Commonwealth Bank of Australia v Rafidi

[2016] NSWSC 381

Supreme Court

New South Wales

Medium Neutral Citation:	Commonwealth Bank of Australia v Rafidi [2016] NSWSC 381
Hearing dates:	4 April 2016
Decision date:	07 April 2016
Jurisdiction:	Equity - Commercial List
Before:	Stevenson J
Decision:	Leave to amend cross-claim refused
Catchwords:	PRACTICE AND PROCEDURE – proposed amendment to cross-claim – whether proposed claim sustainable - whether critical allegations absent – whether leave should be refused
Legislation Cited:	Corporations Act 2001 (Cth)
Category:	Procedural and other rulings
Parties:	Commonwealth Bank of Australia (Plaintiff/Respondent/Cross-Defendant) Iyad Rafidi (Defendant/Applicant/Second Cross-Claimant) Brick & Block Company Pty Limited (in liquidation) (subject to a deed of Company arrangement) (First Cross-Claimant)
Representation:	Counsel: A Leopold SC (Plaintiff/Respondent/Cross-Defendant) R E Dubler SC with R White (Defendant/Applicant/First and Second Cross-Claimants)   Solicitors: Gadens Lawyers (Plaintiff/Respondent/Cross-Defendant) Hall Partners (Defendant/Applicant/First and Second Cross-Claimants)
File Number(s):	SC 2011/251728

Judgment

1. In May 2006, Bank of Western Australia Ltd (“BankWest”) agreed to provide Brick & Block Company Pty Ltd (“BBC”) various financial facilities.

2. At that time BankWest was owned by HBOS Australia Pty Ltd.

3. By an agreement made on 8 October 2008 (the “Share Sale Agreement”) HBOS agreed to sell its shares in BankWest to the plaintiff, Commonwealth Bank of Australia Ltd (“CBA”).

4. In the current iteration of its cross-claim, BBC alleges, amongst other things:

1. it was an implied term of the registered charge granted by it to BankWest that BankWest would exercise its power to appoint a receiver and manager to BBC if an event of default arose;

1. reasonably and in good faith; and

2. not in bad faith for an extraneous or improper purpose or in a capricious or arbitrary manner;

2. in August 2009 BankWest represented to it that it “could resolve its difficulties by restructuring and that it could achieve this through the appointment of an administrator” and that if BankWest approved the restructure, then it was possible that BankWest would allow the appointment of an administrator (described in the cross-claim as “the Administrator Representation”);

3. in reliance on the Administrator Representation, it arranged for chartered accountants, Grant Thornton Australia Ltd, to prepare a restructure proposal for BBC;

4. Grant Thornton prepared a restructure proposal that the directors of BBC resolve pursuant to s 439A of the Corporations Act 2001 (Cth) to appoint administrators and that BBC then enter into a deed of company arrangement (the “Proposed DOCA”);

5. on 28 or 29 October 2009 BankWest represented that it was “comfortable” with the Proposed DOCA”;

6. on 29 October 2009 BankWest represented that if BBC appointed an administrator from a list approved by BankWest, BankWest would not exercise its power under its charge to appoint a receiver and would permit BBC sufficient time to implement the restructure proposal without seeking to sell assets over which BankWest held charges (described in the cross-claim as the “Receiver Representation”);

7. BankWest deliberately failed to warn that it may rely upon the appointment of an administrator as an event of default sufficient to warrant the appointment of receivers to BBC and acted with “an intention to mislead, deceive or to trick BBC into appointing administrators”;

8. in reliance on the Receiver Representation the directors of BBC resolved to appoint administrators; and

9. nonetheless, on 4 November 2009 BankWest appointed receivers to BBC.

Applications to amend the cross-claim

5. Since November 2015 BBC has made five applications to amend its cross-claim and has circulated a total of seven proposed forms of cross-claim.

6. Each of those applications has been rejected, most recently by Hammerschlag J on 1 April 2016.

7. Each of the proposed forms of cross-claim has sought to agitate claims arising from the alleged fact that the appointment by BankWest of the receivers on 4 November 2009 was motivated by a desire, on the part of CBA, to make a “warranty claim” against HBOS under the Share Sale Agreement and, to use a somewhat imprecise expression, to improve BankWest’s balance sheet.

8. On 4 April 2016 I heard BBC’s most recent application to amend its cross-claim. On that application Mr Dubler SC appeared with Mr White for BBC, and Mr Leopold SC appeared for CBA. The proposed cross-claim is an annexure to an affidavit sworn by BBC’s solicitor, Mr Trevor Hall, on 4 April 2016.

9. In the course of argument, the ambit of the dispute between the parties narrowed considerably.

10. Mr Dubler abandoned the “improve the balance sheet” claim (in par 78A of the proposed cross-claim) and argument focused on the “existing warranty” claim.

