Knauf Plasterboard Pty Ltd v Hardy

background 7 Knauf is a manufacturer and supplier of construction materials, principally plasterboard. Retroflex was one of its customers. 8 On or about 4 February 2014 Knauf and Retroflex entered into an agreement, the terms of which are recorded in a document titled "Credit Application Form & Indemnity (With Personal Guarantee)" (Credit Application Form). The Credit Application Form was signed by each of Messrs Hardy, Blignaut and McGinn. By that agreement Knauf agreed to supply goods to Retroflex on terms which included the provision of credit up to a limit of $1.5 million. 9 Relevantly, the Credit Application Form: (1) required Retroflex to pay its account on the due date to be advised as part of Knauf's terms of trade: clause 1(a); (2) provided that any amount not paid by the due date would, at the discretion of Knauf, be subject to interest charged at the rate of 0.05% per day calculated on 80% of any and all monies due but unpaid from the due date of payment to the date of payment, with such interest to be calculated on a daily basis: clause 2(a); and (3) provided that Retroflex would pay all legal costs on an indemnity basis and any expenses incurred by Knauf in connection with recovery of amounts due to it for goods supplied: clause 2(b). 10 Also on or about 4 February 2014 Messrs Hardy and McGinn executed a "Personal Guarantee and Indemnity Agreement" in favour of Knauf (Credit Guarantee) which relevantly included the following terms: 1. I agree to indemnify [Knauf] against any losses, costs, charges and expenses of any nature (including legal costs on an indemnity basis), which [Knauf] incurs as a result of any default by [Retroflex] in respect of compliance with [Knauf's] credit terms (as detailed in [Knauf's] Credit Application Form) and/or [Knauf's] terms of trade or arising under this Guarantee. I agree that I will pay any stamp duty assessed on this Guarantee. 2. I agree to guarantee and hence be liable and pay to [Knauf] in my own right all monies due now or at any time in the future for Goods supplied by [Knauf] to [Retroflex] from time to time together with the other fees, charges and expenses and obligations which arise and are payable by [Retroflex] to [Knauf] pursuant to [Knauf's] credit terms as detailed in [Knauf's] Credit Application form. If more than one guarantee is provided in respect of Goods supplied by [Knauf] to [Retroflex] I acknowledge and agree that such guarantees are joint and several in nature. 3. I agree to and hereby charge all my equitable and legal interest in freehold or leasehold property to secure payment of monies due to [Knauf] for Goods supplied pursuant to [Knauf's] credit terms. I consent to [Knauf] registering a non-lapsing caveat over any of my leasehold or freehold property to secure [Knauf's] charge over that property. 11 Clause 4 of the Credit Guarantee provided that the guarantors agreed that their indemnity and guarantee were continuing security and would not be affected whether or not they had notice of, among other things, the following: (a) If the Supplier: (i) grants any extension of time or other indulgence to [Retroflex]; (ii) refuses further credit to [Retroflex]; (iii) varies the terms of [Retroflex's] account, or the arrangements between [Knauf] and [Retroflex] are changed in any other way (even if this increases my liability under this Guarantee and Indemnity). … 12 On or about 30 June 2014 Knauf entered into a Deed of Acknowledgement, Forbearance and Repayment (Deed of Forbearance) with each of Retroflex and Messrs Hardy, Blignaut and McGinn. The recitals to the Deed of Forbearance record that: A. Knauf has supplied building products on credit to [Retroflex] pursuant to the Credit Agreement. B. [Retroflex] is indebted to Knauf in the sum of the Outstanding Amount. C. The parties have reached an agreement regarding repayment of the Account and the parties wish to enter into this Deed to record the terms of their agreement, including in consideration for Knauf refraining from taking steps to recover the Outstanding Amount, [Retroflex] providing security to Knauf in respect of the monies payable pursuant to this Deed. 13 The "Outstanding Amount" was defined as all outstanding monies drawn under the trading account created by the credit agreement by which Knauf supplied goods on credit to Retroflex, including any interest, fees, costs or charges, which at the date of the Deed of Forbearance was $900,000. 14 By clause 4.1 of the Deed of Forbearance Retroflex acknowledged and agreed that it was liable to Knauf in the amount of $900,000 and that that amount was immediately due and payable. 