FEDERAL COURT OF AUSTRALIA

Palaniappan v Westpac Banking Corporation [2017] FCAFC 121

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GILMOUR J:

1    This is an appeal from the dismissal of an application made by the appellant under s 40(1)(g) of the Bankruptcy Act 1966 (Cth) (the Act) to set aside a bankruptcy notice served on the appellant by the respondent (Bankruptcy Notice). In pursuing his application, the appellant had sought to satisfy the court that he had a cross-demand equal to, or greater than, the quantum of the judgment upon which the Bankruptcy Notice is predicated but which he could not have set up in the proceedings in which the judgment was obtained.

2    The appeal concerns, principally, the application of established authority concerning the proper construction of s 40(1)(g) of the Act to the facts of this case.

3    The Notice of Appeal contains two grounds which were, in summary, that the primary Judge erred in:

(a)    finding that the appellant could have set up his counterclaim or cross-demand in the action in which judgment was obtained (Ground 1); and

(b)    failing to find that the counterclaim or cross-demand was equal to or exceeded the amount payable by the appellant to the respondent under the judgment (Ground 2).

4    There was also before the Court a Notice of Contention by the respondent (the Bank) as well as an application by the appellant for leave to adduce additional documents. These documents were said to go to Ground 2 of appeal.

5    The Court received the documents in question provisionally on the basis that it would, if necessary, rule upon the application in its reasons.

6    However, it is common ground that should Ground 1 be resolved against the appellant, the Court would not be called on to consider Ground 2 or the application to adduce the additional documents, limited in their asserted relevance, as they were, to that ground.

7    I would, for the reasons which follow, resolve Ground 1 against the appellant which, accordingly, is sufficient for the appeal to be dismissed.

Background

8    In 2011, the Bank advanced moneys under facilities to the appellant’s company, Murray Riverside Pty Ltd, for a property development and the Bank relied on the appellant’s guarantee and indemnity executed in 2008 (the Guarantee).

9    In March 2012, demands were made by the Bank pursuant to the Guarantee.

10    From mid-2012 receivers appointed by the Bank (Receivers) attempted to sell Murray Riverside's property and ultimately did so in December 2013.

The Supreme Court proceedings

11    In March 2014, the Bank commenced proceedings against the appellant in the Supreme Court of Western Australia for recovery of a sum due under the Guarantee. In those proceedings, the appellant filed a defence and counterclaim in October 2014 prior to the hearing of the Bank's summary judgment application.

12    The defence was by way of an alleged set-off of the damages claimed in the appellant’s counterclaim which asserted that the Receivers and managers appointed by the Bank sold the property at an undervalue and that, on the facts, in doing so they were acting as agents for the Bank.

13    However, cl 9(a) of the Guarantee provided:

As long as any of the guaranteed money remains unpaid, you may not, without our consent:

(a) Reduce your liability under this guarantee and indemnity by claiming that you or the customer or any other person has a right of set-off or counterclaim against us.

14    At the time of it filing the defence and counterclaim, the appellant had not paid the guaranteed money. Whether this was the result of an inability to do so or for any other reason was not revealed. Nor had the appellant obtained the relevant consent.

15    Before Master Sanderson, on the Bank’s application for summary judgment, the Bank contended successfully that the appellant was precluded from prosecuting his set-off and counterclaim by reason of the terms of cl 9(a) of the Guarantee. Master Sanderson held that the effect of cl 9(a) was to postpone the appellant’s rights to claim a set-off (being the amount of his counterclaim): Westpac Banking Corporation v Palaniappan [2014] WASC 475 at [17]–[18].

16    Master Sanderson awarded partial summary judgment in December 2014 and amended that judgment in May 2015 (the Judgment): Westpac Banking Corporation v Palaniappan (No 2) [2015] WASC 227; Palaniappan v Westpac Banking Corporation [2016] WASC 72 at [4].

17    The appellant’s appeal to the Court of Appeal was dismissed on 29 April 2016: Palaniappan v Westpac Banking Corporation [2016] WASCA 72.

