Saratoga v Canjs

Supreme Court of NSW|2010-06-21|Before: Macready J

CITATION : Saratoga v Canjs [2010] NSWSC 654

Accordingly, upon the plaintiff giving an undertaking to the Court in the terms of the condition, I will make the following orders: DECISION : 1. Upon condition that if the defendants, or one or more of them, sue the plaintiff upon its guarantee or indemnity the plaintiff will not raise as a defence any equitable set off available to Saratoga Professional Services Pty Ltd unless it joins Saratoga Professional Services Pty Ltd as a party to such proceedings, I order that the statutory demand dated 5 February 2010 served on the plaintiff by the defendant be set aside. 2. I order the defendant to pay the plaintiff's costs.

CATCHWORDS : Corporations Law. Applicatgion to set aside statutory demand by a guarantor on various bases including an offsetting claim which relied upon an equitable set off held by the principal debtor. Held that equitable set off only needed to have the principal debtor as a party in the final determination of the claims. Demand set aside on condition as to joinder of necessary parties.

PARTIES : SARATOGA INTEGRATION PTY LIMITED v CANJS PTY LIMITED, ZIPOR PTY LIMITED and CAMPSIE MALL PTY LIMITED

COUNSEL : Mr N Newton for plaintiff Mr A Canceri for defendant

SOLICITORS : Gadens Lawyers for plaintiff Beck Dunwoodie & Associates for defendant

1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

2010/00054316 SARATOGA INTEGRATION PTY LIMITED v CANJS PTY LIMITED, ZIPOR PTY LIMITED and CAMPSIE MALL PTY LIMITED JUDGMENT 1 HIS HONOUR: This is an application to set aside a statutory demand served by the defendants upon the plaintiff. In addition to the statutory demand served by the defendants on the plaintiff in these proceedings the defendants also served a statutory demand for the same sum on a subsidiary of the plaintiff, namely, Saratoga Professional Services Pty Ltd. That company also sought to set aside that demand served upon it and those proceedings were resolved today with the demand being set aside. 2 The dispute arises out of a lease with Saratoga Professional Services Pty Ltd over some inner city property from the defendants who owned the premises. The plaintiff in the present proceedings is the holding company of Saratoga Professional Services and it guaranteed the lease entered into by its subsidiary Saratoga Professional Services Pty Ld. 3 The statutory demand in the present matter dated 5 February 2010 claimed the sum of $214,065.75. The description of the debt in the schedule to the demand was as follows: "[t]he amount of rent and other moneys owing by the company to the creditor pursuant to the lease registered number AC190275." Background history 4 Saratoga Professional Services Pty Ltd entered into a lease with the defendants in respect of the premises in Phillip Street, Sydney on 13 March 2006. The lease was from 1 February 2006 to 31 January 2011. The lease contained provisions by the plaintiff in the present proceedings to give a guarantee and indemnity covenants in respect of the terms of the lease. 5 In March 2008 Mr Weinstock, the director of one of the defendant companies, and Mr Kelso of the plaintiff sought an assignment of the lease. Thereafter negotiations were conducted regarding the assignment of the lease to SITA Environmental Solutions Australia. Unfortunately those negotiations did not lead to an assignment. 6 By late 2008 the plaintiff's subsidiary fell into arrears in respect of the payment of rent and other moneys under the lease. On 12 October 2009 the defendants re-entered and locked out the employees of the lessee. 7 Thereafter there were some negotiations and the lessee was then allowed back into possession. 8 In August 2009 the lessors drew down on the bank guarantee provided under the lease and on 9 November 2009 re-entered the premises for a second time. Arguably no notice was given as required under the lease before this re-entry but this is a matter to which I will return. 9 Thereafter the lessee endeavoured to obtain access to the premises to obtain its books and records. Not only were there books and records but also extensive computer equipment including servers which were located on the premises. The lessor continued to deny appropriate access to the lessee to obtain these documents and computers until March 2010. At that time the lessor packed up the records and computer equipment into about three hundred boxes. The lessee was then able to have the three hundred boxes delivered to them. Pleading the plaintiff's claims 10 The plaintiff makes the following claims in the proceedings:

b. Discharge of the surety as a result of the lessor's repudiation of the lease by breach of the covenant for quiet enjoyment.

