Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd and Geoffrey James Rankine
[2009] NSWLC 30
•11/11/2009
Local Court of New South Wales
CITATION: Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd & Geoffrey James Rankine [2009] NSWLC 30 JURISDICTION: Civil PARTIES: Plaintiff: Protector Glass Industries Pty Ltd
1st Defendant: Southern Cross Autoglass Pty Ltd
2nd Defendant: Geoffrey James RankineFILE NUMBER: 8480/09 PLACE OF HEARING: Downing Centre Local Court DATE OF DECISION: 11/11/2009 MAGISTRATE: Magistrate Dillon CATCHWORDS: Practice – Striking out Defence – Equitable defences in Local Court -- Whether equitable set-off an available Defence – Whether statutory set-off an available Defence – Whether the Defence an abuse of process LEGISLATION CITED: Uniform Civil Procedure Rules 2005
Civil Procedure Act 2005
Law Reform (Law and Equity) Act 1972
Local Court Act 2007CASES CITED: Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927
General Steel Industries v Commissioner for Railways (NSW) (1964) 112 CLR 125
Henry v Henry (1996) 185 CLR 571
Re Just Juice Corporation Pty Ltd; James v Commonwealth Bank of Australia (1992) 109 ALR 334
Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd (in receivership) (1997) 42 NSWLR 462
Walker v Secretary, Department Of Social Security (1995) 129 ALR 198TEXTS CITED: REPRESENTATION: Mr A. Abadee (counsel) instructed by Hugh & Associates for Plaintiff/Applican
Mr A. Fernon (counsel) instructed by Yates Beaggi Lawyers for Defendant/RespondentORDERS: Orders:
1. Motion dismissed.
2. Applicant to pay respondent’s costs of disposal of motion fixed in sum of $1500.
Reasons for decision
1. Protector Glass Industries Pty Ltd (“PGI”) moves the court for orders, pursuant to Rule 14.28 of the Uniform Civil Procedure Rules, striking out the Amended Defence filed in court on 15 October this year by the two defendants and, if that order is granted, summary judgment. These applications are resisted by the defendants.
2. PGI, the plaintiff, is a manufacturer, distributor and installer of motor vehicle products, mainly glass. Southern Cross Autoglass Pty Ltd (“SCA”), the first defendant, as its name suggests, is also involved in the same industry. The second defendant, Mr Geoffrey Rankine, is the sole director of SCA.
3. In March 2008, PGI and SCA entered an agreement concerning the supply of glass products by PGI to SCA. As is common, the terms of that agreement included a credit facility and a condition that a director guarantee payment. Mr Rankine signed the director’s guarantee. Goods were supplied by PGI to SCA pursuant to those agreements.
4. In November 2008, PGI and SCA entered another contract, this time for the purchase of SCA by PGI. That agreement was, however, a conditional agreement. It was never completed and was terminated in February 2009. SCA has brought an action in the Supreme Court concerning the second agreement. It relies on virtually the same facts in its Supreme Court claim and its Local Court Amended Defence. This raises issues to which I will come below.
5. Between the time in November 2008 when the asset sale agreement was entered and the time in February 2009 when the agreement was terminated, PGI continued to supply glass products to SCA under the original credit facility agreements. The action before the Local Court is a claim in debt brought by PGI in respect of goods supplied to SCA but not paid for either by SCA or Mr Rankine pursuant to his director’s guarantee.
6. In its Amended Defence, SCA asserts that PGI breached the asset sale agreement and that, as a consequence, it is entitled to raise both a statutory and an equitable set-off as a complete defence to PGI’s claim.
7. In summary, SCA claims that, in the period following the formation of the agreement, it largely wound down its own independent business and handed over valuable assets, including its customer list and financial data, and transferred the benefit of much of the work and knowledge of its staff to PGI only for PGI to repudiate the agreement greatly to detriment of SCA. Its proceedings in the Supreme Court concern these issues. It relies on those facts, however, to provide a foundation for its set-off defences in the Local Court proceedings.
8. PGI raises a number of issues. First, it raises the question whether either equitable or statutory set-off, or both, are available to SCA as reasonably arguable defences.
