Youssef v Shepherd

Mr Shepherd's application to set aside default judgment

1. In his notice of motion, Mr Shepherd seeks to set aside the default judgment pursuant to Rule 36.15 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). Rule 36.15(1) provides: 36.15 General power to set aside judgment or order (1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith.
2. Having regard to the matters advanced by Mr Shepherd to which I refer below, and his self-represented litigant status, I have also considered the application on the basis of reliance on UCPR, r 36.16(2), which relevantly provides: 36.16 Further power to set aside or vary judgment or order … (2) The court may set aside or vary a judgment or order after it has been entered if: (a) it is a default judgment (other than a default judgment given in open court), or (b) it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or…
3. While Mr Shepherd did not express his application in these terms, I took from his submissions and the matters referred to in his affidavits that he contends that the default judgment should be set aside as having been entered irregularly or against good faith within the meaning of r 36.15(1). He makes this contention on the basis that Mr Youssef's motion seeking default judgment was filed without notice to him, he has a good defence to the claim and he has explained the delay in his application, being matters which are relevant both to whether there is sufficient cause to set aside under r 36.15(1) or whether to set aside under r 36.16(2). There was no suggestion of any illegality within the meaning of r 36.15(1) raised by his submissions.

Irregularity and good faith

1. A judgment will have been obtained irregularly if there has been a failure to comply with proper procedure or the Rules. Examples are where the judgment is entered prematurely or before actual default is made by the defendant, or where judgment is entered for too high a sum.
2. Mr Youssef submits, and I accept, that there was no irregularity in the default judgment entered against Mr Shepherd. Mr Youssef filed his notice of motion for default judgment after Mr Shepherd had been properly served and failed to file a defence within the 28-day period required by the Rules. The default judgment obtained also made allowance for the $25,000 payment received in June 2020.
3. Default judgment may be given without notice to the party in default in accordance with r 16.3(1A) of the UCPR, although the absence of notice of a party's intention to enter judgment can be a relevant consideration in determining whether to set it aside under r 36.15 or r 36.16(2): Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550, cited in Commonwealth Bank of Australia v Wales [2012] NSWSC 407 at [24].
4. Mr Shepherd referred to efforts to resolve the claims made against him and Rx Ops and an expectation that they would receive a further response to the 18 November without prejudice offer before any further steps were taken in the proceedings. However, in the present case, I would not assess Mr Shepherd's evidence as establishing that the default judgment was obtained contrary to a promise or representation made by Mr Youssef's lawyers that Mr Shepherd would be given written notice of any default judgment application, or that they would refrain from taking any further steps in the proceedings pending a reply to the 18 November without prejudice offer. Mr Shepherd had been aware of the proceedings since August 2020. The statement of claim served on him in November 2020 included a notice to the effect that he would be in default and that judgment might be entered against him without further notice if a defence was not filed within 28 days of service.
5. In those circumstances, I am not persuaded that the default judgment was entered against good faith on the ground of lack of notice or a difficulty in engaging with Mr Youssef's lawyers for a commercial resolution of the matter. That said, I accept as relevant to Mr Shepherd's explanation for his delay in filing a defence that it was not unreasonable for him to have expected that a response to the 18 November without prejudice offer would be received based on the correspondence from Mr Youssef's lawyers that referred to obtaining instructions and the content of the communications referred to earlier.

UCPR Rule 36.16(2)

1. The factors relevant to an application to set aside default judgment under r 36.16(2) of the UCPR include whether Mr Shepherd has a bona fide ground of defence, an adequate explanation for the failure to defend, and the length of any delay. Whether Mr Youssef will be prejudiced were the default judgment to be set aside is also a relevant factor: J & M McNamee Holdings Pty Ltd v Mungerie Vale Pty Ltd trading as Greenwood Group Realtors [2019] NSWCA 283 at [48].
2. In determining whether Mr Shepherd has a bona fide defence on the merits, the Court does not embark on a hearing of the full merits of the case. All that is necessary is for him to establish that the defence is asserted bona fide and there is an arguable or triable issue. These principles are also subject to the provisions of the Civil Procedure Act 2005 (NSW): Dai v Zhu [2013] NSWCA 412 at [92].
3. Fundamentally, the question is whether it is in the interests of justice to allow a party seeking to set aside default judgment to be permitted to defend the proceedings on the merits: Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 at [43].
4. In Pham v Gall (2020) 102 NSWLR 269; [2020] NSWCA 116, Payne JA observed, in the context of an application under UCPR r 36.16(2)(b), that the discretion to set aside a judgment involves the Court making a broad evaluative judgment, that no case should be read as formulating any rigid rule, but that it is appropriate to consider the following questions: whether any useful purpose would be served by setting aside the judgment; and how it came about that the applicant found themselves to be bound by a judgment regularly obtained: at [110]. See also Leeming JA at [50].