18    A special leave application to the High Court of Australia was withdrawn in June 2016.

The Bankruptcy Notice

19    The Bankruptcy Notice (number BN 177877) was issued on 16 January 2015 and served by the Bank on the appellant in Malaysia on 27 February 2015.

20    The appellant made an application in this Court to set aside the Bankruptcy Notice on 9 March 2015, which application was adjourned and programmed accordingly pending the appeal from the Judgment. Thereafter the primary judge made various programming orders towards a hearing which was ultimately held on 2 December 2016.

21    At the conclusion of the hearing, the primary judge dismissed the appellant’s claims for:

(1)    declarations that he had a counterclaim and set off which he had been unable to set up in proceedings in the Supreme Court of Western Australia CIV 1307 of 2014, the judgment in which the respondent had relied upon to found a Bankruptcy Notice and that the Bankruptcy Notice was of no form or effect; and

(2)    an order that the Bankruptcy Notice be set aside: Palaniappan v Westpac Banking Corporation [2016] FCA 1494.

22    It is from the judgment that the appeal is brought.

Section 40(1)(g) of the Act

23    The appellant sought to rely on s 40(1)(g) of the Act, under which a debtor commits an act of bankruptcy if:

(a)    a creditor has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed;

(b)    the creditor has served on the debtor a bankruptcy notice; and

(c)    the debtor does not, within the required time:

(i)    comply with the requirements of the notice; or

(ii)    satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.

The primary judge’s reasons

24    It was accepted that the Judgment was a final judgment which had not been stayed and, that the Bank had served a bankruptcy notice on the appellant, the requirements of which were not complied with by him.

25    The primary judge then proceeded on the assumption that the appellant’s counterclaim may be arguable and that the damages recoverable under it would be equal to or greater than the quantum of the Judgment. Thus, the confined issue under part (c)(ii) of the outline of s 40(1)(g) in [23] of these reasons was whether the counterclaim was one that the [appellant] ‘could not have set up in the action or proceeding in which the judgment or order was obtained’: Palaniappan v Westpac Banking Corporation at [10].

26    His Honour answered that issue in the negative: [34].

27    There was no issue before the primary judge as to the proper construction of s 40(1)(g). As his Honour, the primary judge, observed at [26], referring to authority, it was not in doubt that the question of whether or not a debtor ‘could not have set up’ a counterclaim was to be adjudged by reference to legal inability, not personal and practical considerations.

28    Thus, the contest before the primary judge was whether the effect of cl 9 was to create a legal inability such as to bring the appellant within the exception under s 40(1)(g) or, whether personal and practical considerations precluded the appellant from prosecuting his counterclaim.

29    The primary judge observed that it was open to the appellant to have applied to stay the Judgment and that the Court may have acceded to this upon the condition that he pay the Judgment debt or pay the monies into Court in satisfaction of the requirement in cl 9(a) of the Guarantee. Such a circumstance, he concluded, did not legally prevent the applicant from pursuing his counterclaim.

30    His Honour held that as ‘it was in [the appellant's] hands to remove that contractually agreed inhibition … it was not a positive inhibition imposed by law’: [32].

31    The ‘positive inhibition’ his Honour referred was that of the nature referred to in Re Brink; Ex parte Commercial Banking Co of Sydney (1980) 30 ALR 433, which adopted and expanded upon what had been set out by Lukin J in Re Stokvis (1934) 7 ABC 53. I will now consider these and other authorities referable to Ground 1.

Legal principles

32    The principles applicable to the proper construction of s 40(1)(g) of the Act, which the parties accept, correctly, are relatively well settled. They are relevantly:

(1)    The question of whether or not a counterclaim or cross-demand ‘could not have been set up’ is a question to be determined with reference to legal inability, not practical or personal considerations; Re Brink at 434, 437.

(2)    ‘…[A] counterclaim-claim, set-off or cross demand which could not be set up [is] one which, from point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained. …Mere failure to take advantage of the opportunity can hardly be said to be inability’: Re Stokvis at 57.

(3)    The debtor bears the onus of satisfying the Court that he/she was legally incapable of setting up his/her counterclaim in the proceedings in which the judgment was obtained: Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 at 130 and 137.