c. An offsetting claim being the principal debtor's equitable setoff against the creditor in respect of:

d. An offsetting claim under s 51AC(1) of the Trade Practices Act 1974 (Cth). Defect in the demand 11 I have already set out a description of the demand above. The particular matter complained of is the description of the debt namely "the amount of rent and other moneys …". Under the lease there are a number of provisions which require payment of other moneys apart from the rent. These relate to matters such as outgoings and estimates of outgoings given by the lessor to the lessee. The lease contains provisions for giving notice in respect of certain of these matters. 12 It is said that in these circumstances the description is not sufficient to enable a reasonable person in the shoes of the director of the company to know the general nature of the debt to a sufficient degree that he or she can assess whether or not it is owing or whether there is an offsetting claim. Reference was made to LSI Australia v LSI Holdings [2007] NSWSC 1406. 13 In LSI Australia v LSI Holdings Austin J at [54] said: "54 A statutory demand is required by Form 509H to 'describe' the debt that is claimed. If the demand is so vague or ambiguous that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to the existence or amount of the debt or an offsetting claim, then there is a lack of something necessary for completeness, and therefore a defect in the demand. In my opinion, for the reasons I have given, that is the case in respect of both of the statutory demands presently before the court." 14 Austin J refers to the general nature of the debt. Probably in the present case the use of the words "pursuant to lease" is a sufficient general description of the debt. However there is another reason why the demand should not be set aside on this ground and that is that there has been no demonstration of any substantial injustice. No evidence was given as to any misunderstanding on the plaintiff's part of the amount of the demand and there is no other extrinsic evidence such as that available in the case before Austin J to which I have just referred which led him to the view that there was substantial injustice. In these circumstances I will not set aside the demand on this ground. Discharge of the surety as a result of the lessor's repudiation of the lease by a breach of the covenant for quiet enjoyment 15 This is a claim that there is a genuine dispute as to liability. 16 I had the benefit of having a number of submissions in respect of the principles to be applied and I think the most useful summation of what is a genuine dispute is that given by McLelland CJ in Equity in Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785; (1994) 12 ACLC 669. McLelland CJ at page 671 made the following comments in respect of the expression "genuine dispute": "It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s.459H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to (its) truth' (cf Eng Mee Yong v Letchumanan (1980) AC 331 at 341), or 'a patently feeble legal argument, or an assertion of facts unsupported by evidence' (cf South Australia v Wall (1980) 24 SASR 189 at 194). But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at ACLC 1066; ACSR 366-7) Hayne J said, after referring to the state of the law prior to the enactment of Division 3 of Part 5.4 of the Corporations Law, and to the terms of Division 3: 'These matters, taken in combination, suggest that at least in most cases, it is not expected that the Court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute.' In Re Morris Catering (Australia) Pty Limited (1993) 11 ACLC 919 at 922; (1993) 11 ACSR 601 at 605 Thomas J said: 'There is little doubt that Division 3 . . . prescribes a formula that requires the Court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the Court will examine the merits or settle the dispute. The specified limits of the Court's examination are the ascertainment of whether there is a "genuine dispute" and whether there is a "genuine claim". It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simply - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).'"

18 The dispute arises out of the circumstances of what is described in the evidence as the second lockout on 9 November 2009. The relevant terms of the lease which gave the lessor a right of re-entry was clause 12.1 which is as follows: 12.1 Re-entry or surrender on default (a) If the lessee (1) fails to pay any rent or other moneys in respect of the lease or car parking licence within 14 days of the date for payment (whether or not any formal or legal demand is made); … (4) fails to perform or observe any of the lessee's covenants or obligations of the lessee (unless waived or excused by the lessor in writing); or … then the lessor may at any time either: (6) re-enter, repossess and enjoy the premises as its former estate and by this means absolutely determine the lease; or (7) call for the immediate surrender of the lessee's estate and interest under the lease. (b) Paragraph (a): (1) is without prejudice to any claim the lessor has against the lessee in respect of any breach of the lessee's covenants; and (2) has effect despite any other provision of the lease. (c) Not used. (d) The lessor, on the termination of the lease under this clause, is freed and discharged from any action, suit, claim or demand by, or obligation to the lessee in respect of the lease. 19 However, pursuant to clause 12.7 of the lease, the defendants' right of re-entry was conditional on them first giving the lessee "notice of the particular breach of the lessee's covenants on which the lessor relies". Clause 12.7 is in the following terms:

(a) The lessor must not: (1) re-enter the premises; or (2) determine, forfeit or require a surrender of the lease or term, unless it first gives the lessee notice of the particular breach of the lessee's covenants on which the lessor relies. 20 The lease required 14 days notice under clause 12.7(b)(3), which was required to be in writing pursuant to clause 14.6. That requirement plainly constrains the right set out in clause 12.1. There is an issue as to whether or not notice was given as required. Prior to the first lockout a notice was given on 2 July 2009 of breach of essential terms of the lease. This related to the failure to pay the relevant rent at the time. However after that notice there was the first lockout and then the lessee was let back into possession. It was suggested that the lessee was allowed back into possession on a condition as to the bringing up to date the rental payments. That may be so but it seems that even Mr Weinstock acknowledged that he had let the plaintiff back into possession "pursuant to the lease arrangement". In these circumstances it would seem that the notice was spent, re-entry having occurred following its service, and that a new notice was necessary. In these circumstances it is plainly arguable that a new notice was required. In these circumstances there would be a breach of the covenant for quiet enjoyment. 21 A breach of the covenant for quiet enjoyment where a landlord evicts a tenant can amount to a repudiation entitling the tenant to terminate the lease, particularly where the conduct is so gross that it makes it impossible for the tenant to continue in occupation: see Todbern Pty Ltd v Taormina International Pty Ltd (Supreme Court of New South Wales, Powell JA, 13 June 1990, unreported) at 53. This is an appropriate characterisation of the lessor's conduct on this occasion. 22 So far as the various reasons and conditions which the lessor tried to impose as a condition of the lessee obtaining his goods it seems clear from Fitzgerald v Kellion Estates Pty Ltd (1977) 2 BPR 9181 and DW and JA Edwards Pty Ltd v Shih (1995) 7 BPR 14,405 that such conditions cannot be imposed as the tenant is entitled to go onto the land to retrieve his chattels. 23 The evidence contained a discussion between the solicitors which occurred on 18 November 2009 in which the lessee's solicitors indicated that the lessee knew that he would have a claim against him but sees the lease as being at its end. This would be an acceptance of the repudiation. 24 The relevant document is both a guarantee and an indemnity. The relevant clauses are: "15.2 Guarantee The covenantor guarantees to the lessor the prompt performance and observance of the lessee's obligations under the lease. 15.3 Indemnity (a) The covenantor is jointly and severally with the lessee liable to the lessor for: (1) the lessee's observance of the lease; and (2) any damage incurred by the lessor as a result of: (A) the lessee's failure to observe the lease or its defaults under the lease; or (B) the termination of the lease by the lessor." 25 Normally a repudiatory breach of the principal contract will discharge a surety: see National Westminster Bank plc v Riley [1986] BCLC 268 at 275-276. This is of course subject to the terms of the guarantee and in this case the most relevant clause in the guarantee part of the lease is as follows: "15.6 Continuing effect The obligations of the covenantor under this part are not released, discharged or otherwise affected by: … (d) any extinguishments, failure, loss, release, discharge, abandonment, impairment, compound, composition compromise in whole or in part of any document or agreement; …" 26 This is an extremely wide clause and given that the terms of any guarantee should be construed in favour of the surety: see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561; Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 433. 27 It is certainly arguable that the clause does not apply. However, I note that there is also an indemnity with a joint covenant by the guarantor so that he would have a separate liability. 28 It was submitted that any such discharge would only be with effect from the repudiation and would not affect obligations of the surety which accrued prior to the discharge. This would seem to be the situation. See Hindcastle Ltd v Barbara Attenborough Associates Ltd (1997) AC 70 at 89; [1996] 1 All ER 737. 29 In this case we are only concerned with the rent due before the second lock out. In these circumstances there is no arguable case that there is liability. I would not set aside the demand on this ground. An offsetting claim being the principal debtors equitable setoff against the creditor 30 In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 Palmer J usefully described a genuine offsetting claim in these terms: 18 In my opinion, a genuine offsetting claim for the purposes of CA s 459H(1) and (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "Good faith" means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s 459H(1) and (2). 31 I will first deal with the factual matters concerning the offsetting claim. The first matter is the failure to consent to an assignment. In Mr Kelso's affidavit of 2 March 2010 he deals with this in [15] - [24]. A condition in respect of that proposed assignment was that the lessor required guarantees from the existing lessee for the remaining term and any option period being for 5 years. In addition it required guarantees from the incoming lessee in respect of those obligations. As the lessee could not get a backup guarantee from the incoming lessee negotiations for the assignment failed. The only possible question of a breach might be of the lessor's requirement for a guarantee from the outgoing lessee in respect of the option period. 32 Absent any evidence about the appropriateness of that stance it is hard to see whether there would be a breach of the covenant. The relevant covenant in the lease is as follows: 11.2 Modification of restrictions

An assignment, transfer, subletting or licence is deemed not to be in breach of the lessee's covenants if, before it takes effect, the following conditions are satisfied;

(a) the lessee is not in default under the lessee's covenants;

