BROOKES v MARSHALL

Court of Appeal (NSW)|1995-10-10|Before: McInerney J, Priestley JA, Kirby P, Clarke JA, Needham J

BROOKES v MARSHALL SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

KIRBY P, PRIESTLEY and CLARKE JJA 10 October 1995, 1 February 1996

GUARANTEE & INDEMNITY - contribution between co-sureties - application of general equitable principles - proof of diversion of assets of company - want of proof of proper regard to interests of co-sureties - held: Co-sureties released from contribution.

GUARANTEE & INDEMNITY - contribution between co-sureties - application of general equitable principles - co-surety contributes to boat building business - provides guarantee to bank for business overdraft - subsequent sale of business and removal of asset to another company at behest of other surety - original business thereby deprived of assets to use in reduction of bank overdraft - no provision made for release of guarantee - upon appeal from the decision of the Supreme Court (McInerney J) dismissing a claim for contribution - held: (Priestley JA; Kirby P and Clarke JA concurring): (1) Co-sureties are subject to general equitable principles and may, by their conduct, be disqualified from relief as against each other. Connelly v Joosse, Supreme Court (NSW) (Needham J), unreported, 28 May 1990 approved. (2) The objective proof of the removal of the assets of the company and the failure of the other surety to establish that it had occurred in circumstances properly defensive of the position of the co-surety, sustained the decision of the primary judge. (3) Appeal dismissed.

EQUITY - equitable principles - co-sureties - contribution between - obligations to conform to general equitable principles - onus of proof - removal of assets to disadvantage of co-surety - obligation of other surety to establish that such removal, without apparent regard to the interests of the co-surety, was not such as to deprive of co-surety entitlement to contribution. - Trade, Practices Act 1974 (Cth).

Contracts Review Act 1980. - Fair Trading Act 1987.

Australia & New Zealand Banking Group Ltd (ANZ) brought proceedings against Mr and Mrs Brookes (the Brookes), Mr and Mrs Marshall (the Marshalls) and Wayworld Pty Ltd (Wayworld).

In the proceedings ANZ sought judgment for possession of certain land mortgaged to it by the Brookes, and judgment for moneys owed to it by the Brookes and the Marshalls under guarantees by them to ANZ of Wayworld's liabilities. The Brookes cross claimed in various ways against ANZ and the Marshalls. The Marshalls cross claimed in various ways against ANZ and the Brookes.

Wayworld did not defend ANZ's claim against it. It did not bring any cross claims.

The proceedings were heard by McInerney J. Amongst his various judgments was one dismissing one of the Brookes' cross claims against the Marshalls. The Brookes appealed against this judgment but not against any others. Neither ANZ nor the Marshalls appealed against any of the judgements.

However, although only one aspect of the proceedings is thus before this court, it is connected to other parts of the proceedings, and in order to deal with the limited appeal a brief account needs to be given of the matters involved in the proceedings as a whole.

Mr Brookes in 1988 had been in the business of boat building, specialising in yachts, for some years and had decided to go into the business on his own account. Mr Marshall had bought a from a company for which Mr Brookes had worked. He thought Mr Brookes' proposed business could be profitable and was prepared to invest a certain amount of money in it.

In February 1988 the Brookes and the Marshalls became the four shareholders (1 share each) in Wayworld. Mr Brookes and Mr Marshall were the directors. The company began business in March 1988. One luxury yacht was built, sold for $350,000 (AB 977) and the greater part of the sale price received in March 1989.

In the period to July 1988 Mr Marshall had lent a little over $100,000 to Wayworld. He had also made base moulds available to the company. Mr Brookes was managing the production side of the business.

By July 1988 Wayworld was short of funds to finish building its first boat. Mr Brookes arranged an overdraft facility for Wayworld with ANZ to a limit of $150,000. Before agreeing to make this facility available ANZ obtained the security of an unlimited guarantee from the Brookes, a second unlimited guarantee from the Marshalls, and, supporting the guarantees, a mortgage over Mr and Mrs Brookes' home. ANZ was not prepared to agree to the overdraft arrangement unless each of these securities was given to it. They were executed on 3 and 9 August 1988. It was with this finance that

Wayworld was able to finish the building of its first boat. When the greater part of its sale price was received in March 1989 Wayworld's account with ANZ was in credit.

