Palaniappan v Westpac Banking Corporation

1. The applicant's Form 2 Application to set aside bankruptcy notice, dated 9 March 2015, be dismissed.
2. The applicant pay the respondent's costs, to be taxed if not agreed.
3. Liberty to apply with respect to any orders which may be made about the time within which the applicant may file an appeal.
4. The time for compliance with the bankruptcy notice number BN 1777877 be extended until 4pm on 16 December 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BARKER J: 1 This proceeding has been in the Court for some time. It came on for hearing on 2 December 2016. At the end of the hearing I made orders effectively dismissing the application with costs. 2 These are the reasons for the formal orders made, which appear in the order page above. 3 By a Form 2 application made under the Federal Court (Bankruptcy) Rules 2005 (Cth) and filed 24 March 2015, the applicant sought a number of "final orders" in respect of Bankruptcy Notice BN 177877, issued 16 January 2015 by the respondent, Westpac Banking Corporation (the Bank). 4 At the hearing, the only substantive order that the applicant sought was in terms of para 2 of that application, namely: 2. A declaration that the applicant has a counterclaim and set off which the applicant was unable to set up in the Supreme Court of Western Australian CIV 1307 of 2014 proceedings, the judgment in which the respondent has relied upon in the purported Bankruptcy Notice, and that the Bankruptcy Notice is of no force or effect and orders that the Bankruptcy Notice be set aside. 5 On 1 December 2016, a day before the final hearing, the applicant sought leave to adduce further affidavit evidence in support of his application and to rely on a substituted outline of submissions. 6 As I considered the construction of s 40(1)(g) of the Bankruptcy Act 1966 (Cth), being the provision in issue, contended for by the Bank to be correct, it was not necessary to decide the application for leave to adduce further evidence and file late submissions. 7 By his substituted outline of submissions in support of the application, the applicant explained, by reference to a substituted defence and counterclaim in related proceedings in the Supreme Court of Western Australia, that he was possessed of a counterclaim equal to, or greater than, the quantum of the judgment upon which the bankruptcy notice was predicated. 8 The applicant said that the counterclaim was in the form of his claim for damages, namely, that the receivers appointed by the Bank in respect of the property that was the subject of the security that led to the judgment debt upon which the bankruptcy notice was based, had sold the subject property at an undervalue and that, on the facts, in doing so, they were acting as agents for the Bank. 9 The applicant denied that this proposed counterclaim was not arguable or that the quantum of it was not equal to or greater than the quantum of the judgment. 10 Assuming that the claim may be arguable or, to put it another way, may be considered to have a fair chance of succeeding, and that the damages recoverable in such an action would be equal to or greater than the quantum of the judgment, the immediate question is whether, for the purposes of s 40(1)(g) of the Act, the counterclaim was one that the applicant "could not have set up in the action or proceeding in which the judgment or order was obtained". 11 This is presently the relevant point because under s 40(1), a debtor commits an act of bankruptcy in each of the following cases, including that specified in para (g), which provides: (g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia - within the time specified in the notice; or (ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service; comply with the requirements of the notice or satisfy the Court that he or she has a counter‑claim, set‑off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter‑claim, set‑off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained; 12 A little background in respect of the judgment and related proceedings in the Supreme Court of Western Australia might be set out. 13 As Buss JA, in Palaniappan v Westpac Banking Corporation [2016] WASCA 72 (Court of Appeal decision) explained, at [2] to [5]: 2 BUSS JA: The respondent as plaintiff commenced proceedings against the appellant as defendant in the General Division of the Supreme Court. The respondent claimed amounts allegedly due and payable by the appellant pursuant to a written guarantee and indemnity (the Guarantee) executed by the appellant on or about 9 July 2008. 3 The Guarantee secured, relevantly, all amounts owing or payable from time to time by Murray Riverside Pty Ltd (Murray Riverside) to the respondent. 4 The respondent applied for summary judgment on its claim. Ultimately, by orders made on 7 August 2015, Master Sanderson entered partial judgment in the sum of $15,184,557.75. See Westpac Banking Corporation v Palaniappan [2014] WASC 475; Westpac Banking Corporation v Palaniappan [No 2] [2015] WASC 227. 5 The appellant has appealed to this court against the master's decision. 