Supreme Court New South Wales Medium Neutral Citation: Attwells v Marsden [2011] NSWSC 38 Hearing dates: 25 January 2011, 3 February 2011 Decision date: 11 February 2011 Jurisdiction: Equity Division Before: Pembroke J Decision: Statement of Claim dismissed with costs Catchwords: PENALTY - equitable doctrine - consent orders - whether higher amount is a present debt - substance of arrangement Legislation Cited: Farm Debt Mediation Act 1994 Cases Cited: Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259 Cameron v UBS AG [2000] VSCA 222 Hunt v Kallinicos [2009] NSWCA 5 O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 Perpetual Trustee Company Ltd v Aspley Specialist Pty Ltd [2010] QSC 232 Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825 Ringrow PtyLimited v BP Australia Pty Limited [2005] 224 CLR 656 Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2000] QCA 221 Texts Cited: Parkinson P (ed),The Principles of Equity, (Law Book Co Sydney 1996) Parkinson P (ed), The Principles of Equity, Law Book Co Sydney 2003) 2nd Ed Category: Principal judgment Parties: Gregory Ian Attwells (Plaintiff) Barbara Jane Lord (Second Plaintiff) Wilbidgee Beef Pty Limited (Third Plaintiff) Peter William Marsden (First Defendant) David John Kerr (Second Defendant) Australia and New Zealand Banking Group Limited (Third Defendant) Representation: Counsel: M R Speakman SC with P Knowles (Plaintiffs) S B Docker (Defendants) Solicitors: Whites Lawyers (Plaintiffs) Kemp Strang (Defendants) File Number(s): 2011/00024094 Judgment Introduction 1This case concerns the doctrine of penalties. The plaintiffs invoke the doctrine in an attempt to set aside judgments and orders to which they agreed in June 2010. The parties' competing contentions give rise to an issue of general application. 2The judgments and orders were given and made in proceedings commenced by the ANZ Bank and the Receivers for possession of certain properties and for judgment for all outstanding moneys due on certain facilities. The properties are grazing properties at Forbes in New South Wales. The first and second plaintiffs (who I will call the Guarantors) are the registered proprietors of the properties. The third plaintiff is the trustee of their business. The Receivers were appointed on 23 July 2008 and the proceedings were commenced shortly afterwards. The Facts 3Prior to the commencement of the proceedings, there had been a mediation pursuant to the Farm Debt Mediation Act 1994 . Subsequently on 3 December 2007 a Settlement Deed was entered into between the ANZ Bank, the Guarantors and a company which was the then trustee of the grazing business. The Guarantors' failure to comply with the terms of that deed led to the appointment of the Receivers and the commencement of the proceedings. 4In the Settlement Deed, the Guarantors and the then trustee acknowledged, covenanted and warranted that: (a) The Trustee was indebted to the ANZ Bank for the aggregate debit balances on the facilities totalling $2,381,896.19 as at 3 December 2007; (b) The Guarantors were indebted to the ANZ Bank for the debt due by the trustee limited to an amount of $1.5 million together with all other amounts due under Clause 2.2(a) of the Guarantee. 5In the amended Statement of Claim, the ANZ Bank and the Receivers sought, as I have mentioned, possession of the properties and judgment for the full amount of the debt. As well as the Guarantors, they sued the then trustee as third defendant and its replacement trustee as fourth defendant. There was no distinction in the prayers for relief between the position of the Guarantors and that of the trustees. The pleadings however recited that the liability of the Guarantors was limited to $1.5 million plus the Clause 2.2(a) amounts. 6The Guarantors raised a number of defences none of which appear to have had substantial merit. They included an allegation of breach of fiduciary duty against an officer of the ANZ Bank and a claim that the Settlement Deed should be set aside. The hearing commenced on 15 June 2010 before Rein J. It collapsed on 16 June. The Guarantors and the new trustee reached a compromise with the ANZ Bank and the Receivers. Judgment & Orders 7The commercial substance of what was agreed was that the Guarantors and the new trustee agreed to judgment for possession and verdicts against each of them for $3,399,348. This amount was the full amount due to the ANZ Bank after accrued interest was included. In turn, the Receivers and the ANZ Bank agreed that they would not enforce the verdicts and judgments if $1.75 million were paid by 19 November 2010. The ANZ Bank also promised that if that sum were paid, it would provide discharges of the mortgages over the properties, a discharge of the equitable charge and it would return the individual guarantees. Thus, if the opportunity contemplated by the parties' agreement were taken, the Guarantors would retain the properties and be able to continue their grazing business. 