James v Commonwealth Bank of Australia

Re: GEOFFREY RALPH JAMES
And: COMMONWEALTH BANK OF AUSTRALIA; ABN AMRO AUSTRALIA LIMITED; JUST JUICE
CORPORATION PTY LTD (RECEIVERS AND MANAGERS APPOINTED); SERITA PTY LTD
(RECEIVERS AND MANAGERS APPOINTED) and ERNST AND YOUNG
No. N G3132 of 1992
FED No. 617
Corporations - Set-Off
(1992) 8 ASCR 444
(1992) 37 FCR 445

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Corporations - receiver and manager appointed by secured creditor - breaches of duty by receiver and manager in conduct of business of the company - express contractual indemnity - exception to right of indemnity - meaning of "debts properly incurred in the course of said receivership" - meaning of "the result of personal default or neglect of the receiver".

Set-Off - equitable set-off - meaning of "impeach the title to the legal demand" - whether it is sufficient that A's breach of obligations to B has brought about or contributed to the existence of B's liability to A.

McDonnell and East Limited v McGregor (1936) 56 CLR 50

J and S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 61 FLR 108, applied.

Piggott v Williams (1821) 6 Madd 95, 56 ER 1027, followed.

Newfoundland Government v Newfoundland Railway Co (1888) 13 App Cas 199, considered.

HEARING

SYDNEY

#DATE 31:8:1992

Counsel and solicitors Mr F M Douglas QC and
for the Applicant: Mr R J Weber instructed by

Ebsworth and Ebsworth

Counsel and solicitors Mr R L Hunter QC and
for the Respondents: Mr I M Jackman instructed

by Blake Dawson Waldron

ORDER

THE COURT ORDERS THAT:

(1) The Questions for separate decision be answered as follows:

QUESTIONS:

"On the assumption that each of the matters set out in para. 5(b) of the Defence and set out as particulars to paragraphs 5 and 6 of the Defence are established:

(a) Upon the proper construction of the CBA Indemnity is the First Respondent presently obliged to indemnify the Applicant in respect of the debts referred to in Schedules 1 and 2 to the Statement of Claim?

(b) Upon the proper construction of the ABN Indemnity is the Second Respondent obliged to indemnify the Applicant in respect of the debts referred to in Schedules 1 and 2 to the Statement of Claim?

and

(c) If the answer to (a) or (b) is "yes", are the First Respondent and the Second Respondent or either of them entitled to set off against their obligation to indemnify the Applicant, any damages which may be payable by the Applicant to those Respondents or either of them arising out of the matters pleaded in paras. 6, 8, 10, 13, 14 and 15-17 of the Cross-Claim?"

ANSWERS:

(a) No

(b) No

(c) Unnecessary to answer.

(2) The Applicant pay the costs of the Respondents of and incidental to the determination of the Questions for separate decision.

JUDGE1

Order 29, r. 2 of the Rules of Court provides for the making of orders for the decision of any question separately from any other question in a proceeding. What follows are the reasons for judgment upon questions concerning the proper construction of certain instruments upon which the Applicant relies for indemnity by the First Respondent ("CBA") and the Second Respondent ("ABN").

The Securities

Certain facts are admitted on the pleadings or otherwise not in dispute on the present branch of the litigation. The Fourth Respondent ("Serita"), together with Agrinello Pty Ltd ("Agrinello") and Sujaca Properties Pty Ltd ("Sujaca") are subsidiaries of or otherwise associated with the Third Respondent ("Just Juice") and its former directors. Just Juice is incorporated in the State of New South Wales. The Applicant is a member of the firm of Ernst and Young, the Second Cross-Respondent.
To secure advances and accommodation by the CBA, Just Juice, by deed dated 12 February 1988 granted the bank an equitable mortgage (containing a fixed and a floating charge) over all its assets and undertaking ("the CBA Mortgage"). The CBA Mortgage was registered under the provisions of the Companies (New South Wales) Code 1981 ("the Code") on 24 February 1988.
To secure a term loan of $6m and other indebtedness, Just Juice by deeds dated 24 May 1988 granted to ABN an equitable mortgage and a charge over certain specified property and over its assets and undertaking ("the ABN Mortgages"). The ABN Mortgages were registered under the provisions of the Code on 16 June 1988. By deeds dated 24 May 1988, Serita, Agrinello and Sujaca granted ABN charges over all their property assets undertaking ("the Collateral ABN Charges"). The CBA Mortgage, the ABN Mortgages and the Collateral ABN Charges were "cross-collateralised", such that default under any one constituted default under all the others.
In or about June 1990, Just Juice defaulted under each of these securities.
By deed dated 29 June 1990 and executed by the CBA and the Applicant ("the CBA Appointment"), the CBA appointed the Applicant as receiver and manager of all the undertaking property and assets whatsoever, both present and future, and the Applicant accepted that appointment. The appointment was expressed as being made under and pursuant to Clause F(3) of the CBA Mortgage.
Clause F(3), so far as material, states: -

"(3) At any time after the moneys hereby secured become payable or after this mortgage shall have become enforceable the (CBA) or an authorised officer of the (CBA) may appoint in writing any person to be receiver of the mortgaged premises or any part thereof and may remove any such receiver and in case of the removal retirement or death of any such receiver may appoint another in his place and may fix the remuneration of any such receiver at such amount or at such rate as the (CBA) shall think fit Provided always that every such receiver shall be the agent of the Mortgagor and the Mortgagor alone shall be responsible for his acts and defaults. . ."

The clause goes on to list, in paras. (a) - (o) the powers which any such receiver shall have "without any consent on the part of the Mortgagor."