14 A key question before Master Sanderson and in the Court of Appeal was the operation and effect of cl 9 of the written guarantee and indemnity (the Guarantee), which was in the following terms: As long as any of the guaranteed money remains unpaid, you may not, without our consent: (a) reduce your liability under this guarantee and indemnity by claiming that you or the customer or any other person has a right of set-off or counterclaim against us; or (b) exercise any legal rights to claim to be entitled to the benefit of another guarantee, indemnity, mortgage, charge or other security given in connection with the guaranteed money or any other amount payable under this guarantee and indemnity … ; or (c) claim an amount from the customer, or another guarantor of the customer's obligations, under a right of indemnity; or (d) claim an amount in the insolvency of the customer or another guarantor of the guaranteed money (including a person who has signed this guarantee and indemnity with you). 15 In the Court of Appeal decision, Buss JA, at [49], summarised the critical aspects of the applicant's pleaded case before Master Sanderson, in the following terms: a) In par 13 of his amended defence, the appellant pleaded, in effect, an equitable set-off. The equitable set-off was based on the receivers and managers, by their conduct, having allegedly constituted themselves as the respondent's agent (par 12); the receivers and managers having allegedly breached their duty to act in good faith in exercising their power of sale of the Properties (par 13A); and the respondent having allegedly instructed the receivers and managers to act or fail to act in the manner pleaded in par 13A (par 13B) and in the circumstances pleaded in par 13C. The amount sought to be set-off was, in effect, the amount by which the appellant's liability to the respondent under the Guarantee had been increased by the receivers and managers' failure to sell the Properties for their market value or, alternatively, the best available price (the Set-Off Amount). (b) In par 16A of his amended defence, the appellant pleaded, in effect, that, 'by reason of the conduct pleaded above and as a matter of equity', the respondent was not entitled to enforce the Guarantee or, alternatively, was only entitled to enforce the Guarantee after taking into account the Set-Off Amount. (c) In pars 20, 21 and 22 of his counterclaim, the appellant pleaded, in effect, that the respondent acted to his prejudice, as alleged in pars 12 and 13A of the amended defence, and that consequently the appellant has suffered loss and damage, being the Set-Off Amount. (d) In pars 23, 24 and 25 of his counterclaim, the appellant pleaded, in effect, that he was in a position of 'special disadvantage' as against the respondent, the respondent acted unconscionably against him by reason of the matters pleaded in the amended defence and that he has suffered loss and damage by reason of that unconscionable conduct, being the Set-Off Amount. (e) In pars 26 - 36 of his counterclaim, the appellant pleaded, in effect, various causes of action against the respondent pursuant to the ASIC Act, further or alternatively the Corporations Act, further or alternatively the CCA. It was alleged, in effect, that the respondent engaged in unconscionable conduct by reason of the matters pleaded in pars 20 and 21 of the counterclaim and that the appellant has suffered loss and damage by reason of that unconscionable conduct, being the Set-Off Amount. (f) In par 37 of his counterclaim, the appellant pleaded, in effect, that, '[i]n the circumstances', the Guarantee should be declared void ab initio pursuant to, in effect, s 237 read with s 243 of the Australian Consumer Law. (g) In his prayer for relief, the appellant claimed, amongst other things, a declaration that the Guarantee is unenforceable, a declaration that the respondent engaged in unconscionable conduct and an equitable set-off of any amounts due under the counterclaim against any amounts due on the respondent's claim against the appellant. 16 At [70] to [76], Buss JA stated: 70 Two features of cl 9(a) of the Guarantee may be noted. 71 First, the words '[a]s long as', in the chapeau of cl 9, impose a temporal limitation on the period during which the appellant's 'right of set-off or counterclaim against [the respondent]' is suspended. 72 Secondly, the requirement in the chapeau of cl 9 that the guaranteed money 'remains unpaid' (and continues to be unpaid) conditions the circumstances in which the suspension of the appellant's 'right of set-off or counterclaim against [the respondent]' operates. 73 Subject to any statutory provision to the contrary, a right of set-off, including a right of equitable set-off, may be excluded by express or implied agreement. See National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785, 803 - 805 (Viscount Dilhorne), 808 - 809 (Lord Simon of Glaisdale), 817 - 818 (Lord Cross of Chelsea), 821 - 824 (Lord Kilbrandon); Coca-Cola Financial Corporation v Finsat International Ltd [1998] QB 43, 51 - 53 (Neill LJ, Morritt & Hutchison LJJ agreeing); St George Bank Ltd v Field [2007] NSWSC 902 [17] (McDougall J); Hausman v Abigroup Contractors Pty Ltd [2009] VSCA 288; (2009) 29 VR 213 [17] - [30] (Weinberg & Bongiorno JJA & Williams AJA); Oswal v Commonwealth Bank of Australia [2013] WASCA 58 [45] (Pullin JA, Newnes JA agreeing). 