8The Guarantors and the new trustee did not take, or were unable to take, that opportunity. The agreed sum was not paid. Instead, they now seek to set aside the judgment and orders given and made on 16 June 2010. This, of course, has echoes of the approach they took in the underlying proceedings when, after reaching the agreement set out in the Settlement Deed dated 3 December 2007, they sought to set it aside. But there is no legal connection and different principles apply. 9The resolution of the penalty issue now raised by the Guarantors and the new trustee first requires the determination of the proper characterisation of the judgment and orders given and made on 16 June 2010. The terms of those consent orders are relevantly as follows: (1)Verdict and judgment for the third plaintiff against the first, second and fourth defendants in the sum of $3,399,347.67. (2)The first and second defendants give to the plaintiffs possession of the land contained in certificates of title folio identifiers 1/86439, 2/864390, 89/753127, and Auto-Consol 5614-186 collectively known as 'Wilbidgee', Willawang Road, Forbes in the State of New South Wales ("Wilbidgee"). (3)The first and second defendants give to the plaintiffs possession of the land contained in certificate of title folio identifier 101/732202 known as 'Moora Moora" Carrawandool Warroo Road, Forbes in the State of New South Wales ("Moora Moora"). (4)The first and second defendants give to the plaintiffs possession of the water rights as defined in the mortgage of water rights give by the first and second defendants to the third plaintiff dated 6 April 2006 registered book 4487 No 85 in the Register of Deeds at the Land and Property Information ("the Water Rights" and "the Water Rights Mortgage"). (5)The plaintiffs have leave to issue writs of possession forthwith. (6)The first, second and fourth defendants deliver up to the plaintiffs, or as the plaintiffs direct, the items detailed in Annexure "A" to these Consent Orders ("the Goods"). (7)The plaintiffs have leave to issue a writ for the delivery of goods in respect of the Goods forthwith. (8)Verdict and Judgment for the cross-defendants on the Amended Cross-Claim. (9)The Amended Cross-Claim is dismissed. THE COURT NOTES THAT THE THIRD DEFENDANT IS IN LIQUIDATION AND THE AGREEMENT BETWEEN THE PLAINTIFF AND THE FIRST, SECOND AND FOURTH DEFENDANTS THAT: (10)The first, second and fourth defendants agree and acknowledge that: (a)The goods form part of the "charged property" as defined in the mortgage debenture given by the third defendant to the third plaintiff allotted Australian Securities and Investments Commission no. 1295148 ("the Charged Property" and the "the Charge"); (b)Annexure "A" is not an exhaustive list of the Charged Property; and (c)The Charge has become a fixed charge over all of the Charged Property. (11)The plaintiffs shall not enforce orders 1 to 9 above ("the Orders") provided that: (a)The first, second and fourth defendants pay to the third plaintiff the sum of $1,750,000 on or before 19 November 2010 ("the Settlement Sum"); (b)The first and second defendants comply with the terms of (i)The mortgage given by the first and second defendants to the third plaintiff dated 6 April 2006, registered number AC287332 ("the Mortgage"); and (ii)The Water Rights Mortgage. (12)In the event that the first, second and fourth defendants fail to comply with any of their obligations under paragraph 11 above, the plaintiffs shall be at liberty to enforce the Orders forthwith. (13)In the event that the first, second and fourth defendants comply with all of their obligations under paragraph 11 above, upon payment of the Settlement Sum the third plaintiff shall: (a)Provide to the first, second and fourth defendants, in registrable form: (i)Discharge of the Mortgage; (ii)Discharge of the Water Rights Mortgage; and (iii)Discharge of the Charge; (b)Provide to the first and second defendants the original individual Guarantee and Indemnity given by them to the third plaintiff dated 6 April 2006 ("the First Guarantee"); and (c)Provide to the first and second defendants the original Individual Guarantee and Indemnity give by them to the third plaintiff dated 13 October 2006 ("the Second Guarantee"); and (d)Covenant not to sue the first and