Compass Global Holdings Pty Ltd v Manhari Recycling Pty Ltd

Procedural History

1. Compass filed a Statement of Claim on 13 October 2020. It sued both defendants for breach of a written contract for the provision of foreign exchange services. It also sued both defendants for a breach of the Australian Consumer Law. The pleading alleged that both defendants made misleading or deceptive representations that USD 100,000 would be paid to the plaintiff in exchange for $A146,177.65.
2. The claim pleaded by the plaintiff sought damages in the sum of $A146,177.65 against both defendants, costs and interest.
3. Most of the procedural history is set out in the affidavit of Mr El-Hissi sworn on 26 March 2021 (DX 1). Mr El-Hissi is the solicitor for the defendants.
4. On 22 October 2020 Mr El-Hissi sent an email to the solicitors for the plaintiff to advise that service of the Statement of Claim was ineffective because of non-compliance with the Service and Execution of Process Act 1992 (Cth) ("SEPA").
5. That same email requested the plaintiff's solicitor to provide copies of the written contract dated 7 November 2019 referred to in par 6 of the Statement of Claim and the documents evidencing the transactions referred to in par 8 of the pleading. It also asked the plaintiff to provide proper particulars of the representations pleaded in par 14 of the Statement of Claim, including any supporting documents.
6. By a letter dated 28 October 2020 the plaintiff's solicitors wrote to Mr El-Hissi and provided copies of the documents requested. The letter asserted that the representations had been sufficiently particularised in par 14 of the Statement of Claim. That letter was not annexed to the affidavit of Mr El-Hissi, but was separately tendered by the plaintiff and became PX 3.
7. In relation to the issue of proper service, the plaintiff's solicitors wrote to Mr El-Hissi by a second letter dated 28 October 2020. This letter corrected the problem in relation to the SEPA. Thus the Statement of Claim was only properly served on 28 October 2020.
8. The time prescribed by the UCPR for filing Defences expired on 25 November 2021.
9. On 2 December 2020 Mr El-Hissi filed a Notice of Appearance on behalf of both defendants.
10. On 3 December 2020 the plaintiff's solicitors sent an email to Mr El-Hissi which said "Please advise our office as to when your Defence will be served".
11. Mr El-Hissi did not respond to that letter until 28 December 2020, when he advised by email that a Defence would be filed by 19 January 2021.
12. However, in between the email dated 3 December 2020 and the response of Mr El-Hissi on 28 December 2020, the plaintiff obtained a default judgment against both defendants on 15 December 2020. There was no notice given by the plaintiff's solicitors that, in the absence of a Defence, an application would be made for default judgment.
13. On 12 January 2021 the plaintiff lodged a Notice of Motion seeking a Garnishee Order.
14. On 13 January 2021 the court refused that Notice of Motion.
15. On 14 January 2021 the plaintiff lodged a further Notice of Motion seeking a Garnishee Order.
16. On 15 January 2021 the court granted the Garnishee Orders sought by the plaintiff.
17. On about 20 January 2021 Mr Gupta discovered that the monies which were the subject of the default judgment had been garnished from Recycling's bank account on 19 January 2021 by the plaintiff.
18. The solicitors for the parties engaged in correspondence regarding the procedural history set out above. On 3 February 2021 Mr El-Hissi sent by email a copy of the defendants' draft Defence.
19. On 3 March 2021 the plaintiff's solicitors advised that the plaintiff did not consent to setting aside the default judgment.
20. On 26 March 2021 the defendants filed a Notice of Motion seeking an order setting aside the default judgment and allowing the defendants 28 days to file a Defence.
21. On 15 April 2021 the defendants filed an Amended Notice of Motion without leave. I granted leave at the hearing on 15 July 2021 to rely upon the Amended Notice of Motion. The only change in that document was that the defendant sought an additional order that the court direct the plaintiff to return the sum of $153,431.64, held in the trust account of the plaintiff's solicitor, to the defendants. This was the amount garnished from the Westpac bank account of Recycling on 19 January 2021 and was made up of the damages claimed plus interest.

