Westbrook v National Australia Bank Ltd

[1999] FCA 892

FEDERAL COURT OF AUSTRALIA

Westbrook v National Australia Bank Ltd [1999] FCA 892

BANKRUPTCY – application to set aside a bankruptcy notice – whether applicant’s cross-claim could have been set-up in the proceeding in which judgment was obtained – whether cross claim is a substantial and bona fide claim.

Bankruptcy Act 1966 (Cth) – s 40(1)(g)

Gray v Webb (1882) 21 ChD 802 - cited
Quinn v Hession (1878) 40 LT 70 - cited
Shanks and Co Pty Ltd v Hohne (1963) VR 198 - cited

WESTBROOK v NATIONAL AUSTRALIA BANK
VG 7693 of 1998

MERKEL J

22 JUNE 1999
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7693 OF 1998

BETWEEN:	DAVID EDMUND HUGH WESTBROOK AND MARIA CARMEN REYES WESTBROOK Applicants
AND:	NATIONAL AUSTRALIA BANK LTD (ACN 004 044 937) Respondent
JUDGE:	MERKEL J
DATE OF ORDER:	22 JUNE 1999
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.The order of Registrar Wood made on 19 May 1999 be set aside.

2.The application of the applicants for an order that the bankruptcy notice number VN 1268 of 1998 be dismissed.

3.The time for compliance with the said bankruptcy notice be extended from 21 August 1998 to 2 July 1999.

4.The applicants pay to the respondent the costs of and incidental to the application dated 10 September 1998 and the notice of motion dated 8 June 1999.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7693 OF 1998

BETWEEN:	DAVID EDMUND HUGH WESTBROOK AND MARIA CARMEN REYES WESTBROOK Applicants
AND:	NATIONAL AUSTRALIA BANK LTD (ACN 004 044 937) Respondent
JUDGE:	MERKEL J
DATE:	22 JUNE 1999
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

MERKEL J:

1. I have before me, for hearing de novo, an application by the applicants to extend the time for compliance with a bankruptcy notice and also to set aside the bankruptcy notice.  The matter comes as an application for review of the order of Registrar Wood made on 19 May 1999 that the bankruptcy notice number VN 1268 of 1998 be set aside.

2. The matter has had a long and troubled history.  The bankruptcy notice and the issues it raises arise as a result of litigation concerning two discrete transactions.  They both involve loans from the National Bank of Australia which is the banker to the applicants and their related companies.

3. I need to briefly outline part of the history of the matter which is detailed in two judgments of the Supreme Court of Victoria.  Those judgments arose as a result of judgment being entered by the National Australia Bank, which I will refer to as "the bank", against the applicants as guarantors in respect of certain loans made by the bank to companies associated with the applicants.  The applicants applied to the Master of the Supreme Court to set aside the judgments which the Master did on the basis that there was no consideration for their obligations under the guarantee.

4. There was then an appeal from the orders of the Master which came on for hearing before Beach J in the Supreme Court.  His Honour upheld the appeal and enabled the judgment entered to stand.  The applicants then appealed to the Court of Appeal against that decision.  It is unnecessary to go into the details of what occurred before the Court of Appeal, but in substance, after a failure by the appellants to comply with a security for costs order, the appeal stood dismissed and was not reinstated by the Court of Appeal.  However, the Court of Appeal in its judgment made it quite clear that it was allowing the judgment debt, which is in the sum of some $209,453.95 to stand as the grounds sought to be raised by the applicants, which were in effect a cross-claim, would not afford them a defence to the bank's claim.

5. As a result, the judgment obtained in the Supreme Court stood.  No stay was granted and that led to the issue of a bankruptcy notice by the bank against the applicants, claiming the judgment debt as set out in the schedule.  It is that notice that the applicants seek to have set aside.

