National Australia Bank v Lekakis (No 2) No. Scciv-03-772

NATIONAL AUSTRALIA BANK v LEKAKIS (NO 2)
[2004] SASC 103

JUDGE BURLEY. The plaintiff seeks orders for possession of property owned by the defendants who gave mortgages to the plaintiff to secure loans advanced to them by the plaintiff. The application has been made pursuant to Part XVII of the Real Property Act 1886, which provides a summary procedure in relation to applications to enforce mortgages.
Initially, the defendants filed and served, without the leave of the court, a defence, set-off and counterclaim in which the defendants asserted that the plaintiff was not entitled to the relief sought. The plaintiff took no point about the pleading being filed and served without leave. Instead, it argued that the pleading failed to disclose an arguable counterclaim or ground of defence to the plaintiff’s claim. Argument was heard by me last year in relation to the initial pleading and on 17 October 2003, I determined that it did not raise an arguable counterclaim or ground of defence: see NAB v Lekakis and Anor (2003) 230 LSJS 330.
Although the initial pleading was struck out, I gave leave to the defendants to apply for leave to file an amended defence, set-off and counterclaim. This they have done. The hearing of the application for leave to file an amended pleading was heard on 17 March 2004 when Mr J Keen appeared for the defendants and Mr M Livesey for the plaintiff.
Although I have described the application as one for leave to amend, the reality of the application is that the defendants seek a direction from the court that this matter proceed on pleadings rather than in a summary way pursuant to Part XVII of the Real Property Act. In other words, if the pleading now proposed by the defendants is either wholly or in part sufficient, the direction of the court should be that the matter proceed on pleadings (in due course to trial as opposed to a summary hearing), the first of which is to be the proposed counterclaim the subject of this application.
In my reasons of 17 October 2003, I determined that the counterclaim by the defendants was defective in a number of respects. In particular, I determined that the set-off pursued by the defendants could not be pursued because no attempt had been made in the pleadings to quantify the set-off and, secondly, I concluded that the document was defective because the concept of restitution was not dealt with in the pleading.
The nature of the proceedings and a summary of the original counterclaim is set out in my reasons of 17 October 2003. I do not intend to repeat what I there said except where it is necessary to explain the approach that I have taken on this application. These reasons should be read in conjunction with the reasons published on 17 October 2003.
The counterclaim seeks relief in respect of guarantees given by the defendants. However, the plaintiff does not claim (in these proceedings) that it is entitled to orders for possession because of any alleged liability under a guarantee given by the defendants. More specifically, the plaintiff does not seek (in these proceedings) to enforce any mortgage given by the defendants or either of them to secure their obligations under a guarantee. This means that, to the extent that the defendants resist the plaintiff’s application on the basis that any such mortgage given by them is void or is liable to be set aside, such a defence is irrelevant because the plaintiff is not seeking to enforce such a mortgage.
However, the defendants say, in paragraphs 76, 77 and 78 of the proposed counterclaim, that they have sustained damages to the extent that they are liable in respect of guarantees relating to loans to “Wawego” and “Produce” (two of their companies) and that those damages are to be set-off against the sums demanded by the plaintiff. If there is a valid set-off to that extent, the guarantees must be considered, even if the plaintiff does not seek to enforce the mortgages (if any) given by the defendants to secure their obligations under the mortgage.
I shall refer to the pleading the subject of this application as “the proposed counterclaim”. It is Exhibit A to the affidavit of Mr Byrne sworn on 10 November 2003 except for pages 20, 21 and 22 which were replaced at the commencement of the defendants’ submissions. The defendants have quantified the set-off. As to the question of pleading matters relating to restitution, it was submitted by Mr Keen that it was not necessary to do so. I think it appropriate to deal with this aspect of the matter first.
In my reasons of 17 October 2003 I referred to the concept of restitutio in integrum to the extent that such a concept applied where a plaintiff sought orders setting aside contracts or mortgages, the causes of action being based on misrepresentation, breach of Section 52 of the Trade Practices Act, unconscionable conduct and the like. My reference to that concept in October 2003 may not have been entirely accurate, but it was difficult to tell the extent (if any) to which it may have applied, given the somewhat broad brush used by the drafter of the initial counterclaim in setting out the causes of action relied upon.
Essentially the same causes of action are pleaded in the proposed counterclaim and, in my opinion, they raise the question of whether or not it is necessary for the defendants to take into account, in quantifying either a set-off or counterclaim for damages, the fact that monetary advances were made by the plaintiff to the defendants which the defendants used in furtherance of their business purposes. The causes of action whereby avoidance of transactions is sought also raise the question of whether restitutio in integrum needs to be dealt with. In addition, the point arises in relation to the guarantees because “Wawego” and “Produce” acquired assets using funds advanced by the plaintiff.
It may be stating the obvious to say that advances of money are intrinsically valuable. That means that when the plaintiff lent monies to the defendants and to their companies, they and those companies received full value for their promise to repay and to secure repayment by giving a mortgage over real property. Mr Keen said, at the outset of his submissions, that his clients did not claim that they should recover damages in respect of loan monies advanced to them which they used to retire debt. It is common ground that in excess of $500,000 of the monies lent by the plaintiff to the defendants was used to retire existing debt to Westpac. During the course of argument, Mr Keen also conceded, at least to the extent that the defendants purchased real property with monies lent by the plaintiff to them, that the value of that property should be brought into account. However, as far as I can see, the amounts used to retire debt and purchase real property have not been allowed for in the calculation of the damages that are said to be owing by the plaintiff to the defendants as a result of the counterclaim pursued by the defendants. I think this makes the proposed pleading fundamentally flawed. It is not sufficient for the defendants to argue, as was put by Mr Keen, that those deficiencies will be attended to.
It was submitted by Mr Livesey that, even if it is assumed that a counterclaim for unliquidated damages could be off-set against the liquidated claim of the plaintiff, the assertion as to damages by the defendants was not supported by authority. In broad terms the defendants say that they sustained damages as a result of their dealings with the Bank to such an extent that the amount of those damages far exceeds the amount of any indebtedness under the mortgages and that, accordingly, nothing could be said to be owing by the defendants to the plaintiff. In that event, it was argued, the plaintiff is not entitled to an order for possession in respect of any property over which it holds mortgage security.
The key to assessing the cogency of this submission is to ascertain what is meant by the claim that damages have been sustained by the defendants. The defendants say in respect of the causes of action based on alleged misrepresentation, alleged breaches of Section 52 of the Trade Practices Act alleged unconscionable conduct and alleged breach of duty, the plaintiff lent to the defendants a total of monies knowing that the defendants could not afford to repay the loan. As such, it has been pleaded and it was argued, the defendants are entitled to orders avoiding the loan transactions and the security given in respect of those loan transactions and, in addition, the defendants are entitled to damages consisting of the amount which has to be repaid. It is apparently for this reason that the defendants contend that they do not have to take into account the concept of restitution or to make allowance for assets gained when they calculate damages.
The defendants contend that because the plaintiff’s lent to them (and to companies associated with them) monies which the plaintiff knew or should have known that the defendants and their associated companies could not repay, the measure of damages which arose was at least commensurate with the amount of the loans. In advancing that submission, the defendants have not sought to establish damages which are referable to losses that they may have sustained as a result of the allegedly wrongful conduct on the part of the plaintiff prior to and at the time of lending monies to the defendants and their associated companies. In other words, it has not been put that the plaintiff lent money to the defendants and their associated companies, that either or both of the defendants and their associated companies entered into a business venture which failed, that the failure of the business was referable to the conduct of the plaintiff in such a manner that a cause of action arose entitling the defendants to sue the plaintiff for damages, and that the measure of damages exceeded the indebtedness under the mortgages at the time that action was taken to enforce them. In the absence of such a pleading, I cannot see how an arguable counterclaim arises.
In my view, the defendants must address the question of restitution when seeking to avoid the loans and mortgages and they must, when calculating damages, take into account any assets of value that they or their companies have gained from the use of the monies lent by the plaintiff to any of them. As I have said, in the absence of such matters, I consider that the proposed counterclaim is fundamentally flawed, both in relation to the claim for damages and the claim for orders avoiding the loan transactions and mortgages. As such, it should not be permitted to be filed.
I have also had to consider the question of the ability of the defendants to off-set damages against a liquidated claim. It was argued by the defendants that they could off-set their counterclaim for unliquidated damages against the amount of the indebtedness, with the result that nothing was owing under the mortgage and, therefore, the plaintiff was not able to enforce the mortgages as relied upon. Reliance was placed upon passages from Equity Doctrines and Remedies, 4th Ed, Meagher, Heydon and Leeming at page 1053 et seq. Mr Keen also directed my attention to Fisher and Lightwood’s Law of Mortgage, Australian Ed, in which reference was made (at 396) to M E K Nominees Pty Ltd v Billboard Entertainment Pty Ltd (1993) V ConvR para 54-468, [1994] ANZ ConvR 363, where Tadgell J reviewed some of the authorities on the requirements for an equitable set-off.
It is apparent from that decision that for an equitable set-off to arise, “an equity sufficient to defeat the [plaintiffs] claim for possession” must arise: M E K Nominees Pty Ltd at page 367 of [1994] ANZ ConvR. Later, Tadgell J (at 367) refers to the decision of Scott J in Sim v Rotherham Metropolitan Borough Council [1987] Ch 216 at 262 where his Lordship said:
“If, in principle, the nature of a breach and of the cross-claim attributable to the breach impeach a party’s title to full contractual payment, the fact that the claimable damages are small is not, in my view, relevant. Equitable set off does not depend on the size of the damages or on the severity of the breach of contract. It depends, in my judgment, on the nature of the breach relative to the nature of the contractual claim.”
Tadgell J also referred, (at page 65,466) of (1993) V Conv R), to the discussion in the 3rd Edition of Equity Doctrine and Remedies where the suggestion is made that the “impeachment” approach may have been diluted by modern authority.
Having considered these authorities, I have come to the conclusion that it is not necessary to decide whether a strict or watered down approach is to be applied because, in my view, in any event, a set-off of any description does not arise because damages of the type sought by the defendants are not recoverable as a matter of law and consequently no set-off arises.
Since the defendants’ defence to orders for possession relies upon a set-off which is in turn based upon an arguable counterclaim, the defendants have, in my view, failed to disclose in the proposed counterclaim the basis upon which it might be argued that the plaintiff is not entitled to orders for possession.
I mention also that the defendants face real difficulties regarding a claim for damages based on the entry into contracts of guarantee. Damages of the type claimed (based on increased indebtedness) are not recoverable for the same reasons given in relation to their claim for damages based on loan agreements between themselves and the plaintiff. There is also the further complication that “Wawego” and “Produce” are not parties to this action, which casts doubt on the defendants’ ability to seek orders setting aside transactions between the plaintiff and the primary debtors.
It was submitted by Mr Livesey that the defendants have not sought to impugn the mortgage granted by them in respect of the first advance of monies made by the plaintiff to the defendants. As such, he argued that, at the very least, an order for possession ought to be made in respect of the property the subject of that mortgage. Mr Keen responded by saying that although the defendants did not seek to impugn that mortgage, there was nevertheless, by reason of the set-off, no amount due under that mortgage and, as such, there was no basis upon which the plaintiff might enforce the mortgage.
I would agree, that if the defendants were able to establish an arguable set-off which exceeds the total amount due under the mortgages, the plaintiff’s claim to an entitlement to enforce the mortgage in respect of that first advance would have to proceed to trial. However, for the reasons stated above, no arguable set-off has been established by the defendants.
Because I have concluded that the proposed counterclaim is defective and may not be filed, in the absence of an effective set-off, if I am satisfied that the plaintiff has made out an entitlement to orders for possession, those orders for possession ought to be made. In my reasons published on 17 October 2003, I indicated that I would give the defendants one final opportunity to put forwarded an amended set-off and counterclaim. However, during the course of argument in relation to the pleading the subject of these reasons, I indicated that if I were of the view that the defendants should, for a second time, be refused leave to file an amended set-off and counterclaim, I would hear the parties as to whether or not the defendants should be given a further opportunity to file an amended pleading and, if so, upon what terms.
For the above reasons I refuse leave to the defendants to file the proposed counterclaim. I will hear the parties as to costs and any other relevant matters which the parties wish to raise.

[2004] SASC 103

15 April 2004