Lumby v Corportex
[2004] NSWSC 924
•8 October 2004
CITATION: Lumby v Corportex [2004] NSWSC 924 HEARING DATE(S): 14 September 2004 JUDGMENT DATE:
8 October 2004JUDGMENT OF: Barr J at 1 DECISION: See paras 21 and 22. PARTIES :
Lumby Pty Limited v Corportex Pty Limited and Anor FILE NUMBER(S): SC 11875/2003 COUNSEL: Plaintiff: M Cohen
Defendant: S IvanstoffSOLICITORS: Plaintiff: Gadens Lawyers
Defendant: Minerva Technology Lawyers
IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
POSSESSION LIST
GRAHAM BARR J
11875/03 LUMBY PTY LIMITED v CORPORTEX PTY8 October 2004
- LIMITED AND ANOR
1 HIS HONOUR: This is a motion for summary judgment. The evidence establishes that on 7 April 2000 the plaintiff, Lumby Pty Limited (Lumby), and the first defendant, Corportex Pty Limited (Corportex), entered into an agreement for a loan by Lumby to Corportex of amounts not exceeding $200,000, called a trade a trade finance agreement, and Lumby, Corportex and the second defendant, Norman Heinz-Jurgen Mendelsohn, a director of Corportex, entered into an agreement by which Mr Mendelsohn guaranteed the obligation of Corportex to Lumby under the trade finance agreement. On 20 June 2000 Lumby and Corportex agreed that the amount to be lent should increase to $ 600,000 and Mr Mendelsohn executed a second mortgage over certain property of which he was the registered proprietor. The mortgage included terms that Mr Mendelsohn would pay Lumby all money due under the guarantee in default of which Lumby would be entitled to possession of the property. On 17 October 2000 the trade finance agreement was varied a second time to provide for the lending of up to $900, 000. Between 10 April and 28 July 2000 Lumby lent to Corportex sums totalling $899,890.15 under the provisions of the trade finance agreement as varied. Except for the payment of the security deposit of $45,000 and payments totalling $238,792.17 Corportex failed to pay Lumby any amount owing under the trade finance agreement. Corportex and Mr Mendelsohn were in default of their obligations under the arrangements constituted by the trade finance agreement, the guarantee and the mortgage. On 9 May 2002 receivers and managers were appointed to Lumby under the provisions of a deed of charge. On 20 November 2002 Lumby made a demand in writing on the defendants to pay all amounts due and owing. They did not pay. By 10 July 2003 their total indebtedness was $1,978,815.87.
2 The question for the court is whether the matters deposed to in Mr Mendelsohn’s affidavit sworn on 9 September 2004 raise a real question to be tried. Mr Mendelsohn says that Corportex carried on its business in a certain warehouse. On 6 January 2001 fire destroyed the warehouse and all Corportex’s stock and records except a disk containing its accounting records. As a result of the fire Corportex became unable to trade and unable to pay amounts due under the trade finance agreements. The principal sum then owing was $899,890.15. Because of a lack of funds, later attempts by Corportex to trade met severe difficulties. Corportex had an insurance policy and a loss assessor was appointed to assess its loss and make submissions to its insurer, GIO Insurance. The trade finance agreement provided for interest at one rate if payments were made on time but for a higher rate if they were not. Corportex also had to pay a risk fee and, if payments were not made within 90 days of their due date, a higher risk fee. In May 2001 Mr Mendelsohn met Mr Samson, managing director of Lumby, to talk about Corportex’s debts. There was this conversation -
Mendelsohn : Corportex has been totally destroyed by the fire. We’ve been wiped out. All records except for accounting records stored on computer disk and stock have been destroyed. The company is unable to make payments under the Trade Finance Facility until it is re-established, but if the penalties are going to apply, there is no point even trying. It may as well go down now.
Samson: Lumby will support Corportex by charging only what it is charged by our bankers, and the lower rate of interest, until it can re-establish itself. I am more interested in the company surviving and doing more business. What can you give me to make my position with the bank easier?
Mendelsohn: If necessary, I will refinance or sell my home.
Samson: OK, refinance and make the payments up, but don’t worry about the penalties. Your staying in business meets both our goals.
3 No further money was paid. By September 2001 the insurance claim had still not been met and Mr Mendelsohn wrote a letter to Mr Samson. Omitting formal parts, it was as follows –
FURTHER TO OUR RECENT DISCUSSIONS ABOUT THE INTENDED SALE OF MY PERSONAL PROPERTY AND OR THE SETTLEMENT OF THE INSURANCE CLAIM. WE AGREED THAT ALL OUTSTANDING COST BOURNE (sic) BY LUMBY FINANCE WILL BE INCLUDED IN ANY SETTLEMENT, HOWEVER SUBJECT TO HOW SUCCESSFUL WE ARE WITH OUR INSURANCE CLAIM, IT IS AGREED THAT THE PENALTY PAYMENTS WILL BE GREATLY REDUCED. THE FINAL PAYMENT OF THESE PENALTIES WILL BE NEGOTIATED ONCE THE CLAIM HAS BEEN PAID AND WILL BE BASED ON WHAT IS LEFT AFTER PAYING THE SECURED CREDITORS.
HARRY, WE MUST BE REALISTIC ABOUT THIS AREA AS IT COULD OTHEWISE END UP A GREATER AMOUNT THAN THE INTEREST WE WOULD OWE YOU, AND IT WOULD BE MORE PRUDENT TO WIND UP THE COMPANY NOW, RATHER THAN INCUR SUCH A GREAT FURTHER DBT.
I AGAIN THANK YOU FOR YOUR CONTINUED SUPPORT .
4 Late in 2001 or early in 2002 an accountant, Mr Peter Hillig, who had been engaged by Lumby to restructure its business and manage its debtors, said this to Mr Mendelsohn –
Any amount you raise from the sale of the property will be taken off the principal debt owed to Lumby.
5 On 15 April 2002 Mr Mendelsohn borrowed money on the secured property and paid Lumby the sum of $238,972.17.
6 Mr Mendelsohn said in an affidavit sworn on 9 September 2004 that if that he had been told in September 2001 that Lumby was going to enforce the trade finance agreement by charging the higher rate and the higher risk fees he would have placed Corportex into receivership and would have borrowed money on the secured property to pay out the existing debt. He said that after meeting Mr Samson in September 2001 he had a number of conversations with him to inform him about the progress of the insurance claim and about Corportex’s trading position. At no time during those conversations did Mr Samson say anything contrary to the “agreement reached” in their meeting of September 2001.
7 It was submitted that the conversations between the Mr Mendelsohn and Mr Samson and Mr Mendelsohn’s letter of 19 September 2001 effected a third variation to the parties’ agreement. The effect of the third variation was to preclude Lumby from claiming interest at the higher rate and from claiming the late risk fee. The nature of the defence thereby afforded to the defendants was described in their written submissions as follow –
1. the defendants have an equitable set-off, entitling them to set off the claim for damages against the amount secured by the mortgage and guarantee; the quantum of the set-off is calculated as the difference between interest at the Higher Rate plus the Risk Fee plus the Late Fee, less, interest at the Lower Rate plus bank charges incurred by Lumby ‘at cost’.
2. the plaintiff is estopped from denying the Third Variation, such that the damages ought be (sic) calculated on the basis set out above.
3. on proper construction of the Trade Finance Facility, as amended by the Third Variation, damages ought be calculated in accordance with the Third Variation.
4. the defendants propose to seek leave to file a cross-claim, in the terms annexed to this outline of submissions, raising a claim under section 52 of the Trade Practices Act.
8 The defendants contend that the “third variation” is equitable, not legal.
9 I have not found it necessary to set out the terms of the trade finance agreement, the guarantee and the mortgage because they are voluminous and uncontroversial. It should be observed, however, that in the trade finance agreement there appears this clause under the heading “General Provisions”-
This Agreement and the Security shall not be amended or modified except by written instrument duly executed by the Lender and any such amendment or modification shall upon the execution of the written instrument become binding on the parties hereto.
10 The guarantee includes this clause –
Where the lender’s consent or approval is required under the document:
(a) unless otherwise expressed it may in the Lender’s discretion (and whether or not acting reasonably) be withheld or given subject to terms or conditions: and
(b) it is not valid unless expressly given in writing by the Lender.
11 Consistently with the parties’ agreement to vary their agreements only in writing, the first and second variations were fully recorded and executed.
12 Assuming for present purposes that the conversation between Mr Mendelsohn and Mr Samson took place as Mr Mendelsohn has said, they were obviously not intending to vary their respective legal rights. There was no attempt to write down anything that was said in May. Even when Mr Mendelsohn wrote his letter in September, Mr Samson did not respond. The only available conclusion is that the parties continued to acknowledge the legally binding force of their agreements. Those agreements included this passage in the guarantee –
3 Payment of Guaranteed Money
3.1 Time for Payment
3.1.1 Subject to clause 3.2 all payments required under this document must be made by the Guarantor in full in immediately available funds prior to 12.00 noon on the relevant due date (or any earlier time specified) without any set-off or deduction.
3.1.2 The guarantor irrevocably and unconditionally waives any right to set-off, combination or counterclaim in relation to such payments.
3.2 Payment without deduction or set-off
Guaranteed Money must be paid in full without any set-off or deduction. The Guarantor waives all rights to set-off, combination or counterclaim in relation to payment of Guaranteed Money.
Equitable Set-Off
13 An equitable set-off may arise when the defendant has a claim of debt or damages against the plaintiff and the claim is so closely related to the plaintiff’s that it impeaches the plaintiff’s claim in the sense that it would be positively unjust that there should be a recovery without an allowance or deduction; Galambos & Son Pty Limited v McIntyre (1974) 5 ACTR 10; AWA Limited v Exicom Australia Pty Limited (1990) 19 NSWLR 705.
14 In the latter case, Giles J considered the principles governing equitable set-off and said this at 710 –
“This consideration should be undertaken bearing in mind the juristic basis of an equitable set-off. Prior to the Judicature Act , an equitable set-off was enforced by an injunction obtained in equity to restrain the plaintiff at law from proceedings with his action without giving credit to the defendant for the amount of his cross-demand. Hence it was not enough simply to point to the cross-demand: there had to be shown “…some equitable ground for the defendant being protected against his adversary’s demand”: see Rawson v Samuel (1841) Cr and Ph 161 at 178; 41 ER 451 at 458 per Lord Cottenham LC. Hence also where that equitable ground was shown the defendant hds a defence to claim, and more than just a cross-demand. The so-called equitable set-off could be better described as an equitable defence…”
15 In Commonwealth Development Bank v Windermere Pastoral [1999] NSW SC 518 Rolfe J said this –
[60] In Tooth & Co Ltd v Rosier (Wood J - 7 June 1985 - unreported) there was an application for summary judgment. In the course of considering it his Honour dealt with a defence of set-off, considered cases such as Cellulose, Langford and Covino, and said:-“[58] In AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 Giles J gave a wider operation to an equitable set-off or equitable defence. His Honour made clear that in each case one must look at the particular facts to determine whether it would be unjust or inequitable for the plaintiff to be permitted to proceed with its claim without making allowance for the cross-demand and, in doing that, all the circumstances of the case must be considered. His Honour came to a similar decision in Murphy & Anor v Zamonex Pty Ltd & Ors (1993) 31 NSWLR 439, stating, at p465:-
[59] The issues concerning equitable set-off have since been considered in Direct Acceptance Corporation Ltd (In Liq) v Lord (1993) 31 NSWLR 439 and, on appeal, (1993) 32 NSWLR 362, and by me in Coles Myer Ltd v Liverpool Growers (Australasia) Pty Ltd (24 September 1993 - unreported); Westpac Banking Corporation v Nalty (8 October 1993 - unreported); and Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1 August 1997 - unreported). All these decisions make clear that the Court must look at the particular circumstances of each case. This may mean that the ultimate question as to the right to a set-off may not depend on the construction of the security document alone.
‘That the ultimate question might not always turn on the construction of the guarantee alone, is however suggested by the passages in the judgments of Isaacs J in Cellulose Products, and of Hutley JA in Covino, to which reference has been made.’
His Honour cited from the decision of Clarke J in Tooth & Co Ltd v Smith (5 September 1984 - unreported), where his Honour, in considering the circumstances in which an equitable set-off may arise, said:-
‘No general rule can be laid down except by stating that such a set-off will arise when there exists circumstances which make it unjust or inequitable that a plaintiff should be permitted to proceed with his claim.’
16 There are three reasons why I think that the defendants have failed to demonstrate that they have an arguable defence. The draw down date was 7 April 2001, so by the time Mr Mendelsohn and Mr Samson spoke in May of that year the loan had fallen in and Corportex could not pay. Legally, it faced penalty interest rates and higher risk fees. Assuming that the conversation went as Mr Mendelsohn said it did, the parties obviously reached no agreement that was ever put into effect. Mr Samson asked Mr Mendelsohn to borrow money and “make the payments up”. Mr Mendelsohn did not do so. Even when he wrote his letter four months later he did not do so, even though he says there was an agreement with Mr Samson that he would. It was not until 15 April 1992, eleven months after the asserted third variation, that Corportex, or Mr Mendelsohn on its behalf, paid the sum of $238,972.17 a fraction of the amount owing.
17 Where a dispute has arisen, a mortgagee is entitled to require payment of the amount secured by the mortgage and interest and an amount to cover the costs of suit: Bank of New South Wales v O’Connor (1889) 14 App Cas 273; see also Digiplus Pty Limited v RSL COM Partners Pty Limited (2003) 47 ACSR 473 per Gyles J at 479 – 480. The defendants have made no tender.
18 Secondly, it appears from Mr Mendelsohn’s affidavit that by May 2001 Corportex could not pay its debts as they fell due. It was insolvent and Mr Mendelsohn knew it. Yet he proposed to continue to trade, with all the attendant risks to other creditors and interested persons. Counsel for the plaintiff submitted that Mr Mendelsohn was in breach of his obligations under Companies legislation. It is not strictly necessary to consider whether that submission has been made good, but parties whose case is that they deliberately traded while one of them was insolvent come with unclean hands and are unlikely to obtain equitable relief.
19 Finally, Mr Mendelsohn and Corportex, in seeking equity, have been under an obligation to do equity. For two and a half years now they have not paid a penny towards the debt they acknowledge is owed. They have not tendered any amount since the payment of April 2002. Mr Mendelsohn has spoken in the vaguest terms about the claim Corportex made upon its insurer, but Corportex has never accounted to Lumby for the proceeds for the claim, even though it was obliged under the terms of the agreement to have a policy in Lumby’s name. Mr Mendelsohn has not thought to put on evidence about the result of the claim. In my opinion the conduct of Corportex and Mr Mendelsohn has been so unsatisfactory that, even if they were to establish the facts that are asserted in Mr Mendelsohn’s affidavit, there is no reasonable prospect that they would be granted equitable relief.
20 This disposes of the first three of the submissions made on behalf of the defendants. The fourth proposes a cross-claim, which the defendants seek to file under the provisions of s52 Trade Practices Act. A draft further amended defence and a draft cross-claim were handed up during submissions. The intended defence and cross-claim would rely on the asserted third variation and, for the reasons I have explained, would fail. Leave to file them is refused.
21 I make the following orders -
- 1 Direct the entry of judgment for the plaintiff against the defendants;
- 2 Order the defendants to pay the plaintiffs costs.
22 The parties are to calculate the sum for which the plaintiff is entitled to judgment and to file Short Minutes of Orders in the Registry to give effect thereto.
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