National Australia Bank Limited v Strategic Brands Australia Pty Limited

Supreme Court of NSW|2012-03-15|Before: Hislop J

Introduction 1In January 2008 the plaintiff provided financial accommodation to the first defendant in the form of a Bill Facility (limit $2,050,000) and a Trade Finance Facility (limit $450,000). In November 2008 it provided an Overdraft Facility (limit $150,000). 2The Bill Facility was secured by a guarantee and indemnity dated 29 January 2008 given by the third, fourth and fifth defendants, a mortgage by the third defendant of a property at Dural, New South Wales and a mortgage by the fourth and fifth defendants of a property at Castle Hill, New South Wales. 3The Overdraft Facility was secured by a guarantee and indemnity dated 7 November 2008 given by the third, fourth and fifth defendants. 4The third and fourth defendants were directors of the first defendant. 5In July 2009 the first defendant defaulted in its payments to the plaintiff. The plaintiff terminated the facilities and demanded repayment. Repayment was not made. 6On 21 May 2010 the plaintiff filed a statement of claim. The statement of claim sought judgment for the outstanding monies and interest from the first defendant and judgment on the guarantees and indemnities against the third, fourth and fifth defendants, as well as possession of the properties at Dural and Castle Hill (the involvement of the second defendant is irrelevant for present purposes). 7On 29 November 2010 the plaintiff obtained default judgment against the first defendant on the statement of claim. The first defendant went into liquidation and was deregistered on 21 August 2011. 8The statement of claim was served on the third defendant in early June 2010. The third defendant did not file an appearance or defence to the statement of claim. On 29 November 2010 the plaintiff entered default judgment against him. 9The fourth defendant was formally served with the statement of claim in October 2011 though he had been aware of it since the third defendant provided a copy to him shortly after service upon the third defendant. He filed his defence on 10 October 2011. 10Two notices of motion are for determination by the Court. The first, filed on 6 October 2011, is by the third defendant against the plaintiff. It seeks orders to set aside the default judgment and to grant leave to file a defence. The application is opposed by the plaintiff. 11The second notice of motion was filed on 17 October 2011 by the plaintiff against the fourth defendant. It seeks to strike out the fourth defendant's defence and obtain summary judgment on the plaintiff's claim against the fourth defendant. The application is opposed by the fourth defendant. 12The notices of motion were heard together.

Background 13The third and fourth defendants gave evidence as to background facts. The plaintiff did not call evidence to contradict the evidence of the third and fourth defendants. The evidence which I accept for present purposes, is essentially as pleaded in the fourth defendant's defence and is as follows: (a) the first defendant carried on business as an importer and wholesaler of skincare and cosmetic products; (b) it held supply contracts with Woolworths Limited, Coles Myer Limited, Metcash Limited and Franklins Limited for the distribution and sale of those products; (c) in February 2009 Woolworths Limited and Coles Myer Limited placed substantial replenishment orders for the products with the first defendant; (d) on 9 February 2009 the first defendant requested the plaintiff to increase the Trade Finance Facility by an amount of $150,000. The request was made by the fourth defendant orally at the plaintiff's premises at Rosebery to the plaintiff's senior business banking manager, Mr Cranfield, and its relationship manager, Mr Bolwell. At the time the plaintiff's representatives were advised that the increase was needed to pay for products required by the orders, that payment for the products would need to be made to the manufacturer, Devos Cosmetic Asia Limited in Hong Kong (Devos), that the total amount which needed to be paid to Devos for the manufacture and release of products was in the vicinity of $100,000, that the products would not be released by Devos without full payment and that the orders would generate significant cash flow for the first defendant over the period to December 2009; (e) on 29 March 2009 Mr Bolwell telephoned the fourth defendant and informed him that the plaintiff agreed to increase the Trade Finance Facility by $150,000 to $600,000 or alternatively represented such was the case; (f) pursuant to the agreement reached on 29 March 2009, or alternatively pursuant to the representations, the plaintiff on 31 March 2009 remitted the sum of $33,942.09 to Devos in Hong Kong; (g) in accordance with the agreement, or alternatively acting in reliance on the representations, the first defendant took no steps to arrange for finance of the sum of $79,800 due to Devos, and took no steps to warn Woolworths Limited, Metcash Limited or Coles Myer Limited that the supply of products required by the orders might be delayed; (h) in May 2009 Devos required the payment of $79,800 for the release of the products required by the orders and on about 12 May 2009 the fourth defendant requested the release by the plaintiff of $45,000 for part of the payment to Devos; (i) on or about 19 May 2009 the plaintiff declined to provide the sum of $45,000 when requested by the fourth defendant, and declined to provide the first defendant with a reasonable period of time in which to sell the products pursuant to the orders; (j) on 21 May 2009 the fourth defendant met with representatives of the plaintiff and discussed the matter. The plaintiff's representatives promised to get back to the fourth defendant within 48 hours; (k) by letter dated 22 May 2009 the plaintiff confirmed that it would not provide the additional funds required; (l) on 23 May 2009 the fourth defendant rang Mr Bolwell and told him if the funds were not provided the business could be totally destroyed. Mr Bolwell confirmed the funds would not be provided; (m) in consequence of the plaintiff's failure to provide the increase of the Trade Finance Facility, the first defendant was unable to supply products as required by the orders and in consequence Woolworths Limited, Coles Myer Limited, Metcash Limited and Franklins Limited in the period May and June 2009 cancelled the orders and withdrew their supply contracts, in consequence of which the first defendant was unable to comply with the requirements of the Bill Facility and the Overdraft; (n) had the plaintiff complied with the agreement, the first defendant would not have been in default to the plaintiff; (o) had the plaintiff not made the representations, the first defendant would have obtained finance to permit it to pay Devos and would have fulfilled the orders.