Wayworld set about building a second yacht. By the end of April it was again in overdraft with ANZ. Its future depended upon finding a buyer for the second yacht. If it could do this it would probably be able to arrange finance to keep going and complete the yacht for the buyer. In late July 1989 a likely buyer broke off negotiations to buy the second yacht. By 26 July 1989 Wayworld's overdraft debit was $160,000.

The Marshalls decided to call it a day. They agreed to sell their two shares to the Brookes. This was done by a deed dated 12 October 1989 to which the parties were the Marshalls. Wayworld and the Brookes (AB 210). Nothing was said in the deed about the Marshalls' guarantee to ANZ of Wayworld's overdraft debt to ANZ. On 12 October 1989 the debt was $164,716.

Mr Brookes kept going with Wayworld for a short time after this but in December 1989 he and Mr J G Lord signed heads of agreement (AB 247) pursuant to which a new joint venture company was to be formed in which he and Mr Lord would have equal shareholdings, and which would acquire and carry on the business of Wayworld. These arrangements were implemented. The new company was named Wayworld Australia Yachts Pty Ltd (Yachts).

Mr Brookes managed production for this company too. Mr Lord and his accountant appear to have looked after money and accounting. Wayworld kept its account with ANZ Yachts banked with Barclays. Nothing much happened in the ANZ account except that its debit balance kept increasing because of interest accruals, and ANZ was concerned about it being in excess of the $150,000 limit.

Barclays, Mr Lord and Yachts kept assuring Mr Brookes and also ANZ, that Yachts would pay out the ANZ overdraft and itself become Wayworld's creditor. This never happened.

By August 1990 ANZ claimed the debit balance was $199,527 and served notices of demand on Wayworld, the Brookes and the Marshalls (AB 852).

On Mr Lord's application a provisional liquidator was appointed to Yachts on 1 August 1990 and a winding up order made on 2 November 1990 (AB 2522). Litigation began about the title to the yacht the building of which had been begun by Wayworld and later continued by Yachts. This litigation delayed the obtaining by Mr Brookes of other finance for completing the yacht. The prospect of this finance for a time caused ANZ to hold back from court proceedings against Wayworld, the Brookes and the Marshalls. I will later need to refer to the evidence about this litigation in more detail, but for the present I need say only that the parties to the present proceedings were unable to settle their differences, ANZ was not paid, and in September 1992 trial of the numerous issues in the case began before McInerney J.

ANZ relied on its mortgage and its guarantee against the Brookes.

In defence of the mortgage claim the Brookes asserted oral contractual terms an estoppel, misleading or deceptive conduct by ANZ under the Trade Practices Act 1974 (Cth) and Fair Trading Act 1987 (NSW).

A similar set of defences was relied on in answer to ANZ's guarantee claim and in addition one under the Contracts Review Act.

On damages, there was an argument by the Brookes concerning mitigation of damages.

In reasons delivered 23 December 1993 all of these contentions on behalf of the Brookes were rejected.

ANZ proceeded against the Marshalls also on the guarantee. In regard to it the Marshalls relied on defences similar to those relied on by the Brookes. They succeeded on one matter. This arose from what was said between the Marshalls and ANZ's Liverpool Branch manager on the day the Marshalls signed the guarantee in the manager's office. McInerney J resolved evidentiary issues about this by holding that the manager had told the Marshalls (and that as a result they signed the guarantee) that as guarantors they would only be pursued if the proceeds of sale of the Brookes' home were insufficient to cover ANZ's debt.

Having made this finding, McInerney J then held against submissions for the Marshalls that what the manager had said had become a term of the guarantee or a collateral warranty, but held that what he had said raised an estoppel against ANZ which estopped it from recovering anything from the Marshalls under their guarantee until the proceeds of sale of the Brookes' mortgaged land had been applied in reduction of the debt owed by Wayworld to ANZ, once that had been done the Marshalls were liable to pay any remaining shortfall in the debt (see his reasons of 23 December 1993 at 30; AB 1048 and orders 3 and 4 in the formal judgment at AB 1074).

