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
Copyright in the High Court of Australia
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 not sought. But it is to be inferred that it was not consented to because they pressed on with the ‑ ‑ ‑
GORDON J: You did not ask, did you? Your client never asked?
MR PENGLIS: No. There is no evidence of it being asked, no.
GORDON J: If he was financially able he could have paid the money into court – there could have been arrangements made?
MR PENGLIS: Paying the money into court, with respect, would not deal with the issue.
GORDON J: Why is that?
MR PENGLIS: Because the pay now – the clause operates to, in effect, stave off the ability to bring and prosecute the counterclaim unless the money is paid to the judgment debtor – not into court. That is the stay argument that Justice Barker contemplated at first instance – that all courts, all of the judges of appeal rejected and that is, whether or not there is a stay is irrelevant. There was no stay. In fact, one could not ‑ ‑ ‑
GORDON J: No, no, no, I think you misunderstand my point.
MR PENGLIS: Sorry.
GORDON J:
In terms of practicality of prosecution there were two avenues open to your client. One was to seek the consent of the Bank.
The second was to - in the proceedings in the Supreme Court or whichever court it was in – in effect, have the money paid into court pending resolution of the Bank’s entitlement to it.
MR PENGLIS: That would not have freed him from the shackles of clause 9 because clause 9 operates to actually stop the ability to bring a claim unless the payment is made – not into court ‑ ‑ ‑
NETTLE J: But unqualifiedly and unconditionally.
MR PENGLIS: Sorry?
NETTLE J: Unconditionally.
MR PENGLIS: Unconditionally to the judgment creditor. That is the effect of clause 9. So, with respect, the payment into court would not have freed the shackles of clause 9. That is made very clear, if I may take the Court to the Court of Appeal’s decision in the principal proceedings – Palaniappan v Westpac Banking Corporation [2016] WASCA 72 – because this is what the Court of Appeal – I will read the two paragraphs very briefly – said as to the operation of clause 9. Justice of Appeal Buss, as the President then was, said this at paragraph 94:
Clause 9 precludes the [applicant] from asserting any right of set‑off (including any right of equitable set‑off) that might be available –
and, importantly, your Honours – to deal with Justice Gordon’s point:
and from exercising any procedural rights under O 18 r 2 or O 20 r 17 of the RSC, because the [applicant’s] obligation to pay the indebtedness to the respondent in accordance with the Guarantee has not been satisfied.
Can I tell you what those two rules are very briefly? Those two rules – Order 18 rule 2 is the rule that allows a person to bring a counterclaim in the same proceedings as an existing action and Order 20 rule 17 allows a defendant to plead by way of defence a set‑off.
So what the court quite clearly is saying there is that the procedural entitlement to avail yourself of the relevant provisions of the Supreme Court Rules are – to use the words of Justice of Appeal Buss – clause 9 precluded the appellant from…..because the appellant’s obligation to pay the indebtedness to the respondent had not been satisfied. Justice Corboy, with whom the Chief Justice agreed, said at paragraph 161:
In my view, the meaning and effect of cl 9 and cl 13.1 is clear. The clauses provide that the appellant is not entitled to assert a set‑off in law or in equity until the respondent has been paid the ‘guaranteed money’.
We submit as paid to the judgment creditor and not into court. We submit that in regard to the decision itself – of course, the Court will be familiar with the fact that neither party takes issue with the proposition that the concept in section 40(1)(g) is to be precluded as a matter of law – not simply precluded by reason of some practical or personal inhibition. We say that is satisfied because the relevant inhibition here was clause 9.
That is what Justice Charlesworth held. The majority decision below was to the effect that that is not so because the majority view was that the reason why the appellant could not have set up the set‑off or counterclaim were as a result of personal and practical circumstances, namely, non‑payment and no consent. That is at paragraph 40 of page 29 and paragraph 47 of page 31.
