Whether the guarantors have an equitable right of set off to enforce the mortgagor's claim for breach of the mortgagee's duty of good faith
46The plaintiff submits that as a result of certain clauses in the guarantees the guarantors presently have no right of equitable set off, nor are they subrogated to the right of the mortgagor, to sue:
(i)for the alleged breach of the mortgagee's duty of good faith and s420A of the Corporations Act ; or
(ii)because in the sale of the Newton Road Property the plaintiff engaged in unconscionable conduct under s51AC of the Trade Practices Act 1974 (Cth).
47The relevant clauses of the guarantees are as follows:
Clause 4.1 of the Guarantee provides:
"This is a continuing guarantee and indemnity which:
(a) is not wholly or partially discharged by the payment of any of the Guaranteed Money, the settlement of an account or any other matter (other than an unconditional written release by the Lender); and
(b) applies to the present and future balance of the Guaranteed Money."
Clause 4.2 of the Guarantee states:
"The liability of the Guarantor is not adversely affected by anything which would otherwise reduce or discharge the liability of the Guarantor under the law relating to sureties, guarantees and indemnities. In particular, the liability of the Guarantor is not adversely affected by:
(a) the Lender granting time or any other indulgence or concession; or
(b) the Lender increasing the amount, or otherwise varying the type or terms, of financial accommodation provided to the Debtor; or
(c) any transaction or agreement (or variation of a transaction or agreement) between the Lender and the Debtor, a Co-Surety or any other person (even though the relevant transaction, agreement or variation may adversely affect the Guarantor); or
(d) the Insolvency or Incapacity of any person, or the Lender becoming a party to or bound by the Insolvency or Incapacity; or
(e) any judgment or order against the Debtor, the Guarantor or any other person; or
(f) (i) an obligation of the Guarantor, the Debtor or a Co-Surety; or
(ii) a Relevant Agreement, or any provision of a Relevant Agreement, being void, voidable, unenforceable, defective, released, waived, impaired, transferred, enforced, or impossible or illegal to perform; or
(g) the Guaranteed Money not being recoverable or the liability of the Debtor, a Co-Surety or any other person to the Lender ceasing (including as a result of a release or discharge by the Lender); or
(h) the Lender failing to enforce a Relevant Agreement; or
(i) property secured under a Collateral Security being destroyed, forfeited, extinguished, surrendered or resumed; or
(j) any default, misrepresentation, negligence, misconduct, acquiescence, delay, mistake or other action or inaction of any kind by or on behalf of the Lender or any other person; or
(k) any change to a partnership or in the membership of any partnership, joint venture or association."
Clause 5.1 of the Guarantee provides:
"Until the Lender has received all the Guaranteed Money and the Lender is satisfied that it will not have to repay any money received by it in connection with the Guaranteed Money, the Guarantor must not (either directly or indirectly):
(a) claim, exercise or attempt to exercise a right of set-off or any other right which might reduce or discharge the Guarantor's liability under this document; or
(b) claim or exercise a right of subrogation or a right of contribution or otherwise claim the benefit of a Collateral Security; or
(c) unless the Lender has given a written direction to do so:
(i) prove, claim or exercise voting rights in the Insolvency or Incapacity of the Debtor or a Co-Surety in competition with the Lender; or
(ii) otherwise claim or receive the benefit of a distribution, dividend or payment arising out of the Insolvency or Incapacity of the Debtor or a Co-Surety; or
(d) demand, or accept payment of, any money owed to the Guarantor by the Debtor or any Co-Surety."
48It was submitted by the plaintiff that the effect of clauses 4.1, 4.2 and 5.1 of the Guarantee is that unless and until,
(i)the Lender has received all of the Guaranteed Money, and
(ii)the Lender is satisfied that it will not have to repay any money received by it in connection with the Guaranteed Money,
the guarantor has contracted away its right to claim, exercise or attempt to exercise a right of set-off or any other right which might reduce or discharge the Guarantor's liability under this document and its right to claim or exercise a right of subrogation or a right of contribution or otherwise claim the benefit of a Collateral Security.
49This argument, if it is successful, is a complete answer to the defendants' cross claim.
50The defendants' answer is that firstly, clause 5.1 is contrary to public policy and void as it attempts to oust the Court's jurisdiction. Second, in any event, the borrower in this case, Stateland, is insolvent and in liquidation such that the defendants have a statutory right of setoff by virtue of section 553C of the Corporations Act . The defendants also refer to a suggestion by the plaintiff that the defendants had waived their rights to bring a cross-claim, saying that this is not pleaded nor established by the evidence.