15 By clause 5 of the Deed of Forbearance Knauf and Retroflex agreed that interest would be payable on the Outstanding Amount calculated at 7.5% per annum on the last day of each month after the First Payment Date, which was 1 July 2014. Retroflex would pay the Outstanding Amount in accordance with the "Payment Schedule", which provided for 24 monthly instalments of at least $40,500, the Minimum Repayment, made by depositing cleared funds into Knauf's nominated bank account by the first day of each month. 16 Clause 6 of the Deed of Forbearance was headed "Security" and provided as follows: 6.1 To secure the repayment obligations in clause 5, [Retroflex] agrees to execute the Security Deed and return it to Knauf upon the execution of this Deed. 6.2 If Item 8 of the Reference Schedule is filled out, the Guarantor agrees to execute the Guarantee and return it to Knauf upon the execution of this Deed. 6.3 [Retroflex] and the Guarantor agree to do all things necessary to perfect the Securities, including executing any document necessary to have the Securities registered on the PPSR. 17 Item 8 of the Reference Schedule was completed, naming the Guarantors as Messrs Hardy, Blignaut and McGinn. The "Guarantee" was defined as the Guarantee annexed to the Deed of Forbearance as schedule 4. The "Securities" were defined as the "Security Deed", which was in turn defined as the General Security Deed annexed to the Deed of Forbearance as schedule 3, and the Guarantee. 18 Clause 7.1 provided that, subject to the performance by Retroflex of its obligations under the Deed of Forbearance, Knauf conditionally agreed to reinstate Retroflex's account and to affirm the Credit Agreement; and to forbear from seeking payment of the Outstanding Amount until the End Date, 2 June 2016, other than in accordance with the Deed of Forbearance. 19 Clause 8 of the Deed of Forbearance set out Events of Default. It provided that, among other things, an Event of Default included the failure by Retroflex to pay any Minimum Payment in strict accordance with the Payment Schedule; or Retroflex failing to make any payment required under the Deed of Forbearance. 20 Clause 9.1 of the Deed of Forbearance provided that if an Event of Default occurred then, among other things, Knauf would immediately be entitled to enforce all of its rights under the Deed of Forbearance, the Securities and the Credit Agreement against Retroflex. 21 Clause 17 of the Deed of Forbearance is central to those parts of the Amended Defence now in issue. It is titled "Further Assurances" and provided: Each party shall, from time to time at its own cost and expense, make, do and execute and cause to be made, done and executed all such acts, things, agreements, deeds, instruments, assurances and other documents as may be necessary, desirable or reasonably required by another party to perfect or give effect to the transactions or agreements contemplated or contained in this Deed. 22 As required by clause 6.1 of the Deed of Forbearance, Knauf and Retroflex entered into the General Security Deed. That deed provided that: (1) pursuant to clause 3.1, Retroflex granted a PPSA Security Interest to Knauf over all of its "personal property" within the meaning of that term in the Personal Property Securities Act 2009 (Cth) and charged all of its other property to Knauf to secure the due and punctual payment of all present and future debts and monetary liabilities of Retroflex to Knauf; and (2) pursuant to clause 3.2, each party intended the security interests created by the deed "to take priority over all other Security Interests and PPSA Security Interests over the Secured Property of [Retroflex] except those Security Interests which are mandatorily required by any applicable law to have priority". 23 As contemplated by clause 6.2 of the Deed of Forbearance, on or about 30 June 2014 each of Messrs Hardy, Blignaut and McGinn executed a Guarantee and Indemnity (Repayment Guarantee). 24 Pursuant to clause 2.1 of the Repayment Guarantee the Guarantor "guarantee[d] payment of the Secured Monies by [Retroflex] to [Knauf] when they are due and as a further and primary obligation, [undertook] to pay the Secured Monies to [Knauf] on demand". 25 The term "Secured Monies" was relevantly defined in clause 4 of the Repayment Guarantee as being: … all amounts now or at any time in the future falling within any of the following categories:- (a) All monies:- (i) Which are owing and payable by [Retroflex] to [Knauf]; (ii) Which are owing by [Retroflex] to [Knauf] but not presently payable; … … (e) Fees and expenses incurred by [Knauf] in connection with the preparation, execution, stamping, enforcement or attempted enforcement of this Guarantee including legal expenses on a solicitor and client basis; … 26 Clause 8.1 of the Repayment Guarantee provided that the guarantee was a continuing security and that it would not be wholly or partially discharged for so long as "any of the Secured Monies are owing or payable, are contingently owing or payable or may in [Knauf's] opinion become owing or payable". 