Having reached this conclusion, he held it unnecessary to consider the defences raised under the Trade Practices Act, the Fair Trading Act and the Contracts Review Act.

The Brookes' cross claim against the Marshalls was that misrepresentations by the Marshalls at the time of the sale by the Marshalls to the Brookes of their shares in Wayworld had caused damage in the end alleged to be $180,000. This claim was dismissed.

In the course of discussing it McInerney J mentioned that in his view at the time of the making of this sale agreement Mr Brookes had (in effect) a good working knowledge of the state of Wayworld's finances (reasons of 23 December 1993 at 35; AB 1053). There is considerable material in the appeal papers to Justify this view, and, I add also that Mr Brookes' knowledge of the business (as well as the building) side of his business was good. For example, his exposition of the sales tax position in regard to yachts such as Wayworld was building (AB 623-629) shows a close practical grasp of that subject.

These matters are material to the one live issue in this appeal. Before coming to it there is one other claim about which there is no appeal which needs to be mentioned.

This claim concerned yacht moulds. The Marshalls had caused moulds the ownership of which was under their control, sometimes described as "the hull, deck and transom moulds of a Wayworld 45", to be available to Wayworld for its yacht building purposes. (This was done under a hiring arrangement of some kind, later the subject of a dispute which does not now matter, and in any event the arrangement was subsequently terminated.) Other moulds, called in the proceedings "the ancillary moulds" were manufactured by Wayworld itself.

In the Brookes-Lord heads of agreement of December 1989, Wayworld's lease interest in the hull etc moulds was to be assigned to Yachts and the ancillary moulds sold for $50,000.

The Marshalls claimed against the Brookes that they were entitled to have both categories of mould returned to them as their property. McInerney J upheld their claim to the first category but dismissed it to the ancillary moulds.

He ordered that the first category moulds be returned by the Brookes to the Marshalls, and that if they could not be returned the Brookes were to pay damages to be assessed.

The Brookes against the Marshalls The Marshalls against the Brookes

The claims. The Brookes claimed contribution from the Marshalls; that is, in terms of McInerney J's findings to this point, they claimed that although ANZ was bound, on satisfying the judgment in its favour (which, with interest, by the time of McInerney's judgment of 15 July 1994 had become $336,936), first to sell their house, and only then look to the Marshalls for any shortfall, nevertheless as between themselves and the Marshalls, each was obliged to pay half the judgment sum.

The Marshalls claimed that they should be indemnified by the Brookes in respect of any amount they had to pay to ANZ under their guarantee.

The background. The factual background to these directly contradictory claims has already been indicated in a very summary way. Some further details will have to be given subsequently. One matter which was potentially important to the

decision of the relevant issues is that it seems to have been accepted by McInerney J, and in any event, the argument in this court went on the footing that the mortgage of the Brookes' home was a supporting security for the guarantees, the guarantees were the primary obligations, and, unless there had been conduct by the Brookes which should in equity be held to deprive them of the right of contribution from the Marshalls, then they would have the ordinary right of contribution from the Marshalls. This meant that the Marshalls bore the burden of the argument in that it is conventionally accepted that although the doctrine of contribution between guarantors is equitable in origin, it will ordinarily apply, unless displaced by circumstances including those of the kind the Marshalls sought to rely on in the present case.

I therefore turn to the grounds upon which the Marshalls submit they are entitled to the indemnity they claim.

The Marshalls' grounds for claiming indemnity. The Marshalls pleaded (further amended third cross claim, AB 42): 1. the Brookes had promised in July or August 1988 to indemnify them if they would sign the guarantee to ANZ; 2. in consideration of the Marshalls selling their shares in Wayworld to the Brookes, the Brookes had agreed in October 1988 to discharge the Marshalls' indebtedness to ANZ; 3. the Brookes had represented to them in October 1989 that they would discharge the Marshalls' said indebtedness; 4. the Brookes had induced the Marshalls in July or August 1988 to sign the ANZ guarantee by representations which were misleading, or deceptive in contravention of s42 of the Fair Trading Act or given without reasonable grounds; 5. variations of the foregoing; 6. allegations which seem to me to be of sufficient consequence in the appeal to be set out in full:

"21. The second cross defendant [the Brookes] have caused the third defendant [Wayworld] to cease carrying on business.

