APPEAL from the Supreme Court of Western Australia.

GIBBS C.J. I would dismiss this appeal. I am in general agreement with the brother Brennan and could not usefully add anything to them. (at p660)

MURPHY J. I agree with Brennan J. The appeal should be dismissed. (at p660)

AICKIN J. This is an appeal from the Full Court of the Supreme Court of Western Australia which allowed an appeal by the present respondent from the decision of Lavan S.P.J. (at p661)

2. In September 1971, the respondent agreed to advance a sum not exceeding $300,000 at an interest rate of 13 1/2 per cent to Melbourne Hotel Pty. Ltd. ("Melbourne Hotel"). As primary security for the loan an instrument of mortgage of the hotel premises was executed on 23 September 1971 by Melbourne Hotel and it was duly registered. Pursuant to that instrument the freehold title to land belonging to Melbourne Hotel upon which a hotel business was conducted by it was mortgaged in the respondent's favour. (at p661)

3. The mortgage instrument contemplated that the principal sum was to be advanced by instalments over a two year period; Melbourne Hotel covenanted to pay the interest on the sums advanced by 24 monthly payments and thereafter to pay 23 equal monthly instalments of principal and interest with a final instalment of $271,887 which became due on 5 October 1975. (at p661)

4. As a further condition of the loan each of the present appellants was required to enter into a deed of guarantee under which they jointly and severally guaranteed the due and punctual payment by Melbourne Hotel of the principal sum advanced to it by the respondent and interest thereon. That guarantee which was also executed on 23 September 1971 contained the following recitals and provisions:

"NOW THIS GUARANTEE WITNESSETH that in consideration of the premises and in the performance of the said condition and in consideration of the Mortgagee at the request of the Guarantors making the said loan to the Mortgagor the Guarantors DO and each of them DOTH HEREBY JOINTLY AND SEVERALLY GUARANTEE to the Mortgagee the due and punctual payment by the Mortgagors of the said principal sum and interest in the manner in the said Mortgage provided AND IT IS HEREBY DECLARED as follows: -

1. That in the event of default by the Mortgagors in the payment of the principal sum or of any interest thereon or in the observance or performance of any covenant or agreement as aforesaid the Guarantors will within seven days after notice in writing in that behalf shall have been given to them by the Mortgagee pay to the Mortgagee the amount of the principal sum or such interest or make good or cause to be made good the default of the Mortgagors in the observance of any such covenant or agreement as aforesaid.

2. That until the Mortgagee shall have received all moneys owing to it by the Mortgagors the Guarantors shall not be entitled on any grounds whatsoever to claim the benefit of any security now or hereafter held by the mortgagee or either directly or indirectly to claim or receive any dividend or payment out of the estate of the Mortgagors or any co-surety or out of the assets of any person liable jointly with the Mortgagors to the Mortgagee or liable under any security negotiable or otherwise now or hereafter held by the Mortgagee as security for any moneys owing or to become owing by the Mortgagors to the Mortgagee and shall not be entitled to prove in any estate in competition with the Mortgagee so as to diminish any dividend or payment which but for such proof the Mortgagee would be entitled to receive out of such estate and IT IS HEREBY FURTHER AGREED that the Mortgagee may at any time and from time to time grant to the Mortgagors or any person liable as aforesaid any time or other indulgence or consideration and may compound with or release the Mortgagors or any such person and may release or otherwise deal with any property both real and personal comprised in any security now or hereafter held by the Mortgagee without releasing or affecting the liability of the Guarantors under this security and this security shall not in any way affect or be affected by any other security now or hereafter held by the Mortgagee by any loss of the Mortgagee of any collateral or other security or by the Mortgagee failing or neglecting to recover by the realisation of any collateral or other security or otherwise any moneys owing or to become owing to the Mortgagee by the Mortgagors or by any other laches or mistakes on the part of the Mortgagee.

3. That this Guarantee shall not in anywise prejudice or affect any other security or securities which the Mortgagee may now hold or which may hereafter be taken by the Mortgagee for the whole or any part of the moneys hereby secured or intended so to be.

4. That the moneys hereby secured or intended to be are also secured or intended to be by the said Mortgage with which Mortgage this instrument is expressed to be collateral for the sum of THREE HUNDRED THOUSAND DOLLARS ($300,000.00).

