N2948

PAPUA NEW GUINEA

[In the National Court of Justice]

WS NO. 1126 OF 2003

BETWEEN:

KINA FINANCE LIMITED
(Plaintiffs)

AND:

GREG NEVILLE
(Defendant)

Waigani	:	Gabi, J
2004	:	9th December
2005	:	24th November

PRACTICE AND PROCEDURE Service of originating process No instructions to accept service No personal service on defendant-Irregular service Default judgment set aside.

PRACTICE AND PROCEDURE Deed of guarantee and indemnity-Obligations of guarantor-Guarantor may rely on principal debtor’s right to set-off and counterclaims as defence-Summary judgment refused.

CASED CITED
Chief Collector of Taxes –vs- T.A. Field Pty Ltd [1975] PNGLR 144.
Green and Company Pty ltd –vs- Green [1976] PNGLR 73.
Bank of South Pacific –vs- Spencer [1983] PNGLR 239.
Dep International Private Ltd –vs- Ambogo Sawmill Pty Ltd [1987] PNGLR 117.
Wong –vs- Haus Bilas Corporation [1988-89] PNGLR 42.
Kumul Builders Pty Ltd –vs- Post & Telecommunication Corporation [1991] PNGLR 285.
Tsang –vs- Credit Corporation [1993] PNGLR 112.
Curtain Brothers (Qld) Pty Ltd and Kinhill Kramer Pty Ltd –vs- The State [1993] PNGLR 285.
Papua New Guinea Banking Corporation –vs- Pala Aruai and Freeway Enterprises Ltd (2002) N2234.

COUNSEL:
A Mana, for the plaintiff
T Boboro, for the defendant

24th November 2005

DECISION

GABI, J: There are two (2) applications on notice before the Court and both were heard together. The defendant’s application is to set aside the default judgment obtained ex parte by the plaintiff on 7th November, 2003, and leave to file his defence. The plaintiff, on the other hand, seeks summary judgment in the event the default judgment is set aside.

In support of his application, the defendant filed three (3) affidavits: two (2) affidavits of the defendant sworn on 11th and 26th November, 2004 respectively; and the affidavit of Copland Raurela sworn and filed on 1st December, 2004. The plaintiff relies on the following affidavits for its application: the affidavit of service of Joe Onga sworn on 8th September and filed on 28th October, 2003; two (2) affidavits of Allan Mana sworn on 28th October, 2003 and 30th November, 2004 respectively; and the affidavit of Wayne Honeyset sworn on 30th November and filed on 1st December, 2004.

Background
It is helpful to set out the relevant background facts in chronological order. On 29th June, 2001, Morne Industries PNG Ltd (hereinafter the "principal debtor") obtained a loan from the plaintiff. As security for the loan, the defendant provided a personal guarantee and indemnity as evidenced by the Deed of Guarantee and Indemnity dated 29th June, 2001. The defendant is a director of the principal debtor. In addition, two (2) registered bills of sale nos. BS3525/01 dated 29th June, 2001 and BS825/02 dated 20th April, 2002 respectively over certain chattels were given by the principal debtor. On 29th June, 2001, the sum of K120,000 was advanced to the defendant. On 8th October, 2002, the principal debtor defaulted in repaying the loan. The plaintiff issued notices for payment to the principal debtor and the defendant but no payment was forthcoming. On 29th February, 2003, the plaintiff’s lawyers sent a final letter of demand, which has not been complied with.

On 11th April, 2002, the plaintiff issued a petition to wind up the principal debtor in proceedings MP No. 123 of 2003. On 4th June, 2004, the principal debtor applied for the stay of the winding up petition on the basis that sufficient funds were forthcoming from the State to offset the debt. On 9th June, 2003, the plaintiff issued two repossession notices to the principal debtor under the bills of sale. On 25th June, 2003, the winding up petition was stayed pending the settlement of the principal debtors claim by the State. The plaintiff was at liberty to apply if payments were not made within a reasonable time. On 9th and 10th July, 2003, the plaintiff repossessed all the timber milling and dressing equipment the principal debtor had put up as security on the loan. On 29th July, 2003, the principal debtor issued proceedings WS No. 1026 of 2003 claiming that the two (2) bills of sale are invalid pursuant to s. 4 of the Instruments Act, delivery of the chattels to the plaintiff and damages.