The fourth defendant - strike out application 14UCPR 14.28(1) provides that: "The court may at any stage of the proceedings order that the whole or any part of a pleading be struck out if the pleading: (a) discloses no reasonable cause of action or defence..." 15The plaintiff sought to strike out the fourth defendant's defence on the ground it did not disclose a reasonable defence. 16It was common ground that: "...the jurisdiction summarily to terminate an action is to be sparingly employed and is not to be used except in a clear case where the Court is satisfied that it has the requisite material and the necessary assistance from the parties to reach a definite and certain conclusion." General Steel Industries Inc. v Commissioner for Railways (NSW) (1964) 112 CLR 125 "A case must be very clear indeed to justify the summary intervention of the court...once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action [summarily]" - Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91 17The fourth defendant, in his defence, pleaded, in answer to the statement of claim as a whole, that the plaintiff's conduct: (i) constituted a breach of the agreement; or (ii) constituted a breach of s 12DA of the Australian Securities and Investment Commission Act 2001 (Cth) ("the Act") in that the plaintiff engaged in misleading or deceptive conduct in breach of that section; or (iii) constituted a breach of ss 12CA, 12CB, or 12CC of the Act, in that the plaintiff engaged in unconscionable conduct and that, in consequence, the fourth defendant was entitled to make application pursuant to s 12GM of the Act for orders that: (i) the first defendant's liability under the Bill Facility, Overdraft and Trade Finance Facility be set off against any liability the plaintiff may have in respect of the losses occasioned to the first defendant by reason of the plaintiff's wrongful conduct; (ii) enforcement of the guarantee and mortgage to which the fourth defendant is a party be postponed until such liability be determined, or until any liability the plaintiff may have to the fourth defendant is determined; (iii) should the Court determine the conduct of the plaintiff to be in breach of ss 12CA, 12CB or 12CC of the Act in that it was unconscionable, an order that the fourth defendant be relieved of any obligations under the guarantee or mortgage and makes such application. 18Reliance was also placed by the fourth defendant on the principle that a surety is discharged by an alteration to the underlying obligations secured. The plaintiff did not respond to that assertion as it was not part of the case pleaded. 19As to the three matters which were pleaded, the plaintiff submitted: (a) (i) the conditions of the Facility Agreement stated that unless otherwise provided, the terms of the Agreement may only be varied by the written agreement of the parties. The evidence was that the alleged variation was made by telephone; (ii) the third and fourth defendants were not parties to the Facility Agreement and thus could not sue for the alleged breach of contract; (b) in order to make a case under s 12DA of the Act, three things must be established, namely that the representation was made to the first defendant, it was relied upon by the first defendant, and it was the first defendant who suffered loss. Only the first defendant could seek relief under s 12DA. The third and fourth defendants did not have standing to bring such an action. The plaintiff submitted: "If this was a situation where [the first defendant] was here and they were defending the proceedings on this basis, then one might imagine a situation whereby a defence is put on by the third and fourth defendants to the effect of, well, if [the first defendant] is not liable under the Facility Agreements, then obviously I'm not liable under the guarantee, but that is, of course, not occurring in this case. The [first defendant] is not here and cannot be here because it has been deregistered" [This submission appears to ignore the Court's power to restore a deregistered company to the register under the Corporations Act 2001.] (c) (i) the unconscionable conduct claimed under ss 12CA, 12CB and 12CC is pleaded viz a viz the first defendant not the third and fourth defendants; (ii) there is no evidence of special disadvantage so as to found such an action; (iii) there was no unconscionable conduct by the plaintiff in merely refusing to advance more money. 20Thus, the plaintiff submitted that the alleged losses were those of the first defendant and only it would have standing to assert claims or defences in respect of the matters pleaded. 21Section 12GM(1) of the Act provides: "Without limiting the generality of section 12GD, if, in a proceeding instituted under, or for an offence against, this Division, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in in contravention of a provision of this Division, the Court may, whether or not it grants an injunction under section 12GD or makes an order under section 12GF, 12GLA or 12GLB, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (7) of this section) if the Court considers that the order or orders concerned will compensate the first mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage..." 22The plaintiff submitted: (a) the defence does not plead the third and fourth defendants have suffered loss and damage "by" the conduct of the plaintiff in breach of the Act. The case which is pleaded against the plaintiff is that the plaintiff's conduct towards the first defendant breached the Act and caused loss and damage to the first defendant; (b) the third and fourth defendants appear to accept that only the first defendant relied upon the plaintiff's conduct. In these circumstances, the third and fourth defendants cannot be said to have suffered any loss "by" the conduct of the plaintiff such that s 12GM of the Act would apply. 23The fourth defendant submitted: (a) the causes of action are not confined to damages caused only to the person who directly relies, but can be caused to somebody who, as a consequence of that reliance, is ultimately effected. That is what has been sought to be pleaded here; (b) there is no doubt that the first defendant would have a cause of action, but it is not the only cause of action and that is not what s 12DA and s 12CC provide, they provide that people who have damage caused to them can recover. A person who gives a guarantee where, as a result of a breach by the creditor to the principal debtor causes the principal debtor to be unable to perform its obligations suffers damage, by the misleading and deceptive conduct; (c) in Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514 the High Court held: "The statutory cause of action arises when the plaintiff suffers loss or damage 'by' contravening conduct of another person. 'By' is a curious word to use. One might have expected 'by means of', 'by reason of', 'in consequence of' or 'as a result of'. But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common sense concept of causation recently discussed by this court in March v Stramare (E & MH) Pty Ltd, except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had Parliament intended to say something else, it would have been natural and easy to have said so. In the context of the Act, the concept of loss or damage, like the concept of causation, must be applied in a wide variety of situations because the contraventions of Pts IV and V which give rise to causes of action under s 82(1) are diverse." (d) whether the plaintiff caused loss to the guarantors is a matter to be determined on a final hearing, not on an interlocutory hearing. It is at the very least arguable that the breaches or contraventions resulting in the principal debtor being unable to repay the loan caused the loss or damage sufficient to justify relief to the guarantors who are now called upon to repay the same loan.