27 Clause 9.1 of the Repayment Guarantee relevantly provided that: The Guarantor's liability under this Guarantee and Indemnity shall not be discharged or affected by:- … (e) [Knauf] holding or taking any other security for the Secured Monies; (f) any security held or taken by [Knauf] in relation to the indebtedness [of] [Retroflex] being void, defective or informal; … (o) the failure or omission by [Knauf] to take or obtain security or by any loss by [Knauf] of any collateral or other security or securities or by [Knauf] omitting to recover by realising or enforcing any security or otherwise; … (q) any failure by [Knauf] to take any steps for the protection or perfection of any security taken or obtained whether by omitting to register the same or otherwise or by any defect of title in any person or persons giving or purporting to give to [Knauf] any such security or by any other act, omission, delay or mistake on the part of [Knauf]. 28 Clause 11.1 of the Repayment Guarantee relevantly provided that: As long as any of the Secured Monies are owed by [Retroflex] to [Knauf] (whether or not the Guarantor has become liable for those monies under this Guarantee and Indemnity), the Guarantor shall not …: (a) claim any set-off or make any counter-claim against [Retroflex]; … 29 In November 2015 Retroflex defaulted under the terms of the Deed of Forbearance by failing to pay the Minimum Repayment. It has not made any payments since that date. 30 By letter dated 15 February 2016, pursuant to the Repayment Guarantee, Knauf demanded payment of the Secured Monies then owing from Mr Hardy and Mr Blignaut. 31 Mr Hardy's evidence is that as at 8 February 2016 Retroflex had available funds of $178,511.02 and debtors of approximately $2.4 million, half of which were more than 90 days old. Mr Hardy also provides an outstanding debtor reconciliation for Retroflex to 17 August 2016, prepared by its liquidator, which shows total debtors of approximately $1.4 million and a bank statement for Retroflex also dated 17 August 2016 which shows a balance of $613,710.29.

the pleadings 32 Knauf's claim is for recovery under the Repayment Guarantee and, in the alternative, against Mr Hardy under the Credit Guarantee. Knauf's case relevantly is that: (1) in the period 27 October 2014 to 10 February 2016 it supplied goods to Retroflex on credit, invoicing Retroflex for $1,792,842.73 (Invoices); (2) in respect of the Invoices, Retroflex made payments and Knauf agreed to allow credits on Retroflex's account in the sum of $1,233,496.62, leaving Retroflex indebted to Knauf in the sum of $559,346.11; (3) in addition, since November 2015 Retroflex has not made any payments under the Deed of Forbearance with the result that it is indebted to Knauf for $431,771.11 in respect of the Outstanding Amount; (4) Retroflex is thus indebted to Knauf in the total sum of $991,117.22; (5) Knauf demanded repayment of $991,117.22 pursuant to the Repayment Guarantee from Messrs Hardy and Blignaut but that amount remains unpaid; (6) Messrs Hardy and Blignaut are jointly and severally indebted to Knauf in the sum of $991,117.22 pursuant to the Repayment Guarantee; and (7) further, or in the alternative, Mr Hardy is indebted to Knauf under the Credit Guarantee for the sum of $559,346.11 in respect of the Invoices. 33 At paragraphs 19 to 26 of the Amended Defence, Mr Hardy pleads: Breach of Agreement 19. In breach of [clause 17.1 of the Deed of Forbearance], [Knauf] failed to register the security interest obtained by [it] from Retroflex under the General Security Deed promptly after entry into the General Security Deed, or at any time prior to 3 February 2016 (when [Knauf] finally registered its interest) in order to perfect the security interest obtained (Breach). 