(1) the lessee satisfies the lessor that either: (a) the ingoing party (whether assignee, transferee, sub-lessee or licensee) is to pay a full market rent or licence fee; or (b) the sublease or licence entered into by the ingoing party, (whether assignee, transferee, sublicencee or licencee) if not for a full market rent or licence fee, contains a term that it terminates on the expiry or earlier termination of this lease whether at full term or not; and (2) the lessee: (a) executes the sub-lease or licence and procures its execution by the ingoing party, (b) delivers the sub-lease or licence to the lessor for execution; (c) the lessee satisfies the lessor that the ingoing party is: (1) a respectable, responsible and solvent person; and

(2) able to meet its financial obligations under the lease and to comply with all other obligations of the lessee under the lease; (d) the ingoing party enters into a covenant with, and in the form required by, the lessor that the ingoing party must duly perform and observe the lessee's covenants;

(e) the lessee ensures that any person whom the lessor requires to guarantee the obligations of the ingoing party executes and delivers to the lessor a deed of guarantee and indemnity in favour of the lessor in a form required or approved by the lessor and incorporating the provisions of Part 15. 33 The lessor's requirement would arguably fall within clause 11.2(e) above but in any event the lessee would have a continuing obligation on his covenants notwithstanding the assignment. 34 Although no formal application was made to the lessor for consent to the assignment there is no evidence of any attempt to satisfy clause 11.2(c)(2). In these circumstances the evidence is not sufficient to establish any breach by the lessor. 35 So far as a breach of covenant for quiet enjoyment I have already dealt with the nature of that breach. Similarly I have referred to the detention of the chattels. As an result of these actions the lessee still had to pay staff who could not work due to the absence of premises and it lost a number of customer contracts. 36 The evidence is sufficient to establish that the amount of the offsetting claim is $345,000. Other claims for amounts above this sum are not substantiated on the evidence 37 The first question to be determined is whether or not the principal debtor has a right of set off. 38 There is a useful summary on the law on this aspect in Clambake Pty Ltd v Tipperary Projects Pty Ltd (No 3) [2009] WASC 52. At paragraphs 158 and 159 Heenan J summarised the principles as follows: "[158] Certainly, there was once a view that no equitable set-off of a cross-claim against a tenant's liability to pay rent was possible, although Derham SR, The Law of Set-Off [5.56] has expressed doubt over whether that view ever had a solid foundation. The situation now, and for many years since 1980 at the latest, is that an equitable set-off may arise against a landlord's claim for rent if the tenant's cross-claim is sufficiently closely connected with the liability to pay rent as to impeach the claim: British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137; Bennett v Excelsior Land Investment & Building Co Ltd (1893) 14 NSWR (Eq) 179 at 185; M Lambert Pty Ltd v N A & T Papadatos Pty Ltd (1991) 5 ACSR 468 at 471; and Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62 at 68 where many of the cases are collected, and where the history of the rules of equitable set-off in this respect were traced by Kennedy J (67). His Honour made the observation that one requirement of equitable set-off is that it should be essentially bound up with, or impeach, the title of the other party which must go further than the mere existence of a cross-demand - although there had been some departures from that test as discussed in James v Commonwealth Bank of Australia (1992) 37 FCR 445 - those alternative formulations were also addressed by Kennedy J (68). [159] The subject has been the subject of academic writing by Weir, 'A Tenant's Right Of Set-off' (1994) 68 Australian Law Journal 857, 863-5 where examples are given of where an equitable set-off of a claim for damages by a tenant against a landlord's claim for rent has been recognised or considered to be arguable. These include a cross-claim for damages for breach of a covenant to repair defects ( British Anzani (Felixstowe) Ltd ; Knockholt Pty Ltd v Graff [1975] Qd R 88), breach of a covenant relating to the refurbishment of premises ( Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 at 420-1), and a claim for damages for breach of a covenant of quiet enjoyment: Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501. Other examples include a claim for damages for breach of a collateral contract which induced the tenant to take a lease of the premises: Grant v NZMC Ltd [1989] 1 NZLR 8 and for a claim for credit for earlier overpayments of rent made to the same landlord: Fuller v Happy Shopper Markets Ltd - for further examples see Derham (op cit) at 183-5." 39 In this case we have a set off relating to a claim for breach of the covenant for quiet enjoyment and damages for detention of the lessee's chattels wrongfully taken by the lessor. In my view, the nature of these claims are so bound up with the claim of the landlord for rent that they can be the subject of an equitable set off. 40 In this case the lease provides that the rent is to be paid "free of all deductions": see clause 3.1(a). It has been held that such an expression does not prevent the application of an equitable set off: see Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834; [1994] 1 WLR 501. The documentation does not therefore prevent an equitable set off. 41 The question of whether a guarantor can raise an equitable set off which is available to the principal debtor is a vexed one. Similar problems have also arisen in statutory demand matters in the case of joint debtors. 42 In Tatlers.com.au Pty Ltd v Davis [2007] NSWSC 835 White J held that where there were joint debtors, one of them being the plaintiff, that company could not raise such an offsetting claim available to its co-debtor. He explained the matter in detail and concluded his reasons in these terms:

"[43] Hence, it was argued that if Ms Fletcher had been entitled to her debt against the defendant before proceedings were brought by the defendant against her and the plaintiff, then, as the proceedings brought by the defendant against her and the plaintiff were for a joint and several obligation, the debt owed by Ms Fletcher to the plaintiff could have been set off against the debt for which the defendant obtained judgment against both of them. It was submitted that the availability of the set-off should not depend upon the accident that judgment had already been obtained. To the contrary, so it was argued, the plaintiff should be entitled to set off against the judgment owed by it the amount owed by the defendant to Ms Fletcher where she was also jointly and severally liable on the same judgment debt as the plaintiff, in order to avoid circuity of action. Counsel submitted that if the plaintiff paid the whole of the judgment debt pursuant to the defendant's demand, it would be entitled to recover contribution from Ms Fletcher for half of the judgment debt paid, but she could recover $11,000 from the defendant. The same result is reached if the plaintiff, availing itself of the set-off available to Ms Fletcher, paid the defendant the difference between the two judgments, and if Ms Fletcher was given the benefit of the set-off on the claim for contribution. [44] However, this submission demonstrates the reason why one joint and several obligor who is sued alone cannot raise a set-off to which his or her co-obligor is entitled ( Bowyer v Pawson (1881) 6 QBD 540). The reason is that, in a suit so constituted, rights of contribution between the co-obligors cannot be resolved. To take the present case, if the plaintiff were obliged to indemnify Ms Fletcher against her liability under the judgment in favour of the defendant, it would be unjust to allow the plaintiff to rely upon the set-off available to her against the defendant. If that were permitted, she would have to look to the plaintiff, rather than to the defendant, to recover the $11,000 owed to her by the defendant. There is no equity in allowing the plaintiff to distort the true position by taking advantage of a set-off available to her ( Lord v Direct Acceptance Corporation Ltd (in liq) (1993) 32 NSWLR 362 at 369). The position would be different if the co-obligors are both joined in a suit so that a set-off available to one is actually given effect to, and rights of contribution between them can be determined. In the absence of such a suit, the plaintiff is not entitled to avail itself of the set-off available to its co-obligor ( Bowyer v Patterson ). [45] It is true that in Goodwin v Duggan , Handley and Beazley JJA said that it was possible that if the trustee had been sued alone, she could not have relied on a set-off available only to her co-trustee, rather than categorically stating that position. However, as a matter of principle and authority ( Bowyer v Pawson ), and conformably with the reasons of Powell JA in Goodwin v Duggan , in a suit so constituted, the trustee should not be entitled to raise the set-off available to her co-trustee. [46] It follows that in an action to set aside the statutory demand, to which the only parties are the plaintiff and the defendant, and in which the set-off available to Ms Fletcher cannot be given effect to, nor rights of contribution between the plaintiff and Ms Fletcher determined, the plaintiff cannot avail itself of the set-off available to Ms Fletcher." 43 His Honour's decision was plainly not concerned with a guarantee and it may be for this reason that his Honour was not referred to the extensive case law which discusses the ability of a guarantor to raise an equitable set off which is available to the principal debtor against the creditor. 44 In New South Wales a convenient starting point for discussion of the guarantor case law is Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561. After an extensive review of the authorities Isaacs J concluded as follows: "This review of the cases lends no support to the submission that a surety when sued is entitled to set up in equity or at law as a equitable plea any cross action for unliquidated damages which the debtor may have against the creditor in respect of the transaction, the performance of which the guarantor had entered upon his guarantee; that is, in the absence of the debtor being before the court in the proceeding so as to be bound by verdict and judgments. This of course does not mean that the guarantor is without remedy; when he is sued he has a right immediately to join the debtor as a third party and claim complete indemnity from him. The debtor has then a right to join the plaintiff as a fourth party, claiming damages for breach of warranty and so obtain indemnity either in whole or in part. All the actions would be heard together, the rights of all persons determined and appropriate set-off's made after verdict, and if there be any surplus of damages over and above that which is required to meet the guarantee, the debtor will have recovered that from the creditor who, in the result, will get no more than that to which he would be justly entitled."