51On the first point the defendants pointed to the following general statements on the matter of public policy. In Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643, Rich, Dixon, Evatt and McTiernan JJ said at 6523:
"What no contract can do is to take from a party to whom a right actually accrues, whether ex contractu or otherwise, his power of invoking the jurisdiction of the courts to enforce it. ... No contractual provision which attempts to disable a party from resorting to the course of law was ever recognised as valid. It is not possible for a contract to create rights and at the same time to deny to the other party in whom they vest the right to invoke the jurisdiction of the courts to enforce them."
52In Scott v Avery (1856) 5 HL Cas 811 Justice Coleridge said (at 841):
"The courts will not enforce or sanction an agreement which deprives the subject of that recourse to their jurisdiction, which has been considered a right inalienable even by the concurrent will of the parties. But nothing prevents parties from ascertaining and constituting as they please the cause of action which is to become the subject matter of decision by the court."
53Likewise, in Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540, Drummond J explained at 548-549 that:
"At the core of this head of public policy is the notion that the citizen is entitled to have recourse to the court for an adjudication on his legal rights. A contractual agreement to deny a person that "inalienable right" contravenes this public policy and is void. A disincentive to a person to exercise his right of recourse to the court can, depending on how powerfully it operates to discourage litigation, amount to a denial of this right just as complete as an express contractual prohibition against litigation."
54The point the plaintiff makes in answer to these statements is that there is not an ouster of jurisdiction, merely a postponement of the right to recover. In GE Capital Australia v Davis (2002) 180 FLR 250, Bryson J observed that clauses similar to clauses 4.1, 4.2 and 5.1 quoted above precluded the guarantor setting up cross-claims against the creditor unless and until the money payable by the guarantor to the creditor had been paid.
55The clause before Bryson was:
"8.1 As long as the Guaranteed Money or other money payable under this guarantee and indemnity remains unpaid, the Guarantor may not without the consent of GE Capital:
(a) in reduction of its liability under this guarantee and indemnity, raise a defence, set off or counterclaim available to itself, the Debtor or a co-surety or co-indemnifier against GE Capital or claim a set off or make a counter claim against GE Capital; or
(b) make a claim or enforce a right (including without limitation, an Encumbrance) against the Debtor or any other Guarantor or against their estate or property; or
(c) prove in competition with GE Capital if an Insolvency Event occurs in respect of the Debtor or any other Guarantor whether in respect of an amount paid by the Guarantor under this agreement and indemnity, in respect of another amount (including the proceeds of a Security Interest) applied by GE Capital in reduction of the Guarantor's liability under this guarantee and indemnity, or otherwise; or
(d) claim to be entitled by way of contribution, indemnity, subrogation, marshalling or otherwise to the benefit of a Security Interest or guarantee or a share in it now or subsequently held for the Guaranteed Money or other money payable under this guarantee and indemnity."
56Bryson J (at [85]) observed:
"The obligation of the guarantor to the principal creditor arises under the contract between them; however protection extended in Equity to the guarantor has the effect that the guarantor can raise an equitable defence in part or in whole against a claim for its contractual liability. The protection extended to the guarantor in Equity is related to the guarantor's right to be subrogated to the rights of the principal creditor against the security if the guarantor pays out all the secured debt. The protection extended in Equity may have had its origin in this right of subrogation. The availability of protection is subject to any provision in the contract between the guarantor and the principal creditor which qualifies or limits the guarantor's rights; in this case the qualification is of high importance, because of provisions of the guarantee with which I will deal. The guarantor cannot complain of any conduct of the creditor, or of any dealing with the secured security property which was authorised by the terms of the contract of guarantee, or by the terms of the security granted by the debtor."
57Further, in GE Capital Australia v Davis , Bryson J said at [93]:
"Primacy of the plaintiff's right to payment: ouster of jurisdiction.
[93] The effect of the obligations in cl 8.1 is that the guarantors were contractually bound to pay the amount of money owing by the debtor when it was demanded. It was a contract to make an amount of money available when it was demanded. It was not an element of the obligation that it was subject to or limited by any process of ascertaining whether the debtor should be allowed any credits or set-offs, in respect of the security or of any other matter. Irrespective of the existence of security, and irrespective of the state of progress of any attempt at realising the security, it was and remains the obligation of the guarantors to provide to GE Capital the money amount of the debtors' obligation. The provisions relating to suspension of the guarantor's rights including cl 8.1 give effect to the amplitude of this obligation, and remove the possibility that the guarantors might in any way compete with GE Capital in attempts to recover from the debtors. Clause 8.1 does not bar the guarantors from making any claims or enforcing any rights against either GE Capital or the debtors; it suspends those rights so long as the guaranteed money remains unpaid, and the suspension can be ended at once if the guarantors meet their contractual obligation and pay the amount of the guaranteed money. Once they do that, they can bring any proceedings they wish against GE Capital or against the debtors, notwithstanding cl 8.1; but the effect of cl 8.1, and of cl 8.1 generally, is that until they make that payment they are contractually bound to the proposition that they are not entitled to bring any claims or proceedings or to act in any of the manners referred to. The jurisdiction of the Court is not ousted in any respect, the rights of the guarantors are suspended but otherwise not impaired, and they can pursue their rights as they wish if they first comply with what the Guarantee and Indemnity makes their primary obligation."