The second cross defendants have transferred assets, the property ('the assets) of Wayworld to a company incorporated by them, Wayworld Australia Pty Ltd ('Wayworld Australia) without any or any proper consideration for the transfer.

At the time of the transfer of the assets they were valued at approximately $126,000.00.

In the premises, Wayworld was deprived of the assets which would otherwise have been available to discharge its debts and obligations including its obligation to the first cross defendant pursuant to the loan agreement.

The conduct of the second cross defendants in causing Wayworld to transfer the assets to Wayworld Australia without any, or any proper consideration, was conduct in breach of: -

(a) their obligations as directors of Wayworld pursuant to the Companies (NSW) Code, and

(b) in breach of their fiduciary duties as directors of Wayworld.

As a consequence of the conduct particularised in para21 to para25 above, the second cross defendants caused Wayworld to be unable to discharge its obligations to the first cross defendant pursuant to the loan agreement.

The trial judge's decision. McInerney J noted that in addition the Marshalls complained of the Brookes' conduct in removing assets, said to be the property of Wayworld to a third company of which the Brookes were the only shareholders and directors. He then dealt with all the different heads of the claim as follows:

"In my view, the simplest way to approach this matter is by reference to the events and conversations at the time of the execution of the Share Sale Agreement.

The second defendants obviously were desirous of disentangling themselves from Wayworld and that was the reason for them entering into the Share Sale Agreement, it is patently obvious that in entering into this agreement they would wish to have their obligations as guarantor of Wayworld's debt discharged.

I reject the evidence of Mr Brookes to the effect that Mr Marshall 'volunteered' to stay on as a guarantor, as this is contrary to what I believe was the second defendants' intention and is further evidenced by Mr Marshall's approach to the Bank to be released as a guarantor.

The enterprise had proved costly to the second defendants in that they had lost in the vicinity of $112,000 of which they forewent payment on entering into this agreement with the first defendants.

T accept that in the circumstances it was clearly understood between the second defendants and the first defendant that the first defendant, on obtaining a new partner, would either pay out the debt or have the new partner substituted as a guarantor.

A new partner was obtained and monies advanced, but no monies were paid to the plaintiff in respect of the indebtedness of Wayworld and their was a removal of assets by the first defendant from Wayworld to a company formed by them, of which they were the sole office holders and shareholders. These assets of Wayworld should have been available to discharge the indebtedness of Wayworld to the plaintiff.

In all the circumstances, I conclude that the conduct of the first defendants constituted misleading and deceptive representations within the meaning of s42 of the Fair Trading Act 1987 and in the circumstances were of such a nature as to preclude the first defendant from seeking contribution from the second defendants."

Opinion on appeal. On some of the matters mentioned in the above passage I have reached conclusions different from those of McInerney J. Having read all the evidence I can find as to the circumstances in which the Share Sale Agreement was made I do not think it supports a conclusion that the Brookes made or indicated any commitment to the Marshalls as suggested by the trial judge, Mr Brookes and Mr Marshall gave different accounts of what they said to one another at the time of the Share Sale Agreement. The trial judge accepted the evidence of Mr Marshall. In looking at that evidence it is relevant to remember that it was just as much in Mr Brookes' interest to pay out ANZ as it was Mr Marshall's. Obviously Mr Brookes would be likely to say to Mr Marshall that he would do what he could to pay off the debt, but such a statement would in my opinion be indicating no more than that he was looking forward to both the Brookes and the Marshalls being relieved of their guarantee obligations (and the Brookes their mortgage obligation) not that he was making any promise or representation to Mr Marshall affecting the position between the Brookes and the Marshalls.

The passages in Mr Marshall's evidence on which I assume McInerney J was relying in making the finding in the fifth paragraph of the passage set out above are at AB 124 (para26), AB 176 (para58), AB 596 O, AB 597 D and F, AB 599 Q, AB 600 G and M. When these are read along with the passages in the Bank Manager's diary recording Mr Marshall's discussions with him about the guarantees, it seems to me that Mr Marshall was seeking reassurance from Mr

Brookes that when he got a new partner he would do what he could to pay off the debt as soon as possible, for the sake of all the guarantors rather than to do something for the benefit of the Marshalls which might be to the detriment of the Brookes.

Similarly taking Mr Marshall's evidence at its highest in his favour (and remembering the circumstances in which it was said), I do not think anything Mr Brookes said to him at the time of the Share Sale Agreement supports a finding of conduct proscribed by s42(1) of the Fair Trading Act. It seems to me the logic of the situation and the later efforts of Mr Brookes to organise the payout of ANZ combine to show Mr Brookes was sincere in what he said to Mr Marshall at the time in question.

The relevant later efforts began with the finding of a partner, Mr Lord. What was done pursuant to the heads of agreement with him was not in a technical sense a partnership, but no point was taken about this at any stage of these proceedings. Had those heads of agreement been carried out in full ft seems probable Wayworld would have been well in funds to pay out ANZ. For example, $304,000 was to be paid by Yachts to Wayworld for the yacht under construction. Only $108,000 of the total of $507,100 supposed to be paid by Yachts to Wayworld was ever paid. Of this $50,000 went to repay Mr Marshall for an amount he had made available to Wayworld at the time of the share sale agreement, and $58,000 to pay for debts incurred in the period between the share sale agreement and the start of Yachts' operations. From all the evidence it seems to me reasonable to infer that Mr Brookes was expecting further payment to follow the $108,000. For some reason which the evidence did not disclose (beyond some hints that Mr Brookes was arguing with Mr Lord about whether Wayworld or Yachts had title to the nearly completed yacht) Mr Lord's side of the arrangement (which seems to have kept full control of Yacht's finances) kept procrastinating in paying moneys to Wayworld. ANZ's Liverpool Branch Manager was in regular touch not only with Mr Brookes, but also Barclays Bank, this bank being the one with which Mr Lord's side of the arrangement dealt, and his diary entries convey, very clearly it seems to me, the initially apparently very real prospect of ANZ's debt being paid out, and the decline of that expectation into the realisation that it was not going to happen (see AB 840-850). Presumably this was because of a growing dispute between Mr Brookes and Mr Lord. Whether either party was at fault in that is something about which there' is no evidence in these proceedings (apart from the indication in Mr Brookes' oral evidence that in mid 1990 he was asserting that title to the yacht referred to in the heads of agreement was still in Wayworld and Mr Lord was asserting it belonged to Yachts (AB 525 B, 0)); but even assuming Mr Brookes was to blame for the failure of the partnership with Mr Lord, that would give no justification for characterising Mr Brookes' conduct in October of the preceding year as disentitling the Brookes to contribution from the Marshalls.

Although on one reading of the deciding passage in McInerney J's reasons set out above (p9 and p10) it is arguable that he was basing his conclusion only on the conduct of the Brookes relating to the share sale deed of 12 October 1989, it may be that the trial judge was partly basing himself on what he called "the removal of assets" by the Brookes. This aspect of the story seems to me to be a much more formidable reason for coming to the conclusion that Mr Brookes' actions may have disqualified the Brookes from seeking contribution from the Marshalls. The picture here is incomplete.

It seems the yacht which had been in course of building by Wayworld in 1989 was finished by Yachts: AB 794 C, AB 252 I. (It became known as "Evolution" (AB 524 H).) When Yachts' liquidator asserted its title to the yacht and other equipment which had originated with Wayworld, Mr Brookes asserted a competing claim (AB 252 K) on the basis, that title had not passed because the items had never been fully paid for (AB 525). Such a claim must have been made by Mr Brookes on behalf of Wayworld. The liquidator began proceedings to have the question of title decided, but information from him in a report to creditors dated 16 May 1991 showed that to settle the dispute he had accepted an offer from Mr Brookes of $150,000 for the yacht and other assets. This would appear to be the arrangement embodied in a deed dated 11 December 1990 (Exhibit J, AB 779) between Yachts (in liquidation), the Brookes and Wayworld.