Evidence on the Motion

1. The defendants relied upon the following: 1. Affidavit of Omar El-Hissi filed 26 March 2021 (DX 1). 2. Affidavit of Omar El-Hissi filed 13 July 2021 (DX 2). 3. Affidavit of Madhur Gupta filed 28 April 2020 (DX 3). 4. Written Submissions filed 14 July 2021 (MFI 1). 5. Draft Defence provided at 9.45am on the morning of the hearing (MFI 2).
2. The plaintiff relied upon the following: 1. Affidavit of Andrew Su filed 5 May 2021 (PX 1). 2. Affidavit of Ben Thomas sworn 9 July 2021 (PX 2). 3. Email dated 28 October 2020 from the plaintiff's solicitor to the defendants' solicitor and letter of same date and enclosed documents (PX 3).
3. There was no cross-examination of any witnesses.

Rule 36.15 UCPR

1. Rule 36.15 is as follows: "(1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith. (2) A judgment or order of the court in any proceedings may be set aside by order of the court if the parties to the proceedings consent."
2. Counsel for the defendants submitted that the default judgment was obtained irregularly and against good faith. There was no submission that it was obtained illegally.
3. A judgment will have been obtained irregularly if there has been a failure to comply with proper procedure or the rules. Examples are where a party has not been given notice of a hearing and yet judgment is entered against them, where judgment is entered prematurely or before actual default is made by the defendant, or where judgment is entered for too much.
4. Default judgments are obtained under Pt 16 of the UCPR. A defendant is in default for the purposes of Pt 16 if it fails to file a Defence with the prescribed time of 28 days after service of the originating process. Rule 16.3 sets out the procedure and the affidavits required to obtain a default judgment.
5. Counsel for the defendants submitted that the irregularities included the following: 1. The plaintiff and their legal representatives were on notice of an imminent defence and an intention to defend the proceedings. 2. There was an appearance filed prior to the entry of default judgment and there was no notice given to the defendants of the plaintiff's intention to seek a default judgment. 3. The date given for service in the affidavit in support of the default judgment was incorrect. 4. The plaintiff had not informed the court, on an ex parte application to obtain a default judgment, that there was an appearance on file and an indication that a Defence would be filed.
6. Although there is no requirement to notify a defendant of an intention to apply for default judgment to be entered, it may be appropriate in certain circumstances to give such notice, particularly if a defendant has entered an appearance in the proceedings - Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550.
7. In Pope Justice Wallace said: "I think that where the parties signing judgment does so without giving warning of its intention to do so, such party will generally, though perhaps not invariably, be in difficulties on a summons to set aside the judgment where a defence on the merits is disclosed."
8. His Honour said that two questions arise in such an application: 1. Has the defendant disclosed a defence on the merits? 2. If so, should its conduct debar it from success on the summons?
9. Of course, Pope was not dealing with the modern day r 36.15. Nevertheless, that authority has been cited time after time in applications of the present kind, made under earlier provisions.
10. In the present case a Notice of Appearance on behalf of both defendants was filed on 2 December 2020, after service was effected on 28 October 2020. Further, on 3 December 2020, the plaintiff's solicitors asked the defendants' solicitors to advise when the Defence would be served. Unfortunately Mr El-Hissi did not respond promptly to this enquiry. Nevertheless, the sending of the email on 3 December 2020 showed that the plaintiff and its solicitors anticipated that the proceedings would be defended.
11. I am of the view that, as is the usual practice in the profession, some notice should have been given by the plaintiff's solicitors to the solicitors for the defendant to warn that if a Defence was not filed then an application for default judgment would be made. I am therefore of the view that r 36.15 applies and that this default judgment was obtained irregularly within the meaning of the rule.