45 In the course of his discussion of the principle, Isaacs J dealt with the question where as often occurs the principal debtor is insolvent. After referring to a statement by Stirling J at 553 in Alcoy and Gandia Railway and Harbour Co v Greenhill (1897) 76 LT 542, Isaacs at 585 in Cellulose Products Pty Ltd v Truda noted that the liquidation of a company raised a special equity because if the guarantor was not permitted to raise the set off he would be limited to proving in the winding up of the principal debtor and only receiving a dividend. Stirling J said, "It seems to me, therefore, that it would be inconsistent with the equitable right of a surety, and I think, therefore, that the set-off should be available to this extent." Isaacs J went on to say: "This and similar cases which deal with the state of affairs where a debtor is insolvent, are of no value or assistance, excepting perhaps to demonstrate that such cases are exceptions to the general rule that a guarantor cannot avail himself of the remedies which otherwise may be open to the principal debtor as against the creditor." 46 This exception has received further treatment in New South Wales cases in particular Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14. In that case the debtor was in liquidation. The Court at 19 said: "The principle that the guarantor should not be allowed to raise a defence by way of cross-action, unless the debtor is a party, is one for the benefit of the creditor; and this principle can be of no practical benefit to him where the debtor is in liquidation or insolvent. If he wishes to have the debtor bound, he is equally able to have it joined in the proceedings. Despite the theoretical difficulties involved, it seems to us that the guarantor should be allowed to raise this defence, and that the appeal should be allowed." 47 The case was one where there was an application to set a default judgment aside and for the matter to proceed to a hearing. Langford Concrete Pty Ltd was followed in Doherty v Murphy [1966] 2 VR 553, a decision of the Court of Appeal of the Supreme Court of Victoria. The case was one where the principal debtor was in liquidation and notwithstanding this the Court required as a condition of granting leave to defend that the company be joined as a defendant. 48 In England there is a divergence on the authorities which deal with the ability to raise a set off in summary judgment matters which is referred to by authors in Phillips and O'Donovan, Modern Contract of Guarantee, 2nd ed (1992) at 607. In National Westminster Bank plc v Skelton [1993] 1 WLR 72; [1993] All ER 242 Slade J suggested that the reasoning in Cellulose Products Pty Ltd was impressive. However, his Honour noted the exception that Isaacs J pointed to where the debtor was insolvent and he also suggested that the rule would be inappropriate on a strike out application. In the circumstances of the case before him the question did not seem to arise perhaps because of the terms of the documentation. 49 In BOC Group plc v Canteon LLC [1999] 1 All ER (Comm) 53, an alternative view was expressed by Rix J in the context of an application for summary judgment. He said obiter that the guarantor would be entitled to rely on the alleged set off. He relied on a later version of the passage in Halsbury which was the subject of detailed analysis and rejection by Isaacs J in Cellulose Products Pty Ltd. 50 Recently there have been other first instance decisions where the difference has been noted and various views expressed. See, for example, Permanent Trustee Co Ltd v Gulf Import [2008] VSC 162 at 78 and Clambake Pty Ltd v Tipperary Projects Pty Ltd (No 3) [2009] WASC 52 at 196. 51 After referring to these authorities the authors of Modern Contract of Guarantee said the following: "In the context of a summary judgment application, however, it is the authors' view that the guarantor should be allowed to resist such an application on the basis of an equitable set-off without joining the principal as a party to the proceedings at all. It should be sufficient that the principal is joined before the ultimate determination of the validity of the claim, so that the principal is bound by the final orders. In the case of the guarantor showing an arguable defence to the application for summary judgment, leave to defend should only be granted on the condition that the guarantor join the principal as a party to the proceedings. The principal could be joined as a co-defendant on the ground that the relief sought requires the principal to be bound by the final orders. There may be an objection to the guarantor pleading the principal's claim as a defence in summary proceedings on the basis mat the principal's right of election to claim unliquidated damages is negated. But it is thought that this factor is outweighed by the prejudice to the guarantor that would otherwise occur. This view draws support for the general principle that equitable set-off, although not operating in reduction or extinction of the debt at law, does have a substantive effect. As Derham has commented: '[I]f a debtor is possessed of a valid equitable set-off. the creditor as a matter of equity is not entitled to treat the debtor as being indebted to him to the extent of the value of the cross-demand. At law there is still a debt owing to the creditor, but as a matter of equity the debtor to the extent of his cross-demand is not regarded as being in default while circumstances still exist which support an equitable set-off. In this way equitable set-off may be said to operate substantively without working an automatic discharge.' Indeed, in this respect, the argument for allowing the guarantor to plead an equitable set-off as a defence is more compelling than a legal set-off which has only a procedural effect."