We would respectfully submit that that is wrong for three principal reasons. Firstly, it focuses not on the prohibition itself – that is clause 9 – but on whether or not steps could have been taken to overcome the prohibition. So we say it focuses not on the legal inhibition but on what might have been done to overcome it and in that way ‑ ‑ ‑
GORDON J: I think the point they were trying to make was was that there was no legal inhibition in a sense that the counterclaim was on foot.
MR PENGLIS: I am coming to that.
GORDON J: Sorry.
MR PENGLIS: No, sorry. That is another issue which I am coming to in a moment, and that is the filing of the counterclaim itself constituted it being set up. That turns on whether or not “set up” means initiating the proceedings or prosecuting the proceedings. If I may I will come to that in a moment.
Can I take the Court also to the fact that that approach cannot be reconciled with what Justice Avory said in Re A Debtor and that has been applied in the Federal Court and other courts but in particular in one of the reasons before the Court here today - in Re Vicini at page 326 of the FLR, I will read it. Justice Fisher in the Federal Court, said this:
In Re A Debtor supra the circumstances were that at the time of the judgment the debtor was not the assignee of a debt, which debt he in answer to the bankruptcy notice relied upon as constituting a counter‑claim which he could not have set up in the proceedings. Thus at the time of the judgment he could not have as a matter of law set up the counter‑claim. It was nothing to the point that he might have earlier taken an assignment.
Then, the following quote:
I think that upon the true interpretation of the section a debtor is entitled to set up in answer to a bankruptcy notice a counter‑claim which rebus sic stantibus he could not in law have set up in the action in which the judgment was obtained, even though he could, if he had chosen, have taken steps which would have rendered the counter‑claim available to him in the action.
I think it means a counter‑claim which as things then stood the debtor could not set up in the action.
The third point, your Honour – and this is the point that is emphasised in Justice Charlesworth’s reasons for decision at paragraph 64 at page 35 – and that is that section 40(1)(g) contemplates the co‑existence – the simultaneous co‑existence of two things: one, a judgment debt; and, two, a counterclaim, set‑off or cross‑demand that could not have been set up in the action.
The point is that if the so‑called inhibition is the non‑payment of the judgment debt then you would not have a judgment debt because you would not have had an action because the amount, the subject of the judgment debt, would have been paid. So, in other words, there could not have co‑existed at the same time the judgment debt and the counterclaim because there would not be an action in which you can bring your counterclaim if you had paid the money. That is the point made by Justice Charlesworth.
We also respectfully submit that neither Justice Barker at first instance nor the majority below considered the policy and object of the Act. There is not a word spoken of the object and policy of the Act. Justice Charlesworth addresses it. The majority judgment does not consider which of the competing contentions best promotes the purpose and objects of the Act. We respectfully rely on and adopt what her Honour Justice Charlesworth said, and that is at paragraphs 60 and 61 and her conclusion at 55 to 59 that the construction advocated by the applicant best achieved that purpose.
The other point that the majority held was that – and this is the point that has been raised with me a moment ago – the simple filing of the counterclaim constituted the setting‑up and that is dealt with by Justice Gilmour, with whom Justice McKerracher agreed at paragraphs 38 and 39 of his Honour’s reasons.
Now, what his Honour there does is to identify a decision of Justice Hely. The decision of Justice Hely referred to is the decision of Nath v Clipway Pty Ltd [1999] FCA 625. What Justice Hely said, properly construed, is not simply the filing of a counterclaim or filing of a set‑off constitutes the setting‑up within the meaning of the Act but that it was one that could lawfully be prosecuted.
That becomes abundantly clear when you look at paragraph 12 of Justice Hely’s reasons for decision where his Honour says the decision of Justice Fisher in Vicini at 327 is a precise parallel. If you go to what Justice Fisher said at 327, he said this:??
A counter‑claim is set up when a record thereof is placed on the files of the court. As Scrutton LJ said in The Saxicava . . . “It appears to me that setting up a counter‑claim must be done by something which is recorded in the court.” In this present matter the debtor filed his counter‑claim as an addendum to his defence.
This is the important part:
Thereby in my opinion he has set‑up a counter‑claim, which counter‑claim he was as a matter of law entitled to pursue at that time.