5. The said Mortgage shall be primary security, the Debenture dated 23rd September 1971 shall be first collateral and this Guarantee second collateral."

Melbourne Hotel was not a party to that instrument. (at p662)

5. In addition and by way of first collateral security Melbourne Hotel gave to the respondent a floating charge again dated 23 September 1971 over "its property and assets both real and personal whatsoever and wheresoever both present and future" including its hotel business carried on at the premises subject to the registered first mortgage, being the debenture referred to in cl. 5 of the guarantee. (at p662)

6. In 1975 Melbourne Hotel defaulted in the repayment of the principal and interest due under the mortgage. The respondent gave a written notice to Melbourne Hotel on or about 7 March 1975 by which it demanded repayment of $289,247.13 the amount of principal and interest then outstanding. That demand also gave notice that if the payment was not forthcoming within seven days thereof the respondent would proceed to exercise its powers under the mortgage including its power of sale. It was admitted that notice of the demand was sent to the appellants. Melbourne Hotel failed to satisfy the demand. However, rather than exercise its power of sale under the mortgage as it had intimated, the respondent on 18 March 1975 appointed a receiver and manager pursuant to the power in the debenture executed by Melbourne Hotel. (at p663)

"That all moneys secured or expressed so to be by this Debenture or any other security shall immediately become and be deemed to be due payable and recoverable without it being necessary to make any formal demand therefor in any of the events as follows: -

(a) If the Mortgagor shall make default in the due payment of any of such moneys or any moneys which may be or become payable to the Mortgagee under any security or securities collateral herewith."

The power to appoint a receiver and manager was contained in cl. 18 which provided as follows:

"That immediately upon the happening of any of the events in the preceding clause mentioned the Mortgagee may by writing under the hand of any attorney manager or other officer of the property hereby charged and may in like manner from time to time remove any receiver or manager so appointed and appoint another in his stead and may from time to time until this Debenture has been duly discharged fix or alter (retrospectively if thought fit) the remuneration or (sic) any such Receiver."

The receiver and manager was expressed to be the agent of Melbourne Hotel and to have, inter alia, the power "to carry on or concur in carrying on the business of the Mortgagor and to manage and conduct the same as he shall in his discretion think fit". In addition he was empowered "to sell or otherwise dispose of . . . either (a) the Mortgagor's business and assets as a going concern or (b) all or any part of the mortgaged premises by public auction (or) private treaty". The debenture also provided that, if the receiver borrowed moneys from the respondent, such moneys were to be deemed to have been borrowed by Melbourne Hotel on the security of the debenture. (at p663)

8. Under cl. 16 of the deed of mortgage the respondent was given a number of powers including a power to enter and take possession of land, and carry on any business thereon, as well as power to appoint a receiver who was entitled to exercise all powers, discretions and authorities created or conferred on the mortgagee and delegated by him to the receiver. However there was no power to appoint a receiver and manager under the mortgage. The respondent did not exercise the powers given by cl. 16 of the mortgage. (at p664)

9. On the day of his appointment the receiver and manager took possession of the mortgaged premises and the business conducted thereon. Within a few weeks of his appointment he had concluded that financially the business was in a hopeless state and that both it and the premises should be sold. He attempted to sell by tender the land and buildings and the hotel business as a going concern but no acceptable tender was received. The receiver and manager then decided to put the property and business up for sale by auction, but this too was unsuccessful and the property was passed in. The land and buildings and the hotel business as a going concern were finally sold in July 1975 for $251,000; settlement took place on 11 September 1975 and possession of the premises was delivered upon that date, by which time approval for the transfer of the hotel licence had been obtained. (at p664)

10. Until that date the receiver and manager continued to carry on the hotel business. During that time, because of liquidity problems, he found it necessary to borrow two sums, $10,000 and $15,000, from the respondent. (at p664)

11. When he had got in the proceeds of the sale of the freehold and the business, and of the separate sale of the chattels, he paid to the respondent the sum of $235,000 as the net proceeds of his receivership. This figure represented the proceeds of realization after deduction of the amounts paid to preferential creditors, the trading loss of $29,980 suffered while he ran the business, the costs and expenses of sale and his professional fees. However it did not take into account the repayment of the two sums borrowed while the business was conducted or the interest thereon. (at p664)

