Using statutory unconscionability to challenge no set-off clauses

Using statutory unconscionability to challenge no set-off clauses: Westpac Banking Corporation v Zilzie Pty Ltd & Ors[1]


On 21 October 2016 Jackson J of the Supreme Court of Queensland delivered judgment in respect of an application by Westpac for summary judgment on its claim to recover debts owing under a business finance agreement (BFA) and guarantees and indemnities.

Westpac advanced $20 million to a corporate borrower under a BFA. The borrower's obligations under the BFA were guaranteed by corporate and individual guarantors. The terms of the BFA and the guarantees and indemnities included a no set-off clause. Upon the borrower's default, Westpac appointed receivers and managers (Receivers) to the borrower's property and commenced legal proceedings against the borrower and guarantors for the outstanding balance of the debt. The borrowers and guarantors alleged a set-off or defence to Westpac's claim due to the Receivers' alleged breaches of duty in selling the borrower's property at an undervalue.

Jackson J refused to grant summary judgment, on grounds of statutory unconscionability, on the basis that the defendants would likely become insolvent if Westpac's claim proceeded to judgment without set-off or reduction. That argument was not specifically pleaded in the defendants' counterclaim and was sought at the hearing of Westpac's application.

The judgment provides a new template for borrowers and guarantors to challenge a no set-off clause and to prevent a financier from obtaining summary judgment on its claim in a timely and cost effective manner. The effect of the decision is out of touch with business realities and would keep Westpac waiting for a payment, which both the borrower and guarantors expressly contracted Westpac to have, whilst protracted proceedings on the counterclaim are litigated.

Putting to one side the lack of fulsome discussion about the circumstances in which Westpac was said to have become liable for the acts of the Receivers, there being an express term that the Receivers are the agents of the borrower, we do not consider the court's reasoning to be compelling in circumstances where the defendants' liquidator or trustee in bankruptcy (as the case may be) would have the power to prosecute any meritorious counterclaim and the funds to prosecute that claim could be obtained from a litigation funder.

The defendants' claims in damages and the no set-off clause

Jackson J considered whether the no set-off clause in clause D5 of Westpac's general conditions booklet, version 3 dated March 2003 excluded equitable set-off, as pleaded in the defendants' defence and counterclaim, in respect of:

  • a claim for damages or compensation;
  • an account for a breach of section 85 of the Property Law Act 1974 (Qld), being the comparator provision of section 111A of the Conveyancing Act 1919 (NSW);
  • a contravention of section 420A of the Corporations Act 2001 (Cth);
  • a contravention of section 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), being statutory unconscionability within the meaning of the "unwritten law"; or
  • any reduction of the debt of any of the defendants as guarantor by reason of such a set off.

Clause D5 provides:

"If any one or more of you have any money in any account with the Lender or are owed any money by the Lender, the Lender can use it to pay amounts payable…but need not do so…

To the maximum extent allowed by law you give up any right to set off any amounts the Lender owes you (for example credit balances in your accounts or any deposit subject to a Deposit Security) against amounts you owe under the Lender Arrangements.

You will pay money you are required to pay under this document without deducting amounts you claim are owed to you by the Lender or any person (for example, an amount in your deposit account)."

The application for summary judgment was made by Westpac on the footing that the defendants' claims in damages could not be set-off against the liabilities owed to Westpac due to clause D5, so that there was no need for a trial of Westpac's claim because the defendants had no real prospect of successfully defending it.

Statutory unconscionability

The defendants alleged that Westpac engaged in conduct in relation to the provision of financial services which was, in all the circumstances, unconscionable within the meaning of section 12CA of the ASIC Act:

  1. by breaching its equitable duty of care in exercising a power of sale of the borrower's property through the Receivers; and
  2. in making demand for payment of the debts owed without set-off,

and claimed damages under section 12GF of the ASIC Act.

Whilst Jackson J concluded that, in some circumstances, breach of the mortgagee's equitable duty of care in exercising a power of sale, as opposed to the statutory duties, may constitute unconscionable conduct under section 12CA of the ASIC Act, his Honour concluded, following the decision of the Supreme Court of Western Australia in Palaniappan v Westpac Banking Corporation[2], that a claim for damages under section 12GF of the ASIC Act does not operate outside the scope of a no set-off clause.

However, at the hearing of Westpac's application, the defendants sought leave to amend their counterclaim to seek orders varying the BFA and the guarantees and indemnities retrospectively pursuant to section 12GM of the ASIC Act to enable them to set-off against any liability to Westpac any claim for loss arising from the conduct of Westpac in contravention of section 12CA of the ASIC Act. The effect of the orders would be that the varied contractual terms would prevent Westpac from relying on clause D5 to repel the defendants' claims of set-off or reduction of liability.

Jackson J noted that although a party would be unable in equity to secure an order varying an individual contractual term, an order under section 12GM(7) of the ASIC Act made in connection with contravening unconscionable conduct does not depend upon equitable principle.

There are two interrelated express conditions upon the power to make an order under section 12GM of the ASIC Act:

  1. The defendant must be a person who "has suffered or is likely to suffer loss or damage" by the conduct of the plaintiff that was unconscionable within the meaning of the unwritten law;
  2. The court must consider that the order to be made "will compensate the person…or prevent or reduce the loss or damage suffered or likely to be suffered".

