Hannet and Hannet v ANZ Banking Group (PNG) Ltd [1996] PGSC 7; SC505 (16 August 1996)

Unreported Supreme Court Decisions

SC505

PAPUA NEW GUINEA

[SUPREME COURT OF JUSTICE]

CA NO. 32 OF 1994
BETWEEN: LEO HANNET
FIRST APPELLANT
AND: ELIZABETH HANNET
SECOND APPELLANT
AND: ANZ BANKING GROUP (PNG) LTD
RESPONDENT.

Waigani

Kapi DCJ Los Salika JJ
17 June 1996
16 August 1996

PRACTICE AND PROCEDURE - Application to set aside judgement by default - Discretion - Matters going to exercise of discretion - Application under O 12 r 8 (2) (a) and (3) (a) of the National Court Rules

PRACTICE AND PROCEDURE - Distinction between irregularity outside the National Court Rules and a mere irregularity within the Rules - O 1 r 8 of the National Court Rules.

PRACTICE AND PROCEDURE - Application to set aside will not be allowed if party has taken fresh step with knowledge of irregularity - O 1 r 9 National Court Rules.

Cases Cited

Anlaby v. Praetorions [1888] UKLawRpKQB 55; (1988) 20 QBD 764

Green & Company Pty Ltd v. Green [1976] PNGLR 73

Smeeton v. Davara House Pty Ltd [1979] PNGLR 324

Page P/L v. Malipu Balakau [1982] PNGLR 140

Bank of South Pacific v. Spancer [1983] PNGLR 239

Barker v. The Government of Papua New Guinea, Davis and Bux [1976] PNGLR 340

In re Pritchard, dec’d, Pritchard v. Deacon and Others [1963 Ch 502.

Legislation Cited

National Court Rules

Counsel

J F Aisa for the Appellants

K Naru for the Respondent

16 August 1996

KAPI DCJ LOS SALIKA JJ: The appellants are husband and wife. They are both directors and shareholders of a company known as Liz and Krist Enterprises Pty Lt. On 12 January 1989 the appellants executed a guarantee and indemnity deed with the respondent for a credit account and banking facilities to accommodate the management and operations of the said company. This credit facility included an overdraft facility which increased to about K53, 220.47 by the 12 August 1992. The respondent served a Notice of Demand for the payment of the balance owing by the appellants under the guarantee but the appellants did not meet the demand.

Subsequently, the respondent instituted legal proceedings (WS No. 670 of 1992) in the National Court on 2 September 1992 to recover the amount of money owing.

The writ of summons was served on the first appellant and subsequently a default judgment was entered against him on 7 October 1992. We are not concerned with the default judgment entered against the first appellant.

A default judgment was entered against the second appellant on 22 March 1994 for the sum of K70, 895.08. On 14 June 1994 an application was made to the National Court to set aside the default judgment on the basis that there was no proper service of the writ of summons on the second appellant.

The motion came on for hearing before the Chief Justice on 20 July 1994. His Honour found that the second appellant was not served personally with the writ of summons in accordance with the National Court Rules, and then further concluded in the following words:

"It is trite that it is strictly unnecessary to show defence on the merits in order to apply to set aside an irregularly obtained judgment. However I support the proposition that it is advisable even in such a case to set out the facts disclosed on the Defence of the merits because there is nothing to be lost and indeed maybe a good deal to be gained by doing so."

His Honour later continued in his judgment:

"The Second Defendant has not filed or deposed to a proposed defence but Counsel has advised that he has instructions to file such defence. I propose therefore in those circumstances to defer ruling and direct that the Second Defendant file Affidavit of Defence and proposed Defence by tomorrow Thursday 21st of July 1994 and serve it upon the Applicant Plaintiff. Motion stands adjourned to Friday 22nd July 1994 Motions."

Subsequently, the second appellant filed a proposed defence and further submissions were made by the parties. The Chief Justice then handed down his final decision in the matter on 29 July 1994. In his reasons for decision His Honour restated his earlier finding "that technically the default judgment was irregularly entered on the basis of the Writ of Summons not having been properly served upon the second Defendant".

On the question of defence on the merits he finally concluded that:

"So that in the end result I am not satisfied that demonstrated to me prima facie defence on the merits such that this default judgment should be set aside for this matter to proceed to a trial."

The second appellant has appealed against this decision. This case falls to be decided on the following ground of appeal:

"That His Honour erred in law and in fact in refusing to set aside the Default Judgment which was entered without required service under National Court Rules and therefore was irregular."

Counsel for the second appellant submitted that once the Chief Justice reached the conclusion that the judgment was entered irregularly, namely, that there was no proper service in accordance with the National Court Rules, he had no discretion but to set aside the default judgment. He submitted that His Honour erred in directing the second appellant to prove a defence on the merits.