6. The original transaction, the subject of the Supreme Court proceedings, related to a loan to acquire a property known as Monomeith.  The borrower was Brook Reyes Pty Ltd, a company of the applicants.  When it defaulted in repaying the loan the bank sold the property and sued the applicants as guarantors for the deficiency.  The applicants claimed that the sale was for under value but that claim was rejected as having no foundation by Beach J in the Supreme Court.  However, the applicants sought to raise a separate claim, in effect by way of a cross-claim in the Supreme Court proceedings, arising out of a separate transaction.  The basis for the cross-claim was set out in some detail in the affidavit material relied upon by the applicants.  It was considered by Beach J and the Court of Appeal.  The cross‑claim related to loans made by companies associated with the applicants to enable the purchase of a substantial amount of goods which were the subject of hire purchase agreements, the bank being the owners of the goods which were leased under the Hire Purchase Act.  The hirer was a company called ST(2) Pty Ltd.

7. I will not repeat what had occurred in respect of that transaction as that is set out in the Supreme Court judgments.  In substance, the bank, after giving notices of default, eventually took possession of the goods and resold them.  As a consequence of the resale, a substantial debt remained owing.  More importantly it is contended by the applicants that the resale was at gross under value and, as a consequence, moneys that should have been realised on a proper sale were never paid to the companies entitled to those moneys with the further consequence that at the end of the line, debts owing to the applicants by Brook Reyes Pty Ltd were unable to be paid.

8. The applicants raised those matters in the Supreme Court proceedings.  They sought to raise them on the basis that they gave rise to some form of set-off or defence to the claims under the guarantee.  However, they were unsuccessful in that regard and that failure ultimately led to judgment being entered against them.  The pleading in the Supreme Court proceeding, a defence and counterclaim dated 12 October 1998, sets out the basis of the claims which are said to have resulted in rights in the applicants to damages as a result of the sale of the goods at under value.  In effect, those rights were founded upon a cause of action that the bank, in exercising its rights as owner in reselling the goods, was under a duty of a fiduciary kind to act in the best interests of a number of parties which included the applicants as guarantors of the liabilities of certain entities, but also as creditors in respect of monies owed to them by Brook Reyes Pty Ltd.

9. After the failure of the applicants in the proceedings in the Supreme Court, a further writ was issued in the Supreme Court in respect of the sale of the goods at under value.  That writ was issued by ST(2) Pty Ltd, Brook Reyes Pty Ltd and the applicants against the National Bank.  In that writ, relevantly for present purposes, the applicants sought to raise an additional cause of action based upon the facts which had been raised before the Supreme Court in respect of the alleged sale of the goods, the subject of the hire purchase agreements, at under value.  What was said was that the bank's conduct in selling the goods at under value, and without having given Fourth Schedule notices under the Hire Purchase Act (which it was required to do) resulted in the bank sale being unlawful and at under value resulting in deprivation of the parties interested in the proceeds of their entitlement to the proceeds they would have received on a sale at full value.  The applicants claim a derivative entitlement to those proceeds which would have enabled Brook Reyes to repay its loan (which is called in the pleading the Westbrook loan) of some $630,000 which was repayable after 10 years from June 1985, and also disenabled Brook Reyes from paying interest under that loan.  It was contended that those transactions gave rise to a right in the applicants to sue the bank for damages for interference with their contractual relations the interference allegedly arising by lawful and unlawful means.

10. It needs to be observed at the outset that although what is claimed in the new Supreme Court proceeding by the applicants is a new cause of action, the basic underlying factual matrix remained the sale of goods at under value allegedly made by the bank which was very much at the heart of the issues sought to be raised in the defence and the counterclaim in the earlier Supreme Court proceeding.

11. There are a number of problems that confront the applicants in the present case. The first is that under section 40(1)(g) of the Bankruptcy Act 1966 the debtors need to establish that the cross-claim the subject of their cross-demand they wish to presently pursue is one that:

    “he or she could not have set up in the action or proceeding in which the judgment or order was obtained.”