Is there a bona fide defence on the merits?

1. Mr Shepherd contends that he has a prime facie defence to the claim and submits that the alleged breach of the 2020 Deed relied on by Mr Youssef as the basis for his cause of action is invalid for three reasons. First, the electronic signing of the 2020 Deed by Rx Ops renders the Deed invalid. Second, the 2020 Deed is not a valid agreement because there is no relevant consideration. Third, and alternatively, any liability owing by him is conditional on a breach by Rx Ops, which is not defined in the 2020 Deed.
2. Mr Shepherd also submits that, in the event the 2020 Deed is valid, then so is the 2019 Deed under which Mr Youssef agreed to be bound by analogous obligations to guarantee and indemnify Mr Shepherd for the same debts and, as I understand his submission, would operate as a set-off or a cross-claim to Mr Youssef's claim. He also raised discrepancies and errors in the statement of claim that he submits give rise to questions regarding the reliability of the document and the claim made against him.
3. In relation to the first matter, Mr Shepherd deposes that he has been advised by his lawyers that the 2020 Deed was not validly executed by Rx Ops in accordance with s 127 of the Corporations Act 2001 (Cth) and refers to the authority of Bendigo and Adelaide Bank Ltd v Pickard [2019] SASC 123 (Bendigo Bank v Pickard) in support of that proposition.
4. Section 127 of the Corporations Act relevantly provides that: 127 Execution of documents (including deeds) by the company itself Executing a document without a common seal (1) A company may execute a document without using a common seal if the document is signed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary - that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company. … (3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2). …
5. In Bendigo and Adelaide Bank Ltd v DY Logistics Pty Ltd [2018] VSC 558, Croft J considered whether a document purporting to be loan deed had been executed in accordance with s 127 of the Corporations Act in circumstances where the company director and secretary's facsimile signatures were affixed to the document. There was no evidence as to who affixed or authenticated the affixing of the purported facsimile signatures on the loan deed. His Honour noted that the Corporations Act excludes the operation of s 10 of the Electronic Transactions Act 1999 (Cth) and concluded that, on its proper construction, s 127 of the Corporations Act requires a deed to be physically signed by the relevant company officers or for them to personally authenticate the mark appearing as their signature: at [48]-[50]. Accordingly, in that case, he held the facsimile signatures were not effective and the loan deeds were not validly executed under s 127 of the Corporations Act.
6. Croft J's reasoning was applied in Bendigo Bank v Pickard. In that case, a loan deed containing a guarantee had purported to be executed by the affixing of electronic signatures of the relevant company officers to an electronic version of the document. Stanley J held that s 127 of the Corporations Act had not been complied with as there was no evidence that the directors authenticated their electronic signatures, such as in the form of minutes or resolutions, or had any involvement in their production: at [69]. In coming to that conclusion, his Honour considered that, given s 127(1) of the Corporations Act contemplated a document being executed by two officers signing it, there was good reason to consider that there must be a single, static document rather than a situation where two electronic signatures are sequentially applied to an electronic document: at [70]. His Honour supported that reasoning by reference to Seddon on Deeds (2015, 2nd ed, The Federation Press), where the author states that it is insufficient that two signatures appear on different counterparts or copies of the same document because no one counterpart or copy would be properly executed by the company under s 127(1).
7. Mr Shepherd deposes that he believes that each signature in the 2020 Deed execution blocks was signed digitally and at different times. According to his evidence, the 2020 Deed was signed remotely by a director of Rx Ops located in South Africa, sent to another director who also signed remotely, and then sent to him where he signed remotely in Tasmania by digitally affixing his electronic signature to the 2020 Deed. He also deposes that, on his recollection, the board of Rx Ops did not provide authority by resolution or otherwise permitting the signing of the 2020 Deed, let alone signing by electronic signature.
8. Applying the reasoning in Bendigo Bank v Pickard and the other matters referred to above, in my view, Mr Shepherd's evidence indicates that that he may have a defence to Mr Youssef's claim on that basis that the 2020 Deed is not valid and the guarantee and indemnity provided therein are not enforceable against him. Prima facie, his evidence indicates that the two electronic signatures of the directors of Rx Ops were sequentially applied to an electronic version of the 2020 Deed such that there was no one counterpart properly executed by the company in accordance with s 127 of the Corporations Act.