On the basis that the only loss alleged in the counterclaim was the loss suffered on the sale of the property by the Receivers acting as Westpac's agents, the proposed section 12GM orders, to retrospectively vary the BFA and the guarantees and indemnities to prevent Westpac from relying on clause D5, were held not to affect the loss suffered on the sale or compensate for that loss. The only orders that would compensate for that loss or damage were the orders for damages or compensation for loss sought on the counterclaim which did not operate outside the scope of clause D5.

However, in contrast to Palaniappan (where the point was not considered), Jackson J identified potential loss or damage to the defendants arising out of their inability to pay and consequent insolvency being a different species of loss to that arising out of sale of the secured assets at an undervalue. In this context the court also noted that, upon an insolvency, the power to conduct proceedings for compensation would become vested in the defendants' liquidator or trustees in bankruptcy (as the case may be).

In the circumstances, Jackson J concluded that as there may potentially be loss or damage to the defendants within the meaning of section 12GM of the ASIC Act in connection with section 12CA unconscionable conduct, Westpac's application for summary judgment was refused in order to give the defendants an opportunity to establish loss or damage arising out of the defendants' potential insolvency. Thus, if the defendants are able to establish relevant loss or damage arising out of their insolvency, it would be open to the court to make an order under section 12GM of the ASIC Act striking out the no set-off clause thereby enabling the defendants to plead any defence to Westpac's claim.

This decision sits uncomfortably with the general understanding as to the effect of a no set-off clause. Further, from an analytical standpoint, there is a clear tension between on the one hand, Jackson J's acceptance that all forms of equitable set-off (including a claim for contravention of section 12CA of the ASIC Act) may be expressly excluded and on the other, his decision to refuse summary judgment based on a claim of statutory unconscionable conduct potentially resulting in a variation of a no set-off clause pursuant to a power contained in section 12GM of the ASIC Act. The reasoning is circular. The no set-off clause should be either valid or invalid. A potential halfway house depending on the turnout of events leads to uncertainty, which is both commercially and legally unacceptable.

[1] [2016] QSC 238.

[2] [2016] WASCA 72.

Mark Hilton

I walk with honour in dark places. Take my hand. We've got this.

Mark Hilton Partner

Mark specialises in banking recovery, including all forms of consumer and corporate recovery and insolvency. He has acted for banks and other financial institutions, receivers, liquidators and administrators for over 28 years.

Mark is a leading insolvency lawyer who has been involved in some of Australia's largest and most complex insolvency matters over the past decade.

He is known for his solid relationships with Australia's Big 4 Banks, as well as his expertise in recovery and enforcement, and litigation and dispute resolution.

Clients call upon Mark for his industry knowledge, achieved from being exposed to businesses across a spectrum of industries such as aged care, banking and financial services, retail, property development, manufacturing, pharmaceutical and infrastructure.

His background in commercial litigation has provided a basis for a substantial practice involving the recovery of loss associated with negligent valuations in connection with securitised loans.

Mark's willingness to embrace innovation is, among other things, evidenced by his coordination of the establishment of recovery extranets to assist financial institutions to monitor the status of recovery and enforcement action on secured and unsecured lending transactions.

see my profile
John Poulsen

We use our expertise and experience to solve our clients' problems.

John Poulsen Senior Associate

John acts for banks and insolvency practitioners on all security enforcement and recovery matters.

John is a senior associate in our Brisbane office and specialises in the resolution of banking and insolvency disputes. John has experience in personal and corporate insolvency, commercial litigation in both Federal and State Courts, professional negligence claims, public examinations, and farm debt mediation in Queensland and New South Wales. John has experience across many sectors including commercial, rural and residential property, hotels, retail, and mining services.

John has recently completed secondments to the Dispute Resolution Group and RBB Legal Team, Compliance, Legal & Secretariat, Westpac Banking Corporation, in Sydney and to Resolution Advisory Services, BOQ Group Legal & Secretariat, Bank of Queensland Limited, in Brisbane.

As part of HDY's Pro Bono program, John volunteers at LawRight's Self Representation Service providing free legal advice and assistance to self-represented parties through the course of their civil proceedings in the Federal Court and the Federal Circuit Court of Australia. 

see my profile
Mark Schneider

Achieving our clients' business goals drives our strategy and advice. It's what we do.

Mark Schneider Partner

Mark is the partner responsible for managing our Brisbane office. He has broad experience in corporate restructuring, insolvency and banking and general commercial litigation. Mark specialises in resolving disputes, advising both banks and insolvency practitioners in relation to all aspects of the enforcement of securities and the realisation of distressed assets in Australia and internationally.

Mark has advised insolvency practitioners, secured and unsecured creditors including financial institutions and directors in relation to debt recovery, security enforcement, restructuring, formal insolvency procedures and dispute resolution throughout Australia and in Europe.

He takes pride in helping banks, financiers and their appointees implement practical strategies for resolving disputes, enforcing securities and realising distressed assets in Australia and internationally.

Mark regularly advises on secured creditors' rights, including undertaking complex security reviews and the intensive management of complex and sensitive debt positions.

Mark is sought out by clients involved in potential disputes who are concerned about protecting their reputation. He is experienced with alternative dispute resolution as well as appearing and instructing in the State and Federal Courts, including at Appellate level.

Mark has experience in many industry sectors including commercial, rural and residential property, hotels and leisure, retail, energy and resources (including mining services).

see my profile