12. I say that is a problem because when one considers the provisions of Order 10 rules 1 and 2, it is plain that in the proceeding in the Supreme Court of Victoria the defendant could have counterclaimed in respect of any claim he or she had against the plaintiff bank (see Supreme Court rule 10.02).  It is well established that it is not necessary that the claim be connected with the plaintiff's claim (see Gray v Webb (1882) 21 ChD 802 and Quinn v Hession (1878) 40 LT 70). The plaintiff's claim and the counterclaim are tried together unless the court otherwise orders (see rule 10.05).

13. It was submitted by counsel on behalf of the applicants that because the claim could not afford a defence or because there were other parties who were necessary to it, it was not a claim that could have been brought by way of counterclaim in the Supreme Court proceedings.  I cannot accept that submission.  It seems to me that the claim in tort for damages for interference with contractual relations was a claim for unliquidated damages which could have been brought by the applicants in the Supreme Court proceeding, albeit under a different cause of action, as it arose from the same matrix relied upon by the applicants in their proposed defence and counterclaim in that proceeding.

14. It is next contended that the cross-claim could not have been brought because judgment had been entered against the applicants in the Supreme Court proceeding.  It is true that a counterclaim is to be made while the original proceeding is on foot, that is, before the plaintiff gets judgment (see Shanks and Co Pty Ltd v Hohne (1963) VR 198). However, it is abundantly clear that that consideration cannot affect the operation of section 40(1)(g) of the Bankruptcy Act.

15. The question under that subsection is whether the claim made in the present matter, that is, in the bankruptcy matter, was one which could not have been set up in the proceeding in which the judgment or order was obtained. Plainly that means, was not capable of being set up in the proceeding prior to the judgment or order being obtained. Indeed, the artificiality of the submission can be tested in an additional context; namely, that had the Court of Appeal found that there was substance in the claim or indeed in the proposed counterclaim, it may well have taken a different course to that which it did. At all events, it seems to me that the claim presently sought to be set up is one which falls within the words of section 40(1)(g) and is a counterclaim or cross-demand that could have been set up in the original proceeding. It must follow that the application to set aside the bankruptcy notice must fail on that ground.

16. However, there are additional problems. Those problems relate to the nature of the evidence presently before the court. It is quite clear that when reliance is placed upon section 40(1)(g) the Court is not to merely look at the pleading and ask whether it raises a pleadable cause of action. It is well established that the Court must be satisfied that the claim is a substantial and bona fide claim which the debtors should fairly be permitted to litigate before the bankruptcy proceedings are allowed to continue. There are enormous conceptual problems with the claim in that regard.

17. It has been accepted that intent is a critical element in the tort of interfering with contractual relations.  Thus, the mere fact that a breach of contract was a natural consequence of conduct is not sufficient.  The consequence must have been intended (see Fleming, The Law of Torts, 9th edition at 761).

18. In the present context I take "intent" to include actual or constructive intent,  constructive intent being conduct that may be in reckless disregard of its consequences in procuring a breach of contract.  The situation that in fact must be relied upon by the applicants is in substance one in which they must contend that the bank intended to sell the goods the subject of the hire purchase agreements at under value and thereby disenable the parties entitled to share in the proceeds of a sale at the full value from distributing the proceeds down a chain which ultimately would lead to Brook Reyes Pty Ltd which, so it must be said, the bank intended would thereby be unable to pay its indebtedness to the two applicants in 2005, and in the meantime be unable to pay interest due under its loan agreement.

19. Whatever may be the validity of the tort claim in respect of the corporations entitled to share in the proceeds - and I say nothing in that regard in the present context - the extraordinary proposition that has to be contended for by the applicants is the bank engaged in its conduct with actual or constructive intent that it would have the effect of preventing Brook Reyes from repaying its loan and interest to the applicants.