52 In this case the principal debtor is not in liquidation. Accordingly, the exception referred to in Cellulose Products Pty Ltd does not apply even if it were appropriate. Summary judgment applications have their own procedural difficulties because of the need only to determine whether there is an arguable case. The cases frequently illustrate the principal debtor is not a party to such an interlocutory application. The authors make the point that in these cases it is sufficient that the principal is joined before the final determination of the validity of the claim. 53 What has to be considered is the nature of the present application, namely, an application to set aside a statutory demand and to consider the application of the principle in the context of this type of application. 54 As is plain the nature of the current proceedings is not one where a controversy as to the extent of any equitable set off will be resolved. All that has to occur is to see whether there is an appropriate offsetting claim available to a defendant which exceeds the amount of the statutory demand. In the event that the demand is set aside one might anticipate that the defendants will sue the plaintiff on the guarantee and joint covenant and there would then be raised for determination any claim by the present plaintiff to raise the set off available to the principal debtor. 55 The plaintiff in these proceedings has undertaken that, in the event they are sued, it would join the lessee in those proceedings. That of course may not be the outcome because there may be instead proceedings between the lessee and the lessor commenced by one or other of them. If the guarantor was added to those proceedings before the final hearing debate could take place about the set off and the guarantor's liability adjusted accordingly. It is only where the guarantor is sued alone by the lessor that the problem of joinder arises. 56 As there is a power to make an order subject to conditions, under s 459M of the Corporations Act, plainly, this court could impose an appropriate condition that if the guarantor is sued by the lessor the guarantor will join the lessee to the proceedings. In any event it would be in the guarantor's interest to do so. 57 Should one judge the position by reference to the action as presently constituted in these proceedings or should one judge it by the action as ultimately constituted when the parties' rights in relation to the debt for rent and the set off are to be enforced. There has been much debate in the cases as to whether actions setting aside a final demand or dismissing an application to set aside a statutory demand are final or interlocutory for the purposes of the exercise of rights of appeal. I think that debate does not directly address the question which I have to consider but the latest case in that debate, namely, Hardel Pty Ltd v Burrell & Family Pty Ltd [2009] SASC 77 usefully describes the nature of these applications. In that case Kourakis J said the following: [40] Those statutory provisions show that, although the service of a statutory demand and the proceeding in which it can be set aside precede an application to wind up a company, their only legal effect is in the subsequent winding up proceedings, should they ever be brought. Proceedings to set aside a statutory demand are therefore analogous to other pre-action proceedings, like applications for leave to proceed and applications for pre-action discovery. [41] Applications to set aside a statutory demand are pre-action procedures which affect, and only affect, the proceedings on the winding up. Service of statutory demands, orders dismissing applications to set them aside and orders varying them do not determine or affect in any way the underlying controversy about the alleged debtor's liability to pay the debt. If the creditor wishes to prove the debt and obtain an order for its payment, it must take separate proceedings for that purpose. Even orders made on the winding up proceedings cannot settle the controversy over the debt. The substantive right in question in the winding up proceedings is the right of the company to its corporate personality and to the exercise of the rights, powers and privileges that go with it. [42] The procedural nature of the orders made on the application to set aside a statutory demand is emphasised by ss 459C(3) and 459S(2) of the Act. Section 459C(3) allows the company to rebut the presumption of insolvency, which is a statutory concomitant of an extant statutory demand, by proving that the company is solvent notwithstanding the debt which is the subject of the demand. Section 459S empowers the court, in the exercise of its discretion, to allow the debt itself to be disputed even where a statutory demand has not been set aside. 58 No decision will be made on the set off in the hearing of this application to set aside the statutory demand. All that has to be demonstrated is that there is an available offsetting claim in accordance with s 459H of the Act. To use the words of s 459A of the Act this court must satisfy itself that the company "has an offsetting claim". It will have an offsetting claim if in the proceedings to determine that claim the appropriate joinder is achieved. I do not see why it is necessary for the joinder to be available in the statutory demand procedures. In my view, provided the appropriate conditions for joinder can be applied so that ultimately when the question is raised, the suit is properly constituted it is immaterial that the relevant party is not a party to the present proceedings. I appreciate that this is a different result to that which would be achieved if I applied the reasoning of White J in Tatlers.com.au Pty Ltd v Davis. Normally I would follow a decision of another first instance Judge but in this case it seems that his Honour did not have all the relevant cases presented to him with appropriate argument. 59 In these circumstances, the offsetting claim of the guarantor is available and as it exceeds the amount of the statutory demand the demand should be set aside. An offsetting claim arising under s 51AC(1) of the Trade Practices Act 1974 60 It was suggested that the plaintiff, the surety in this case, would have a claim under s 51AC of the Trade Practices Act which provides as follows: 61 Section 51AC (1) provides: "A corporation must not, in trade or commerce, in connection with: (a) the supply or possible supply of goods or services to a person (other than a listed public company); or (b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable." 62 Section 51AC(3) provides: "Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the supplier) has contravened subsection (1) ... in connection with the supply or possible supply of goods or services to a person ... (the business consumer), the Court may have regard to: (a) the relative strengths of the bargaining positions of the supplier and the business consumer; and (b) whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and (e) the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and (f) the extent to which the supplier's conduct towards the business consumer was consistent with the supplier's conduct in similar transactions between the supplier and other like business consumers; and (g) the requirements of any applicable industry code; and (h) the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and (i) the extent to which the supplier unreasonably failed to disclose to the business consumer: (i) any intended conduct of the supplier that might affect the interests of the business consumer; and (ii) any risks to the business consumer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and (j) the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer; and (k) the extent to which the supplier and the business consumer acted in good faith." 63 In the factual circumstances of this case the most relevant submission would be (d) but this would not limit the Court as the definition is only inclusive.