11. That claim is set out in pars 59B and 59C of the proposed cross-claim.

Paragraph 59B

12. The proposed par 59B is in the following form:

“Further and in the alternative, the decision to appoint Receivers as pleaded at paragraph 59 was in breach of the implied term pleaded at paragraph 49B above in that it was done in breach of the Receiver Representation.”

13. In that paragraph, BBC asserts that the decision to appoint the receiver was, a breach of the implied term referred to at [4] above.

14. Presumably, what the pleader means to say is that, as the appointment was contrary to the Receiver Representation, it was made unreasonably, or in bad faith or for an extraneous or improper purpose, or in a capricious or arbitrary manner.

15. Such a rolled up pleading is embarrassing.

16. Following Mr Leopold’s criticism of it, Mr Dubler made no attempt to justify it.

17. My opinion is that it should not be allowed.

Paragraph 59C

18. The proposed par 59C is in the following terms:

“Further and in the alternative, the decision to appoint Receivers, as pleaded at paragraph 59 was in breach of the implied term pleaded at paragraph 49B above as it was taken in bad faith and for the extraneous or improper purpose of enabling CBA, in respect of the BBC loans, to make a warranty claim, or to evidence and support the existing warranty claim made on 21 January 2009, under the Share Sale Deed between CBA, HBOS Australia Pty Ltd and HBOS plc dated 8 October 2008 (the Share Sale Deed), in that (to the knowledge of the officers who decided to appoint Receivers, being Messrs Pavisich, Ogilvy and Notman (“the Officers”)):

(1)   by clause 15.1 of the Share Sale Deed, the books and accounts of BankWest were warranted as correct and a claim could be made for breach of such warranty;

(2)   such books and account made no provision for the BBC loans as being an impaired asset;

(3)   If a provision should have been made for the BBC loans as being impaired assets in the books and accounts of BankWest, the subject of the warranty, then a claim could have been made in that regard;

(4)   On or about 9 June 2009, following a Review Panel meeting held in order to identify warranty claims, the BBC facilities were classified as “Loss (actual)” with provision of 100% loss and alleged events of default had been identified as occurring prior to 19 December 2008 thereby making the BBC loan potentially eligible to be part of a warranty claim which CBA thereafter wished to pursue;

(5)   However, as at 9 June 2009, the loan to value ratio showed there was adequate security in the event of default and there was no monetary default or failure to repay any monies when due and BankWest by letter dated 31 March 2009 had indicated to BBC that all BBC facilities were within terms and arrangements, thereby waiving any reliance on such past events of default;

(6)   Thereby, the cross defendant was up to, and including, the date of the appointment of receivers precluded from pursuing a warranty claim as the loan after 31 March 2009 was continuing to be conducted within terms and arrangements; and

(7)   in the circumstances pleaded above, the decision to appoint receivers and not honour the Receiver Representation was taken because such appointment then enabled CBA, in respect of the BBC loans, to make a warranty claim, or to evidence and support the existing warranty claim made on 21 January 2009.”

19. There follow a lengthy list of particulars. There was debate before me as to whether some or all of those particulars were relevant to the matters pleaded in par 59C.

20. In view of the conclusion to which I have come concerning the pleading itself, it is not necessary for me to consider the particulars.

21. Before considering the pleading itself, it is necessary to have regard to some background matters.

22. Proposed par 59C speaks of CBA making a “warranty claim” under the Share Sale Agreement.

23. The relevant clauses of the Share Sale Agreement are cll 15.1, 15.3, 16.1, 16.2 and 5.1 of Schedule 6.

24. The effect of those clauses is that:

1. HBOS warranted to CBA that, as of the date of the Share Sale Agreement (8 October 2008) and on completion of that Agreement (19 December 2008), the financial records of BankWest did not “contain or reflect any material inaccuracies or material discrepancies”;

2. HBOS was not liable in respect of a warranty claim unless, relevantly:

1. CBA gave it a “Claim Notice” (being a notice describing in reasonable detail the facts, matters or circumstances giving rise to a “Warranty Claim”) within 12 months of completion (that is by 19 December 2009); and

2. (unless the claim was satisfied) CBA commenced proceedings against HBOS in respect of the warranty claim within six months of any “Claim Notice”.

25. In fact, CBA commenced proceedings against HBOS on 29 September 2009. CBA made no claim in those proceedings that BankWest’s financial records contained any material inaccuracy or discrepancy; let alone that any such inaccuracy or discrepancy arose by reason of its dealings with BBC.

26. Proposed par 59C also refers to “the existing warranty claim made on 21 January 2009”.

27. That is a reference to a letter sent by CBA’s solicitors, Freehills, to HBOS on 21 January 2009. I do not read that letter as itself being a warranty claim.