Mr Brookes now had to raise the finance to pay the liquidator the $150,000. The Commonwealth Development Bank began preparations to do this (17 December 1990, AB 777; 2 January 1991, AB 867 R). This deal seems to have been nearing completion towards the end of January (22 January 1991, AB 869 E). Had this gone through, it seems ANZ's debt would have been paid.

However, about 22 January 1991 Mr Lord commenced proceedings for an injunction to restrain the liquidator from completing the sale; apparently an interlocutory injunction was granted (AB 868 M; 252 Q). These proceedings were decided on 12 April 1991. The injunction was dissolved and the liquidator "authorised to enter into the deal with Joe Brookes" (AB 252 S).

it is what happened after that that is not at all clear. The only evidence of what happened to the assets the subject of the settlement deed Exhibit J came from Mr Brookes in cross examination. He said that the liquidator sold him and his wife those assets after the court decision, but not pursuant to the deed of settlement, Exhibit J. The price was changed to $140,000 (AB 528 C, 529 F). The assets went to a company named Frontmond, incorporated in May 1991, in which the Brookes were the only shareholders (AB 528 K-L). He said it was a condition of finance then being negotiated with the Commonwealth Development Bank that it be done that way (AB 528 G). It was also done that way "on solicitor's advice, a new company because they said that Wayworld was not in a position to be able to buy it back because they would be breaking the laws" (AB 528 E-F).

A little later, answering questions going to his belief that Wayworld was entitled to the assets, he gave the following answers:

"A. Yes, that's what I understood the position to he and then I was advised that that wasn't the case. I was acting under solicitor's advice through all of this. 'm not saving that everything was right or correct or that I understood everything. You have no idea what my wife and I were going through.... we are looking for a solicitor to try and work it out for us with money we didn't even have." (at AB 529)

"We went into an agreement. At one stage we were going to enter into an agreement where the assets were supposed to be returned to Wayworld but an injunction was taken out. Then I was advised by solicitors that Wayworld was technically insolvent. I wasn't allowed to go and borrow money on its behalf. Then the whole thing changed I can't explain all the things that happened." (at AB 530)

"... when all this happened, the liquidator was going to sell all these goods to John Lord without clear title. That's what

suddenly changed all this. I went to another meeting with another liquidator. Thad run out of money. I didn't have any money to fight the court case any more. I spoke to Jim Marshall and said did he want to put up the money, and he didn't want to. All of a sudden we had a fight with John Lord in respect of the liquidator on which I had no money to contest." (at AB 530)

Although not in evidence, it was mentioned in the pleadings, and this court was told by consent, that Wayworld went into liquidation on 18 May 1992. Mr Brookes' cross examination from which I have been, quoting took place on 4 September 1992. Further evidence was given on 10 and 11 May 1993). Oral submissions were made on 20 and 21 September 1993. On 21 September counsel for the Marshals said the following on the present point:

"... we say, if your Honour looks at the post-departure conduct of Mr Brookes, so far as assets of the old company are concerned, the assets are handed over to the new company. There is a valid claim in the old company for the return of those assets. Because of incomplete payment, Mr Brookes causes that claim to be released and he causes the assets, the subject of the claim, to be transferred to his own company for a consideration very much reduced, by reason of the old company's claim.

He deprives effectively the debtor of the old Wayworld company from any ability to discharge the old Wayworld debt from its own resources, and having regard to the equitable nature of the requirement contribution, to the analysis of Mr Justice Needham in the Connolly case, there need he contribution costs and the Marshalls should have no indemnity by the directors for any liability to the bank." (at AB 1143)

This submission was invoking the equitable considerations which underlie questions of contribution between co-sureties. In Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 3rd ed 1992, it is said:

"The conduct of a plaintiff seeking contribution may have disqualified him from relief, he being subject to general equitable principles in this regard. " (p301, paral026)

The decision of Needham J referred to by counsel (Connelly v Joosse, unreported, 28 May 1990) is an application of this concept. Its possible application to the present case was not contested, the argument went to whether the facts justified its use.