64 It was submitted that the plaintiff had an arguable claim for unconscionable conduct on the following basis: a. "Saratoga Integration was the guarantor of Saratoga Professional Pty Ltd's ( Saratoga Professional ) obligations pursuant to the Lease and was vulnerable to the extent Saratoga Professional was unable to comply with its obligations pursuant to the lease. b. The defendants' failure to agree to the assignment (referred to in paragraphs 38-40 of the Original Submissions) was arguably a result of requiring Saratoga Integration and Saratoga Professional to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the defendant. Further, had the defendants consented to the assignment on the terms proposed by Saratoga Integration and Saratoga Professional (as they should have done), Saratoga Integration may not have had any liability to the defendants under the guarantee. c. The defendants breached the lease by re-entry (referred to in paragraphs 19-28 of the Original Submissions), which meant that Saratoga Integration did not have access to its office and caused damage to Saratoga Professional and Saratoga Marine Pty Ltd (wholly owned subsidiaries of Saratoga Integration). Their loss practically was Saratoga Integration's loss and lead to a greater prospect that Saratoga Integration would be called upon pursuant to the guarantee. d. The defendants' detention of Saratoga Integration's, Saratoga Professional's and Saratoga Marine' goods caused direct and indirect loss to Saratoga Integration (referred to in paragraphs 32-35 of the Original Submissions). It also led to a greater prospect that Saratoga Integration would be called upon pursuant to the guarantee." 65 Under the Act there is the right to damages and also a wide variety of relief which may be available under s 87. 66 I put to one side the question of assignment and note that in the context of these provisions unconscionable conduct is given a wider construction than under the general law: see ASIC v National Exchange Pty Ltd [2005] FCAFC 236 [30]. However, a court may be persuaded to come to the assistance of the guarantors as well as the lessee but in this case I would prefer to base my decision on the guarantor's ability to raise the lessee's right of equitable set off. 67 It is necessary that the condition be effective. One way of achieving this is to require the plaintiff to give an undertaking to the Court. There is always the possibility that the lessee will cease to exist. This means that the condition should be formed to accommodate this eventuality. The condition which I will impose on the condition of relief will have the effect that, if joinder of the lessee cannot be achieved, the setoff cannot be raised as a defence. 68 I will set aside the statutory demand upon condition that if the defendants, or one of them, sue the plaintiff upon its guarantee the plaintiff will not raise as a defence any equitable set off available to Saratoga Professional Services Pty Ltd unless it joins Saratoga Professional Services Pty Ltd as a party to such proceedings. 69 Accordingly, upon the plaintiff giving an undertaking to the Court in the terms of the condition, I will make the following orders:

Upon condition that if the defendants, or one or more of them, sue the plaintiff upon its guarantee or indemnity the plaintiff will not raise as a defence any equitable set off available to Saratoga Professional Services Pty Ltd unless it joins Saratoga Professional Services Pty Ltd as a party to such proceedings, I order that the statutory demand dated 5 February 2010 served on the plaintiff by the defendant be set aside.

I order the defendant to pay the plaintiff's costs. **********

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Trade Practices Act 1974(Cth)

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Judgment (25 paragraphs)

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