58He further put the matter (at [97] - [98]) as follows:
"The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off.
The effect in substance of the provisions of the guarantee including cl.8.1(a) is that there is no limit on the right to resort to the courts if the guarantor first meets the obligation the protection of which is the primary purpose of the guarantee and indemnity, and pays the amount of the debt. It is well established in this area of the law that the guarantor can have recourse to securities given by a principal debtor to indemnify himself, but that he cannot do so until he has paid the whole debt. The validity of modifications of what would under the general law be the rights of guarantors is well established. These contractual provisions extend the ways in which the guarantors' remedies are postponed, and extend the creditor's freedom from competition in enforcement of its rights. The condition which must be fulfilled is directly related to the purposes of the agreement."
59There are other earlier cases where a similar result has ensued. See: Hong Kong Bank of Australia Ltd v Larobi Pty Ltd (1991) 23 NSWLR 593 and Bond v Larobi Pty Ltd (1992) 6 WAR 489.
60The decision of Bryson J on this aspect has received approval in later cases such as Permanent Custodians Ltd v AGB Developments Pty Ltd [2010] NSWSC 540 and Bank of Western Australia Limited v Usalj [2010] NSWSC 991.
61Considering the matter for myself, the logic of Justice Bryson's arguments seems quite correct and I am not of the view that the clause is against public policy.
62It was also suggested by the defendants that s 420A of the Corporations Act conferred a direct right of action on the guarantors. That section is in the following form:
"420A Controller's duty of care in exercising power of sale
(1) In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
(a) if, when it is sold, it has a market value-not less than that market value; or
(b) otherwise-the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
(2) Nothing in subsection (1) limits the generality of anything in section 180, 181, 182, 183 or 184."
63Bryson J dealt with a similar submission made to him in GE Capital Australia v Davis from paragraphs [43] to [57]. His conclusion at [56] was as follows:
"56 In my view there is nothing to indicate that it was the intention of the legislature that subs.420A(1) should confer any right or remedy on guarantors or other persons who involve themselves contractually in consequences of the exercise of the power of sale, but the guarantor is entitled to rely on the availability to the mortgagor of a remedy, whether the remedy was that previously established by Pendlebury v. Colonial Mutual Life Assurance Society Ltd [1912] HCA 9 ; (1912) 13 CLR 676 or is now the remedy available to the mortgagor on breach of the duty declared by subs.420A(1); the guarantor is entitled to have an equitable remedy on the basis that the mortgage accounts are taken on whatever may be the principle truly applicable to taking mortgage accounts. In my opinion the equitable remedies which in an earlier state of the law were available to a guarantor where there was a breach of the mortgagee's duty to a mortgagor corporation are now to be tested by reference to whether there was a breach of the duty stated in subs.420A(1)."
64This conclusion was subject to further argument in Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 where Young J gave further consideration to the matter. He said at [83] to [95] and at [107]:
"83 Mr Ashhurst submits that Bryson J was in error in holding that some equitable rights flowed though to the mortgagor and guarantor by virtue of section 420A.
84 First, Mr Ashhurst says that Bryson J overlooked the fact that under s 1311(2) and (5) of the Corporations Act 2001, there is a penalty of five penalty units for a breach of s 420A.
85 Secondly, Mr Ashhurst puts that the absence of reference to s 420A in sections such as s 1317H of the Corporations Act is a strong indication that the purpose of s 420A was to control controllers not to give rights to mortgagors.
86 Thirdly, Mr Ashhurst points to the drafting history which he rightly says points to a deliberate omission of a right of action.
87 There is a lot of force in those submissions. However, I consider that other factors support the view that Bryson J took in the GE Capital case .