12. Upon receipt of this sum the respondent applied $26,193.50 to the repayment of the moneys advanced to the receiver and manager and the interest accured thereon. The balance of $208,806.50 was applied in reduction of the principal due and interest which amounted to $308,631. After various other allowances were made, the principal remaining due as at 23 September 1975 was $100,122.55. It was this amount plus accrued interest which the respondent sought to recover in these proceedings against Melbourne Hotel and each of the appellants. Melbourne Hotel did not enter an appearance and judgment by default was entered against it on 21 November 1977. That judgment remained wholly unsatisfied. (at p664)

13. The appellants conceded at the trial that the moneys lent were advanced at their request and further that under the guarantee their liability was joint and several. In par. (2) of their defence, they admitted that they each had a liability to pay the respondents their respective proportions of the shortfall between the amount realised from the sale of the freehold land and hotel premises together with the reasonable costs incurred in the sale, and interest on that sum for a period of six weeks from the date of default by Melbourne Hotel. However, they denied that they had any liability to pay any part of the professional fees of the receiver and manager or the debts, obligations or losses suffered or incurred by him. (at p665)

14. At the trial it was admitted that the appointment of the receiver and manager was authorized under the debenture and that it was properly made in accordance with its provisions, and that each of the appellants was jointly and severally liable for the whole of the amount due. It was not suggested that any of the steps taken by the receiver and manager were not authorized by the debenture. (at p665)

15. In essence the appellants' submission was that they should be liable only for the difference between the principal outstanding and interest and the net amount recovered upon realization of assets of Melbourne Hotel after deduction of the reasonable expenses attributable to that realization. In their submission no deduction should have been made in respect of the trading loss of the business while it was carried on by the receiver and manager or any other expenses incurred by him save those directly incurred in the sale of the hotel premises. (at p665)

16. The trial judge found for the appellants in respect of their main submission. Accordingly from the amount of $308,631 due he allowed them a credit of the full sale price, viz., $251,000 less $8,513 which was agreed on as the reasonable costs of realization. (at p665)

17. On the balance of $66,144, he awarded interest at 13 1/2 per cent until the date of the judgment against the appellants (11 September 1978). In the result, judgment was entered against the appellants for $92,928. (at p665)

18. An appeal to the Full Court of the Supreme Court of Western Australia was allowed. Their Honours were of the view that the appellants were not entitled to a credit for the full sale price and that the credit given should be reduced by $76,421 to account for the trading losses of the hotel business while it was conducted by the receiver and manager as well as his professional fees and other expenses. With regard to the question of interest, they held that the appellants were liable for interest on the amount borrowed by Melbourne Hotel up until the date judgment was entered against Melbourne Hotel (21 November 1977). It was conceded that they were thereafter liable for interest on the judgment debt at the rate of 8 per cent pursuant to the Supreme Court Act 1935-1979 (W.A.). Accordingly, subject to some minor matters, it was held that the respondent was entitled to recover $129,598 from the appellants. (at p666)

19. Before this Court the main issue was whether the respondent was entitled to debit against the proceeds of sale of the mortgaged premises any part of the trading losses incurred by the receiver and manager and his professional fees and other expenses incurred whilst he was carrying on the business pending sale. It does not appear to have been disputed that the business was carried on for the purpose of preserving the licence. (at p666)

20. It was submitted by counsel for the appellants that under the terms of the guarantee, the appellants guaranteed the due and punctual payment of principal and interest due by Melbourne Hotel as well as the performance of the other convenants contained in the mortgage but that there was no liability for any larger sum. They relied on the decision of the House of Lords in Duncan, Fox, & Co. v. North and South Wales Bank (1880) 6 App Cas 1 and contended that a surety is, by virtue of an equity of indemnification, entitled to the benefit of any securities in the hands of the creditor and that they were therefore entitled to a credit for the full amount of the sale price received from the sale of Melbourne Hotel's assets save the reasonable costs of that sale. It was argued that it was the performance of the obligations under the mortgage which they had guaranteed and they were therefore not to be held liable for the expenses incurred by the receiver and manager acting under the debenture, the obligations under which they did not guarantee. The respondent did not dispute the authority of that decision but contended that the terms of cl. 2 of the guarantee produced the result that the appellants as guarantors were not entitled to the benefit of the security until the full amount of any indebtedness of Melbourne Hotel to the respondent has been discharged. (at p666)