Counsel for the respondent on the other hand submitted that while the Chief Justice found that the judgment was entered irregularly, he did not fall into error when he directed the second appellant to file evidence of a defence on the merits. He submitted that there is a wide discretion in the National Court to require that the second appellant to prove a defence on the merits under O 12 r 8 (2) (a) and (3) (a) of the Rules. It is necessary to set out the terms of these rules:

"8. Setting aside or varying judgment or order.

(1) .....

(2) The Court may, on terms, set aside or vary a judgment-

(a) where the judgment has been entered pursuant to Order 12 Division 3 (default judgment);

(b) ...

(c) ...

(3) The Court may, on terms, set aside or vary an order-

(a) where the order has been made in the absence of a party, whether or not the absent party is in default of giving a notice of intention to defend or otherwise in default, and whether or not the absent party had notice of motion for the order;"

It is clear from the terms of these rules that the National Court has a wide discretion in setting aside a default judgment. There are two broad categories of cases. The first relate to judgments that are entered irregularly and the second relate to judgments which are entered regularly.

In the present case we are concerned with judgments entered irregularly. The question then arises; how should the Court exercise its discretion where the judgment is obtained irregularly?

The Courts in Papua New Guinea have quoted authorities from England as well as Australian States on this issue. The most often quoted authority on this issue is Anlaby v Praetorius [1888] UKLawRpKQB 55; (1888) 20 QBD 764 which stands for the proposition that if a judgment is entered irregularly, the defendant is entitled to set it aside ex debito justitiae (as required in the interests of justice). This principle was approved in Green & Company Pty Ltd v Green [1976] PNGLR 73; Smeeton v Davara House Pty Ltd [1979] PNGLR 324; Page P/L v Malipu Balakau [1982] PNGLR 140. This authority is also referred to in Bank of South Pacific v Spencer [1983] PNGLR 239.

Upon a close analysis of Anlaby v Praetorius (supra) there is a further distinction to be made between judgments entered irregularly in acting under a rule and a judgment obtained irregularly independently of the rules. This distinction was clearly drawn by Greville Smith J. in Page P/L v Malipu Balakau (supra) at pages 145 to 146. At page 145 he made reference to O'Leary J. in Green and Co Pty Ltd v Green (supra) and continued:

"This passage which is 'obiter dicta' because his Honour then went on to find that the judgment before him had in fact been regularly entered, cannot in any event be lifted as a general statement of principle without distinguishing between an irregularity in acting under a rule and an irregularity independently of the rules. What his Honour said is true of the second but not of the first. If it were true of both then O 93 r 17 would have no meaning or effect. In Anlaby v Praetorius (supra) Fry LJ at p 769:

'But in the present case we are not concerned with an instance of non-compliance with a rule, nor with an irregularity in acting under any rule. The irregular entry of judgment was made independently of any of the rules; the plaintiff had no right to obtain any judgment at all.'

In the instant case the plaintiff did have a right to serve the writ and, as I have found, he did serve it, and assuming that there was an irregularity in service it was an irregularity consisting only of a non-compliance with O 10 r 1. It would follow that entry of judgment, if it were tainted with such an earlier irregularity, would be irregular in the same way - an irregularity falling within O 93 r 17 which says, as I have already in substance remarked:

'Non-compliance with these rules...shall not render any proceedings void..'

(The emphasis is of course mine)"

The reference to the rules in this passage relate to the old rules. The equivalent under the current rules is O 1 r 8 of the National Court Rules:

"8. Non-compliance with the Rules not to render proceedings void.

Non-compliance with any of the Rules, or with any rule of practice for the time being in force, shall not render any proceedings void, unless the Court s directs, but the proceedings may be set aside, either wholly or in part, as irregular, or may be amended or otherwise dealt with, in such manner, and on such terms, as the Court thinks fit."

Where a judgment is regularly obtained the manner in which the Court may exercise its discretion to set aside such a judgment is set out in Barker v The Government of Papua New Guinea, Davis and Bux [1976] PNGLR 340, namely:

1. There must be an affidavit stating facts showing a defence on the merits;

2. There must be reasonable explanation why judgment was allowed to go by default; and

3. The application must be made promptly and within a reasonable time.

In dealing with judgments entered irregularly which fall within the equivalent of current O 1 r 8, Graville Smith J. in Page P/L v. Malipu Balakau (supra) said:

"This leaves open the matter of a judgment obtained irregularly. In my opinion, ordinarily the same rules apply in the case of an irregularity which falls within the ambit of O 93 r 17."

He concluded that the practice in relation to judgments obtained regularly should apply to judgments obtained irregularly that fall within O 1 r 8. This he concluded comes within the "untrammelled discretion with a view to doing justice."