On 13th August, 2003, the plaintiff filed this proceedings WS No. 1126 of 2003 to enforce the personal guarantee and indemnity given by the defendant. The plaintiff alleged that the Writ of Summons was served on the defendant on 3rd September, 2003. On 7th November, 2003, the plaintiff obtained default judgment against the defendant. On 24th August, 2004, the defendant filed his notice of intention to defend this proceedings. On 11th November, 2004, the defendant filed his notice of motion to set aside the default judgment. As a result of the defendant’s application on notice, the plaintiff filed its notice of motion on 30th November, 2004, to obtain summary judgment.

A matter that is relevant is the proceedings WS No. 978 of 2004. That action was filed on 28th July, 2004, by the principal debtor against the State claiming the sum of K537,000 due under a Deed of Release. A summary judgment was entered against the State in the sum of K537,000 on 26th November, 2004.

Irregular Service
Counsel for the defendant submitted that the service of the Writ of Summons on 3rd September, 2003, on a Ms Aida Puyokam, an employee of the principal debtor, was irregular in that she had no instructions to accept service on behalf of the defendant. As the Writ was irregularly served on the defendant, the default judgment should be set aside as a matter of right. He argued that the Court has no discretion in the matter but to set aside the default judgment. It was submitted in the alternative by Counsel for the defendant that the judgment should be set aside on the grounds that the defendant has offered a reasonable explanation for allowing the default judgment to be entered, that the affidavit evidence disclosed a defence on merits and that the plaintiff will not suffer any prejudice.

Order 6 of the National Court Rules deals with service of documents. O 6 rr 1 and 3(1) provides:

"1.	Mode of service (9/1)

Any document required or permitted to be served in any proceedings may be served personally, but need not be served personally unless personal service is required by these Rules or by order of the Court…

3.	Personal service: How effected (9/3)

(1)	Personal service of a document may be effected by leaving a copy of the document with the person to be served or, if he does not accept the copy, by putting the copy down in his presence and telling him the nature of the document."

The law is settled in this jurisdiction that if a judgment is irregularly entered then the defendant is entitled to set it aside as a matter of law (see Green and Company Pty Ltd -vs- Green [1976] PNGLR 73; Bank of South Pacific -vs- Spencer [1983] PNGLR 239; and Wong -vs- Haus Bilas Corporation [1988-89] PNGLR 42).

The evidence as regards to service of the Writ conflicts. Joe Onga deposed that on 30th September 2003, he attended at the offices of the defendant and effected service on a Ms Aida Puyokam, who confirmed that she had authority from the defendant to accept service. He further deposed that he overheard the defendant, on two way radio, advising Ms Puyokam to accept service (see affidavit of service of Joe Onga sworn on 8th October, 2003, paragraphs 2 and 4).

The defendant strongly denies giving instructions to Ms Aida Puyokam to accept service on his behalf. He deposed that he never gave instructions to anyone including Ms Aida Puyokam or his relatives to accept service of the Writ. He further deposed that he became aware of the default judgment on 9th July, 2004 (see affidavit of Greg Neville sworn and filed on 11th November, 2004, paragraphs 12 and 13.

I have considered carefully the evidence on service. There is no clear evidence that the defendant gave instructions to Ms Aida Puyokam to accept service of the Writ. As such the defendant must be given the benefit of doubt. There was no personal service of the Writ on the defendant. I find that Ms Aida Puyokam had no instructions to accept service on behalf of the defendant. The default judgment was obtained irregularly and must be set aside as a matter of principle.

