to trial in the ordinary course". Nor is it a case, as I have sought to show, where the interpretation of the mortgage, necessarily, leads to the conclusion that an equitable set-off or cross-claim is precluded. 63 Mr Bell submitted that if I was minded to allow the matter to proceed on the grounds of equitable set-off or cross-claim arising from the breach of a fiduciary duty, I should, none-the-less, hold that no cause of action had been disclosed in respect of the breach of any terms of the mortgages or on the ground that the entry into the mortgages was harsh and unconscionable. I am not satisfied that there is no such basis shown. However, it seems to me that once it is established that there is a viable ground on the basis of which the proceedings may go forward, the proper approach is to permit all matters to go to trial: Wickstead & Ors v Browne (1992) 30 NSWLR 1. I appreciate that in that case there were undoubtedly good causes of action, but, as a matter of principle, I do not see why that should not be extended when a matter is to proceed.

Conclusions 64 In my opinion the plaintiff's Notice of Motion, to the extent that it seeks orders that the Defence and Cross-Claim dated 3 February 1999 be struck out and for summary judgment, must be dismissed with costs. I propose to make that order and to stand the balance of the Notice of Motion over until Friday, 4 June 1999. My present inclination is to order that the proceedings be transferred to the Commercial List of the Equity Division and to seek to have the matter heard as soon as possible.

1. The plaintiff's Notice of Motion in so far as it seeks orders that the defendant's Defence and Cross-Claim dated 3 February 1999 be struck out and for summary judgment be dismissed.

2. The plaintiff pay the defendant's costs of the Notice of Motion to date.

3. Matter stood over to 4 June 1999 for directions.

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