9. A further issue raised by PGI is abuse of process. Is it an abuse of process for SCA to pursue a defence of equitable set-off when it knows that the same facts are to be litigated in other proceedings?
10. It is trite law that the power to strike out the defence should only be used in a ‘plain and obvious case’: General Steel Industries v Commissioner for Railways (NSW) (1964) 112 CLR 125. The primary question for this court to determine is whether this is, as the plaintiff argues, such a case.
11. It is also trite law that PGI bears the onus of proving that this is such a case.
12. The Local Court has limited equitable jurisdiction. It may take account of, and give effect to, any equitable defence: s 6 Law Reform (Law and Equity) Act 1972. It has no power to offer equitable relief. Section 7 of that Act provides that the Local Court’s jurisdiction is not enlarged in terms of relief available from it but may, for the purposes of s 6, postpone relief pending an application to the Supreme Court for it.
13. Equitable set-off is a defence available in the Local Court irrespective whether the contrary claims are liquidated or “mutual” as required by s 21 of the Civil Procedure Act 2005 (see further below). The defence has been described as a “procedural defence”. In that sense, the mutual debts remain in existence separately and distinctly until judgment is entered and the defence has no effect until then. 1 More significantly for the present case, equitable set-off is recognised as a substantive defence: see, for example, Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd (in receivership) (1997) 42 NSWLR 462.
an equitable set-off impeaches the title of the other party to the legal demand against which it is asserted. In other words, if it would be unconscionable for the creditor to regard the debtor as being indebted the debtor has an equitable set-off.2
15. The Court of Appeal (at 481) quoted approvingly the dictum of Goff LJ who said in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 (at 982) that a defence of equitable set-off may be set up “not merely as a means of preventing ... judgment, or, at any rate, execution, but also as an immediate answer to ... liability to pay”.
16. This raises the question whether or not SCA has a reasonably arguable case that it may impeach PGI’s claim against it. SCA argues, correctly, that PGI bears the onus of proving clearly and unequivocally that it does not.
17. It is a necessary (but not sufficient) condition for an equitable set-off that there be an interdependence between the two transactions. In this case, PGI contends that the two transactions in question are independent rather than interdependent and thus no equitable set-off can impeach its claim against SCA. PGI argues that the history of the relationship between the two companies demonstrates. The first contract was formed in March 2008, goods were supplied in accordance with it. PGI says that those supplies continued regardless of the negotiations and the formation of the asset sale contract and regardless of the terms of that contract.
18. In support of its argument that the transactions had no nexus or insufficient nexus to ground an equitable set-off, PGI tendered an affidavit of Ms Sarah Furlonger sworn 15 June 2009. That affidavit had been produced to support an application by SCA for consolidation of the two proceedings in the Supreme Court.
19. In summary, Ms Furlonger baldly stated that the two proceedings “share the same factual matrix and otherwise relate to and or [sic] arise from an Asset Sale Agreement between the SCA and PGI dated 19 November 2008, such that the matters and facts giving rise to the offsetting claims are identical.”
20. With respect to Ms Furlonger, that statement was self-evidently incorrect and no doubt Macready AsJ had little hesitation in dismissing the application for consolidation on such thin grounds. He was not satisfied that SCA had demonstrated sufficient connection between the two proceedings or of the existence of an equitable set-off.
21. Nevertheless, Ms Furlonger’s affidavit, which is, unfortunately, almost devoid of real evidence and, in fact, merely states an incorrect opinion, does not provide support for an argument that SCA is not entitled to raise the defence of equitable set-off. The “factual matrix” does not have to be identical or be shared in both proceedings for there to be a sufficient degree of interdependence between the two transactions to give rise to an equitable set-off. Whether there is will depend on the circumstances.
22. Macready AsJ’s decision relating to the consolidation issue was provided to me. His view that there was insufficient evidence of interdependence. PGI argues that nothing has changed.
23. His Honour’s decision was a factual finding not a statement of law. It was based on the evidence before him at that time and the onus of proof. Although the Amended Defence does not particularise the basis on which the set-off will be argued, there is now some evidence which provides some illumination of SCA’s position. The evidence before me appears to be different from, and considerably fuller than, the evidence before the Supreme Court on the consolidation application.
24. It includes a copy of the Asset Sale Agreement, an affidavit from Mr Rankine and the Supreme Court Statement of Claim.