It is necessary to explore this matter further. The equivalent of Order 1 r 8 is to be found in the old English Rules O 71 r 1 of RSC 1883. The application of this rule was considered by the Court of Appeal in In re Pritchard, dced. Pritchard v. Deacon and Others [1963] Ch 502. This case is important because it sought to clarify the types of cases that fall within the rule and those that fall outside it. A distinction is made between proceedings which may result in a mere irregularity and proceedings that can be said to be a “nullity”. In respect of the first category, they come within the rule and the Court has a wide discretion given by the rule. Where a proceeding is a nullity, it is not covered by the rule and the Court must as a matter of law set aside the proceeding.

There has been confusion over the meaning of what is a “nullity”. At page 516 Lord Denning said:

“We were referred to many cases on nullity and irregularity. They are most confusing because of the loose way in which the word “nullity” is used: and the sooner it is put in its proper place the better. Often a proceeding has been said to be a “nullity” when it would have been more correct to say that, if the irregularity has not been waived, it will be set aside ex debito justitiae. Thus, a judgment by default which is signed irregularly will be set aside ex debito justitiae: see Anlaby v. Praetorius (188) [1888] UKLawRpKQB 55; 20 QBD 764; 4 TLR 439 CA Hughes v. Justin [1894] UKLawRpKQB 33; [1894] 1 QB 667; 10 TLR 291, CA, particularly when it is signed in defiance of an express rule: see Hamp-Adams v. Hall [1911] UKLawRpKQB 129; [1911] 2 KB 942; 27 TLR, CA, but it is not a nullity. Even when an order is obtained without due service of process, it is not a nullity (despite what was said in Craig v. Kanssen) [1943] 1 KB 256; [1943] 1 All ER 198, CA; but it will be set aside ex debito justitiae, if it has not been waived: see Hewitson v. Fabre [1888] UKLawRpKQB 87; (1888) 21 QBD 6; 4 TLR 510 DC; (where the headnote is wrong in saying it was a nullity), and Wiseman v. Wiseman [1953] P. 79; [1953] 2 WLR 499; [1953] 1 All ER 601, CA. There are many cases which show that non-service can be waived: for it a man knows of the process and allows execution to be levied against him without complaint, and does not apply to the court to set it aside within a reasonable time, h e may be too late to get any relief: see Holmes v. Russel (1841) 9 Dowling 487 (where there is a most instructive judgement by Coleridge J.), Emerson v. Brown (1844) 8 Scott NR 219: Archbold’s Practice (1866), pp. 211-212. The case of Fry v. Moor [1889] UKLawRpKQB 90; (1889) 23 QBD 395, CA seems to me a simple illustration where the defendant had not in fact been served, and yet it was held that he had waived the irregularity. Even Smurthwaite v. Hannay [1894] UKLawRpAC 54; [1894] AC 494, 498, 501, 506; 10 TLR 649 HL is not a case of nullity. There was a misjoinder of causes of action contrary to the rules then in force. Mr. Finlay Q.C. argued that it was “a mere iregularity” and that “the application was not made within reasonable time within Ord. 70, r. 2.” Note he only put it on Ord. 70, r. 2. The House rejected that argument and went on to restore the order of the Queen’s Bench which was clearly based on Ord. 70, r. 1. There was a non-compliance with the rules and the court dealt with the proceedings by allowing the plaintiffs to amend and elect as to which claim they would proceed with. Clearly the proceedings were not held to be a nullity; because you cannot amend a nullity. No other cases give rise to any difficulty. In most of them, I am glad to say you will find that the courts have refused to set aside process for technical irregularities: see MacFoy v. United Africa Co. Ltd. [1962] AC 152, 160, Pontin v. Wood [1962] 1 QB 594. The only true cases of nullity that I have found are when a sole plaintiff or a sole defendant is dead: see Tetlow v. Orela Ltd. [1920] 2 ch 24, or non-existent: see Lazard Bros. v. Midland Bank [1933] AC 289, 206; 49 TLR 94 HL; and I would like to see the word “nullity” confined to those cases in future.”

Lord Upjohn after setting out the effect of a nullity said at page 520:

“I am not so sure that it is so difficult to draw a line between irregularities, by which I mean defects in procedure which fall within Ord. 70, and true nullities, though I agree no precise definition of either is possible. I think part of the difficulty is that the phrase “ex debito justitiae” has been taken as being equivalent to a nullity, but, with all respect to Lord Greene’s judgment in Crag v. Kanssen [1943] 1 KB 256, 258 ef seq., it is not. The phrase means that the plaintiff is entitled as a matter of right to have it set aside. Let me quote an analogy. The right to wind up a company is by statute a discretionary right. Yet the books and authorities point out that in many cases as against the company an unpaid creditor on a winding-up petition is entitled to a winding-up order ex debito justitiae. This means no more than that, in accordance with settled practice, the court can only exercise its discretion in one way, namely, by granting the order sought. So in many of the cases where there are defects of procedure, even if the defects are mere irregularities for the purposes of Ord. 70 so that the court has a discretion, it must follow that the applicant, if he is in no wise estopped by conduct or waiver, is entitled to say: “ I am entitled under Ord. 70 to have the “order made upon me set aside ex debito justitiae.” Indeed, the only difference between a nullity and an irregularity, to which such a principle applies, is where, being a nullity, it is too late to start again.