20. By reason of the Breach: 20.1 [Knauf] has been unable to rely upon a perfected and undisputed security interest from on or about June 2014 under the General Security Deed in respect of any monies payable by Retroflex to [Knauf] (Monies Payable); 20.2 following about June 2014 various other parties registered security interests against the Property of Retroflex and … Retroflex was placed into liquidation on or about 12 February 2016; 20.3 [Knauf's] security interest may have lost the priority it would otherwise have had; 20.4 [Knauf] has commenced Federal Court Action NSD 439/2016 against Retroflex in which it is relevantly seeking: (a) a declaration that the General Security Deed … is a valid and subsisting security interest for the purposes of the Corporations Act 2001 and the Personal Property Securities Act 2009; (b) a declaration that the General Security Deed is a perfected security interest within the meaning of the Personal Property Securities Act 2000 (sic); and (c) a declaration that [Knauf's] security interest has not vested in [Retroflex] pursuant to section 588FL of the Corporations Act 2001. 21. By reason of the matters pleaded at paragraph 19 and 20 above: 21.1 [Knauf] has been, and will be (in the event that [Knauf] fails to obtain the relief sought in the Federal Court Action), unable to obtain payment of the Monies Payable from Retroflex in circumstances in which [Knauf] would otherwise be paid the full amount of the Monies Payable by Retroflex; 21.2 in the event that [Mr Hardy] is liable to [Knauf] under the Guarantee for the Monies Payable, [Mr Hardy] would be liable to [Knauf] in respect of the Monies Payable; in circumstances in which, but for the breach, [Knauf] would obtain full payment of the Monies Payable from Retroflex and have no further claim on [Mr Hardy] under the Guarantee. 22. By reason of the matters pleaded in paragraph 21 above, in the event that [Mr Hardy] is found to be liable in this action to pay the Monies Payable or any sum at all under the Guarantee, that liability would not have arisen, or would be extinguished, but for the Breach. 23. In relation to paragraph 17 of the statement of claim [that the respondents have failed to pay any amount to Knauf in respect of the Repayment Guarantee or the Credit Guarantee], [Mr Hardy]: 23.1 admits that [he] has not paid any amount to [Knauf] in respect of the Guarantee or the Credit Guarantee; 23.2 says that [he] has no liability to [Knauf] in respect of the Credit Guarantee; 23.3 denies [he] has any liability to [Knauf] in respect of the Guarantee; and 23.4 otherwise denies the allegations contained therein. 24. [Mr Hardy] denies the allegations contained in paragraph 18 of the statement of claim [that the respondents are jointly and severally indebted to Knauf in the sum of $991,117.22 pursuant to the Repayment Guarantee]. 25. In relation to paragraph 19 of the statement of claim [that Mr Hardy and the Estate of Mr McGinn are jointly and severally indebted to Knauf in the sum of $559,346.11 pursuant to the Credit Guarantee], [Mr Hardy]: 25.1 refers to and repeats paragraph 17 [of his defence]; 25.2 otherwise denies the allegations contained therein. Set Off 26. By reason of the matters pleaded in paragraphs 19 to 22 above, the applicant (sic) [Mr Hardy] sets off any liability to pay [Knauf] the Monies Payable or any sum at all under the Guarantee against [Knauf's] liability to [Mr Hardy] in respect of the Breach.

principles 34 Rule 16.21 of the Rules provides that a party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading, relevantly, fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading. 35 The power to strike out a pleading is discretionary. It should be employed sparingly and only in a clear case, but where such a case is made out the Court should not shrink from exercising its discretion to strike out the relevant pleading: Radisich v McDonald (2010) 198 IR 244; [2010] FCA 762 (Gilmour J) at [20]. 36 In Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1994) 217 ALR 226 at 236 Beaumont J summarised the principles relating to a strike out application as follows: (1) A "reasonable cause of action" means one with some chance of success if regard be had only to the allegations in the pleadings relied upon by the claimant; in such a case, the claim cannot be struck out (Davey v Bentinck ([1893] 1 QB 185)). (2) The mere fact that the case appears to be a weak one is not of itself sufficient to justify the striking out of the action (cf Wenlock v Moloney ([1965] 1 WLR 1238; [1965] 2 All ER 871)). (3) Normally, the power to strike out should be exercised only in plain and obvious cases, where no reasonable amendment could cure the alleged defect (cf Hodson v Pare ([1899] 1 QB 455)). (4) It goes without saying that if a substantial case is involved in the claim, the power to strike out cannot be exercised. (5) Where a point of law has to be decided, and the judge is satisfied that this can be done by him appropriately, thereby avoiding the necessity of, and expense in going to trial, he is entitled to determine the point (cf Williams & Humbert Ltd v W & H Trade Marks ([1986] AC 368; [1986] 1 All ER 129)).