We would submit that the notion of being able to set up means not only to file it but to actually prosecute it and for the reasons identified by her Honour Justice Charlesworth, again it would be inconsistent with the scheme of the Act if, for instance, a judgment debtor was unable to rely upon the exemption to section 40(1)(g) if, say, they were an unrepresented litigant, they simply filed a cross‑claim or a set‑off only to find cause by way of a clause such as clause 9 they could not do so. So the mere filing of it should not be taken – I will put it differently – the concept of set‑off – being able to set it up – means to be able to set up as a matter of law, not simply as a matter of fact being able to file it.
We submit that this is a short point that is a matter of public importance – the importance extends beyond the interests of these parties. It can be dealt with in very short terms and it is not one that this Court has considered and it is one, in our respectful submission, the Court should do so by granting special leave. Unless there is anything further, they are our submissions.
NETTLE J: Thank you, Mr Penglis. Mr Dharmananda.
MR DHARMANANDA: May it please your Honours. Special leave should be refused for three reasons. The majority of the Full Federal Court…..the matter does not raise an issue of public importance generally and this is not a suitable vehicle in any event. There is no question of general public importance because the applicant itself concedes at paragraph 29 of their submissions that the case only concerns application of established principles about section 40(1)(g) of the Bankruptcy Act to the applicant’s particular circumstances involving his failed property development and his refusal to pay the sums owed under the guarantee.
Even if there was a special leave question, which is not accepted, it is quite clear on the face of the record that this is not a suitable vehicle for the grant of special leave. This is so because the appeal will not be determinative of the dispute, as the applicant can only obtain an order for remitter.
The orders sought require remitter to Justice Barker and there there will need to be attention given to other appeal grounds in respect of the setting aside of the notice. There is an outstanding application for the receipt of late evidence and some of that late evidence goes to the grounds sought to be raised in defence of the notice. There are a further two notices of contention.
NETTLE J: On that last point, do you mean by that that even if it were held as a matter of principle, the applicant is correct in what he says about the right to a set‑off or counterclaim? It would still not avail him because there is not sufficient evidence to do so, or do you mean something else?
MR DHARMANANDA: The submission, your Honours, is that even if he were right about the question there are still other attacks in relation to whether he has a counterclaim, because we rely on provisions of the guarantee with respect to whether he can bring this sort of claim. In addition, there is a debate about whether he has sufficient evidence to demonstrate a prima facie case.
That brings us to the attempt to introduce into the hearing before Justice Barker late evidence of an expert kind concerning the valuation of the property as it relates to the assertion about breach of duty when it came to selling the property. To fall within section 40(1)(g), the relevant section, there has to be evidence that satisfies the Court that there is a genuine or bona fide counterclaim. That is why this is not an appropriate vehicle.
What my learned friend submitted to you about there being no disputation of fact is correct only insofar as the courts below proceeded on an assumed basis of fact to deal with the question of principle, to knock off the whole matter by reference to established principles concerning what “could not set up” means and therefore did not engage with the various other grounds upon which the applicant’s attempt to set aside the notice would, in our respectful submission, fail in any event. There has not at any stage been any grappling with those matters. In our submission that does not make this a suitable vehicle.
NETTLE J: Just to understand, it is not suitable because he was late in applying to try to demonstrate the point that his land was sold at an under‑value and therefore did not have the evidence, or for another reason?
MR DHARMANANDA: There are further substantive questions to be addressed, both in the appeal grounds raised before the Full Federal Court. There is a notice of contention in the Full Federal Court. Even at the level of the treatment by Justice Barker, certain matters were unresolved.
GORDON J: Can I understand that submission? To put it bluntly, does that mean that the trial judge and the Full Court decided to deal with one issue and leave other issues out because they thought they were not relevant or because they decided that was the quickest way home?
MR DHARMANANDA: They thought it was the quickest way home, your Honour. If I could just point out that there is a debate about whether the alleged counterclaim exceeds the value of the judgment because that must be shown in order to attract the operation of section 40(1)(g). If I could take your Honours to ‑ ‑ ‑
NETTLE J: Is the point that because he has not yet had a chance to put his counterclaim, we do not know whether it would exceed the demand?