74 A suspension provision of the kind embodied in cl 9 of the Guarantee does not oust the jurisdiction of the courts. It suspends, but does not otherwise impair, the rights of the party bound by the provision. That party is entitled to enforce the rights in question provided it conforms with its primary obligation to make payment to the other party. See GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 [93] (Bryson J); Westpac Banking Corporation v Helicopters Brisbane Pty Ltd [2012] QSC 263 [24] (Martin J). 75 The apparent purpose or object of cl 9(a) of the Guarantee is to ensure immediate payment by the appellant to the respondent, if Murray Riverside does not pay, of the whole of the amount due and payable by Murray Riverside to the respondent, without any deduction on account of any set-off or counterclaim. In The 'Fedora', Parker LJ said 'the commercial purpose of the [guarantee] transaction [in question] is that, upon default by the borrower the bank should be paid quickly, and … that all set-offs and counterclaims are excluded' (444). A little later, his Lordship observed: We can see no relevant distinction between the guarantee in [Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd's Rep 256] and the guarantees presently under consideration. The purpose of both was to ensure immediate payment if the principal debtor did not pay. Indeed the present cases make it the more necessary that the Court should not interfere, for here the parties have specifically provided both in the loan agreement and the guarantees that payment should be made free of any set-off or counterclaim. It would defeat the whole commercial purpose of the transaction, would be out of touch with business realities and would keep the bank waiting for a payment, which both the borrowers and the guarantors intended that it should have, whilst protracted proceedings on the alleged counterclaims were litigated (445). 76 Clause 9(a) of the Guarantee refers, relevantly, to the appellant claiming 'a right of set-off or counterclaim against [the respondent]'. It does not specifically refer to a right of equitable set-off. However, the ordinary and natural meaning of the expression 'a right of set-off', in the context of a contractual provision that suspends the making of a claim of 'a right of set-off' by a party to the contract, includes all forms of set-off. See The 'Fedora' (444); Norman [181] - [202]; Oswal [54]; O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71; (2013) 16 BPR 31,705 [94] (Ward JA, Beazley P agreeing). In my opinion, the reference to 'set-off' in cl 9(a) includes an equitable set-off. 17 Other submissions put as to why leave to appeal from the Master's decision should be granted, were also rejected by his Honour. 18 In the Court of Appeal decision, Corboy J, with whom Martin CJ agreed, said, at [133] to [135], that: 133 A suspension clause in a form such as cl 9 of the Guarantee will not apply where the guarantor alleges a defence that denies the debt or the enforceability of the guarantee (rather than asserting a claim that it would be unconscionable for the creditor to enforce an otherwise valid guarantee). So, for example, a guarantor will not be required to 'pay now and litigate later' where it alleges that the creditor was estopped from asserting that the debt was payable or from making a demand for payment. Nor will a suspension clause apply where the creditor has allegedly engaged in misleading or deceptive conduct by making a demand for payment after representing that a loan facility would be extended and rolled over on the expiry date: O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71. 134 Relevant to the appellant's proposed ground of appeal, a suspension clause will also not apply where the creditor's dealings with the guarantor might result in the guarantee being discharged or set aside for invalidity - for example, where the creditor has engaged in misleading or unconscionable conduct in connection with the giving of the guarantee. Further, statutory relief for misleading or unconscionable conduct may operate to void or vary a contract retrospectively. 135 Accordingly, there is a distinction between a defence that alleges that a guarantee should be set aside or varied and a defence that pleads an equitable set-off. The distinction is illustrated in the reasons of Holmes J (as her Honour then was) in Capital Finance Australia Ltd v Airstar Aviation Pty Ltd [2003] QSC 151; [2004] 1 Qd R 122. 19 On the basis of this distinction, his Honour did not consider that the proposed relevant ground of appeal advanced by the applicant provided a basis for granting leave to appeal from Master Sanderson's decision. 