20. I am not satisfied that there is any evidence before me that would establish or even entitle the court to draw an inference that there was an arguable case that the bank held any such intent.  However, there are even greater problems with the cause of action contended for.  It has also been accepted that there must be some proof of causal connection between the defendant's conduct and the breach of the relevant contract.  In other words, there must be some evidence - which in the present context I really take to mean evidence that amounts to establishing a substantial and bona fide claim - that the inability of Brook Reyes Pty Ltd to pay its indebtedness to the applicants was caused by some conduct of the bank.  In my view, the evidence in the present case does not establish that there is any basis for inferring that there is a bona fide claim or that the applicants have an arguable case, in that regard.

21. It is unnecessary to outline the structure of the relevant group of entities which might have an interest in the proceeds.  The applicants handed up and relied upon a chart setting out that structure.  In summary, that chart shows that the debtor to the applicants, Brook Reyes, held two-thirds of the units in the Sunwood Timber Unit Trust which in turn had a 50 per cent interest in a joint venture called the Sunwood Timber Joint Venture, the trustee of which was Sunwood Timber Pty Ltd.  The hire purchase agreement was with ST(2) which was the trustee of the Sunwood Timber Unit Trust.  However, the evidence establishes that ST(2) had effectively assigned all its right to the proceeds of sale or all its entitlement under the hire purchase agreement in respect of the goods to Sunwood Timber Pty Ltd, that is, the Sunwood Timber Joint Venture.  Thus, upon a sale yielding an amount in excess of the indebtedness, that is, what the applicants contend is a sale for full value, the net proceeds, that is the excess, would have been payable to Sunwood Timber Pty Ltd.  In the event that it was had a sufficient surplus to do so (in relation to which I have no evidence) it would have been obliged to pay 50 per cent of the net proceeds in due course to ST(2).  ST(2), in the event it was in surplus and was able and obliged to distribute such surplus as it had, would have been obliged at some point of time, possibly in the next financial year or this financial year, to distribute two-thirds of its surplus to Brook Reyes.  In the event that Brook Reyes then had sufficient assets to meet all of its liabilities, it would no doubt have paid its liability for interest to the applicants under the loan agreement with the applicants.

22. The outcome of that situation is very much a matter of pure hypothesis.  I indicated to counsel for the applicants in the course of argument that I would not accept, there being objection to it, the materials in the most general form sworn to by the applicants that they believed that the contents of the statement of claim are true and correct.  I said I would not accept that as proof of the individual matters pleaded.

23. All in all, it seems to me that the evidence does not sustain a sufficiently arguable case to meet the criterion I have indicated is required to establish a substantial and bona fide claim which the debtor should fairly be permitted to litigate before the bankruptcy proceedings are allowed to continue.

24. In these circumstances, the application to set aside the bankruptcy notice must fail.  By making that order, I do not intend to foreclose the ability of the applicants to defend the bankruptcy proceedings on the assumption that they are issued, and an act of bankruptcy is committed, on any issue which they may be advised they are entitled to pursue and on such evidence that they wish to place before the court.   The only decision I am making at the present time is that on the material presently before the court, I am not satisfied that the applicants have made out their case for an order that the bankruptcy notice be set aside.  Accordingly, I make the following orders:

    1.        Set aside the order of Registrar Wood on 19 May 1999.

    2.Dismiss the application of the applicants for an order that the bankruptcy notice be set aside.

    3.Extend the time for compliance with the bankruptcy notice served on the debtors from 21 August 1998 to 2 July 1999.

    4.The applicants pay to the respondent the costs of and incidental to the application dated 10 September 1998 and the notice of motion dated 8 June 1999.

I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

Associate:

Dated:             22 June 1999

Counsel for the Applicant:	Mr C Harrison
Counsel for the Respondent:	Mr M Clarke
Solicitor for the Respondent:	Russell Kennedy
Date of Hearing:	21 June 1999
Date of Judgment:	22 June 1999