MR DHARMANANDA: Your Honour, he pleaded his counterclaim and when it came to satisfying the court as it related to setting aside the notice the onus was upon him to attract the operation of section 40(1)(g) to show that the alleged counterclaim would exceed the amount of the judgment debt. That issue was never assessed. It was in relation to that issue that Mr Palaniappan thought late to introduce additional expert evidence. That issue was not dealt with by either Justice Barker or by the Full Court.
If your Honours go to lines 40 to 45 of page 24 of the application book, your Honours will see how that is dealt with. On the point that I raised earlier concerning the question of the value, if your Honours go to application book at page 19, lines 18 to 20, that matter was put to one side. That is also referred to and taken up in the Full Federal Court at page 31, lines 35 and 38, and page 35 at lines ‑ ‑ ‑
NETTLE J: Mr Dharmananda, …..understood the issues but why does that render this matter an inappropriate vehicle for consideration of the question of principle which has been identified? It will not dispose of the matter but it will dispose of that question of principle upon the basis of which the matter can then be decided, can it not?
MR DHARMANANDA: That is true, your Honour. It is a question as to whether in the circumstances, where those matters are unresolved, this is an appropriate case to test the full bounds of 40(1)(g), if that be a question that needs to be addressed in circumstances where there is no debate between the parties as to the established principles to apply. Both parties accept that there needs to be demonstrated a legal disability. The only question is whether, in these circumstances, such a disability arises. In our submission that question will be better raised and answered in the context of all of the matters relevant to the setting aside of the notice.
With respect, her Honour Justice Gordon raised a very important question which is what attempts were made concerning the obtaining of consent in circumstances where there is presently in the Supreme Court of Western Australia still remaining the Bank’s action for the recovery of about $1.5 million, which it did not press at summary judgment. Mr Palaniappan’s counterclaim in the Supreme Court of Western Australia still exists; it has not been disposed of.
Add to that the fact that it is possible – it might be a matter to which attention has already been drawn – that, within the form of the bankruptcy notice itself there is scope for the recipient of the notice to make arrangements to the creditor’s satisfaction for settlement of the debt. That, of course, would involve paying into court, for example.
In those circumstances, our submission is that this is not an appropriate vehicle to determine the question. In any event, the question, in our respectful submission, has been correctly answered. What the Court must do in determining whether section 40(1)(g), or the exception within it, is attracted, is first assess whether the debtor presently has a counterclaim, set‑off or cross‑demand which is equal to or exceeds the demand.
The expression of that phrase “counter‑claim set‑off or cross demand” in the text of the section says that it must be one that the debtor has – present tense. That means that the question to be answered is does the debtor have a claim that could be categorised as a counterclaim, set‑off or cross demand? Once that question is answered, the next question is whether that debtor was previously unable to set up that counterclaim or cross demand. When attention turns to that second inquiry that is where the words “could not have set up” come into play. That is a question of legal disability.
The operation of contractual mechanisms that were bargained with respect to conditions that affect the entitlement to initiate litigation are, in our respectful submission, not legal disabilities. They are matters that the debtor has agreed to and must comply with. There could be provisions for mediation. There could be provisions that the debtor pays the stamp duty on the deed of guarantee. If the debtor chooses not to pay that stamp duty, is that therefore a legal disability? On Mr Penglis’ construction, it must be.
If the debtor has commenced a counterclaim in the Supreme Court and has either adverse costs orders or fails to comply with the court’s orders such that there is a – or a security for costs application such that there is an order that he can take no further steps until he pays a particular amount into court, and he chooses not to pay that amount into court, is that a legal disability? In our submission, no, it is not. That is clear on the various authorities, including several Full Federal Court authorities. In our submission the question that was answered by the majority of the Full Federal Court was answered correctly.