21. It was not disputed that under the debenture Melbourne Hotel was indebted to the respondent in respect of the costs of the receiver and manager and the losses incurred by him in carrying on the business pending sale of the licensed premises, its fixtures and fittings and stock in trade. The respondent relies on cl. 2 of the guarantee, the whole of which is quoted above. The opening words of that clause were: "(U)ntil the Mortgagee shall have received all moneys owing to it by the Mortgagors the Guarantors shall not be entitled on any grounds whatsoever to claim the benefit of any security now or hereafter held by the Mortgagee". It is clear that the nature and extent of a guarantor's rights against the security held by a principal debtor depend on the terms of the guarantee; cp. O'Day v. Commercial Bank of Australia Ltd. [1933] HCA 37; (1933) 50 CLR 200, at p 223 , per McTiernan J. (at p667)

22. The trial judge held that cl. 2 did no more than obviate the risk that the guarantee might become unenforceable because of some variation of the security as between the respondent and Melbourne Hotel and rejected the respondent's argument that cl. 2 postponed the appellants' rights to an equity of indemnification until all indebtedness of Melbourne Hotel to the respondent had been satisfied, whether secured by the mortgage or not. (at p667)

23. It is true that the second part of cl. 2, beginning with the words "IT IS HEREBY FURTHER AGREED" does have the effect of preserving the guarantors' liability notwithstanding variations in the security as between the respondent and Melbourne Hotel but the first part is not directed to that objective. Indeed the words are not capable of having that effect. (at p667)

24. The Full Court of the Supreme Court accepted the mortgagee's argument that the guarantors' equity of indemnification was postponed until all indebtedness of whatever kind of the mortgagor to the mortgagee was discharged. For the appellant in this Court it was argued that the words "all moneys owing to it by the Mortgagors" in cl. 2 of the guarantee meant "all moneys owing to it by the Mortgagors under the Mortgage", and thus moneys owing by virtue of or secured by the debenture alone could not be withheld from the guarantors. (at p667)

25. The differences between the terms of the debenture and the terms of the mortgage are of some significance in the present appeal. The mortgage charged only the land but not the fittings, fixtures and stock in trade or the goodwill (if any) of the business and the power of sale under the mortgage did not extend to any of those items. The mortgage did not charge the licence which could not be regarded as attached to the land. It required a separate transfer which required the consent of the relevant licensing authority. (at p667)

26. There is no doubt that the fixtures, fittings and stock in trade as well as the licence and the goodwill (if any) of the business were covered by the debenture at the moment of the charge crystallizing. When the property was sold as a going concern it was sold free of the mortgage debt, the contract expressly providing that the property was sold free of all incumbrances, save for an irrelevant exception, but subject to the condition that approval of the transfer of the licence was obtained. (at p667)

27. The debenture expressly authorized the appointment of a receiver and manager who was to be the agent of the mortgagor and who was authorized to carry on the business conducted on the premises. The receiver and manager had express power under the debenture to sell the business and assets of the mortgagor as a going concern by public auction or private treaty. The debenture also provided that the receiver and manager should have power:

"To borrow further moneys from the Mortgagee for the purpose of payment of or paying the necessary outgoings and expenses of managing and carrying on the business of the Mortgagor and otherwise for any of the purposes herein authorized and all moneys so drawn by the Receiver for all or any of the purposes hereinbefore mentioned shall be deemed to have been borrowed by the Mortgagor upon the security hereof and to bear interest accordingly and to be secured by the charge hereby created and to rank rateably and paripassu with the moneys secured hereby PROVIDED that the Mortgagee shall not be bound or entitled to enquire as to the necessity or propriety of any such borrowing as is hereinbefore provided not be responsible."