Having set aside the judgment, is service on the defendant necessary? Order 6 r 2(3) provides:

"(3)	Where a defendant to any originating process serves a notice of intention to defend under Order 7, the originating process shall be taken to have been served on him personally on the date on which that notice is filed or on such earlier date as may be proved."

After having become aware of the proceedings on 9th July, 2004, the defendant filed his notice of intention to defend on 24th August, 2004. I am of the view that, there is no need for service of the Writ on the defendant.

Summary Judgment

Order 12 r 38(1) clearly sets out the circumstances in which a summary judgment should be entered for the plaintiff. O 12 r 38(1) provides:

"38.	Summary judgment (13/2)

(1)	Where, on application by the plaintiff in relation to any claim for relief or any part of any claim for relief of the plaintiff –

(a)	there is evidence of the facts on which the claim or part is based; and

(b)	there is evidence given by the plaintiff or by some responsible person that, in the belief of the person giving the evidence, the defendant has no defence to the claim or part, or no defence except as to the amount of any damages claimed.

the court may, by order, direct the entry of such judgment for the plaintiff on that claim or part, as the nature of the case requires."

At what point should an application be made? In Kumul Builders Pty Ltd –vs- Post and Telecommunication Corporation [1991] PNGLR 299, His Honour, Sheehan, J discussed the purpose and the time when an application may be made. He said at page 300:

"The purpose of these rules is to enable a plaintiff to obtain judgment without trial, if he can prove his claim clearly and if the defendant is unable to set up a bona fide defence, or raise an issue against the claim which ought to be tried …

An application for summary judgment is normally made after the filing of a notice of intention to defend but prior to the actual filing of a statement of defence. But the mere fact of filing a defence does not, of itself, prevent an application under the rule if it can be shown there is in fact no arguable defence."

In Tsang –vs- Credit Corporation [1993] PNGLR 112, the Supreme Court (Kapi, DCJ, Sheehan and Brown, JJ) considered the proper application of the rule. The Court said at page 117:

"There are two elements involved in this rule:

(a)	evidence of the facts proving the essential elements of the claim; and

(b)	that the plaintiff or some responsible person gives evidence that in his belief there is no defence.

In this case, there is no issue in relation to the first element.

As to the second element, the plaintiff must show in absence of any defence or evidence from the defendant that, in his belief, the defendant has no defence. If a defence is filed or evidence is given by the defendant…, the plaintiff must show that, upon the facts and/or the law, the defendant has no defence. The plaintiff will not be entitled to summary judgment if there is a serious conflict on questions of fact or law. Whether a case should go to trial on these issues will be determined on the facts of each case. However, the authorities show that the summary jurisdiction should only be invoked in a clear case."

The authorities clearly show that the discretion conferred on the Court by O 12 r 38 should be exercised in a clear case and with considerable care. Summary judgment should be granted only where there is no serious triable issue of fact or law. If there is no dispute as to fact and the law is clear then judgment must be entered for the plaintiff (see also the Chief Collector of Taxes –vs- T.A. Field Pty Ltd [1975] PNGLR 144; Dep International Private Ltd –vs- Ambogo Sawmill Pty Ltd [1987] PNLR 117; Curtain Brothers (Qld) Pty Ltd and Kinhill Kramer Pty Ltd –vs- The State [1993] PNGLR 285).

Does the defendant have a defence? The defendant’s defence is to be found in paragraphs 19 to 24 of the defendant’s first affidavit dated 11th November, 2004; paragraphs 3(d), (e) and (f) of the defendant’s second affidavit dated 26th November, 2004; and paragraphs 3, 4 and 5 of the affidavit of Copland Raurela dated 1st December, 2004. The defendant set up three (3) defences:

1.	The defendant says that the plaintiff cannot pursue the claim against himself unless it’s efforts to have the principal debtor pay the debts owed are fully exhausted and it recovers nothing from the principal debtor.