consideration 37 Mr Hardy asserted, as a party to the Deed of Forbearance and not as guarantor under the Repayment Guarantee, that on a proper construction of the Deed of Forbearance, in particular clause 17.1, Knauf was required to do, cause to be done and execute all acts, instruments and other documents to perfect the security interest obtained from Retroflex under the General Security Deed and to do so promptly upon entry into the Deed of Forbearance and the General Security Deed. 38 Mr Hardy contended that in entering into the Deed of Forbearance the directors of Retroflex undertook certain obligations but also received a benefit, namely, that Retroflex and Knauf would enter into the General Security Deed. He contended that the parties did so with the intention that those parties would ensure that the security interest created by the General Security Deed had priority over other interests. 39 Mr Hardy submitted that in construing the terms of the Deed of Forbearance the Court should be astute to give effect to its discernible commercial purpose; that references to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement; and that the meaning of the terms of a contract is to be determined by what a reasonable person would have understood them to mean. Mr Hardy contended that taking account of context requires that particular terms be considered in the light of the whole text of the contract; that particular phrases be considered in the light of their setting; and that related contracts should also be taken into account. 40 Mr Hardy further submitted that the construction contended for by him is consistent with the terms of clause 17 of the Deed of Forbearance; the purposes and objects of the transactions contemplated by the Deed of Forbearance; the terms of the Deed of Forbearance under which the directors agreed to certain obligations, including the obligation to subsequently execute guarantees in favour of Knauf; the terms of the General Security Deed; the fact that time was of the essence under the Deed of Forbearance; and the general principles concerning express or implied conditions said to arise in circumstances in which parties provide guarantees. 41 Mr Hardy said that if the construction contended for by him arises then Knauf has breached the Deed of Forbearance by failing to promptly register the security interest obtained by it from Retroflex under the General Security Deed. Mr Hardy further contended that, by reason of the breach, Knauf has been unable to rely upon a perfected security interest under the General Security Deed in respect of monies payable by Retroflex to it. He contended that the immediate effect of that inability was that after Knauf purported to appoint a receiver to Retroflex a dispute arose as to the enforceability of Knauf's security interest. 42 Mr Hardy submitted that, as a matter of common sense, if there had been no basis for dispute as to the perfection of Knauf's security interest, Knauf would have proceeded through its receiver to collect in the assets of Retroflex in satisfaction of the amount owed by Retroflex to it. He contended that if that were the case, and but for Knauf's breach, Knauf would have been claiming $991,117.22 in circumstances where the evidence shows that Retroflex had, as at 8 February 2016, a bank balance of $178,511.02 and debtors of $2,406,518.29. Mr Hardy further contended that if, rather than having a disputed security interest, Knauf had perfected its security interest it would have faced a decision as to whether it wished to pursue the Guarantors. He contended that, on the basis of the evidence of the assets available as at 8 February 2016, Knauf would likely not have pursued the Guarantors. He also contended that the available evidence supports a conclusion that Knauf would have been paid out any monies owing to it by Retroflex without resort to any recovery against the Guarantors. 43 Mr Hardy submitted that even if Knauf would have pursued the Guarantors in respect of the monies payable, in view of the amounts likely recoverable by Retroflex through its liquidator, he would have been entitled to seek and possibly obtain quia timet relief from the Court requiring Retroflex to pay the amount of his liability under the Repayment Guarantee before any judgment was entered against him. Mr Hardy contended that if that order were made then he would not be liable to judgment under the Repayment Guarantee. 44 Mr Hardy also asserts an equitable set-off which, he submitted, depends on the general proposition that, where contrary liabilities are sufficiently closely connected, it would be inequitable for an applicant to be permitted to proceed with its claim without making allowance for a respondent's claim against it. Mr Hardy further submitted that his liability under the Repayment Guarantee is so closely connected with Knauf's breach of its obligation to perfect its security interest that it would be inequitable for Knauf to proceed with its claim without making allowance for Mr Hardy's claim against it. Accordingly, Mr Hardy contends that any liability he has under the Repayment Guarantee ought to be set off against Knauf's liability in respect of its breach. 