25. SCA claims damages in respect of (a) the non-payment by PGI of the purchase price said to be due under the contract; (b) loss of intangible business assets provided to PGI and (c) loss of future earnings and bonuses. In the alternative, it seeks equitable relief: see [12] of the Statement of Claim. The claims for loss of intangible assets and loss of future earnings are unliquidated. (While this does not affect an equitable set-off, it has significance in respect of the statutory set-off issue.)
26. The facts upon which SCA relies are set out in the Statement of Claim and Mr Rankine’s affidavit. SCA asserts that PGI repudiated the Asset Sale Agreement by serving, in January 2009, a notice of intention to terminate the agreement and, in February 2009, issuing a Deed of Termination.
27. It was a term of the Asset Sale Agreement that the assets being purchased by PGI included SCA’s stock being “the stock-in-trade… on hand as at the Completion Date”. The stock-in-trade may therefore have included stock bought from PGI during January and February 2009 which had not been on-sold by SCA. The contract did not set a specific completion date. The value of that stock was to be determined according to a formula specified in the contract. In most cases, the stock was to be valued at the price paid by SCA. (See Item 6 of the Asset Sales Agreement.) Thus, if goods were purchased from PGI, PGI would get them back at the price SCA had paid for them. The agreement included a number of conditions precedent and provision for set-off of claims by third parties in respect of stock and certain SCA employee entitlements against the purchase price.
28. Mr Rankine’s evidence is to the effect that, following the formation of the Asset Sales Agreement, and in reliance on it, he provided PGI with SCA’s customer lists, introduced the management of PGI to SCA’s customers and suppliers, located premises from which to trade, made SCA’s staff available to PGI, opened SCA’s books to PGI and refrained from large stock purchases. His evidence was that SCA had run down the business, ordering only from PGI for the purposes of meeting the needs of SCA’s continuing customers while he awaited the takeover to complete.
29. He stated that as a consequence of PGI’s failure to complete the contract, and “in circumstances where PGI had assumed the business of SCA such that SCA was no longer trading”, he had been “eventually left with stock which was supplied by PGI and various other suppliers which we were forced to liquidate so as to meet the ongoing expenses and/or satisfy creditors of SCA”.
30. On the basis of that evidence, there appears to me to be at least an argument that there is a sufficient degree of interdependence between the transactions to enable to the defence to be raised.
31. The second question here is whether there is some basis for impeachment of PGI’s claim. Impeachment is a somewhat vague or nebulous concept which requires further consideration.
32. In Walker v Secretary, Department Of Social Security (1995) 129 ALR 198, the Full Court of the Federal Court grappled with the essential requirement of an equitable set-off, namely the necessity for the party claiming one to show some equitable ground for being protected from the creditor’s claim. The mere existence of a cross-claim or cross-demand is insufficient. Drummond J, who while dissenting, provided the strongest analysis of the concepts. He noted the long line of authority to the effect that impeachment of the legal demand was integral to an equitable set-off, but complained that those cases provided little assistance due to the vagueness of the concept of impeachment itself. He observed that what constitutes such an equitable ground had not been precisely formulated. In seeking a formulation, he said (at 206-207):
…Derham, in his article ``Recent Issues in Relation to Set-Off'’ in 68 ALJ 331, observed at 332: ``The concept of `impeachment’ itself suffers from a sense of vagueness.'’ The author lists various judicial explications of this term that do not, however, illuminate it beyond emphasising the necessity for a close connection between the subject matter of the set-off and that of the adversary's demand. To these references can be added the statement in at 367:
- The concept [of impeachment] is better stated in Meagher, Gummow and Lehane, Equity, Doctrines and Remedies, 3rd ed (1992), para 3709(h) at 818, where the learned authors say that it is an indispensable requirement of equitable set-off that the set-off actually go to the root of, be essentially bound up with, `impeach’ the title of the plaintiff.
33. In Re Just Juice Corporation Pty Ltd; James v Commonwealth Bank of Australia (1992) 109 ALR 334, Gummow J, this time as a judge rather than as a legal writer, analysed the requirements. He said (at 347-349):
[E]quitable 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…
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 Corp v Total Transport Ltd [1977] 1 All ER 398 at 404–5, 406–7…
I should refer briefly to some decisions illustrative of the operation of 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 & 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 Ltd 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.)