33    Therefore, for present purposes, as Hill J noted in Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183 at 189:

As the law presently stands it would seem that the mere fact that for practical reasons a debtor is unable to bring a cross-action etc will not entitle the debtor to argue that he or she had a cross-action etc which could not have been brought in the original proceedings.

34    It is the application of these principles, found in these authorities and others to which I will return, to the facts of this case which is in issue.

35    The appellant submitted that, in effect, the Master and the Court of Appeal, in affirming the Judgment, concluded that the appellant could not, as a matter of law, set up his claim, either by way of defence or counterclaim, in order to reduce or extinguish his liability to the respondent under the Guarantee thereby bringing him within the exception under (c)(ii) of the outline of s 40(1)(g) in [23] of these reasons.

36    Specifically, the appellant submitted that his inability to prosecute his counterclaim in the proceedings in which the Judgment debt arises was an inhibition imposed at law, namely by contract. The appellant contended that the inhibition was not of a ‘personal’ or ‘practical’ nature, but rather was of the nature referred to in Re Brink and Re Stokvis – or, specifically, it was a ‘positive inhibition’ out of the types of legal inability identified by Lukin J in Re Stokvis at 57.

37    The appellant acknowledges that the authorities are to the effect that if there is something that a party who wishes to prosecute a counterclaim can do in order for the counterclaim to be prosecuted in the action brought against that party, and the party does not do so, s 40(1)(g) will not be satisfied. However, he contends that none of the cases go so far as to extend that principle to payment of the claim made in the proceedings in which the counterclaim is sought to be brought. He submits that such a requirement is inconsistent with the longstanding explanations as to the purpose of s 40(1)(g).

Consideration

38    The appellant did, in fact, file a defence and counterclaim. The counterclaim is still on foot. The appellant, for this reason alone does not come within the exception in s 40(1)(g): Nath v Clipway Pty Ltd [1999] FCA 625 per Hely J at [11].

39    If, however, ‘unable to set up’ means, in effect, unable to prosecute rather than unable to institute a counterclaim, even then the appellant, in my opinion, fails to meet the terms of the exception.

40    The appellant could have prosecuted his counterclaim if he had complied with the terms of the Guarantee, by paying to the Bank the guaranteed monies. By cl 9(a) of the Guarantee, so long as any of the guaranteed money remains unpaid, he could not, without the Bank's consent, reduce his liability under the Guarantee by claiming that he or Murray Riverside or any other person has a right of set-off or counterclaim against the Bank.

41    As Buss JA, in the Court of Appeal, described the effect of cl 9 at [74] in Palanappian v Westpac Banking Corporation:

74    A suspension provision of the kind embodied in cl 9 of the Guarantee does not oust the jurisdiction of the courts. It suspends, but does not otherwise impair, the rights of the party bound by the provision. That party is entitled to enforce the rights in question provided it conforms with its primary obligation to make payment to the other party. See GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 [93] (Bryson J); Westpac Banking Corporation v Helicopters Brisbane Pty Ltd [2012] QSC 263 [24] (Martin J). (emphasis added).

42    Contrary to the appellant’s submission, the conclusion of the Master and, in turn the Court of Appeal, was not, in effect, a finding that, as a matter of law, the appellant could not set up his set-off and counterclaim, at least not in the sense of a legal inhibition which would attract the exception provided in s 40(1)(g)(c)(ii) of the Act.

43    The appellant submits that on its proper construction s 40(1)(g) could not sensibly mean that it does not apply where the ‘positive inhibition’ to the bringing of a cross-claim is, as in this case, the non-payment of the self-same amount claimed in the action and which resulted in the judgment debt upon which the bankruptcy notice has issued. This, he submits, is because the section proceeds on the basis of a valid bankruptcy notice which, in many cases, as in this case, is founded upon a judgment debt and that if the disputed amount had to be paid, the operation of s 40(1)(g) would become redundant as there would not have been a bankruptcy notice in the first place.