Conclusion 24In my opinion, there is an arguable or triable issue that the first defendant suffered loss by reason of the plaintiff's representations and/or breach of contract. There is an arguable or triable case that, as a result of the conduct of the plaintiff, the first defendant failed to meet its obligations to the plaintiff, thereby exposing the third and fourth defendants to a liability under the guarantees. It is arguable the third and fourth defendants' potential liability was suffered by the conduct of the plaintiff. In my opinion there are real questions of fact and law to be determined upon which the rights of the parties depend. The plaintiff has not demonstrated that the fourth defendant's defence should be struck out. 25In a note forwarded to the Court, with leave, after completion of the hearing, the fourth defendant stated: "Alternatively, to the extent that the plaintiff's point is in reality a pleading point based upon the framing of the relief, then the defendants should have leave to replead the issues as expressed above which properly arise for determination." 26I grant leave to the fourth defendant to amend his defence as he may be advised within 14 days of the date of this judgment so as to ensure the real issues raised by the proceedings are pleaded and ultimately determined.

The third defendant - setting aside default judgment 27UCPR 36.16 provides the court may set aside or vary a judgment or order after it has been entered if it is a default judgment. 28The ultimate question for determination by the Court on this application is whether the interests of justice require that the third defendant should be permitted to contest the plaintiff's claim notwithstanding his failure to file a defence within time and his delay in moving to set aside the default judgment. 29Factors relevant to the consideration of that issue include: (a) whether the proposed defence presents an arguable or triable issue; (b) whether the third defendant has shown a satisfactory explanation for the delay in filing a defence or in moving to set aside the judgment, though this is not determinative - see Cohen v McWilliam (1995) 38 NSWLR 476 at 479 where it was held: "The constant reference to these factors, in particular delay, is sometimes used to found an argument that delay must be satisfactorily explained before discretion can be exercised in favour of the applicant. The remaining emphasised parts... demonstrate this is not so...What it does do is make the court examine more closely the question whether there really is a triable issue going to the merits...in the ordinary course it will only be where the applicant has not shown a defence on the merits (which, as numerous authorities show, means an arguable defence on the merits) that the applicant will not be allowed to contest the case at trial... ...a careful reading shows there is not one example in the schedule where a litigant has been shut out by procedural default from litigating (sometimes on severe conditions) a defence which the court felt was arguable. The cases where litigants have been shut out are those where, in one form or another, the court was not satisfied there was enough prospect of the applicant party succeeding on the issue raised to make it just for the issue to be tried." (c) whether, if the judgment was set aside, prejudice would be occasioned to the plaintiff. 30The third defendant seeks leave, if the default judgment is set aside, to file a defence in terms similar to that filed by the fourth defendant. As earlier determined, the fourth defendant's defence gives rise to arguable or triable issues. Accordingly, I accept the third defendant has established that the defence proposed by him presents arguable or triable issues. 31The plaintiff alleges prejudice would be occasioned to it if the judgment was set aside because the amount of debt has increased significantly since the third defendant was served with the statement of claim and if the proceedings had followed the ordinary course it was probable they would have been completed by now. This will be of significance only if the plaintiff succeeds in its claim and if the available equities are insufficient to meet the claim. 32The third defendant was served with the statement of claim in June 2010. Default judgment was entered on 29 November 2010 and the application to set aside the judgment was made on 6 October 2011. 