9. Mr Youssef submits that this is not sufficient to establish a bona fide defence. He contends that the company's position is not known and that Rx Ops may accept that it is bound by the 2020 Deed, it may ratify the Deed, or its articles of association or constitution may provide for the Deed to be electronically signed. He also raises the possibility that Mr Shepherd may be estopped from denying the validity of the 2020 Deed. In my view, there is some merit to those submissions, particularly as the evidence suggests that the relevant directors of Rx Ops intended to affix their digital signatures to the 2020 Deed or were involved in doing so, and might be taken to have authenticated the document. Further, according to Mr Shepherd's evidence, he sent the 2020 Deed to Mr Youssef by email and Rx Ops paid $25,000 in June 2020 towards the claim in response to the breach notice.
10. That said, those matters raise questions of fact which are not the subject of evidence and are not possible to resolve on this application. They also do not deal with the issue raised as to whether the sequential application of signatures to an electronic version of a document, such that there is not one counterpart executed by the company at any one time, is sufficient execution for the purposes of a deed under s 127 of the Corporations Act.
11. Mr Youssef's Counsel also submits that Mr Shepherd's digital execution does not render the 2020 Deed invalid. I was more persuaded by that submission. It seemed to me that the affixing of an electronic signature would not, of itself, be an impediment to the validity of the 2020 Deed. Victorian law, being the governing law of the 2020 Deed, supports the use of electronic signatures for deeds executed by individuals: see Electronic Transactions Victoria Act 2000 (Vic), ss 7, 12A and Property Law Act 1958 (Vic), ss 73(1), 73A. In the event that Tasmanian law applies in circumstances where Mr Shepherd was located in Tasmania when he signed the Deed remotely, s 63(4) of the Conveyancing and Law of Property Act 1884 (Tas) provides that a deed that has been defectively executed by a party can be taken to have be validly executed if it appears from external evidence that the party intended to be bound.
12. However, if the 2020 Deed was not validly executed by Rx Ops and the covenants it gave are not enforceable under the Deed, based on the reasoning in Bendigo Bank v Pickard, it would seem to follow that the guarantee and indemnity given by Mr Shepherd would be invalid: Bendigo Bank v Pickard at [71].
13. If the 2020 Deed is not a valid deed, the next issue raised by Mr Shepherd's submissions is whether he has a defence on the ground that 2020 Deed is not an enforceable contract. This is because the consideration given for Mr Shepherd's guarantee and indemnity relates to the Banjo Loan debt which had already been incurred and is, thus, past consideration: Bendigo Bank v Pickard at [74]. At the hearing, Mr Youssef's Counsel accepted, correctly in my view, that there is no consideration on the face of the 2020 Deed that supports the guarantee and indemnity. While he contended that the case at trial would be that the Deed was part of a larger transaction in which people each gave consideration to the other, that contention raises factual issues in respect of which there is no evidence on this application. He also accepted that Rx Ops or Mr Shepherd's election to pay $25,000 is a matter going to the Court's exercise of discretion to set aside default judgment rather than negating a defence based on a lack of consideration.
14. Bearing in mind that it is not the role of this Court to adjudicate on the ultimate merits of the defence on this application, having regard to the above, I am persuaded that Mr Shepherd has raised triable issues and has arguable defences to Mr Youssef's claim under the guarantee and indemnity on the basis that the 2020 Deed is not a valid deed given the manner of execution by Rx Ops or is not an enforceable agreement because the guarantee and indemnity are based on past consideration.
15. In view of that conclusion, it is unnecessary to consider the other arguments raised by Mr Shepherd by way of defence. I simply record that I am not persuaded that the lack of definition of "default" in the 2020 Deed, on its own, was sufficient to establish a bona fide defence, or that the claim based on the 2019 Deed was articulated in a way that demonstrated a defence on the merits to Mr Youssef's claim. Further, the discrepancies and errors in the statement of claim raised by Mr Shepherd's submissions are not, in my view, matters of substance that are sufficient to undermine the claim based on the 2020 Deed.