12. The dates set out in the chronology above are important. It is a matter of common ground that service of the Statement of Claim was only properly effected on 28 October 2020.
13. By r 14.3(1) UCPR the time limited for a defendant to file a Defence is 28 days after service on the defendant of the Statement of Claim. Since the Statement of Claim was only effectively served on 28 October 2020, the defendants had 28 days until 25 November 2020 to file their Defence. While they failed to do so, the sending of the email on 3 December 2020, eight days after time for a Defence had expired, conveyed that the plaintiff was not going to insist upon its right to have a Defence filed either within the time prescribed by the rules (which had already expired), or until a response was received to the email dated 3 December 2020.
14. There is a further irregularity in the way in which the default judgment was obtained. The Motion for the default judgment, which is in the court file, is one dated 15 December 2020. It is prepared by the plaintiff's solicitors. The affidavit in support of the Motion required by the rules was sworn by Mr Su, the Chief Executive Officer of the plaintiff, on 15 December 2020. He deposed that Recycling was served with a Statement of Claim on 15 October 2020 and Mr Gupta was served with the Statement of Claim on 20 October 2020. Both assertions were incorrect as a matter of law. That error would most certainly have been known to the plaintiff's solicitors, who had engaged in correspondence regarding ineffective service on 20 October 2020, which they cured by compliance with the SEPA on 28 October 2020.
15. Solicitors must be scrupulously careful in putting affidavits before a court to obtain an ex parte order. This affidavit was incorrect in two important respects. While Mr Su may not have known this, the plaintiff's solicitors must have known.
16. Judges cannot turn a blind eye to such matters. In my view the errors in the affidavit mean that the default judgment was obtained irregularly within the meaning of r 36.15 UCPR.
17. However that is not the end of the matter, as a judgment which has been obtained irregularly may be set aside under the rule "on sufficient cause being shown".
18. In Johnsen v Duks [1963] NSWR 730; 80 WN (NSW) 272 Justice Jacobs held that if a judgment has been entered irregularly, then a defendant has a right to have it set aside ex debito justitiae. This is a Latin phrase meaning "from what is owed". The term is used in the law to indicate that it is a remedy that the court has no discretion to refuse. The applicant has the remedy as of right.
19. Justice Jacobs was hearing an application in the inherent jurisdiction of the Supreme Court. The application made to this court is governed by r 36.15 which provides that a judgment which has been made irregularly may be set aside "on sufficient cause being shown". That was not a consideration which had to be taken into account in Johnsen v Duks. The whole point of setting aside a default judgment under r 36.15 or r 36.16 is to allow a defendant in to defend. If that defendant has no arguable defence then there is no point in making the order. If there is no defence, then no sufficient cause has been shown for setting aside the judgment, even if it was obtained irregularly.
20. In Faircharm Investments Ltd v Citibank International PLC [1998] Lloyd's Rep. Bank 127 the England and Wales Court of Appeal said: "…if Citibank are bound to lose on a subsequent application for summary judgment, it would be pointless to set aside the existing judgment. Lex non cogit ad inutilia. [1] I would not go so far as to say that no irregularity could be so fundamental that the judgment in such a case would have to be set aside, whatever the other circumstances. But if indeed Citibank would be bound to lose I do not, in the circumstances of this case, consider that there is such a degree of fundamental error to require the judgment to be set aside… As was said over 100 years ago, 'We are not here to punish people for their mistakes in procedure but to do justice'." (Endnote added)
21. I will take the same approach. I find that there is no right to have the irregularly entered judgment set aside ex debito justitiae.
22. I deal below, after considering r 36.16, with whether or not the defendants have an arguable defence, and thus whether "sufficient cause" is shown to set aside the default judgment.