44    I do not accept this submission. There are many cases, in which a practical inability to proceed with a counter-claim has been held not to be a positive inhibition, which are analogous to the appellant’s circumstances. In Re Vicini; Ex parte E. A. Sealey & Co (1982) 64 FLR 323, an inability to proceed with a counterclaim due to a lack of available witnesses and supporting evidence was held to amount to a mere failure to take advantage of an opportunity, rather than a positive inhibition to doing so: at 325-326 applying Lukin J’s observations in Re Stokvis at 57. Similarly, in Walton v National Mutual Life Association of Australia Limited (1994) 49 FCR 406, the Court held at 408 that a solicitor’s negligent failure to set up a cross-demand would not amount to an inability to set up the cross-demand for the purposes of s 40(1)(g) of the Act.

45    Moreover this descriptive phrase, ‘positive inhibition’, is not found in s 40(1)(g). It is the language of this section to which attention must be given, rather than the language of judgments of the Court: Walton at 408. That there would have been no Bankruptcy Notice issued had the guaranteed monies been paid is self-evident. Indeed if they had been paid before the Judgment was entered there would have been no judgment. This would have been the consequence of compliance with the term of the Guarantee. It was the failure of the appellant to meet his contractual obligations which has led to the outcome.

46    It was not, in my view, the correct approach by the primary judge to analyse the circumstances by reference to whether a stay of the Judgment was applied for. Section 40(1)(g) does not require expressly or implicitly that there has been made an application to stay the relevant judgment. All that is required is that the judgment not have been stayed: s 40(1)(g).

47    Nonetheless, the conclusion of the primary judge was correct, that the counterclaim was not one which the appellant could not have set up in the proceeding in which the Judgment was obtained. At [32] his Honour observed that, by cl 9(a) of the Guarantee, the applicant had agreed that his right to make such a counterclaim would be suspended while his liability under the Guarantee remained unmet, and that it was in the appellant’s hands to remove the contractually agreed inhibition. His conclusion that this inhibition was not a positive inhibition imposed by law of the kind referred to in Re Brink or by Lukin J in Re Stokvis was correct. Unlike the facts of those cases, the appellant’s failure to pay or to obtain the relevant consent were personal and practical circumstances.

48    For these reasons, I would not uphold Ground 1. There is, in that circumstance, as was accepted by the parties, no need to consider Ground 2 or the Notice of Contention.

Orders

49    The appeal will be dismissed with costs.

Associate:

Dated:    10 August 2017

REASONS FOR JUDGMENT

MCKERRACHER J:

50    I agree with the reasons of and orders proposed by Justice Gilmour.

Associate:

Dated:    10 August 2017

REASONS FOR JUDGMENT

CHARLESWORTH J:

51    I have had the benefit of reading the draft reasons for judgment of Gilmour J in relation to Ground 1 of this appeal.

52    As Gilmour J observed, the appellant did indeed file a counter-claim in the same proceeding in which the Bank obtained the Judgment. I agree that the impediment to the enforcement of the rights asserted in the counter-claim is one to which the appellant contractually agreed. It was always the case that the appellant could not, without the Bank’s consent, enforce any rights arising from the facts pleaded in the counter-claim without first paying the amount owing under the terms of the Guarantee.

53    It is convenient to proceed on the assumption that the appellant’s asserted counter-claim is arguable and that it sounds in damages equal to or exceeding the amount of the Judgment now underlying the Bankruptcy Notice.

54    It is not disputed that the appellant bears the onus of satisfying the Court that he was legally incapable of setting up his counter-claim in accordance with the principles stated in the authorities to which Gilmour J refers at [32] of his Honour’s reasons. It is not sufficient to point to practical or personal considerations preventing the set-off, counter-claim or cross demand from being “set up” in the same action or proceeding.

55    In my view, Ground 1 of this appeal turns on a narrower question: what is meant by the words “set up” as they appear in the phrase “set up in the action or proceeding in which the judgment or order was obtained” in s 40(1)(g) of the Act? That is a question of construction that did not arise for determination in the authorities relied upon by the Bank.

56    The appellant’s argument is identified by Gilmour J at [39] and [43] of his Honour’s reasons. It is the appellant’s case that the words “set up”, in context, mean enforce or prosecute to judgment.

57    The appellant’s construction should be accepted. The closing words of s 40(1)(g) should be construed as referring to the enforcement within an action or proceeding of rights by one person (say a counter-claimant) against, or in answer to, the rights asserted by another person (a primary claimant) so as to affect the entitlement of the primary claimant to obtain judgment either in the amount claimed or at all.