McInerney J's first judgment was delivered on 23 December 1993. That did not deal with the Marshalls' cross claim for the moulds. That and various other matters were dealt with in a second judgment on 15 July 1994.

At no stage after Mr Brookes' cross examination on 4 September 1992 was any further explanation given or sought to be given by the Brookes of how assets, claimed to be Wayworld's had ended in Frontmond as the result of a compromise of Wayworld's claim. Mr Brookes in his cross examination seemed to be trying to say that he did not really understand how that happened and it had come about by his following legal advice and the instructions of the Commonwealth Development Bank. This may be so but is rather hard to accept in the absence of supporting evidence that I would think would have been readily available to the Brookes, such as - evidence, documentary or oral, from the Commonwealth Development Bank - the same, from the legal adviser Mr Brookes relied on - the same, from the liquidator of Yachts as to the actual transaction by which the assets in the end went to Frontmond - evidence as to the financial position of Wayworld at the time the assets went to Frontmond - evidence from the then

recently appointed liquidator of Wayworld, or at least from his records - and some indication of who was the "other liquidator" Mr Brookes mentioned.

As far as I can make out from Mr Brookes' evidence, if what he was saying had been clarified by at least some material of the kind I have mentioned, the best position from his point of view that could have emerged would have been that the body that lent the money which eventually paid Yachts' liquidator was not prepared to lend it to Wayworld because it was

believed to be technically insolvent and that in that state it was not lawful for it to continue in business; therefore it would only lend to some trouble free company, and thus the loan was made to Frontmond.

The first problem with this explanation is that I do not think there is enough evidence in the materials for this court properly to infer that the explanation is correct and in the circumstances of this case I think the onus was on Mr Brookes, if he wanted to rely on some such explanation, to put sufficient material before the court to enable it to assess such explanation.

A second problem is that the advice Mr Brookes received leading to the course of action (assuming some such explanation as the one I have constructed were correct) may not have been sound. For example, the lender, or Mr Brookes' adviser may have overlooked the position of the Marshalls in the matter, for which some provision should have been made. But not enough is known about the circumstances for any conclusion to be reached on this point. These are matters adverse to the Brookes in the case.

The last and principal problem is that even if some such explanation as I have been discussing is available on the evidence, and should be accepted. the facts would have remained - the Brookes through Frontmond now had assets which should have been Wayworld's - subject to Wayworld owing $140,000 to the Brookes. Further, Mr Brookes had considered these assets worth much more than $140,000, although until 4 September 1992 at least that opinion had not been borne out. On that day McInerney J had raised the topic:

"HIS HONOUR: Q. What happened to them? A. They are still there. I have been trying to sell them for over a year and the best offer has been less than we paid for them. We were hoping to try and get the company re-established with the contracts Wayworld Australia had made but unfortunately John Lord had done so much damage for us, that it became impossible." (AB 529-530)

These assets included the completed yacht of the same kind that had been sold in 1988 for $350,000; it thus seems quite reasonable for Mr Brookes to have expected to get more for the assets the subject of the transaction with Yachts' liquidator than the price he paid for them. The evidence in the case suggests that the market for yachts of this kind comes and goes, according to the availability of capital for conspicuous consumption, and it is quite possible that the Brookes got a good, price for the assets after September 1992. Whether or not that has happened does not really matter. The fact that in my opinion does matter is that in 1991, when the Frontmond deal was done, it was a reasonable possibility that it might happen. Assets were diverted, which, if not diverted, may have enabled Wayworld to pay or reduce its debt to ANZ. The step taken by the Brookes ensured that Wayworld would never be able to pay ANZ, which would have to have recourse to the guarantors and the mortgage, in which case Mr Brookes seems to have believed he and his wife would in the end only have to go halves with the Marshalls (his general attitude on this appears from his account of "settlement" negotiations with ANZ on 3 July 1991 in his affidavit of 2 September 1991, AB 127-132 and also the branch manager's note of it, AB 879,

and affidavit at 290. In his affidavit of 21 September 1991 Mr Brookes dates this as 3 July 1990; but this is clearly a mistake - see eg his evidence at 464 C).