These powers the receiver and manager exercised. (at p668)

28. It was argued for the appellants that they are entitled to be credited with the whole of the proceeds of the exercise of the power of sale under the debenture subject to deduction only of the amounts paid to the preferential creditors and of the reasonable costs of the sale of the property. They contend that the mortgagee is not entitled to receive the amount of the losses incurred by the receiver and manager, the fees payable to him or the additional amount of $25,000 advanced to him to enable him to carry on the business pending the sale. They base this contention upon the argument that they guaranteed only the liability of Melbourne Hotel under the mortgage and they are entitled to an "equity of indemnification" enabling them to obtain the benefit of the debenture, being an additional security of the respondent (the creditor). (at p668)

29. The appellants' contention in the form in which it is put is in my opinion misconceived. The authority relied upon, i.e. Duncan, Fox, & Co. v. North and South Wales Bank (1880) 6 App Cas 1 and cases which have followed it, establish a much narrower proposition, namely that: "A surety paying off the debt has always been held entitled to any securities which may have been given for the debt by the principal to the creditor. This right does not depend upon contract, but upon the equity that the surety should not have the whole thrown upon him by the choice of the creditor not to resort to the remedies in his power." (Rowlatt on Principal and Surety, 3rd ed. (1936), p. 205.) (at p669)

30. Thus Lord Selborne L.C. said in that case (1880) 6 App Cas, at p 13 :

"It appears to me that these principles of Equity are not less applicable to cases of the third class, - cases in which there is, strictly speaking, no contract of suretyship, but in which there is a primary and secondary liability of two persons for one and the same debt, by virtue of which, if it is paid by the person who is not primarily liable, he has a right to reimbursement or indemnity from the other, - than to those of the second class, in which there is a contract of suretyship to which the creditor is not a party. To this third class of cases, the rights of an indorser against an acceptor of a bill of exchange may most properly be referred. The liability of the indorser to the holder is, by the law merchant, conditional, and (as was said by Mr. Justice Buller, in Tindal v. Brown (1786) 1 TR 167 at p 170 (99 ER 1033 at p 1035); aff [1788] EngR 54; (1787) 2 TR 186 (100 ER 101) 'only secondary'; but, when the conditions required by that law are fulfilled, it becomes absolute, and is that of a principal; and the indorser's right, if he pays the holder, to recover over against the acceptor is not founded on any agreement between him and the acceptor (who is as likely as not to be a stranger without any communication with him before the indorsement), but is established by the same law." (at p669)

31. Lord Blackburn (1880) 6 App Cas, at p 19 quoted with approval the following passage from the speech of Lord Redesdale in Stirling v. Forrester (1821) 3 Bli 575, at p 590 (HL) (4 ER 712, at p 717) :

"If several persons are indebted, and one makes the payment, the creditor is bound in conscience (if not by contract) to give to the party paying the debt all his remedies against the other debtors." (at p669)

32. In the present case these principles do not directly apply because the appellants have not paid any part of the amount due by them under the guarantee, however that amount may be calculated. They are accordingly not presently entitled to any rights under or by reason of the securities. There is no direct authority dealing with the position where the surety does not pay on demand as he is bound to do, and the mortgagee exercises his rights under the securities which he held. However where, as in this case, there are two securities not capable of sensible concurrent exercise a bona fide choise of one rather than the other by the respondent does not seem to me to be capable of being the basis of a complaint by the guarantors that the security to which they would have been entitled if they had paid in accordance with their obligations under the guarantee has been adversely affected. There is here no challenge to the bona fides of the respondent. Indeed in choosing, as it did, to enforce the security which extended over a wider range of property rather than seeking to sell the freehold only it followed the only sensible course. It was found by the trial judge that the best price would be expected to be obtained by selling the hotel as a going concern with the licence and that could be done only under the debenture. (at p670)

33. The guarantors asserted but made no attempt to prove that an early sale of the freehold alone would have realised more than the receiver and manager obtained for the freehold and licence, and the separate sale of the fixtures, fittings and stock in trade, even after allowances for the trading losses incurred in preserving the licence. It is accordingly not necessary to decide what would be the position if they had proved that fact. (at p670)

34. The appellants having failed to pay any amount under their guarantee are in my opinion not entitled to assert that they would have been better off if the respondent had exercised the power of sale under the mortgage, even if they could establish that more would have been received by that means. Different considerations would no doubt apply in the case of fraud but here there is no question of the bona fides of the respondent; indeed it seems clear on the material before us that they pursued the only sensible course. (at p670)

35. There appears to be no reason in principle why the circumstance that the two charges overlapped, so that the security provided by the mortgage (i.e. the freehold land only) was also part of the property charged by the debenture, should make any difference. If there had not been overlapping charges but two separate charges, each over different property, the respondent would have been at liberty to resort to one charge and if the proceeds of that sale were insufficient then to resort to the other. (at p670)