58    Expressed in more procedural terms, where a set-off is raised at common law, such as in the case of a running account, the rights may be “set up” as a complete or partial answer to the primary claimant’s cause of action. In the context of an equitable set-off, counter-claim or cross demand, the rights may give rise to an entitlement to damages that may be offset against any amount of damages to which the primary claimant might otherwise be entitled. In either case, where the set-off, counter-claim or cross demand is successfully prosecuted in the same proceeding, the offsetting effect may either disentitle the primary claimant to judgment or diminish the judgment amount. That, in my opinion, is the legal outcome to which the words “set up” are directed.

59    That construction, in my view, best achieves the purpose or object of s 40(1) of the Act: Acts Interpretation Act 1901 (Cth), s 15AA.

60    Section 40 defines the circumstances in which a debtor commits an act of bankruptcy. Proof of the commission of an act of bankruptcy is an essential requirement for the presentation of a creditor’s petition for a sequestration order against the debtor: s 43(1)(a); s 52(1)(a). Section 40(1)(g) is to be understood in that context: it defines the circumstances in which a judgment creditor may have resort to the bankruptcy regime in reliance upon an unsatisfied judgment debt. Subject to the concluding words of the provision, a judgment creditor may not have resort to the bankruptcy regime if the judgment debtor has a set-off counter-claim, or cross demand “equal to or exceeding the amount of the judgment debt”. Those words are concerned to ensure that the respective rights and obligations of the debtor and creditor are considered together and offset. They reflect the desirability that a judgment creditor not petition for the bankruptcy of a person to whom he or she is, in truth, indebted. That policy consideration is nonetheless subject to the competing consideration inherent in the closing words of the provision:

being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment … was obtained

61    In my view, the intent of those words is to relieve the bankruptcy court of the burden of considering the rights of a judgment debtor that could and should have been prosecuted to judgment in the earlier proceeding. That discrete object is achieved by imposing a consequence on a debtor if he or she could have, but did not, enforce his or her offsetting rights: the debtor cannot be heard to complain that the amount of the judgment debt underlying a bankruptcy notice does not reflect the net position of the parties’ respective rights and obligations if it was within his or her legal capacity to ensure that it did. There would appear to be no policy or object, consistent with the rationale of the bankruptcy regime as a whole, to impose such a consequence on a judgment debtor who could not, because of a legal impediment, prosecute (say) a counter-claim in the proceeding as an answer or partial answer to the primary claimant’s asserted entitlement to judgment.

62    On the facts, cl 9 of the Guarantee entitled the Bank to proceed to judgment on its claim without the counter-claim being set up in the same action or proceeding in the sense I have described. The Bank enforced that very entitlement when it applied for and obtained summary judgment on its claim without the factual and legal controversy raised in the counter-claim being heard and determined.

63    There was a corresponding legal impediment preventing the appellant from setting up the counter-claim against the Bank’s claim so as to avoid the rights asserted in the Bank’s claim (being a rightful claim for immediate payment) merging in a judgment. Although the counter-claim was pleaded in the same proceeding, it was not a claim the appellant was entitled to sue upon so as to disentitle the Bank to judgment or so as to diminish the Judgment amount. It is in that sense that the appellant was legally incapable of setting up his counter-claim in accordance with the settled principle stated in the authorities upon which the Bank relied.

64    The appellant could not have overcome that particular legal impediment by paying the sum demanded by the Bank. Upon satisfaction of the demand, the rights enforced by the Bank in the proceeding would be extinguished. The very payment of the demand would preclude the enforcement of a counter-claim in answer to or diminution of it.

65    Although the appellant’s counterclaim may have in fact been commenced, filed or pleaded in the action or proceeding in which the Judgment was obtained, it was not “set up” in that proceeding within the meaning of s 40(1)(g) of the Act, properly construed.

66    I would uphold Ground 1 of the appeal. In light of the orders made by Gilmour and McKerracher JJ dismissing the appeal, I do not express any view as to the merits of Ground 2.

Associate:

Dated:    10 August 2017