My reading of the materials has led me to these conclusions. I do not think the Brookes had done anything prejudicial to their right to contribution from the Marshalls until the stage when they, rather than Wayworld, purchased full control, to the exclusion of Wayworld (at least so far as legal title is concerned), of the assets to which Wayworld had a claim. To that time the Brookes had been trying to obtain finance (from Mr Lord and later lenders) from which the ANZ debt would have been paid. I do not think it was Mr Brookes' fault that the finance Mr Lord raised, through his sources (Barclays), for Yachts, was not used to pay Wayworld's debt to ANZ. Then later, it seems the arrangements proposed with the Commonwealth Development Bank provided for payment of ANZ, until Mr Lord's injunction proceedings began towards the end of January 1991. To this point in my opinion, the right to contribution remained. However, for the reasons I have given it seems to me that the purchase by the Brookes of control of the assets, including Evolution, without acknowledgment of or provision for Wayworld's interest was prejudicial to the Marshalls.

Indeed, the possibility that the court might reach this conclusion was recognised by counsel for the Brookes when the appeal began. The first submission that was put took up that part of McInerney J's reasons which referred to the removal of assets from Wayworld to Frontmond and in which he said those assets should have been available to discharge Wayworld's debt to ANZ, and, conceding for the purposes of the argument that that was so, counsel submitted that the jud2e, having reached that conclusion, should have gone on to determine to what extent that removal had affected the ability of Wayworld to pay ANZ's debt: depending on the result of that assessment he could then have properly determined whether the Marshall's obligation to contribdte had been left untouched, or diminished, or extinguished: not to have made that assessment constituted an error of law.

The concept that a co-guarantor's obligation to contribute might need, in equity, to be tailored in this way, could involve an equity judge in making a very close and difficult examination of the financial circumstances of a debtor, which might involve valuations of assets where the valuations were very much matters of opinion, (as this case happens to demonstrate). That does not mean the concept advanced by the appellants' counsel might not be applicable in appropriate circumstances: it seems to be a logical (and reasonable) application of the equitable ideas upon which the doctrines of contribution are based.

I do not think however that the concept is applicable in the present case. Although there is a lot of detail of the accounts of Wayworld in the appeal papers, none of it shows the position of Wayworld at either the end of 1990 or the middle of 1991, so the basis for McInerney J to have done what it is submitted he should have done was not before him. Further, and I think unsurmountably, any assessment of the kind suggested would have involved valuing (inter alia) "Evolution", and the available evidence shows a very wide range of possibly available sale prices. One actual sale figure of a comparable yacht is known - $350,000 - and Mr Brookes said in evidence that much higher figures might be obtained if overseas buyers could be found: there was evidence in the branch manager's diaries that at different times both Japanese and American buyers seemed to be real prospects.

So, as I see it, the way the evidence stands left the situation as I described it above: the actions of the Brookes in gaining control, to the exclusion of Wayworld, of "Evolution" and the other assets in mid 1991, had the effect of depriving Wayworld of prospects (unquantifiable on the evidence, but in my opinion real) of discharging all or part of ANZ's debt, and that deprivation was sufficient to make it inequitable for the Brookes to claim contribution from the Marshalls. The parties appeared to assume that if that were established it would necessarily follow that the Marshalls would be entitled to indemnity from the Brookes for anything they might have to pay under their guarantee. That is, the argument as I understood it, went on the common ground that the Marshalls, if released from contribution, were entitled to indemnity. In the circumstances of this case, as the evidence was left, this would seem to me to follow, and as it appeared to be common ground. I am prepared to decide the case on that footing, without finally considering the point for myself.

In my opinion the appeal should be dismissed with costs.

Clarke JA I agree with the reasons and orders of Priestley JA.

Counsel for the appellants: A Gelbart Solicitors for the appellants: Holmes & Bevan Counsel for the respondents: J B Simpkins

Trade, Practices Act 1974(Cth)

Trade Practices Act 1974(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (101 paragraphs)

Parties

Legislation Cited (3)

Cited By (1)