45 Mr Hardy's defence alleges, first, that Knauf assumed in the Deed of Forbearance a contractual obligation to do all things necessary to procure the perfecting of the security given in the General Security Deed; secondly, that Knauf breached that obligation; and thirdly, that Mr Hardy suffered loss as a consequence of that breach in the form of a liability under the Repayment Guarantee which, in turn, is said to be the basis for the alleged equitable set-off. In other words, Mr Hardy alleges that, but for the alleged breach by Knauf of clause 17.1 of the Deed of Forbearance, Knauf would have been able to assert, as against Retroflex, a perfected security interest under the General Security Deed; that upon enforcement of the General Security Deed Knauf would have recovered in full whatever was due to it from Retroflex; and that Mr Hardy's liability under the Credit Guarantee and the Repayment Guarantee would not have arisen or would have been extinguished. 46 Mr Hardy's submissions raise two separate but related issues for consideration: the construction of the Deed of Forbearance and the nature of equitable set-off that is said to arise. 47 Turning first to the construction issue. Mr Hardy submitted orally that the Deed of Forbearance and the Repayment Guarantee should be read independently of one another. In contrast, in his written submissions Mr Hardy quite rightly, in my opinion, submitted that in construing a contract regard should be had to, among other things, related contracts (see [39] above). The Deed of Forbearance annexes the Repayment Guarantee to it as schedule 4. The latter was integral to the transaction. To read the Deed of Forbearance and the Repayment Guarantee in isolation from one another would divorce them from context. That is evident from their terms. 48 Clause 6 of the Deed of Forbearance requires: first, that to secure its repayment obligations, Retroflex must sign and return the General Security Deed upon execution of the Deed of Forbearance; secondly, that the Guarantors execute and return the Repayment Guarantee upon execution of the Deed of Forbearance; and, thirdly, that Retroflex and the Guarantors agree to do all things necessary to perfect the General Security Deed and the Repayment Guarantee, including executing any document necessary to have them registered on the Personal Property Securities Register. 49 Clause 17.1 of the Deed of Forbearance, which, as set out at [21] above, requires each party to do all things necessary to perfect or give effect to the transactions or agreements contemplated or contained in the Deed of Forbearance, cannot be read in isolation. It must be read in the context of the Deed of Forbearance as a whole. When that is done, it is clear that clause 17.1 is of a general nature, imposing obligations on all parties to the transaction to do all things necessary, desirable or reasonably required by another party. Unlike clause 6.3 it does not impose an express obligation on any particular party and, in particular, on Knauf. 50 Knauf submitted that the Court would apply the canon of construction whereby the specific prevails over the general, such that clause 6.3 would prevail over clause 17.1. The effect of that submission is that the obligation to perfect the securities lay exclusively with Retroflex and the Guarantors and that Knauf therefore had no such obligation. The canon of construction referred to by Knauf is the maxim generalia specialibus non derogant: that where there is conflict between specific and general provisions the specific provision will prevail: see Construction, Forestry, Mining and Energy Union v Hadgkiss (No 2) (2009) 174 FCR 237 at [77]. To the extent of any conflict between clauses 6.3 and 17.1, I accept that submission. 51 Clause 17.1 must also be read in the context of the Repayment Guarantee. By clause 26.1(b) of the Repayment Guarantee, the Guarantor expressly acknowledged that there was no condition affecting the operation of the Repayment Guarantee that was not contained in the Repayment Guarantee. That is one basis for rejecting Mr Hardy's construction of clause 17 because, contrary to his acknowledgement in clause 26.1(b), clause 17 would affect the operation of the Repayment Guarantee. Further, clause 9.1(q) of the Repayment Guarantee expressly provides that the Guarantor's liability will not be "discharged or affected by … any failure by [Knauf] to take any steps for the protection or perfection of any security taken or obtained" (emphasis added), including by an omission to register. Accordingly, even if the obligation contended for by Mr Hardy as incumbent upon Knauf arose, by reason of clause 9.1(q), the operation of the Repayment Guarantee would not be affected by a failure to discharge that obligation. 52 The second issue concerns the equitable set-off that is said to arise from the alleged breach of clause 17 of the Deed of Forbearance, assuming that the construction contended for by Mr Hardy is correct. 