36. If there had been a surplus on the sale in the present case, there is no doubt that the appellants would have been thereby discharged from their guarantee and Melbourne Hotel would have been entitled to such surplus. (at p670)

37. If the appellants had paid the amount due on the guarantee upon demand being made upon them they would have become entitled to the benefit of both the mortgage and the debenture and made their own decision as to how they should exercise the powers thereby given. This principle is succinctly stated in Rowlatt at p. 205 in the passage quoted above. Not having done that they are in my opinion in no position to complain as to the manner in which the respondent bona fide exercised the power given by one of those securities, whether or not it gave a power of sale over the property the subject of the other security. (at p671)

38. Another aspect of the argument for the appellants which calls for separate comment was that the respondent had prejudiced the value to them of the mortgage, to the benefit of which they were entitled, and that their liability to the respondent was thereby discharged to the extent that the acts done by the respondent reduced the amount to which they should be credited by reason of the sale of the property. They relied on the proposition stated by Lord Watson in Taylor v. Bank of New South Wales (1886) 11 App Cas 596, at p 603 :

"The present case would, in such event, have been within the rule of Pearl v. Deacon [1857] EngR 639; (1857) 24 Beav 186; 1 De G & J 461 (44 ER 802) , where the creditor had, by his own act, rendered unavailable part of the security, to the benefit of which the surety was entitled, and the latter was held to be discharged, not absolutely, but only pro tanto."

Pearl v. Deacon was a case in which the creditor destroyed the security by the exercise of a paramount right, in that case by distraining for rent furniture mortgaged to secure the amount guaranteed, and it was held that the surety was discharged pro tanto. It is not altogether clear whether such pro tanto discharge is available only when there is wilful neglect or default; see Rowlatt, at pp. 289-291; Carter v. White (1883) 25 Ch D 666, at p 670 . However that is of no significance in the present case because the principle referred to by Lord Watson is subject to the terms of the guarantee itself; see, e.g., Bank of Adelaide v. Lorden [1970] HCA 59; (1970) 127 CLR 185 . The guarantee in the present case contains in the latter part of cl. 2 an express provision that the liability of the guarantors (the appellants) is not to be affected by any release of or dealing with any property comprised in any security held by the mortgagee (the respondent). That provision is sufficient to prevent any such right as is relied upon from arising. (at p671)

39. For those reasons, which differ somewhat from those of the Full Court, I am of opinion that the appellants are entitled to credit for the net balance accounted for by the receiver and manager less the amount of the advances made by the respondent to the receiver and manager and interest thereon. (at p671)

40. I would therefore dismiss this appeal. (at p671)

WILSON J. I have had the advantage of reading the reasons for judgment that have been prepared by my brothers Aickin and Brennan. I agree generally with those reasons, and with the conclusion to which they lead. I do not wish to add anything. (at p672)

2. I would therefore dismiss the appeal. (at p672)

BRENNAN J. Melbourne Hotel Pty. Ltd. agreed to borrow $300,000 at interest of 13 1/2 per cent per annum from the respondent, a finance company. Payment of interest and repayment of the principal sum were to be made by monthly instalments. the first instalment to be paid on 5 November 1971, the last on 5 October 1975. The due payment of the instalments was secured by a mortgage, a debenture and a guarantee. Melbourne Hotel Pty. Ltd. was the registered proprietor of an estate in fee simple in land situated at 942 Hay Street in Perth on which the Melbourne Hotel was built, and it gave a mortgage over that land. It also gave a debenture which created a specific charge over some of its assets and a floating charge over the balance of them. (at p672)

2. The guarantee was given by the appellants. By deed they jointly and severally guaranteed "to the Mortgagee the due and punctual payment by the Mortgagors of the said principal sum and interest in the manner in the said Mortgage provided". There was no covenant with respect to obligations contained only in the debenture, the single reference to the debenture being: "The said Mortgage shall be primary security, the Debenture . . . shall be first collateral and this Guarantee second collateral." (at p672)

3. The mortgagor defaulted in paying the instalments and on or about 7 March 1975, the respondent gave notice to the mortgagor and to each of the appellants demanding payment of $289,247.13, the amount due and payable at that date, and interest until payment. The demand was not met. Although the respondent gave notice that in default of payment within seven days it would "proceed to exercise its power of sale and all other its powers under the said Mortgage", it did not exercise its power of sale under the mortgage. (at p672)