20 The applicant referred to Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 to support the proposition that the expression "could not have set up in the action or proceeding in which the judgment or order was obtained" means "which [you] could not by law set up in the action". The applicant further noted that the Court, in Re Brink, referred to Re Stokvis (1934) 7 ABC 53 at 57, in which Lukin J had observed that, in turn, this means: a counter claim, set off or cross demand which could not be set up as one which, from point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained. … Mere failure to take advantage of the opportunity can hardly be said to be inability. 21 In short, the applicant contended that the fact that he took steps to raise his counterclaim by filing his defence and counterclaim, did not mean that, as a matter of law, he was able to "set it up". 22 He further contended that Master Sanderson at first instance and the Court of Appeal on appeal, in affirming the Master's decision, concluded that the applicant could not, as a matter of law, set up his claim either by way of defence or counterclaim in order to reduce his liability to the respondent under the Guarantee. At least, the applicant should be taken to contend that that is the effect of those decisions. The applicant contended this was a positive inhibition of the kind identified as a reason "at law" why the counterclaim could not be "set up". 23 As a consequence, the applicant submitted that the existence of cl 9 did not prevent him raising the existence of the counterclaim as a basis for setting aside the bankruptcy notice. 24 He submitted that one of the obvious aims of the s 40(1) provisions of the Act was to avoid the reliance by a creditor on contractual terms such as cl 9 to bankrupt a debtor in circumstances where the statement of account as between the creditor and the debtor is in the debtor's favour. 25 In my view, on a reasonable analysis of the circumstances, the submissions of the applicant should not be accepted. 26 It may be accepted, and was not in doubt, that the question of whether or not a debtor "could not have set up" the counterclaim was to be adjudged by reference to legal inability, not personal and practical considerations. See Van Leeuwen v Bank of Western Australia Ltd [2001] FCA 1826 at [16]; Jensen v Queensland Law Society Incorporated [2004] FCA 1630 at [10]; and Walton v National Mutual Life Association of Australasia Limited (1994) 49 FCR 406 at 408; [1994] FCA 314. 27 In my view there can be little doubt that, at material times, it was open to the applicant to seek to stay the judgment entered by the Master on the liability arising under the Guarantee, when judgment was entered or at any time thereafter. 28 More particularly, it was open to the applicant to seek that stay in order to allow his counterclaim to be dealt with; the "suspension" of the counterclaim having become effective under cl 9 of the Guarantee. This course of action is specifically contemplated by O 14, r 3(2) of the Rules of the Supreme Court 1971 (WA), which provides: The Court may, by order and subject to such conditions, if any, as may be just, stay execution of any judgment given against a defendant under this rule until after the trial of any counterclaim made or raised by the defendant in the action. 29 The applicant did not seek to stay the judgment in order to set up a counterclaim. 30 Of course, it may be accepted, that in order to remove the suspension of his right to do so, he may have been required to meet a condition of payment of the judgment debt, or payment into Court. 31 But that circumstance, in my view, does not constitute a "positive inhibition" of the type that the applicant contended for. Clause 9 did not legally prevent the applicant from pursuing his counterclaim. The financial impediments to taking such a course of action may be considered personal and practical ones. The applicant, however, chose not to take the practical course that was available to him to set up the counterclaim. 32 Accordingly, I accept the submission made on behalf of the Bank, that the applicant was under no legal disability from pursuing his counterclaim. Rather, by the Guarantee that he had made with the Bank, he had agreed that his right to make such a counterclaim would be suspended while his liability under the Guarantee remained unmet. It was in his hands to remove that contractually agreed inhibition. But it was not a positive inhibition imposed by the law, of the nature referred to in Re Brink or by Lukin J in Re Stokvis. 33 In particular, having regard to a submission made by counsel for the applicant, it did not constitute a "point in time" inhibition (an expression used by Lukin J in the passage from Re Stokvis relied upon). I accepted the submission made by senior counsel for the Bank that that expression in context was intended simply to indicate that, in some circumstances, liability may not have arisen at the particular point in time when a judgment was obtained, and so it was not open to the judgment debtor to set up a counterclaim at the material time. 34 For these reasons, I was not satisfied that the counterclaim that the applicant wished to set up against the judgment debt the subject of the bankruptcy notice, was one that he "could not have set up in the action or proceeding in which the judgment or order was obtained". I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker.