Palaniappan v Westpac Banking Corporation - [2018] HCATrans 30

[2018] HCATrans 030

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Perth No P52 of 2017

B e t w e e n -
KASI PALANIAPPAN
Applicant
and
WESTPAC BANKING CORPORATION
Respondent
Application for special leave to appeal

NETTLE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO PERTH

ON FRIDAY, 16 FEBRUARY 2018, AT 1.33 PM

MR S. PENGLIS: May it please the Court, I appear for the applicant. (instructed by Bennett + Co)

MR S.K. DHARMANANDA, SC: Your Honours, I appear with my learned friend, MR A.J. PAPAMATHEOS, for the respondent. (instructed by Lavan)

NETTLE J: Mr Penglis.

MR PENGLIS: The special leave question that is raised in this application is a short but important one, in our submission, and it is this. Is a counterclaim, set‑off and cross‑demand which a judgment debtor is not able to prosecute by reason of what is known as a suspension clause or a “pay now/litigate later” clause in a contract a cross‑claim, set‑off or cross‑demand which the judgment debtor could not have set up within the meaning of section 40(1)(g) of the Bankruptcy Act?

That is a question that this Court has not previously considered and we say that it is a question that raises an important matter of principle and the matter of principle is this, that is, whilst the majority decision below stands the effect is that where a contract – and particularly a banking contract, a loan contract – contains such a clause then a bank or the judgment debtor will be able to enforce that clause by shutting out any set‑off, cross‑claim, or cross‑demand in the proceedings, obtain a judgment and then proceed to bankrupt the relevant judgment creditor even though that judgment creditor may have, by way of a defence that has not been able to be articulated, a complete defence – alternatively is, by reason of a cross‑demand or cross‑claim indeed a net creditor of the bank.

That is, in our respectful submission, an important point of principle and we submit is contrary to the clear policy underlying section 40(1) of the Bankruptcy Act. We say that it is an issue that is attended – we also say it is an appropriate vehicle since it has come up through the courts on the basis that the other criteria in section 40(1)(g) are effectively assumed to be satisfied and that is that there is a counter‑claim or cross‑demand and that it is of a greater amount. So there is no factual dispute. There is no factual issue that contaminates the issue before the Court. It is a clear‑cut question of law.

GORDON J: There are two factual matters that are arguably against your application, are there not? One is that your client did not seek the Bank’s consent as he was entitled to under clause 9. Is that the correct position?

MR PENGLIS: It was not granted. It was…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2018] HCATrans 30
Decision Date

CaseChat Overview and Summary

This proceeding concerns an application for special leave to appeal to the High Court of Australia. The applicant, Mr Palaniappan, sought to appeal a decision of the Full Federal Court concerning the interpretation of section 40(1)(g) of the *Bankruptcy Act 1966* (Cth). The core of the dispute revolved around whether a counterclaim, set-off, or cross-demand that a judgment debtor was prevented from prosecuting due to a "pay now/litigate later" clause in a contract could be considered a claim the debtor "could not have set up" within the meaning of the Act. The applicant argued that such a contractual prohibition constituted a legal disability, thereby satisfying the requirements of section 40(1)(g) and preventing his bankruptcy.

The legal issue before the High Court was whether a contractual clause that suspends a debtor's right to litigate a counterclaim or set-off until a debt is paid constitutes a legal disability preventing the debtor from "setting up" such a claim within the meaning of section 40(1)(g) of the *Bankruptcy Act*. This section provides an exception to the ability of a creditor to rely on a bankruptcy notice if the debtor has a counterclaim, set-off, or cross-demand that equals or exceeds the judgment debt and which the debtor could not have set up in the proceedings in which the judgment was obtained. The applicant contended that the majority decision below, which held that such contractual provisions did not create a legal disability, was contrary to the policy of the *Bankruptcy Act*.

The applicant's argument was that the "pay now/litigate later" clause in the banking contract created a genuine legal inhibition, preventing the prosecution of his counterclaim. He submitted that the focus should be on the prohibition itself, not on whether steps could have been taken to overcome it, and that this interpretation aligned with the purpose of section 40(1)(g) to protect debtors who have legitimate claims that cannot be litigated due to circumstances beyond their control. Conversely, the respondent argued that contractual obligations voluntarily entered into do not constitute legal disabilities, and that the applicant had not demonstrated a genuine or bona fide counterclaim sufficient to satisfy the requirements of the Act, nor had he pursued all available avenues to resolve the matter. The respondent also submitted that the case was not a suitable vehicle for special leave due to unresolved factual issues and other grounds of appeal.

Orders