I propose to mention one or two of the earlier authorities, for I think they are no more than examples of irregularities where the court, exercising its discretion, was bound to set aside the proceedings because the irregularity was such that the applicant ex debito justitiae was entitled to it. Thus in the earliest case in date cited to us by counsel, Anlaby v. Praetorius 20 QBD 765, CA, judgment was signed before the time limited for defence expired and so was held bad. Of course it was. It was said that the parties were entitled ex debito justitiae to have it set aside, and I would have thought (with all respect to the judgment of Fry L.J. and Lopes L.J.) that this was really a case where it could be said that there had been a mere failure to comply with the rules, and that judgment was obtained in default of defence when in fact the time for defence had not expired. But it was plain that the defendant was entitled to have the judgment set aside ex debito justitiae, he not having waived the point or taken any further step in the action. Suppose in Anlaby v. Praetorius the defendant, instead of applying to set the judgment aside, had compounded with the plaintiff and agreed to pay off the judgment by instalments upon the terms that if he fell into arrear the whole of the judgment debt should become due, could it be said that on the happening of that event the plaintiff could not proceed to enforce his judgment and levy execution? I should have thought in such a case that the defendant would have been held to have waived what would have been an irregularity and there would be jurisdiction in such a case under Ord. 70 to make such order as might be just.”

The distinction made is between proceedings that are a nullity and those that are mere irregularity. To the first, O 1 r 8 is not applicable and the Court has no discretion but to set it aside. If it is an irregularity within the meaning of O 1 r 8, the Court has a wide discretion to deal with it under the terms of the rule. That the phrase “ex debito justitiae” is not to be confused with a “nullity”. A party who asks for a judgment to be set aside ex debito justitiae simply is asking the Court to exercise its discretion in one way, namely, to set aside judgment in the circumstances. This falls within the latter category.

There is no dispute that the judgment in this matter was obtained in breach of provisions relating to service of originating process under O 6 r 3 of the National Court Rules. It is therefore an irregularity which falls within O 1 r 8. It is not a nullity. We conclude from this that the Chief Justice did not fall into error when he directed the second appellant to show evidence of a defence on the merits. The discretion to set aside in respect of the latter is subject to the practice that an applicant must show a defence on the merits. In this regard we adopt the opinion of Graville Smith in Page P/L v. Malipu Balakau (supra).

In response to the direction to prove a defence on the merits counsel for the second appellant filed a proposed defence and a counterclaim. The Chief justice considered this and concluded:

"The conclusion on the proposed defence that has been filed is that I am not satisfied that that is sufficiently demonstrating defence on the merits. It deposes to and pleads some arrangements in relation to the house that was the subject of the loan for which the defendants the first and the second, husband and wife had given guarantees."

In our view the second appellant cannot succeed on the question of a defence on the merits. The practice with regard to proving a defence on the merits must be done by way of an affidavit setting out the proposed defence. The second appellant did not file such an affidavit as directed to do so. A proposed defence is not sufficient. We would dismiss this ground of appeal.

There is a further basis on which the appeal may be dismissed. Under O 1 r 9, an application to set aside any proceeding for irregularity shall not be allowed “if made after the party applying has taken fresh step with knowledge of the irregularity”.

In this matter the second appellant became aware of the irregularity of service when she returned from Bougainville about January 1994 (see paragraph 4 of Affidavit of the second appellant sworn 6 June 1994). Following the default judgment which took effect on 22 March 1994, Garnishee proceedings were taken out by the respondent in April 1994. In response to these proceedings the second appellant instructed her lawyer, Mr Aisa, through whom an offer was made to adjourn the Garnishee proceedings on the basis of an undertaking to pay K10,000 and an instalment payment of K1000 per month (see paragraph 3 of affidavit of Kelly Naru sworn 1 July 1994). In our view this constitutes a fresh step taken with knowledge of the irregularity. The application to set aside was made after instruction were given to settle the full amount owing. Consequently an application to set aside the default judgement cannot be allowed.

The order of the Court is that the appeal is dismissed with costs to the respondent.

Lawyers for the Appellants: J F Aisa and Associates

Lawyers for the Respondent: Carter Newell