Consideration of Rule 36.16 UCPR

1. Rule 36.16 provides as follows: "(1) The court may set aside or vary a judgment or order if notice of motion for the setting aside or variation is filed before entry of the judgment or order. (2) The court may set aside or vary a judgment or order after it has been entered if - (a) it is a default judgment (other than a default judgment given in open court), or (b) it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or (c) in the case of proceedings for possession of land, it has been given or made in the absence of a person whom the court has ordered to be added as a defendant, whether or not the absent person had notice of the relevant hearing or of the application for the judgment or order."
2. To have a judgment set aside under r 36.16 the defendant has to establish a defence on the merits and must explain the delay in filing a Defence: Cohen v McWilliam (1995) 38 NSWLR 476.
3. In the present case the affidavit of Mr Gupta does not provide any explanation for the delay in filing a Defence.
4. In par 11 of his first affidavit (DX 1) Mr El-Hissi said: "December is usually a very hectic and difficult time of the year which in 2020 was compounded by the effects of extensive lockdowns in Victoria as a result of the COVID-19 pandemic. I am instructed by the second defendant, and, believe, that the business of exporting metal to various overseas locations by the first defendant was severally [sic] and adversely effected [sic] by the long lockdowns both in Victoria and internationally, particularly in India. This has had a compounding effect resulting in some delay in relation to obtaining instructions in respect of a defence."
5. I find that that is a reasonable explanation for the delay in filing a Defence. It was not challenged.
6. The question of whether the defendants have a defence on the merits is much more difficult. This issue is relevant to both r 36.15 and r 36.16 UCPR.

Is there a Defence on the Merits?

1. The affidavit of Mr Gupta (DX 3) makes it plain that Recycling was obliged to pay USD 100,000 to the plaintiff and while it attempted to do so, it has not made that payment. The obligation to make the payment thus still exists.
2. In those circumstances the only defence on the merits which may be available to Recycling is one of set-off. Mr Gupta has no such defence.
3. In the proposed Defence (MFI 2) the defendants plead that the currency conversions were requested "by the second defendant on behalf of the business known as Manhari Metals".
4. As previously recited, the business of "Manhari Metals" is one conducted by Recycling, International, and other entities associated with Mr Gupta.
5. Paragraph 6 of the proposed Defence goes on to allege that the agreement between the plaintiff and the first defendant was made as a result of conversations between a person named Priyanka on behalf of the plaintiff and "the second defendant on behalf of the first defendant and Manhari International Pty Ltd". It is pleaded that the agreement was "to facilitate currency exchanges from time to time for the business known as Manhari Metals".
6. Paragraph 8 of the proposed Defence refers to "transactions between the plaintiff and the first defendant and Manhari International Pty Ltd".
7. Paragraph 21b of the proposed Defence pleads that the agreement between the parties included a term that Recycling or International would book a series of forward spot trade contracts with the plaintiff to exchange US Dollars for Australian dollars.
8. Paragraph 21c of the proposed Defence refers to Exhibit MG1 to the affidavit of Mr Gupta (DX 3). This is a schedule setting out currency trades with Compass between February and April 2020. The customer's name is "Manhari Metals", which of course is the business conducted by Recycling, International and other unnamed entities associated with Mr Gupta.
9. Paragraph 21g of the proposed Defence pleads that the damages of Recycling are as follows: "The first defendant lost the sum of $276,833.99 being the difference between the sum of $A5,238,725 it would have received had the plaintiff complied with the Agreement, and, the sum of AUD$4,961,000 which the first defendant did receive by exchanging the sum of USD$3.6 million with Westpac Banking Corporation."
10. Paragraph 21h of the proposed Defence pleads that if the defendants are liable to the plaintiff for any loss or damage, then the defendants or either of them should be entitled to set-off against such loss or damage, the damage suffered by Recycling by reason of the plaintiff's breach of the Agreement.
11. From 1984 until the passing of the Civil Procedure Act 2005 (NSW), a set-off had to be pleaded by way of a Cross-Claim. The history of the provision is set out in Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514. Section 21 of the Civil Procedure Act 2005 reintroduced the concept of a statutory set-off.
12. Section 21 provides: "(1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. (2) This section extends to civil proceedings in which one or more of the mutual debts is owed by or to a deceased person who is represented by a legal personal representative. (3) This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set off against each other. (4) This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise. (5) This section is subject to section 120 of the Industrial Relations Act 1996 . (6) In this section, 'debt' means any liquidated claim."
13. For a claimed set-off to provide a defence, it must fall within the provisions of s 21. In my view there are two reasons why the Recycling claim does not. Firstly, there must be mutual debts between a plaintiff and a defendant. Section 21(6) defines "debt" to mean "any liquidated claim". The pleading that Recycling had to go to a different foreign currency dealer (Westpac) to exchange its US Dollars for Australian dollars is clearly not a liquidated claim. Recycling is alleging a breach of an agreement which it (and others) had with the plaintiff. To prove its damages it will have to call evidence of the sale of scrap metal to overseas buyers, payments received in USD, the need to convert USD to Australian dollars and the dealings it had with Westpac. It will also have to show that the rates offered by Westpac are the proper measure of damages for breach of contract. By contrast the contractual claim pleaded by Compass is a liquidated claim, as the contract provided for the payment of a definite sum of money and the breach led to damages in that amount.
14. I find that the set-off proposed by the defendants is not available because of s 21(1) and s 21(6) of the Civil Procedure Act 2005.
15. There is a second reason why the set-off is not available. It is clear from the evidence of Mr Gupta and the proposed Defence that the arrangement concerning foreign currency exchanges was an arrangement not just between Compass and Recycling but was an arrangement to facilitate the foreign exchange requirements of Recycling, International, and other entities associated with Mr Gupta, all of which comprised the business of Manhari Metals. Many of the documents attached to Mr Gupta's affidavit, suggest that some of the currency dealings involved International rather than Recycling. See for example Annexures MG2, MG4, MG7, MG8, MG9, MG14, MG16, and MG32 to Mr Gupta's affidavit (DX 3).
16. The evidence is so vague. The defendants have not discharged their obligation to produce evidence on this application to establish that there is a defence on the merits by way of set-off. If the obligation to provide forward currency services was an obligation owed jointly to Recycling and International, or partly to Recycling and partly to International, the evidence does not enable the court to say that there are "mutual debts between a plaintiff and a defendant" as required by s 21(1).
17. When these concerns were drawn to the attention of counsel for the defendants during submissions, counsel suggested that perhaps the draft Defence needed "further refinement". What that refinement might be was not articulated. In any event, on a Motion first filed almost four months ago, the defendants should have been able to do better than a proposed Defence (which was only circulated 15 minutes before the hearing started), in a form which raises more questions than it answers.
18. I find that the defendants do not have a defence available by way of set-off because: 1. Their claim is for unliquidated damages rather than for a liquidated sum; and 2. They have not established by evidence that they have a defence on the merits.