Even accepting that there is some sort of overarching policy that informs the proper construction of the provision, that is not to be obtained
from the text of the provision because there are no words of the text of the provision or the surrounding provisions that inform the submissions made by Mr Penglis.
Let us accept that such a policy exists. But the complaint of unfairness which is raised that this does not seem to be a fair situation does not really raise any matter for inquiry. That is because, pursuant to section 52(2) of the Bankruptcy Act, before an order for sequestration is made, the court has a capacity to examine other sufficient causes. It is there that Mr Palaniappan, if he chooses to, can raise such matters as are presently sought to be agitated concerning the operation of the suspension clause.
In our submission it is not the case that Mr Palaniappan is not without redress insofar as the present situation that he faces is concerned. I should note that the application concerning the sequestration is in the Federal Circuit Court of Australia presently. We have addressed other matters in our written submissions. Unless the Court has any questions, those are our submissions in response.
NETTLE J: Thank you, Mr Dharmananda. Any reply, Mr Penglis?
MR PENGLIS: Yes, your Honour. Firstly, in regard to the issue of question of public importance, we respectfully submit that it is wrong to say that somehow this all turns on the facts of this case. When you read the reasons for decision of the Full Court, they do not turn on the facts of this case at all. It is a proper construction as to the important operation of section 40(1)(g) to a clause of the nature of clause 9.
The written submissions indicate that that is a clause which the authorities refer to now as a quite prominent clause. This is not a one‑off clause in a one‑off contract; this is a clause that prevails in society. At the end of the day, the clear application and decision below do not turn on whether or not Mr Palaniappan could have or did not pay. It turns on what is said to be the proper construction.
If the non‑payment of the judgment debt is said to be a personal inhibition then it matters not whether you can pay or cannot pay; it is the non‑payment. If that is the inhibition, it matters not whether or not that person chooses not to pay or cannot pay. The fact of the matter is that the way that the court below, in the majority, analysed it is on the basis that the non‑payment is the inhibition, not the clause itself.
The second thing we say is that, in regard to the notion that it is not a proper vehicle because all the other issues have not been agitated, that is neither here nor there. At the end of the day, the crisp question for
determination by this Court is whether or not what the court has effectively determined as a preliminary issue is right or wrong. If it has been determined and it is wrong then, like any other preliminary issue, we go back and we determine all the other issues that will then arise. That is dealt with in our reply submissions at paragraphs 14 and 15, at page 74.
We also make the observation there that, with respect, it is a bit rich for the respondent to be taking this point, given, as we point out in paragraph 15, the respondent agreed to the Full Federal Court only determining ground 1, and that is referred to at our footnote on that page, which is at paragraph 48 of Justice Gilmour’s reasons for decision. That is why it comes up as a pure issue because there have been no findings of fact in regard to the principal issues, and that is why that is a distraction from the issue of whether or not the one issue that has been resolved ought to be reviewed by the Court.
Can I then deal with, finally, the issue that was raised in regard to mediation? The difference between satisfying a condition precedent in this condition is that you can satisfy a condition precedent to the ability to sue where that allows you to litigate the counterclaim in the very self‑same action in which the judgment debt is sought to be obtained. This is very different. What the respondent and what the majority of the Full Court have said is you need to satisfy that criterion, but that criterion happens to be payment of the actual amount claimed by the Bank against you, which, if you satisfy it, means there will not be an action in the first place.
If you have a contractual prohibition in regard to mediation, you have the mediation and then you can litigate your counterclaim in the self‑same action as, in this case, the Bank would litigate its claim for a debt. That does not arise. I appreciate that I am out of time. They are my submissions.
NETTLE J: Thank you.
While the Court does not necessarily endorse all of the reasoning of the Full Court of the Federal Court of Australia, the Court is not persuaded having regard to the way in which the matter has proceeded thus far that it is an appropriate vehicle for a grant of special leave. Accordingly, the application is dismissed.
MR DHARMANANDA: We seek our costs, your Honour.
NETTLE J: The application is dismissed with costs.
AT 2.09 PM THE MATTER WAS CONCLUDED
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