34. It would appear, therefore, that where there is misconduct, unprofessional conduct or some sort of wrong conduct on the part of a creditor that induced or influenced the debtor to enter into or continue the arrangement which resulted in a legal debt arising, and that conduct goes to the heart of the transaction in question, a court may find that the plaintiff’s claim is impeached. SCA, in its Supreme Court pleading, makes this very type of claim.
35. While the following matters were not pleaded in the Amended Defence, the gravamen of SCA’s case, as can be gleaned from the defendants’ evidence in this application, is that Mr Rankine and SCA were induced by representations made by PGI in the Asset Sale Agreement and the associated negotiations to hand over much of the value of SCA to PGI and to withdraw from the field within which it operated, leaving PGI to occupy it to its ultimate benefit and enrichment but without the promised compensation to SCA. It is also part-and-parcel of the claim that SCA’s business was being wound down in preparation for the takeover by PGI and that only continuing customers were being serviced. Finally, it is also an integral part of SCA’s case that goods supplied by PGI to SCA in January and February 2009 would be sold back under the Asset Sales Agreement to PGI as part of the business at cost price: a zero-sum proposition in that regard.
36. SCA alleges that PGI unjustly enriched itself at the expense of SCA and that PGI’s claim in debt against it is impeached by that conduct. It was argued for PGI that, if there has been any unconscientious conduct, it has been on the part of SCA not PGI. More particularly, it was contended that this unconscientious conduct “lies in SCA insisting (in its Supreme Court claim) that PGI pay for it failing to buy back stock PGI had previously supplied to SCA without accounting to for its failure to pay PGI for the stock supplied pursuant to the credit facility.
37. Whether PGI has acted unconscionably is not an argument for me to determine. I note, however, that SCA’s case, in effect, is that the reason it did not pay PGI was that it was financially reduced as a result of PGI’s conduct and was unable to meet its legal obligations under the credit facility agreement. I cannot determine the merits of those contentions. It is enough that, despite certain apparent weaknesses, SCA’s position seems at least reasonably arguable. In my opinion, PGI has not discharged its onus of proving on the balance of probabilities that SCA clearly has no such defence available to it.
38. PGI’s further contention is that SCA’s defence is, in substance, a cross-claim and that this court, accordingly, has no jurisdiction to deal with it. While there is, of course, a distinction between the two things, it seems to me that PGI’s argument must fail. True it is that in the Supreme Court SCA brings a claim with many similar features of the defence it seeks to raise in the Local Court. But a set-off as a plea in bar is a defence in whole or in part to a claim, whereas a counter-claim is procedure whereby two distinct actions by opposing parties are tried simultaneously. The claim and cross-claim are treated as distinct actions for the purposes of deciding such things as striking out pleadings, summary judgment and costs. Although the ultimate economic outcomes for the parties will often be the same whether they proceed by way of cross-claim or set-off, they are, in principle, different processes. Where claims and cross-claims are heard, separate judgments will entered. Where a set-off is pleaded as a defence, a single judgment will be entered.
39. It is contended for PGI that the defence, in form and substance, is clearly distinct from the traditional equitable defences of laches, acquiescence, unclean hands and so on. The cardinal distinction, according to PGI, is that it depends initially on SCA establishing a claim for equitable relief against PGI. It is said that only thereafter may the question whether the claim impeaches PGI’s claim arise.
40. Superficially attractive as that argument may be, I have been referred to no authority supporting it and the weight of statute and authority appear to be against it. Equitable set-off may have many of the characteristics of a counter-claim but it is a substantive defence which the Local Court has jurisdiction to entertain: see s 6 Law Reform (Law and Equity) Act 1972 and Roadshow Entertainment v CEL Home Video (1997) 42 NSWLR 462. In this case, SCA does not claim any order for relief from this court. This is not a Walsh v Lonsdale situation where equitable relief is required to make out the defence. It simply says that PGI’s own unconscionable conduct would make it unjust to enforce the legal debt without deduction.