Conclusion

1. Because I have found that the defendants have not established a defence on the merits, both as a matter of fact and as a matter of law, I make the following further findings: 1. Sufficient cause has not been shown under r 36.15 for the default judgment to be set aside, even though I have found that such judgment was obtained irregularly. 2. The defendants cannot have the judgment set aside under r 36.16.
2. The ultimate result is that the defendants' Amended Notice of Motion will be dismissed with costs.
3. If Recycling has a claim which it wants to bring against Compass, along the lines of that pleaded in the proposed Defence, it can do so in separate proceedings. If International had suffered a loss then it can do the same. Nothing in this judgment would prevent such further actions. This judgment is confined to the legal issue of whether those asserted claims can be raised as a set-off which would operate as a defence to the plaintiff's claim. I have held that a set-off is not available as a defence.

Orders

1. In the current COVID-19 lockdown of Greater Sydney, the parties have very sensibly agreed that this judgment may be delivered by publication on Caselaw and a link to the published judgment being sent by email to the lawyers for the parties.
2. My orders are: 1. Dismiss the defendants' Amended Notice of Motion filed on 15 April 2021. 2. Order the defendants to pay the plaintiff's costs of the Amended Notice of Motion.

Endnote

1. The law does not compel one to useless things 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: 20 July 2021