33The reasons advanced by the third defendant by way of explanation of delay are as follows: (a) since December 2004 he had suffered from various medical conditions including severe osteoarthritis, gout, hypertension and insulin resistance which required him to undergo regular medical treatment and checkups. Over the months which followed 22 May 2009 he began to suffer from anxiety, depression and stress. As a consequence his pre-existing medical conditions were exacerbated. He felt extremely overwhelmed by the combination of worsening health and financial strain. Due to the state of his physical and mental health he did not address the claim at the time it was served upon him beyond giving a copy of the statement of claim to the fourth defendant and relying upon him to follow up as appropriate; (b) the fourth defendant made efforts to seek out officers of the plaintiff with whom he had had previous dealings to discuss the matter but the majority of them had since ceased employment with the defendant. He also sought to obtain legal representation during the period May to December 2010 with limited success; (c) the third defendant said he had reached the stage where he "stuck his head in the sand" in the hope it would all go away. He also said he was unfamiliar with the litigation process and terminology and it was not until he met his present solicitor that he understood the seriousness of the legal position, as a result of which he has borrowed funds to pay for his legal representation. 34As against the third defendant's evidence, the plaintiff points to the concession in cross examination that the third defendant knew the statement of claim was a serious document and that it could have serious implications for him. He was able to work 30-40 hours as a director and it was not until the sheriff issued a notice to vacate the property at Dural on 7 October that steps were taken by the third defendant resulting in him making an application to set aside the judgment on 6 October 2011. 35In my opinion, the third defendant's explanation for the delay in filing a defence or moving to set aside the judgment is less than satisfactory. 36However, the ultimate question for determination by the Court is whether the interests of justice require that the third defendant should be permitted to contest the plaintiff's claim notwithstanding his failure to file a defence within time, or to move promptly to set aside the judgment. 37In my opinion, it would not be in the interests of justice to exclude the third defendant from contesting the plaintiff's claim whilst permitting the fourth defendant to contest the claim. I have held the third and fourth defendants have an arguable defence. The issue is precisely the same for each defendant and the possible risk of inconsistent verdicts is to be avoided if possible. No significant additional time or costs would be incurred if the third and fourth defendants' defences were heard together. The alleged prejudice to the plaintiff, by permitting the third defendant to defend the claim, is mitigated by the desirability that the claim should be determined on the merits. 38In my opinion, the default judgment should be set aside and the third defendant allowed in to defend the claim. 39As the third defendant has been granted an indulgence, he should be liable for the costs of and associated with the notice of motion filed on 6 October 2011. 40The orders of the Court are as follows:

The notice of motion filed on 17 October 2011 by the plaintiff against the fourth defendant is dismissed. The plaintiff is to pay the fourth defendant's costs thereof.
Leave is granted to the fourth defendant to amend his defence as he may be advised and to file and serve any amended defence by 4.00 pm on 6 July 2012.
The default judgment entered against the third defendant on 29 November 2010 is set aside.
The third defendant is to pay the plaintiff's costs of and associated with the notice of motion filed on 6 October 2011.
The third defendant is to file and serve his defence within 21 days of the date of this judgment.
The proceedings will be listed before the registrar for directions on 16 July 2012.

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: 22 June 2012

Australian Securities and Investment Commission Act 2001(Cth)

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