41. It is also argued by PGI that there is a real danger that the Local Court’s monetary jurisdiction may be exceeded if the defence is allowed to stand. It is contended that if the defence is not struck out, this court would be required to determine whether PGI repudiated the Assets Sales Agreement and the quantum of damages that would flow to SCI from the repudiation. That is probably so.
42. I cannot, however, accept the argument that this requires that the Amended Defence be struck out. Section 30 of the Local Court Act 2007 confers jurisdiction on the Local Court to “hear and determine” money claims up to the limit of its monetary jurisdiction. That limit is $60,000 or, with the consent of the parties, $72,000. An equitable set-off is a defence to a claim, not a claim in itself. PGI cannot claim more than $60,000 against SCA but SCA is not limited in the amount it can set-off against that amount. In order to succeed completely in its defence, SCA could prove a set-off of, say, $60,001 or $1,000,000. The Local Court could hear the evidence relating to that set-off defence. The ultimate effect, if the defence succeeded, would simply be to create a deduction from PGI’s claim.
Statutory set-off
43. Section 21 of the Civil Procedure Act 2005 provides for a statutory defence of set-off in relation to mutual liquidated claims. PGI’s claim is liquidated but although some aspects of SCA’s claimed set-off are liquidated – the purchase price of the business is capable of being determined by calculation – others, which are significant, are not.
44. Statutory set-off therefore seems to me to be unavailable as a defence under s 21. The words “statutory and” should therefore be struck out of paragraph [3] of the Amended Defence.
Abuse of process
45. Relying on the High Court’s decision in Henry v Henry (1996) 185 CLR 571, PGI argues that the Amended Defence is abusive of this court’s process and ought be struck out on that ground pursuant to Rule 14.28 (1)(c).
46. Counsel for PGI drew my attention to the following passage in Henry (at 591) where the majority said:
35. It is prima facie vexatious and oppressive, in the strict sense of those terms, to commence a second or subsequent action in the courts of this country if an action is already pending with respect to the matter in issue. And although there are cases in which it has been held that it is not prima facie vexatious, in the strict sense of that word, to bring proceedings in different countries, the problems which arise if the identical issue or the same controversy is to be litigated in different countries which have jurisdiction with respect to the matter are such, in our view, that, prima facie, the continuation of one or the other should be seen as vexatious or oppressive within the Voth sense of those words.
36. It does not follow that, because one or other of the proceedings is prima facie vexatious or oppressive within the Voth sense of those words, the local proceedings should be stayed. However, it does follow that the fact that there are or, even, that there may be simultaneous proceedings in different countries with respect to the same controversy is highly relevant to the question whether the local proceedings are oppressive in the sense of "seriously and unfairly burdensome, prejudicial or damaging", or, vexatious, in the sense of "productive of serious and unjustified trouble and harassment". And it also follows that courts should strive, to the extent that Voth permits, to avoid that situation.
47. Henry
was a family law case in which parallel divorce proceedings had been commenced in both Australia and Monaco. It was in that context that the High Court expressed its views about parallel proceedings.
48. This case, however, while it has factual issues in common with the proceedings in the Supreme Court, is not strictly a parallel with the Supreme Court matter. Although, as plaintiff, SCA has, among other things, claimed equitable relief, in this case it is the defendant.
49. It would undoubtedly be an abuse of process for SCA to commence proceedings in relation to the same subject matter in two courts. That is not the case here: it was brought to court involuntarily. It would be anomalous, indeed, if a defendant was disentitled from raising a legitimate defence simply because it was relying on the same set of facts to seek relief in another forum.
50. True it is that the problem, or potential problem, of conflicting factual findings arises if both matters proceed. The Supreme Court has refused to consolidate the proceedings. The answer may be for one or other set of proceedings to be stayed pending the resolution of the other, but that is not an argument before this court at present. It seems to me that the problem is not justly solved by striking out the Amended Defence. I, therefore, reject PGI’s argument.
Conclusion
51. For all the above reasons the application fails.
Orders
(i) Motion dismissed.
(ii) Applicant to pay respondent’s costs of the motion which I fix in the sum of $1500.
Hugh Dillon
Magistrate
1
See Derham, Rory The Law of Set-off (3rd ed), Oxford UP, Oxford 2003 p.93.
2
See Derham p.97.
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