53 In Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462 the Court of Appeal of the Supreme Court of New South Wales (Gleeson CJ, Handley JA and Brownie A-JA) considered a defence of equitable set-off. Relevantly at 481 their Honours said: Equitable set-off is a substantive defence: see S R Derham, Set-Off, 2nd ed (1996) at 56-65. As Goff LJ said in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 at 982, a defence of equitable set-off may be set up "not merely as a means of preventing … judgment, or, at any rate, execution, but also as an immediate answer to … liability to pay". This must be correct because an equitable set-off impeaches the title of the other party to the legal demand against which it is asserted. When "the circumstances which support an equitable set-off exist, it is unconscionable for the creditor to regard the debtor as being indebted": Derham (at 60). The debtor can therefore claim that the payment demanded was never due: see Tomlinson v Cut Price Deli Pty Ltd (1992) 38 FCR 490 at 494-495, per Drummond J and the cases there cited … 54 That is, an equitable set-off operates to reduce or extinguish the liability of the principal claim. It is a substantive, as opposed to procedural, defence and it thus affects liability on the principal claim. Clause 9.1(q) of the Repayment Guarantee, as emphasised at [49] above, would preclude the defence of equitable set-off as pleaded by Mr Hardy. 55 There is a further and possibly more fundamental issue with these paragraphs of the Amended Defence. Even if the security interest conferred by the General Security Deed had been perfected by registration at the earliest opportunity, Mr Hardy would still be liable under the Repayment Guarantee. That is, if Knauf had perfected its security interest under the General Security Deed and, following default by Retroflex, it had elected to make a demand on Mr Hardy under the Repayment Guarantee, as distinct from enforcing the General Security Deed, Mr Hardy would have had no basis for complaint. Notably, clause 9.1(o) of the Repayment Guarantee provides that Mr Hardy's liability is not affected by an omission by Knauf to recover by realising or enforcing any security or otherwise. Knauf would have been proceeding in accordance with the transaction documents agreed between the parties and Mr Hardy would be in no different position to his current position. 56 Mr Hardy submitted that if action were taken against him pursuant to the Repayment Guarantee in circumstances where Knauf had perfected its security interest under the General Security Deed then he would possibly obtain quia timet relief against Retroflex, requiring Retroflex to discharge its indebtedness to Knauf before judgment was entered against him. But such action is precluded by clause 11.1(a) of the Repayment Guarantee, as set out at [28] above, which relevantly provides that as long as any of the Secured Monies are owed by Retroflex to Knauf the Guarantor shall not claim any set-off or make any counter-claim against Retroflex. It is difficult to see why Mr Hardy should be able to assert a set-off in circumstances where Knauf, allegedly having failed to perfect its security under the General Security Deed, seeks to assert its right against him. 57 Mr Hardy also denies liability under the Credit Guarantee. He submitted that the effect of the Repayment Guarantee was to substitute his liability under the Credit Guarantee with liability under the Repayment Guarantee. However, clause 17.1 of the Repayment Guarantee provides that Knauf's right under the Repayment Guarantee would: … [b]e additional to and shall not merge with, affect or be affected by:- (a) any other securities now or subsequently held by [Knauf] from [Retroflex], the Guarantor or any co-surety; or (b) any other obligation of the Guarantor to [Knauf] notwithstanding any rule of law or equity to the contrary. 58 In addition, by clause 4 of the Credit Guarantee, Mr Hardy agreed that the guarantee therein was a continuing security that would not be affected if, among other things, Knauf "varie[d] the terms of [Retroflex's] account, or the arrangements between [Knauf] and [Retroflex] are changed in any other way (even if this increase[d] [his] liability under this Guarantee and Indemnity)". Insofar as the Deed of Forbearance was a change in the arrangements between Knauf and Retroflex, the terms of clause 4 of the Credit Guarantee make it clear that such a change did not affect the Guarantor's liability under that Guarantee. 59 The defence pleaded in paragraphs 19 to 26 of the Amended Defence does not disclose a reasonable defence. Having regard to the allegations pleaded therein, paragraphs 19 to 26 of the Amended Defence have no chance of success. It is not merely that that part of the Amended Defence is weak. Those paragraphs do not raise a significant factual dispute and can be considered by reference only to the terms of the transaction documents. When that is done, and having regard to the terms of the pleading, paragraphs 19 to 26 of the Amended Defence disclose a defence that is hopeless on its face. Knauf should not have to face the prospect of a trial based on a defence of that nature. Nor would that part of Amended Hardy Defence be assisted by a grant of leave to amend. Those paragraphs are liable to and should be struck out.

conclusion 60 It follows from my findings above that Knauf has succeeded in its application to strike out paragraphs 19 to 26 of the Amended Defence. I will make orders accordingly, including orders that Mr Hardy pay Knauf's costs of its interlocutory application insofar as they concern the application made pursuant to r 16.21 of the Rules. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.