second defendants any further in respect of the First Guarantee or the Second Guarantee. Proper Construction 10For my part, I do not see any basis for construing Order 1 as anything other than the creation of an immediate and enforceable debt. It records the agreement between the parties that necessarily preceded the consent orders. There are obvious commercial reasons why the Guarantors might have agreed to that order. By doing so, they procured for themselves the opportunity of retaining the properties of which they are the registered proprietors. If the sum of $1.75 million was not paid by 19 November 2010, they would, among other things, lose possession of the properties. If the scheme contemplated by the agreement embodied in the consent orders were fulfilled, they would, upon payment of $1.75 million before 19 November 2010, have received discharges in registrable form of the Bank's mortgages over the properties. This was a considerable benefit to the Guarantors. Their consideration for this benefit consisted, in part, of their consent to verdicts against them for $3,399,348. It was part of the commercial and legal re-structuring of their affairs which they chose to undertake. 11It is irrelevant that, prior to reaching the agreement embodied in the consent orders, the legal liability of the Guarantors was limited to $1.5 million plus further lesser amounts. The Guarantors were legally advised. By the consent orders, they negotiated and agreed to the formulation of new rights and liabilities that bound them. They asked the court to make orders reflecting their agreement. Those orders reflected a new "bargain" which was freely entered into by them. An exception from that freedom to contract, so as to attract judicial intervention to set aside a bargain on which parties of full capacity have agreed, requires good reason: Ringrow Pty Limited v BP Australia Pty Limited [2005] 224 CLR at [31]-[32]. The Penalty Argument 12The argument for the Guarantors was put with clarity and economy but I have reached the view that it has no sound factual or legal basis and that the Statement of Claim should be dismissed. The argument depended on the preliminary proposition that, properly construed, the verdicts for $3,399,348 do not constitute a present debt. This was the starting point for the argument because the Guarantors accepted that the doctrine of penalties has no application "where the agreement provides for a party to recover the full amount of a present debt if the other party fails to pay some agreed lesser amount within a specified time". 13This principle was articulated in O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 367. It means that where a creditor agrees to accept part payment of a debt as full discharge if certain conditions are met, but stipulates that if the conditions are not met, the full amount will be payable, there is no penalty. See also Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 518. 14The principle is well stated in The Principles of Equity , 1996 edited by Professor Parkinson at 296; see also second edition 2003 at 307-308. This passage was cited with approval by the Queensland Court of Appeal in Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2000] QCA 221 (Pincus JA, White J and Chesterman J) at [19]. It is as follows: Where a stipulated sum is presently due and owing as a debt and the creditor grants the debtor an indulgence to pay the debt by instalments, it is not a penalty for the creditor to provide, as a condition of granting the indulgence, that the indulgence will be withdrawn if the debtor defaults in the payment of an instalment. However, this principle ... has no application where, having regard to the substance and notwithstanding the form of the transaction, the stipulated sum is not owing as a present debt. 15In this case the Guarantors contend that, in the context, the verdict for $3,399.348 should not be characterised as a present debt. They rely, in particular, on the fact that the Guarantors were only legally liable under their guarantees for $1.5 million plus other lesser amounts. It is therefore said that, if the hearing had proceeded to a final determination, the maximum amount for which a judgment could have been given against the Guarantors was $1.5 million plus other lesser amounts. 16Consequently, the structure of the consent orders is said to create a device or stratagem that operates in a manner that is penal. It is said that the substance of the agreement is that the real liability is only $1.75 million. The substance, as distinct from the form, of the orders, and the context in which they arose, demonstrate, so it is said, that the verdict for $3,399,348 was stipulated in terrorem; that in truth that provision was a penalty, the amount of which is disproportionate to the true obligation. 