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.