The practice of appointing a receiver as agent of the mortgagor, exemplified in the above extract from the CBA mortgage, developed in the nineteenth century as a conveyancing device designed to assist the position of the mortgagee. The liabilities of a mortgagee in possession under the general law were described as "almost penal", with the result that the mortgagee sought a means whereby he could place in control of the mortgaged premises a party selected by him but without rendering himself liable as being in possession. The power of appointment given to the mortgagee was irrevocable by the mortgagor because the mortgagor had granted it to the mortgagee for value. The matter is explained in the well known judgment of Rigby L.J. in Gaskell v Gosling (1896) 1 QB 669 at 691 et seq, a dissenting judgment affirmed by the House of Lords, (1897) AC 575; see also the discussion in Mr W R D Stevenson's article "Receivers" (1973) 47 ALJ 438 at 443-445.
In Picarda "The Law Relating to Receivers, Managers and Administrators", 2nd ed., 1990, p 115 (an English work in which many Australian decisions are referred to) it is said: -

"A receiver plainly owes duties to the debenture holder who appointed him. And he owes those duties to his appointor both in contract and in tort. His appointment on acceptance becomes a contract between his appointor and himself giving rise to contractual and tortious duties. He will also owe fiduciary duties to his appointor in respect of the realisation of charged assets."

In Gomba Holdings UK Ltd v Homan (1986) 3 All ER 94 at 97, Hoffmann J said that although nominally the agent of the company, the primary duty of the receiver is to realise the assets in the interests of the debenture holder.

The position thus established is supplemented by modern legislation such as s. 324 of the Code and s. 419 of the Corporations Law.
Sub-sections 324(1), (2) of the Code provided: -

"324(1) A receiver, or any other authorized person, who, whether as agent for the corporation concerned or not, enters into possession or assumes control of any property of a corporation for the purpose of enforcing any charge is, notwithstanding any agreement to the contrary, but without prejudice to his rights against the corporation or any other person, liable for debts incurred by him in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased, used, or occupied.

(2) Sub-section (1) shall not be construed so as to constitute the person entitled to the charge a mortgagee in possession."

Section 321 provided that a reference to a receiver in relation to property of a corporation includes a reference to a receiver and manager of property of a corporation. But it should be noted that by reason of other provisions to which I refer later, the receiver may become an officer of that corporation and, as such, have statutory duties to the corporation.

The CBA Appointment specified in paras. (a) - (o) of Schedule 1 the rights and powers which were to be exercisable by the receiver and manager. These paras. (a) - (o) followed those to which I have referred in cl F(3) of the CBA Mortgage. They included a power to carry on the business of Just Juice (para. (c)).
By a deed executed on 29 June 1990 but dated 29 July 1990 the CBA expressly indemnified the Applicant against certain debts and liabilities incurred by him in the course of his receivership ("the CBA Indemnity"). It will be necessary to refer more fully to the terms of this instrument. At general law, the Applicant would have an equitable lien over the assets of the companies to the extent of liabilities "properly incurred" by him: Hill v Venning (1979) 4 ACLR 555 at 556. In addition it is apparent, as Picarda points out, supra at 245, that the importance to a receiver and manager of a proper contractual right of indemnity "can hardly be over-stated." But it is equally important to the appointor that the terms of any express contractual indemnity not damage its interest in the proper conduct of the receivership.
By two deeds dated 29 June 1990 and executed by ABN and the Applicant, ABN appointed the Applicant as receiver and manager of the property defined as the "mortgaged premises" in the securities given by Just Juice, Serita, Agrinello and Sujaca. The Applicant was stated as having all the "powers, authorities, discretions and obligations" conferred or imposed by the relevant security or by statute. He accepted that appointment.
The ABN Mortgages, like the CBA Mortgage, provided for the appointment of a receiver or receiver and manager called the "receiver" who should be the agent of the mortgagor and have wide powers including a power to carry on the business of the mortgagor.
By deeds dated 29 June and 12 July 1990 ABN indemnified the Applicant against debts and other liabilities incurred by him in the course of his receivership ("the ABN Indemnities"). It will be necessary also to refer to these more fully later in these Reasons.
By letter dated 9 June 1992, but delivered 3 days later, CBA determined the Applicant's appointment as its receiver and manager of Just Juice. By letter dated 17 June 1992, ABN determined his appointment as its receiver and manager of Just Juice, Serita, Sujaca and Agrinello.
The Pleadings
The Applicant alleges in his Statement of Claim that between 29 June 1990 and 9 June 1992, whilst trading as the CBA's and ABN's receiver and manager of Just Juice, Serita, Sujaca and Agrinello he incurred the debts and liabilities specified in Schedule 1 to the Statement of Claim (defined in para. 15 as "the Debts"). These exceed $25m of which more than $22m are debts to trade creditors. It is accepted for the purpose of the separate determination of the present questions that all of the debts referred to in the Schedule are in respect of invoices rendered, goods purchased and property hired, leased, used or occupied and that they were incurred by the Applicant in the course of his receivership of Just Juice between 29 June 1990 and 12 June 1992. The Applicant alleges (para. 16) that in respect of each of the Debts he may look to CBA under the CBA Indemnity and to ABN under the ABN Indemnities but that the CBA and ABN have refused any indemnity to the Applicant. The Applicant thus makes a liquidated claim upon CBA and ABN.
The Applicant further alleges that by reason of these matters he is entitled to a lien over assets and undertaking of Just Juice, Serita, Sujaca and Agrinello pending payment to him of such sums as may be required fully to indemnify him for the said debts and liabilities and to provide his outstanding remuneration at the rates agreed with the CBA and ABN. No issue as to remuneration arises on the present Questions before me. By arrangement between the parties set out in a letter from the solicitors for the Respondents to the solicitors for the Applicant, dated 17 June 1992, the terms of which were announced in Court on 18 June 1992, the Applicant delivered up those of the assets of Just Juice, Serita, Sujaca and Agrinello which remained in his possession or under his control. The Respondents accepted that that step had not detrimentally affected any equitable lien to which the Applicant was or would otherwise have been entitled over the assets of those companies. Just Juice and Serita undertook to maintain separate bank accounts to receive all proceeds of realization of their respective assets after delivery of possession or control by the Applicant.
In their Defence, the Respondents deny the entitlement of the Applicant to indemnity and deny that there is any liability in respect of which an equitable lien may attach. No issue concerning the equitable lien arises on the present Questions for separate determination.
In particular, as to the CBA Indemnity, the Respondents plead in para. 5 of the Defence that: -

"(a) the Debts are the result of personal default or neglect of the Applicant or his employees or agents, and accordingly are not within clause 1 of the (CBA) Indemnity; and

(b) the Applicant has not had recourse against any insurance cover or other indemnity available to him under which he is entitled to claim."

The particulars later given of para. 5(a) of the Defence make clear that the Respondents allege that each of the Debts referred to in the Schedules to the Statement of Claim was incurred as the result of the personal default or neglect of the Applicant. By their Cross Claim, CBA, ABN and Just Juice allege that they have suffered loss and damage by reason of the Applicant's breaches of duty, false representations and negligence. They seek to set off an amount recovered against them on the indemnities any damages recovered by them on the unliquidated claims in their Cross-Claim. The particulars to the Defence contain many cross-references to the Cross Claim. CBA contends that the failure of the Applicant to exercise a reasonable degree of care and diligence in his receivership of Just Juice resulted in continuation of trading by the Applicant at a time and in circumstances in which, had the true financial position been known, no one of the Debts would not have been incurred. Either the business of Just Juice would have been sold or trading would have ceased.

In relation to the ABN Indemnities, it is pleaded in para. 7 of the Defence that the Debts

"were not properly incurred by the Applicant in that they arose out of the Applicant's personal default, negligence and breach of duty . . ."

The result is said to be that these obligations are not within the ABN Indemnities.

In the particulars appended to paras. 5 and 6 of the Defence reference is made to paras. 6, 8, 10, 13, 14 and 15-17 of the Cross-Claim. In those paragraphs CBA, ABN and Just Juice allege that the Applicant failed (i) to create adequate accounting records for the efficient control of the business of Just Juice and so as to safeguard its assets, (ii) to conduct adequate account reviews of Just Juice to audit standard in 1990 and 1991, (iii) to investigate accounting deficiencies within Just Juice, (iv) to install appropriate accounting procedures for the credit note system of Just Juice and (v) to supervise the management of that company. It is also alleged against the Applicant (para. 11 of the cross-claim) that between 31 July 1990 and 9 March 1992 he represented to the CBA and ABN that Just Juice was trading profitably in receivership, that its assets were not being depleted and that its business was viable, whereas (para. 12) those statements were false. The particulars state that the year ending 30 June 1991 the net loss incurred by Just Juice was over $3.8m, that in the period 1 July 1991 to 31 December 1991 a trading loss was incurred of more than $5.3m and that for the year ending 30 June 1992 the anticipated net loss is more than $6.4m.
I should set out in full para. 17 of the Cross-Claim: -
"17 If CBA and ABN had known of the falsity of (the

Applicant's) representations set out in para. 11 and the truth of the matters set out in para. 12 at any time since September 1990 then:

(a) CBA and ABN would have requested (the Applicant) to cease carrying on the business of Just Juice and sell the assets of Just Juice; and

(b) if (the Applicant) had not complied with that request, CBA and ABN would have terminated (the Applicant's) appointment and sold the assets of Just Juice themselves."

It is contended (para. 18) that by reason of the Applicant's breaches of duty, misleading conduct and, inter alia, the matters set out in para. 17, each of CBA, ABN and Just Juice has suffered loss and damage.

The particulars of that loss and damage which are appended to para. 18 of the cross-claim fall into 2 parts. In para. (a) it is said that the net assets of Just Juice have deteriorated during the receivership as follows:

DATE BOOK VALUE LIQUIDATION VALUE 30.6.90 $ 6,660,920 $ 3,316,769 30.6.91 $ 598,866 $ (6,215,932) 31.12.91 $(7,154,117) $(14,492,728)

It is alleged that as a result the assets of Just Juice available to the secured creditors have deteriorated. Paragraph (b) of these particulars to para. 18 is in the following terms: -

"(b) If (which is denied) CBA and ABN are liable to indemnify (the Applicant) for liabilities incurred by (the Applicant) in the course of his acting as receiver and manager of Just Juice (which liability is claimed by (the Applicant) in the amount of $25,830,143.62) that liability would not have been incurred but for the reliance by CBA and ABN on (the Applicant's) representations as set out in paragraph 16 and 17 above."

The relief sought in the cross-claim includes a declaration that CBA and ABN are not liable to indemnify the Applicant in respect of debts incurred by him as Receiver and Manager of Just Juice. As I have said, an order is sought that any amount as to which they are obliged to indemnify him be set off against damages payable by him to the Banks. No Defence to the Cross-Claim has been filed.
The Debts are said by the Respondents to have been improperly incurred or incurred as result, over the course of the receivership, of default or negligence of the Applicant, and by reason of his breaches of various duties. It is alleged that within the meaning of sub-s. 232(1) of the Corporations Law the Applicant was an officer of Just Juice and that thereby, by reason of sub-s. (4), he owed a duty to Just Juice to exercise a reasonable degree of care and diligence in the exercise of his powers and in the discharge of his duties. He is also said to have owed a duty in tort to Just Juice to exercise a reasonable degree of care and diligence in acting as receiver and manager of Just Juice. Those duties are said to have been breached by the Applicant's gross negligence.
As regards CBA and ABN, the Applicant is said to have owed to each of them a duty to exercise reasonable care in doing acts and making statements as receiver and manager of Just Juice. The Applicant is alleged to have failed to exercise a reasonable degree of care in the discharge of his office and to have made negligently certain misrepresentations. The misrepresentations also are alleged to have been misleading or deceptive conduct or likely to mislead or deceive within the meaning of s. 42 of the Fair Trading Act 1987 (NSW).

In the Cross-Claim, CBA, ABN and Just Juice also allege against the Second Cross-Respondent, Ernst and Young that the wrongful acts or omissions alleged against the Applicant were those of the Applicant acting in the ordinary course of business of that firm, of which he was a partner. It is then said that, by reason of the operation of s. 10 of the Partnership Act 1892 (NSW), the firm is liable for the loss of CBA and ABN to the same extent as the Applicant. Nothing presently turns upon this portion of the Cross-Claim.
The Questions
The questions for separate decision require important and extensive assumptions of fact. Those fact have not been proved at trial. The Questions are as follows: -

"On the assumption that each of the matters set out in para. 5(b) of the Defence and set out as particulars to paragraphs 5 and 6 of the Defence are established:

(a) Upon the proper construction of the CBA Indemnity is the First Respondent presently obliged to indemnify the Applicant in respect of the debts referred to in Schedules 1 and 2 to the Statement of Claim?

(b) Upon the proper construction of the ABN Indemnity is the Second Respondent obliged to indemnify the Applicant in respect of the debts referred to in Schedules 1 and 2 to the Statement of Claim?

and

(c) If the answer to (a) or (b) is "yes", are the First Respondent and the Second Respondent or either of them entitled to set off against their obligation to indemnify the Applicant, any damages which may be payable by the Applicant to those Respondents or either of them arising out of the matters pleaded in paras. 6, 8, 10, 13, 14 and 15-17 of the cross-claim?"

The CBA Indemnity

I turn now to the text of the CBA Indemnity. It recites that CBA is mortgagee under the CBA Mortgage, that Just Juice is in default under the terms of that security, that CBA has become entitled to appoint a receiver and manager of the undertaking, property and assets of Just Juice, that the Applicant has agreed to act as receiver and manager "under and pursuant to Clause F(3)" of the security, and that he has been so appointed by deed. The operative portion of the CBA Indemnity comprises 4 clauses. They are as follows: -

"(1) The (CBA) will indemnify the Receiver and keep him indemnified against all losses claims actions and proceedings sustained or suffered by the Receiver and all liability for all debts incurred by the Receiver arising out of his acceptance of appointment as receiver and manager under the Mortgage and all or any acts performed by him in such capacity except to the extent that the same are the result of personal default or neglect of the Receiver or his employees or agents or any of them.

(2) The Receiver before claiming on the indemnity herein shall first have recourse against any insurance cover or other indemnity available to him if entitled to claim thereunder.

(3) The remuneration of the Receiver shall be an amount equal to the charge for the time actually spent by him, his partners or employees in performing the duties of receiver and manager provided that such charge shall be calculated at rates not exceeding the maximum rates recommended from time to time by the Insolvency Practitioners Association of Australia for work of that nature.

(4) The Receiver will keep the (CBA) informed regarding his actions as receiver and manager and will furnish to the

(CBA) such reports and accounts and give to the (CBA) such details and general information concerning the progress of the recovery and realisation of the assets of the Mortgagor as the (CBA) may require."

(Emphasis supplied)

Exhibit D comprises portions of Ernst and Young's professional indemnity policy for 1991-1992. I accept the submission for the Applicant that by its nature this policy is concerned with claims in respect of the conduct of professional business rather than with the provision of cover in respect of the debts for which the claim for indemnity is made against the CBA. I accept that there is no present availability to the Applicant of recourse against any insurance cover, within the meaning of cl. 2 of the CBA Indemnity.
So far as concerns the Applicant's equitable lien over the assets and undertaking of Just Juice and the other companies, he is not in a position to exercise that lien and so avail himself of any indemnity it affords him. This is a consequence of the arrangement to which I earlier referred whereby, whilst his lien is not prejudiced, the Applicant has relinquished control of the assets and undertakings of the companies in question.
However, if the Applicant be correct as to his entitlement to claim thereunder, the ABN Indemnities are indemnities to which cl. 2 of the CBA Indemnities does apply. The result of this is that before claiming on the CBA Indemnity the Applicant is obliged by cl 2 of the CBA Indemnity first to have recourse against ABN under the ABN Indemnities. Counsel for the Applicant indicated that if his client had first to avail himself of those indemnities then he was content to abide that result.
Nevertheless, I should consider whether the Applicant does have a right of recourse against the CBA Indemnity, albeit one to be exercised after such rights as he has under the ABN Indemnities. The answer to this question involves the construction of cl 1 of the CBA Indemnity, in particular the phrase "except to the extent that the same are the result of personal default or neglect of the Receiver or his employees or agents or any of them."
I have referred earlier to the reasons for the practice, exemplified in the present case, of drawing securities so as to provide for the receiver to be agent of the corporation granting the security to the lender which appoints the receiver. In a sense, as Professor O'Donovan indicates in "Company Receivers and Managers", 2nd ed., para. 11.10, the result is that the receiver has concurrent obligations. Nevertheless, as the learned author and the other authorities to which I have already referred point out, given the special and limited agency of the company, the receiver primarily is responsible to the party appointing him, the debenture holder.
There was no dissent by counsel for the Applicant from the adoption by counsel for the Respondents of the following general statement of the duties of a receiver and manager appointed under a charge over the property of a corporation. The extract is from Blanchard "The Law of Company Receiverships in Australia and New Zealand", 1982, para. 1101: -

"In general terms the duties of a receiver appointed under a debenture are by realisation or profitable management of the assets of the debtor company to produce cash and to apply it in or towards payment of the preferential creditors, meeting his own expenses and remuneration, paying off any security ranking ahead of the debenture and repaying the amount owing under the debenture. Thereafter he must account to the company for any surplus funds. In undertaking these tasks he must exercise his powers in good faith and, it is submitted, without acting in a manner which is negligent in the particular circumstances. He must also observe certain duties cast upon him by statute."

The Respondents submit that the CBA Indemnity and the ABN Indemnities, being instruments of express indemnity, should be construed against the background of the relevant general law as to what otherwise would be the Applicant's rights of indemnity. They point out that at general law an agent under a contractual agency has in his favour an implied term for his reimbursement and indemnification by the principal, but that this term does not extend to indemnity from the principal against losses and liabilities incurred in consequence of the agent's negligence, default or breach of duty: "Bowstead on Agency", 15th ed., 1985, by Mr F M B Reynolds, pp 246-256. That proposition has been applied to receivers: Picarda supra p 248.
The Respondents submit that the assumed facts establish that the conduct of the Applicant of which they complain constitutes personal neglect or default. I have referred to the common law and statutory duties in question. The Respondents further submit that the assumed facts establish that each of the Debts in respect of which the indemnification is sought was incurred as a result of the default and neglect of the Applicant. In particular they point to the statement of CBA that had the true position been revealed to it the Debts would not have been incurred. They further submit that the expression "personal neglect or default" is wide enough to encompass breaches by the Applicant over the course of his receivership of his duties both to Just Juice and to CBA. This is said to flow from the nature of the duties of the receiver as I have described them and from the need to examine the existence of default or neglect in the context of both sets of relationship, that between the receiver and the company and that between the receiver and the secured creditor.
On the other hand, counsel for the Applicant submits the question is not whether the debts incurred by the receiver and for which he seeks indemnity are "the result of" his "personal default or neglect" in the sense that "but for" that neglect or default the debts may not have been incurred. The contention is that the phrase "the result of" relates to "personal default or neglect of the receiver directly in the incurring of the debts." The submission looked to the "intrinsic" nature of the transaction as between the receiver and the creditor, asking whether the contract which produced the debt was inappropriate for the business then being carried on.
One difficulty with such a proposition is that cl. 1 of the indemnity is plainly not concerned merely with debts incurred in the ordinary course of business of Just Juice. In terms, it is concerned with liability for debts incurred by the Applicant "arising out of his acceptance of the appointment" and of "acts performed by him in that capacity." The "personal default or neglect" of which cl. 1 of the CBA Indemnity speaks, in my view, is directed to the personal default or neglect of the Applicant in the discharge of the office, the appointment to which by CBA he accepted.
I accept that it follows from the assumed facts both that the Applicant was guilty of personal default or neglect in the conduct of his receivership and that the incurring of each of the Debts was, in an immediate sense, the result of personal default or neglect of the Applicant.
Accordingly, I would answer question (a) "No".
The ABN Indemnity
The ABN Indemnity dated 29 June 1990 is concerned with the Applicant's appointment as Receiver and Manager in relation to securities given by Just Juice, Agrinello and Serita. That of 12 July 1990 is concerned with securities given by Sujaca. There is, for present purposes, no material difference between the terms of the ABN Indemnities. I set out relevant extracts from the first of the ABN Indemnities and treat the Questions concerning "the ABN Indemnity" as directed to this instrument.
This recites that the Applicant has requested an indemnity from ABN against any liability, loss or damage which he may incur and claims and demands which may be made against him "in the course of or arising out of the said receivership". It also recites that ABN, defined therein as "the Bank" has agreed to provide an indemnity "on the terms and conditions hereinafter set forth". Clauses (1) and (2) state: -

"(1) The Bank agrees with the Receiver and his legal personal representatives that it will at all times hereafter save harmless and keep indemnified the receiver from and against:

(a) all his liability under section 324(1) of the Companies (New South Wales) Code for debts properly incurred by him in the course of the said receivership for services rendered, goods purchased and property hired, leased, used or occupied,

(b) all his liability (if any) for debts properly incurred by him in the course of the said receivership additional to those mentioned in the said section 324(1) including monies borrowed and interest thereon;

(c) all actions, proceedings, accounts, claims, demands, awards, judgments and verdicts whatsoever arising out of or in the course of the said receivership and whether as a result of the acts or omissions of the Receiver or otherwise which may be brought, made or awarded against the Receiver or his legal personal representatives by any person or corporation whatsoever, without limiting the generality of the foregoing, the Companies and any shareholder or shareholders of the Companies, any director or directors of the Companies, any liquidator of the Companies, any official manager of the Companies, any creditor or creditors, secured or unsecured, of the Companies and any receiver or receiver and manager or receivers and managers appointed by any such creditor or creditors, against all costs, charges and expenses incurred by the Receiver in respect thereof PROVIDED ALWAYS that the Receiver shall not be entitled to any indemnity under this paragraph (c) in respect of any costs, charges or expenses arising out of or in relation to any fraudulent or negligent act or omission in the exercise or performance of his duties, powers or authorities as receiver and manager, and

(d) any liabilities, actions, proceedings, accounts, claims, demands, loss and damage whatsoever (including all proper costs, charges expenses and remuneration of the Receiver) howsoever arising out of or as a result of:

(i) any defect whatsoever in the appointment of the Receiver by the Bank;

(ii) any defect whatsoever in the legality, enforceability or validity of or the illegality, unenforceability or invalidity of the Charges;

(iii) any cancellation or cessation of the appointment of the Receiver, or the Receiver refusing to act or refusing to continue to act by reason of:

(a) the appointment of a liquidator either by a court or a creditor, creditors or members of the Companies; or

(b) the appointment of an official manager of the Companies either before or after the appointment of the Receiver.

(2) This deed shall not nor shall anything herein contained affect or prejudice all or any such rights (if any) that the Receiver may have against the Companies or any other person to be indemnified the costs, charges, expenses and liabilities incurred by the Receiver in or incidental to the exercise or performance of any of the duties, powers or authorities conferred by the Charges or otherwise in relation thereto."

The Applicant contends that the debts in respect of which the indemnity is claimed against ABN were debts "properly incurred by him" in the course of the said receivership within the meaning of sub-cls. 1(a), (b) of ABN Indemnity. He submits that this phrase identifies debts incurred in and for the purposes of the business being carried on by the receiver and that whilst questions of reasonableness may be involved, debts "are not properly incurred, if for reasons extraneous to the incurring of those debts, the business may not have been traded." The consequence of holding otherwise would be, it is said, to subject a receiver under an indemnity drawn in this fashion "to extreme commercial risk for negligence". This is because he would be unable to obtain indemnity in respect of all of the debts incurred by him even if "this did not represent the true measure of loss".
I accept the submission by counsel for ABN that the determination of whether a debt was properly incurred by the receiver in the course of the receivership involves an examination of the duties imposed upon him by virtue of his acceptance of the office of receiver. Accordingly, the inquiry as to whether a debt was properly incurred within the meaning of cl 1 of the ABN Indemnity is not necessarily restricted to an examination, in isolation or as between the receiver and the trade creditor, of the transaction which created the liability for which the receiver seeks recoupment under a contract of indemnity with the secured creditor which appointed him as receiver.
In particular, the receiver, in exercising the powers given him by his appointment was obliged to meet certain standards of conduct. I have referred to the position at general law. As I have indicated, if the Debts were incurred in consequence of negligence default or breach of duty in improper performance of the Applicant's duties as receiver, the Debts would not attract an obligation to indemnify by applicant. The Debts would not have been properly incurred.
Do the express terms of the ABN Indemnity produce a different result by use of the term "properly incurred" in a particular context?
Some assistance, by way of analogy, is provided by the rule that a trustee is entitled to reimbursement for monies paid for expenses "properly incurred" in the execution of the trust. The phrase "properly incurred" has been construed as meaning "reasonably as well as honestly incurred" (In re Beddoe (1893) 1 Ch 547 at 562) and the inquiry may extend to an examination of the general performance by the trustee of the "duty to execute the trust with reasonable diligence and care": RWG Management Limited v Commissioner for Corporate Affairs (1985) VR 358 at 396.
The assumed facts show that over the course of the receivership the Applicant has been guilty of breaches of several of the duties owed both to CBA and ABN (and also of duties owed to Just Juice) and that had the true trading position been revealed at any time since September 1990 the banks would have requested the Applicant to cease carrying on the business of Just Juice and sell the assets of Just Juice. If the Applicant had not complied with that request the banks themselves would have terminated his appointment. The Debts in respect of which the indemnity is sought then would not have been incurred.
The Respondents have rightly emphasised that what is required by the terms of the ABN Indemnity is not that each of the Debts be properly incurred by the receiver in some isolated sense, but that it be "properly incurred by him in the course of the said receivership." I accept the submission that on the assumed facts, each of the Debts was incurred as the result of the improper conduct of the receivership and that it was not properly incurred in the course of that receivership within the meaning of cl 1 of the ABN Indemnity.
Each side placed some reliance upon the proviso to sub-cl. 1(c) of
the ABN Indemnity. This paragraph is directed not to debts but to actions, proceedings, claims, verdicts and the like arising out of or in the course of the receivership and certain "cost charges or expenses" are excluded. These are identified as arising out of or in relation to "any fraudulent or negligent act or omission in the exercise or performance" by the receiver of his "duties, powers or authorities." The Respondents say that the debts in respect of which the Applicant seeks indemnity would answer, on the assumed facts, the description of debts arising out of or in relation to negligent acts or omissions in the exercise or performance of the duties, powers or authorities of the Applicant as receiver and manager. The Applicant responds that the express advertence in para. (c) to the consequences of fraudulent or negligent acts or omissions suggests that the absence of any such express terms in a proviso to paras. (a) and (b) was intentional.
I accept that the longer form of words in the proviso to para. (c) encapsulates a similar concept to that of debts properly incurred found in paras. (a) and (b). When concerned with particular debts as the subject of the indemnity they may directly be identified in the first instance as "debts properly incurred", rather than by insertion of the qualification in an express proviso. On the other hand, if the subject matter of the indemnity, as in para. (c), is actions, proceedings, demands and judgments which are not consensual in nature but which are rather are suffered by the receiver, a phrase such as "properly incurred by him" is inapt. Hence the appropriateness in para. (c) of the use of a proviso to impose a limitation in respect of actions, proceedings, judgments and the like which arise out of or in the course of the receivership, whether as a result of his acts or omissions or otherwise, for which the indemnity otherwise is given by the instrument.

As the Respondents pointed out, it would be an odd result if in respect of actions, proceedings, and judgments which arose out of or in the course of the Applicant's receivership, there was no indemnity for costs, charges or expenses arising out of or in relation to any negligent act or omission in the exercise by the receiver of his duties, powers or authorities, whilst a debt arising out of or in relation to any negligent act or omission by him in the exercise or performance of his duties, powers or authorities might nevertheless be within paras. (a) and (b) because of the clause of the narrower meaning of the expression "properly incurred by him".
In my view, the answer to question to (b) should be "no".
As will have been apparent, I have reached my conclusion on both questions (a) and (b) without the need to rely upon what is said in various authorities to be a principle of a construction that to be effective to indemnify in respect of loss caused by negligence of the party indemnified, clear and unambiguous language must be used and that the contract is to be construed strictly in favour of the indemnifier: Canada Steamship Lines Ld v The King (1952) AC 192 at 208, 211-214, O'Donovan and Phillips "The Modern Contract of Guarantee", 1985, pp 149-150.
Equitable Set-off
The third question does not arise if the first two are answered "No". Nevertheless, in view of the full argument and importance of the matter, I should state my conclusion as to what would have been the position, on the assumed facts, if there was a liquidated claim under the indemnities, met with the unliquidated claim on the Cross-Claim.
There not being two liquidated claims, it was accepted that no question of legal set-off could arise. The submissions dealt with equitable set-off.
The Applicant submits that for there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or "impeach" the "title" of the Applicant. He submits that it is not sufficient that there be merely countervailing claims which are mutual and which arose out of the same transaction.
The Respondents accept this but point in particular to para. (b) of the particulars to para. 18 of the cross-claim. I set this out above. The liability claimed by the Applicant on the indemnities, for the debts identified in the Schedules to the Statement of Claim (being more than $25m), would not have been incurred but for the reliance by CBA and ABN upon representations by the Applicant set out in para. 16 and 17 of the cross-claim. I have referred to these earlier in these reasons.
As will appear, there is a number of cases in which A's breach of duty or obligation owed to B has brought about or at least contributed to the existence of B's liability to A and in which an equitable set-off has been allowed.
The applicable principles in this Court appear from the judgment of the Full Court in J and S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 61 FLR 108 at 127. Namely, equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from his adversary's demand and the mere existence of cross demands is not sufficient. As authorities for those propositions, the Full Court cited Rawson v Samuel (1841) Cr and Ph 161 at 178, 41 ER 451 at 458, and Welton v Harnett (1886) 7 NSWR 74 at 76. Rawson v Samuel was approved and applied, in terms, by Griffith C.J. (with whom Barton J agreed) in Hill v Ziymack (1908) 7 CLR 352 at 360-362. That decision, together with J and S Holdings supra is binding upon me.
Rawson v Samuel has been applied by the New South Wales Court of Appeal in Covino v Bandag Manufacturing Pty Ltd (1983) 1 NSWLR 237 at 238, by the Victorian Full Court in Indrisie v General Credits Limited (1985) VR 251 at 254, by Dunn J in General Credits (Finance) Pty Ltd v Stoyakovich (1975) Qd R 352 at 355-6 and by Olney J in W Pope and Co Pty Ltd v Edward Sovery and Co Pty Ltd (1983) WAR 117 at 122.
With reference to the judgment of Lord Cottenham LC. in Rawson v Samuel, Lord Wilberforce and Lord Simon of Glaisdale have pointed to the need for some ground for equitable intervention beyond the mere existence of a cross-claim and to the requirement that the equity "impeach the title to the legal demand": Aries Tanker Corporation v Total Transport Ltd (1977) 1 All ER 398 at 404-5, 406-7.
In Rawson v Samuel itself, the defendants had agreed to arrange for the sale of the plaintiffs' goods in the East Indies, and the plaintiffs had agreed to accept bills of exchange drawn on them by the defendants. On an application by the defendants for a common injunction, the Lord Chancellor (on appeal from the Vice-Chancellor) refused to enjoin the plaintiff who had commenced an action at law for damages for breach of contract. The injunction was sought because of the unsettled account pending between the parties. The defendants alleged that the plaintiff had been guilty of misconduct in drawing for bills for larger sums than the value of the goods justified, and other matters. It was submitted that the ultimate balance of the account might exceed the amount of the judgment at law but Lord Cottenham LC pointed out that the suggested equity must rest upon a complicated and unsettled account and that it could not be assumed the balance of account would favour the judgment debtor at law. If the balance should be the other way, there would be nothing to compensate the judgment creditor for the injury that would have been sustained by the delay in enforcing the judgment. His Lordship referred to cases cited in support of the application for the injunction, pointing out that in every one "the equity of the bill impeached the title to the legal demand."
I should refer briefly to some decisions illustrative of the operation of the these principles. They show that the requirement of "impeachment" and the phrase "title to the legal demand" have not been narrowly construed.
In Piggott v Williams (1821) 6 Madd 95, 56 ER 1027, Sir John Leach V-C held that there was a clear case of equitable set-off where, to a bill for foreclosure of an estate pledged to the plaintiff solicitor as security for costs, there was a cross-claim by the client that the costs claimed would not have been incurred had the solicitor conducted himself with "integrity, skill and attention." Woodward J, sitting as a Judge of the Supreme Court of the Australian Capital Territory, dealt with the subject in D Galambos and Son Pty Ltd v McIntyre (1974) 5 ACTR 10. His Honour held that an unliquidated claim for damages for breach of a building contract (arising, for example, from delay) might be set-off against claims for money due under the contract and that even where one of the claims is not in terms based upon the contract, but flows out of and is directly connected with it, a court of equity may recognise a set-off. To the same effect is the decision of Barker J in Popular Homes Ltd v Circuit Developments Ltd (1979) 2 NZLR 642 at 659-60. The plaintiff, a building contractor, claimed damages for breach of contract. The defendant had promised to provide it with secured finance for a development project by a series of advances, but had defaulted. Barker J held that the default in providing all of the promised finance was a direct cause of the plaintiff's inability to complete the project and repay the mortgage, and that before the defendant was permitted to enforce the mortgage against the plaintiff equity would allow a set-off of the damages caused by the defendant's breach.
On the other hand, in Eagle Star Nominees Limited v Merril (1982) VR 557, Tadgell J, after discussing many of the authorities, held that no equitable set-off was available. The plaintiff vendor, under a terms contract which provided for the defendant purchaser to go into possession, sought recovery of possession of the land following default in the payment of instalments. His Honour was prepared to assume that the plaintiff's claim might be characterised as a claim for payment of the balance of the purchase price and not merely as a claim for possession. The defendant asserted a claim to unliquidated damages for breach of a contract by the plaintiff to assign a policy of insurance in respect of the contents of the premises. Tadgell J held, at 561:-

"There is no suggestion on the defendant's part that his purchase was dependent on or induced or even influenced by the assignment of the policy which he says or infers was promised; and there is no room for an implication to that effect. The plaintiff's promise, assuming it was made and is enforceable, was collateral but subordinate to the contract of sale; and no question of fraud or any other question which might cause equity to intervene was raised. It follows that the plaintiff's claim owes nothing to any right, legal or equitable, which the defendant asserts and is not impeachable by any equity to which the defendant can refer."

(Emphasis supplied).

This judgment was approved by the Full Court in Indrisie v General Credits Limited supra.

It is not, of itself, an objection to the availability of equitable set-off that either or both of the legal demands is made pursuant to a statute which creates new obligations and rights which give rise to debts or liabilities in unliquidated damages. The issue will be whether expressly or by necessary implication the statute excludes what otherwise would be the operation of equitable set-off upon those statutory debts and liabilities; see McPherson v Minister for Natural Resources (1990) 22 NSWLR 671 at 682-3 affd. 687.
In Rawson v Samuel the Lord Chancellor referred to the impeachment of "the title to the legal demand" not merely the right to obtain judgment on the demand; see Derham "Set-Off" 1987, p 48. Nevertheless, these authorities, particularly Piggott v Williams (which antedates Rawson v Samuel), suggest that it is sufficient that the existence of the legal demand, in this case the Applicant's claims to payment by the banks on the indemnities, would not have come about or were at least contributed to by the Applicant's own breaches of duty owed to the banks. In Rawson v Samuel (at 180, 459) the Lord Chancellor expressly approved Piggott v Williams, saying that "the complaint against the solicitor for negligence went directly to impeach the demand he was attempting to enforce".
Upon the assumed facts the banks would have the equitable set-off they assert if, contrary to the answers to questions (a) and (b) they were obliged to indemnify the Applicant under the respective indemnities. However, in the light of the answers to the other questions, the answer to question to (c) is "Unnecessary to answer."
In other jurisdictions there appears to have been some loosening in the requirement of impeachment. I was referred to various authorities and should say something about them. The actual results in these cases may not have differed if orthodox principle had been applied, but that is not the reason they attract attention. In Bank of Boston Connecticut v European Grain and Shipping Ltd (1989) AC 1056 at 1103, 1106, in the course of denying the availability of an equitable set-off in the facts before it, the House of Lords approved a formulation which treats as sufficient for an equitable set-off a cross-claim "flowing out of and inseparably connected with the dealings and transactions which also give rise" to the principal claim. Decisions in England, New South Wales and New Zealand have accepted a dilution of the impeachment requirement in similar but varying formulations.
Thus, equitable set-off was said to be available "whenever the cross-claim arises out of the same transaction as the claim; or out of a transaction that is closely related to the claim": The Brede (1974) QB 233 at 248. This was said to be a consequence of the Judicature system of fused procedure. Then it was said that in addition, or as an alternative (this was not made clear) the cross-claim must be "so closely connected with (the plaintiff's) demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim": Federal Commerce and Navigation Co Limited v Molena Alpha Inc (1978) 1 QB 927 at 974-5. In Grant v NZMC Ltd (1989) 1 NZLR 8 at 12-13, the New Zealand Court of Appeal said: -