28. In the letter, Freehills asserted that there “may” be inadequate “provisions” in BankWest’s accounts in relation to “impaired asset values”, that this “may” result in some of BankWest’s financial records containing “material inaccuracies or material discrepancies” and that this is a “potential warranty breach”.

29. To return to the proposed pleading, par 59C is written in the passive voice and conceals more than it reveals.

30. Thus, it alleges that BankWest’s decision to appoint receivers was taken in bad faith and for the extraneous or improper purpose of:

1. “enabling” CBA to make a warranty claim “in respect of the BBC loans”; or

2. to “evidence and support” the “existing warranty claim” said to have been made on 21 January 2009.

31. The explanation the pleading gives as to why it is that BBC alleges that BankWest had such a purpose is to be found in proposed sub-pars 59C(1)-(7) (hence the words “in that” that precede those subparagraphs).

32. Sub-paragraph (1) recites an abbreviated summary of the relevant provisions of the Share Sale Agreement.

33. Sub-paragraph (2) asserts that BankWest’s “books and account made no provision for the BBC loans as being an impaired asset”.

34. The first point is that this is not the language used in the Share Sale Agreement which speaks of “material inaccuracies or material discrepancies” in BankWest’s “financial records”.

35. Second, it is not alleged:

1. that the BBC loans were in fact “impaired assets”; or

2. that “provision” should have been made for them in BankWest’s financial records such that, in their absence, there was a “material inaccuracy” or “material discrepancy” in such financial records; or

3. what that provision should have been; or

4. when that provision should have been made (a critical question, bearing in mind that any warranty claim could only be made in respect of BankWest’s financial records as at 8 October 2008 or 19 December 2008).

36. Indeed, the pleading makes a point of not making any such allegation. Thus, sub-par (3) states that “if a provision should have been made for the BBC loans” (without identifying what such provision might be or when it should have been made), then “a claim could have been made in that regard”.

37. Sub-paragraph (4) asserts on or about 9 June 2009, following a meeting of BankWest’s Review Panel:

1. the BBC facilities were classified as “Loss (actual)” with “provision of 100% loss”; and

2. events of default were identified as occurring before 19 December 2008 (the completion date under the Share Sale Agreement).

38. Sub-paragraph (4) alleges that the Review Panel meeting was held “in order to identify warranty claims”. It might be thought odd that such matters would be considered at a BankWest Review Panel meeting, rather than at a CBA meeting. Mr Leopold tendered a minute of the BankWest Review Panel meeting of 11 June 2009, which contained no reference to warranty claims. That is no doubt a matter to be explored at the hearing (to take place over six weeks commencing on 11 October 2016), if it remains relevant.

39. Sub-paragraph (4) goes on simply to assert that the matter at [37] above had the result that the BBC loan was “potentially eligible to be part of a warranty claim which CBA thereafter wished to pursue”.

40. That allegation leaves two critical questions unanswered:

1. does BBC allege (and is BBC able to allege) that CBA (the party entitled to make a warranty claim under the Share Sale Agreement) and BankWest (the party that appointed the receivers) actually considered that the BBC loan was potentially or actually eligible to be part of any warranty claim CBA might make (particularly bearing in mind that any material inaccuracy or discrepancy in BankWest’s financial records had to exist on 19 December 2009, at the latest, to be relevant to a warranty claim under the Share Sale Agreement)? and;

2. if so, on what precise basis is such an allegation made?

41. If BBC is not able to make a properly particularised allegation to this effect, I find it hard to see how it can allege that BankWest’s purpose in appointing the receiver was to “enable” CBA to make a warranty claim or to “evidence and support” the claim allegedly foreshadowed in Freehills’ letter of 21 January 2009.

42. Sub-paragraphs (5) and (6) assert that, in effect, BBC’s loan arrangements with BankWest were within “terms and arrangements” such that CBA could not have made a warranty claim in respect of them.

43. Finally, sub-par (7) alleges that, as a matter of fact, BankWest decided to appoint the receiver “because such appointment then enabled CBA, in respect of the BBC loans, to make a warranty claim” (or to “evidence and support” the claim allegedly made in the Freehills’ letter of 21 January 2009).

44. Again, this pleading leaves critical matters unstated:

1. does BBC allege that CBA ever decided to make, or contemplated making a warranty claim in respect of the BBC facility?

2. If so, when did this occur?

3. Did BankWest know this?

4. If the answer to these questions is “no”, how can it be alleged that BankWest’s decision to appoint the receivers was “because” the appointment “enabled” CBA to make a warranty claim?

45. The proposed pleading asserts bad faith on the part of BankWest. That is a very serious allegation. The proposed pleading does not adequately reveal a basis, if indeed one exists, for BBC to make such an allegation.

46. I find these shortcomings in the proposed pleadings to be fundamental.

47. I am not prepared to grant BBC the leave it seeks.

48. BBC’s motion of 4 April 2016 is dismissed with costs.

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Decision last updated: 07 April 2016