88 My starting point is the decision of the Full Court of this Court in Castlereagh Motels Ltd v Davies-Roe (1966) 67 SR (NSW) 279. In that case it was decided that on the form of the legislation that existed in 1966, the predecessor of s 181 of the Corporations Act did not give rise to a civil action. The Court asked whether the statutory intendment was to provide a civil cause of action at law. The Court noted that there was already in equity an action for breach of a similar duty if the director concerned was guilty of self dealing. In the light of this, and in the light of there being a criminal penalty imposed for breach of the section, it was hardly likely that a statute would have intended that the company itself should have an action for damages no matter whether the company suffered loss or not. The Court applied the test stemming from O'Connor v S P Bray Ltd (1937) 56 CLR 464 and which has been applied on many occasions since.
89 The Corporations Act is odd in that it provides various remedies in various parts of the statute, but contains no overall provision for the enforcement of duties. The closest provision (putting aside s 423) that might be applicable to the instant case is s 598, the problem being, however, that the present plaintiffs are not eligible applicants.
90 In my view it would be a complete nonsense to say that s 420A was inserted into the Corporations Act with no consequences at all (other than the obtaining of an injunction if someone had asked in time) if there was a breach. It is not a civil liability provision; it is not a criminal provision, except to a very minor extent and there is no other way in which it can be enforced.
91 The legislature could not have meant a solemn farce. The Act does not provide any realistic scheme for controlling controllers with respect to price. The purpose of the section, viewed in the light of its drafting history was to give some protection to borrowers. I thus conclude that the legislature intended that there be a private action.
92 The next question is what sort of private action?
93 As I have indicated earlier, the trend of authority is away from even Cuckmere damages, being damages in tort to the idea of equitable damages and, though it probably does not matter, in my view that is the appropriate remedy here.
94 In my view the breach of 420A gives rise to an action for equitable damages against the controller in the same way as there would have been an action to recover surplus proceeds of sale in equity where a mortgagee had wrongly sold the property contrary to the Pendlebury rule. This is much the same conclusion that Bryson J reached in the GE Capital case .
95 It was odd that there was not much argument placed on the key concept in s 420A, namely the term "market value".
...
107 It must follow from the above discussion that the plaintiffs' claim must wholly fail as neither the general equitable duty nor s 420A operate to give a "wronged party" damages or compensation. Their only effect is to adjust the accounting. However it is necessary to pursue the remaining issues as there may need to be some adjustment in 3048/2002"
65In any event the rights which are available are subject to the restrictions which have been agreed between the parties. The defendants sought to avoid this result by recourse to s 1324(1) and 1324(10) of the Corporations Act which are in these terms:
" 1324 Injunctions
(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:
(a)a contravention of this Act; or
(b)attempting to contravene this Act; or
(c)aiding, abetting, counselling or procuring a person to contravene this Act; or
(d)inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or
(e)being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or
(f)conspiring with others to contravene this Act;
the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the firstmentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.
...
(10) Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person."
66It was submitted that once there has been a breach of s 420A, the Court has power to grant an injunction within the meaning of s 1324(1) and 1324(10). Whether the Court actually exercises that power is a matter of discretion. It is said that it matters not that the Court would not, or did not, grant an injunction in order to enliven the Court's jurisdiction to award damages under s 1324(10).
67There is no prospect of an injunction being ordered under s1324(10) of the Corporations Act to restrain a breach of s420A as all the events relating to the exercise of the power of sale have been completed and there is no prospect that conduct relating to exercise of the power of sale will be repeated or continued under s1324(10).
68The cases demonstrate that where there is simply no prospect of the grant of an injunction, there is no room under sub-s1324(10) for ordering payment of damages: see GE Capital Australia v Davis at [58]-[61]; Bank of Western Australia Ltd v Usalj at [26]-[28].
69In Skinner v Jeogla Pty Ltd [2001] NSWCA 15 referred to by the defendants the Court of Appeal said:
"6 Before his Honour, it was common ground that s420A was an appropriate basis for the Plaintiffs' claim for an award of damages. In written submissions filed in this Court, the Appellant indicated a wish to agitate, for the first time, an issue as to whether or not s420A could lead to an award for damages. No doubt, before his Honour, the parties had in mind the provisions of s1324(10) of the Corporations Law . It is not, however, necessary to reach a concluded opinion on the substance of the issue, or on the ability of the Appellant to raise the issue for the first time on appeal."
Plainly the Court of Appeal has not decided the question. In these circumstances I will follow the other authorities.
70No claim for injunctive relief under s1324(10) has been made in the proceedings. Section 1324(10) does not permit a court to award damages in the absence of an actual claim for injunctive relief. See Executor Trustee Australia Ltd v Deloitte Haskins Sells (1996) 22 ACSR 270 at 278-279; Waterhouse v Waterhouse (1999) 46 NSWLR 449 at 490-491; Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565 at [132].
71The claim under s 420A and s1324(10) fails.