2.	In proceedings WS No. 978 of 2004 between the principal debtor and the State, the principal debtor had obtained summary judgment for the sum of K537,000, which monies would be used to pay the plaintiff.

3.	In proceedings WS No. 1026 of 2003 between the principal debtor and the plaintiff, the two (2) bills of sales, which were put up as security for the loan, have been found to be void and ineffective and damages that will be assessed would be used as a set-off against the plaintiff’s claim.

In respect of the first defence, there is support for that position in this jurisdiction. It has been said that it is only "fair and reasonable" that the lender seek primary enforcement against the borrower and only "as a last resort" against the Guarantor: Papua New Guinea Banking Corporation –vs- Pala Aruai and Freeway Enterprises Ltd (2002) N2234. In that case, the Bank lent money to the company for construction of a hostel property. It was supported by a personal guarantee over Mr Aruai’s residential property. The security the company offered, which was the hostel property, was inadequate and the Bank moved against the Guarantor’s residential property. His Honour Kandakasi, J said at page 10:

"Where a third party to a Loan Agreement or arrangement gives security to a Bank to facilitate an advance or a loan to a borrower, it is only fair and reasonable that every step must be taken to recover the principle and the interest from the borrower first. Failing any success in that direction the mortgagee may then turn to the third party Mortgagee as a last resort."

Counsel for plaintiff submitted that the defendant’s obligations are primary obligations and may be enforced against the defendant without the plaintiff being required to exhaust any remedy it may have against the principal debtor. He referred me to clause 3 of the Deed of Guarantee and Indemnity dated 29th June, 2001. Clause 3.1 provides:

"3.1	Principal Obligations

The Guarantor’s obligations:

(a)	are principal obligations and not ancillary or collateral to any other obligation; and

(b)	may be enforced against the Guarantor without the Beneficiary being required to exhaust any remedy it may have against the Debtor or to enforce any security it may hold with respect to the Debtor’s Obligations."

Clause 3.1(b) is not mandatory. It provides that the obligations "may be enforced against the guarantor" without the remedies being exhausted. It does not operate automatically. It is open to the defendant to argue that the enforcement against him is directory.

The second and third defences could be combined as set off or counter claim. In essence, the defence is that the damages that will be assessed in proceedings WS No. 1026 of 2003 and the judgment debt of K537,000 obtained against the State by the principal debtor in proceedings Ws No. 978 of 2004 would be used to set-off the plaintiff’s claim. At the time the application was made, no assessment had been made in proceedings WS No. 1026 of 2003. The plaintiff was ordered to deliver the chattels to the principal debtor, failing which the principal debtor was to go for assessment of damages.

The plaintiff argued that the right to set-off is available to the principal debtor, not the guarantor. Secondly, in respect of the judgment of K537,000 in WS No. 978 of 2004, it is a contingent asset and the defendant cannot rely on it as a defence.

The principal debtor has a right to set-off the plaintiff’s claim. The defendant is entitled to rely on that set-off or counterclaim as a defence in a personal action based on the guarantee. The learned authors in Halsbury’s Laws said that:

"On being sued by the creditor for payment of the debt guaranteed, a surety may avail himself of any right to set off or counterclaim which the principal debtor possesses against the creditor" (see Halsbury’s Laws of England, 4th Edition, Volume 20, page 102, paragraph 190)."

I adopt and apply that principle in this case. I am satisfied that the defendant has an arguable defence. As a result, I decline the application for summary judgment. I make the following orders

1.	The default judgment obtained on 7th December, 2003 is set aside.

2.	The application for summary judgment is dismissed.

3.	The defendant is granted leave to file his defence within fourteen (14) days form the date of this order.

4.	The plaintiff has fourteen (14) days after service to file it’s reply, if any, to the defence.

5.	Costs is in the cause.

___________________________________________________________
Lawyers for the Plaintiff	:	Allens Arthur Robinson Lawyers
Lawyers for the Defendant	:	Rageau Elemi & Kikira Lawyers