"The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract."

No further indication is given as to what amounts to injustice or unfairness in this formulation. Finally, it has been said the ultimate test is whether, having regard primarily to the relationship and closeness of connection between the two claims and the general conduct of the parties, it would be unjust or inequitable that a plaintiff should be allowed to proceed with its claim without regard to the claim of the defendant: AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705, Australian Mutual Provident Society v Specialist Funding Consultants Pty Ltd (1991) 24 NSWLR 326 at 328-329.

In some of these cases Rawson v Samuel was treated as still representing the law, albeit after reinterpretation. In others it was, in effect, bypassed. In all of the above cases reliance is placed directly or indirectly upon Hanak v Green (1958) 2 QB 9, in which, in turn, reliance was placed (at 25, 30-31) upon what was said by the Privy Council in The Government of Newfoundland v The Newfoundland Railway Company (1888) 13 App Cas 199. It is in that case that there appears the phrase recently accepted by the House of Lords, "flowing out of and inseparably connected with dealings and transactions which also give rise (to the plaintiff's claims)." But, as will became apparent, this must be read in its context.
The difficulty with any acceptance of the Newfoundland case as qualifying or explaining what was said in Rawson v Samuel is the analysis given the Newfoundland case by the High Court in a decision which, of course, binds me: McDonnell and East Limited v McGregor (1936) 56 CLR 50, on appeal from the Supreme Court of Queensland.
Further, the procedural changes introduced by the Judicature system do not alter substantive rights and thus do not change the doctrine of equitable set-off. That has been affirmed by various courts, including the High Court and the House of Lords. See, in particular, Stumore v Campbell and Co (1892) 1 QB 314 at 316-7, 318, 318-9, McDonnell and East Limited v McGregor supra at 60-61, Edward Ward and Co v McDougall (1972) VR 433 at 436-9, Covino v Bandag Manufacturing Pty Ltd supra at 238, Bank of Boston Connecticut v European Grain and Shipping Limited supra at 1109.
In the Newfoundland case a railway construction company had assigned its rights to subsidy under contract with the Newfoundland government to trustees for bond holders from whom it had raised finance. It was assumed that the local equivalent of sub-s. 25(6) of the Judicature Act 1873 (UK) (in New South Wales, s. 12 of the Conveyancing Act 1919 (NSW)) applied to that assignment. The statute provided that the assignee took "subject to all equities which would have been entitled to priority over the right of the assignee if this Act had not been passed." These "equities" included claims which might have been set-off in equity, thereby in a Judicature system affording a defence to a claim. They also included cross-demands which, whilst affording no defence and giving rise only to a counter-claim, under the old system would have founded a common injunction against the enforcement of the plaintiff's claim.
As between the railway construction company (the assignor) and the government, it was conceded that in response to the claim for subsidy payments which had accrued under the contract before it had been abandoned by the contractor, the government might counter-claim for damages for breach of that contract. The argument (at 210) was that no "equity" within the assignment statute existed because when assigned the accrued debt representing the right to the subsidy payments was "so severed" from the rest of the construction contract that the assignee, the trustees for the bond holders, held it free from any counter-claim arising from the other terms of the same contract. The trustees for the bond holders submitted that the result was that they could recover this accrued debt from the government without allowance for the government's claim in damages against the assignor.
These submissions were rejected (at 211, 213). Their Lordships said:

"Unliquidated damages may now be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment."

In McDonnell and East Limited v McGregor supra at 59-60 Dixon J referred to the distinction between a set-off and a cross-demand and to the apparent deviation from that position by the Privy Council. His Honour said that the framers of the Judicature rules had not sought to make a hard and fast decision between the expressions "set-off" and "counter-claim". A cross-demand might now be used in the same proceeding whether it would have amounted to a defence or been only the subject of an independent proceeding. Dixon J then said of the advice delivered by Lord Hobhouse:

"His Lordship was then dealing with a question whether an assignee of a contract could recover moneys arising under it without being met by a counterclaim for breaches by the assignor of the same contract. He did not, I think, intend to institute a comparison between set-off in the strict sense and counterclaim. It would have been irrelevant to institute such a comparison. In fact he was dealing with liability under a counterclaim, and the conclusion of the board which is stated at pp 213, 214, again makes it clear that not a set-off but a counterclaim was allowed by the judgment."

The matter is further explained by Dr Spry QC in his article "Equitable Set-Offs" (1969) 43 ALJ 265 at 268-270. The analysis recently offered by the House of Lords in the Bank of Boston Connecticut (at 1110-1111) may differ from that of Dixon J, but it was made without regard to the High Court decision.

It follows, in my view, that in this Court the Newfoundland case does not provide a good juridical root for any changed doctrine of equitable set-off.
However, as I have indicated, consistently with established principle, if in the present case the answers to questions (a) and (b) had been in the negative, the answer to question (c) would have been answered favourably to the existence of a right of equitable set-off.
The Applicant should pay the cost of the Respondents of and incidental to the determination of the questions for separate decision.

[1992] FCA 617

31 AUGUST 1992