17When the true factual complexion is properly understood, this argument only needs to be stated to appreciate why it is inapposite. It ignores the commercial reality of the bargain made by the parties. I have explained the factual complexion, the commercial reality and the essential elements of that bargain in paragraphs [10] and [11] above. The Authorities 18A number of authorities were relied upon. Some appear to be confusing. But in fact, on a careful analysis, each involves the application of the same underlying principle to different facts. Those different facts lead to different results in different cases. In Zenith (supra), it was found that there was no "present debt" for the higher amount of $72,567.13, merely an unsubstantiated claim which was not the subject of any judgment or agreed liability. In Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259 (Nettle, Redlich and Harper JJA), it was held that although the "present debt" for the higher amount of $262,648.96 was not established by judgment, it was implicit, as a matter of construction, in the terms of settlement. By those terms the debtor was taken to have acknowledged that the sum of $26,2648.96 was due. In Cameron v UBS AG [2000] VSCA 222 (Winneke P, Phillips and Buchanan JJA), it was held that there was a "present debt" for the higher amount of $8.4 million constituted by a judgment obtained in a Swiss court which the creditor had a right to enforce. The deed of settlement in the Victorian proceedings contained an implicit acknowledgement by the debtor that the judgment was due and payable. 19In Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825 (Davies J), as in this case, the consent orders recorded a judgment for the higher amount ($1,047,837.83). There was therefore a present debt. No penalty was involved in the parties' agreement that if $800,000 were paid, and certain conditions complied with, the creditor could enforce the consent judgment for the higher amount. The actual decision is consistent with the result at which I have arrived in this case. The reasons however went further. They appeared to introduce a distinction that, with great respect, I do not think is appropriate. At paragraphs [28] and [29], Davies J seemed to require a "pre-existing debt" separate from the consent orders. He thought that it was significant that the form of the agreement involved an acknowledgement that "the debt [was] owing before the arrangement was made in the agreement for the payment of a lower sum on conditions being met": [29]. For my part, I do not consider this to be a necessary requirement. 20Each case will depend on its own facts and the substance of the arrangement which they reveal: Hunt v Kallinicos [2009] NSWCA 5 at [22] (Handley AJA). I have already explained why, on the facts of this case, the Guarantors' agreement to the verdicts against them has a rational basis. The question is whether, as a matter of substance, there is a present debt for the higher amount of $3,399,348. In this case, the Guarantors received a valuable benefit in return for their consent to verdicts against them for the higher amount. There is, in my view, no logical reason why the consent orders should be characterised as penal simply because the "present debt" ($3,399,348) was created by the parties' agreement embodied in those consent orders, rather than as a consequence of some anterior and separate liability. Governing Principle 21In my opinion, the underlying principle governing these cases is clear. The search is for a present debt considered as a matter of substance. An inquiry as to whether, independently of the consent orders, there is a pre-existing debt, or some past dealings giving rise to a prior liability, is apt to distract from the central proposition: Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232 at [22] and [28]. In some cases, the distinction may be relevant. But it will not always be so. It will depend on the particular facts. And I do not think that the decision in Hunt v Kallinicos (supra) suggests otherwise, despite the language of "past dealings" at [27]. 22I have reached the view in this case that the substance of the matter is that Order 1 in the Consent Orders represents a present debt and that there is no penalty involved in the scheme to which the parties agreed. The Statement of Claim should be dismissed with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 February 2011