Delay and other matters

1. On the issue of delay, Mr Shepherd contends that he was unable to file a defence within the requisite time and delayed in making his application to set aside default judgment because of his poor financial circumstances, his ill health and his self-represented litigant status. He deposes that he had not received any income from 1 March 2020 until 1 April 2021 when he stated working part-time, he only had the ability to seek legal advice from late April 2021, and, as a self-represented litigant, was unaware of the serious implications of failing to file a defence. He submits that if he had the financial capacity to do so, he would have sought legal advice and filed a defence earlier. He also says that his ill-health impacted his ability to take action to defend the proceedings, deposing to the worsening of his heart and blood pressure illness in the second half of 2020 and early 2021, which only started to improve in March 2021.
2. Mr Youssef submits that these matters do not adequately explain Mr Shepherd's delay in this case. I agree. Mr Shepherd's assertion of ill-health is not supported by a medical certificate or other evidence that enables a proper assessment to be made of the asserted difficulty in responding to the claims made in these proceedings. It is also significant that Mr Shepherd's health did not prevent him from arranging for payment of $25,000 to be made to Mr Youssef in June 2020 or from engaging in correspondence with Mr Youssef and his lawyers in which offers were made to pay the claim over time.
3. While accepting that the evidence indicates that Mr Shepherd may have had (and continues to have) financial difficulties, presumably exacerbated by the COVID-19 pandemic and its impact on business, that matter and his self-represented status are not entirely persuasive factors in the context of the delay in this case. He was able to retain lawyers to advise him after receipt of the bankruptcy notice, but delayed more than three months after becoming aware that default judgment had been entered against him to file this application. That said, and as noted above, some of the delay in this case can be explained by Mr Shepherd's belief that Mr Youssef was not going to take any further steps in the litigation and his expectation that Mr Youssef's lawyers would write back to him with a response to his 18 November without prejudice offer.
4. Mr Youssef also submits that relevant to the exercise of the Court's discretion is the evidence that Mr Shepherd elected to treat the debt as owing and his failure to put forward a draft defence that would be filed and relied on, making it difficult to properly assess the defence as claimed. The payment of $25,000 in June 2020, the acknowledgment of indebtedness in subsequent correspondence and the absence of a draft defence raise a question as to the bone fides of Mr Shepherd's proposed defences. However, Mr Shepherd's explanation that he was unaware of the nature of the defences until he obtained legal advice is plausible in my view. The defences are of a technical nature and it might be expected that they would not have been identified by a self‑represented litigant. There is also a question of what indebtedness was, in fact, acknowledged and by whom. As to the absence of a draft defence, in my view, the factual and other matters deposed to in Mr Shepherd's affidavit sufficiently identify the bases of his proposed defences and he has agreed to file a defence within a reasonable period of time, namely four weeks.
5. No prejudice was asserted by Mr Youssef in the event the default judgment is set aside, although I accept that there would be presumptive prejudice of delay, inconvenience and cost to Mr Youssef in that event.

Conclusion

1. The Court must make an evaluative judgment taking into account the matters raised by the parties as to whether to set aside the default judgment. Notwithstanding the delay and the default judgment not being irregularly obtained, I have concluded that it is appropriate to exercise my discretion to do so. This is primarily because I accept that some of Mr Shepherd's proposed defences raise triable issues and have merit, and the delay can be explained, in part, by Mr Shepherd's lack of knowledge about the application to seek default judgment and the technical nature of his defences which he was not advised about until late April and May 2021. To my mind, it is not in the interests of justice to shut Mr Shepherd out from having an opportunity to defend the claim made against him in the proceedings.
2. I should record that Mr Shepherd will be expected to comply with the direction made for the filing of his defence and any cross-claim and other directions that will be made for the future conduct of the proceedings.

Costs and Orders

1. As to costs, as there was no irregularity or lack of good faith in entering the default judgment and Mr Shepherd has not yet prepared or filed his defence, I consider it appropriate, in the exercise of my discretion, to order that Mr Shepherd pay Mr Youssef's costs of the application for default judgment and that costs in respect of Mr Shepherd's notice of motion seeking to set aside default judgment be costs in the cause.
2. For these reasons I make the following orders. 1. The default judgment entered against the First Defendant on 2 February 2021 be set aside. 2. The First Defendant to file and serve his defence and any cross-claim on or before 16 November 2021. 3. The First Defendant to pay the Plaintiff's costs of his application for default judgment. 4. The costs in respect of the notice of motion filed by the First Defendant seeking to set aside the default judgment be costs in the cause. 5. List the proceedings before the Equity Registrar for directions at 9.30 am on 23 November 2021.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 October 2021