4. On 18 March 1975, it appointed a Mr. Twogood to be receiver and manager of the assets of the mortgagor, and it is common ground that the appointment was made under the debenture. Mr. Twogood carried on the business of the hotel, but he did not trade profitably. He kept the licence on foot and within six months he sold the hotel as a going concern. He exercised the power of sale conferred upon him by cl. 19 (d) of the debenture which provided, inter alia, that a receiver and manager "shall be the agent of the Mortgagor and shall have power . . . to sell . . . either (a) the Mortgagor's business and assets as a going concern or (b) all or any part of the mortgaged premises . . . ". Mr. Twogood obtained $280,850 gross for the undertaking: $251,000 for the land and buildings and an additional $29,850 for stock in trade, fixtures and fittings. Costs of the sale were deducted from the gross proceeds. (at p673)

5. Clause 20 of the debenture provided that a receiver and manager should apply the net proceeds of any sale in payment of all costs charges and expenses of and incidental to the exercise of the powers of the receiver and manager including his remuneration and all outgoings properly paid by him in priority to the payment to the mortgagee of moneys "secured . . . by these presents and every security collateral herewith . . . ". Mr. Twogood accordingly deducted from the net proceeds of the sale the losses which he had incurred in trading and his own fees before paying the respondent $208,806.50 in partial satisfaction of the secured debt. The respondent received that sum on 11 September 1975, shortly after Mr. Twogood had received the proceeds of the sale. The respondent then sued the mortgagor and the appellants as guarantors for the balance, claiming interest upon the balance at 13 1/2 per cent per annum from 11 September 1975, until judgment. On 21 November 1977, it recovered judgment in the Supreme Court of Western Australia against the mortgagor in the amount of $129,598.04. The judgment remained wholly unsatisfied. The action against the appellants went to trial. (at p673)

6. On 8 September 1978, judgment was entered against the appellants for a lesser amount, $92,928.90, Lavan S.P.J. holding that the guarantors' liability was to be assessed without regard to the trading losses incurred by the receiver and manager or to his fees (a total of $57,177) and that the whole of the net proceeds of the sale of the land and buildings (but not of the stock and plant) should be credited against the amount owing under the mortgage on 11 September 1975. (at p673)

7. On appeal by the present respondent to the Full Court, it was held that the losses and fees were to be taken into account and that judgment should be entered against the appellants on the same footing as the judgment entered against the mortgagor (subject to an adjustment which might have affected both judgments and which is not material to this appeal). Accordingly, the Full Court, allowing interest under a provision of the Supreme Court Act 1935-1979 (W.A.) upon the amount of $129,598.04 from 21 November 1977 when judgment was recovered against the principal debtor, varied the judgment of Lavan S.P.J. by ordering the appellants to pay $135,961.99 in lieu of $92,928.90. (at p673)

8. The question now is whether the liability of the appellants is to be calculated by crediting in partial satisfaction of the debt secured by the mortgage the net amount which the respondent actually received from Mr. Twogood, or a larger amount which is said to represent the net proceeds of the sale of the land and building. The exercise by Mr. Twogood of the powers conferred upon him by the debenture to carry on business and to sell the business and assets of the mortgagor as a going concern is said to account for the difference between the two amounts. The appellants submit that they cannot be made to bear the trading losses and receiver and manager's fees although those items are to be debited to the mortgagor under the debenture. (at p674)

9. The appellants' argument is put in the alternative: either the additional amounts which may be debited to the mortgagor are not within the appellants' deed of guarantee, or the respondent's appointment of the receiver and manager and the consequent exercise of the powers conferred upon him by the debenture adversely affected the appellants' entitlement to the benefit of the mortgage given by the mortgagor and discharged the appellants from so much of their liability as is attributable to the exercise of powers pursuant to the debenture. The former argument prevailed before Lavan S.P.J., but both arguments were rejected by the Full Court. (at p674)

10. The obligation of the mortgagor which the appellants guaranteed was described in the same terms by both the mortgage and the debenture. The same obligation, namely, the due payment of the instalments, was secured by both instruments, and the appellants were liable under the guarantee to the extent to which the mortgagor failed in the due discharge of that obligation. It is not the guaranteed obligation which is in question, but the extent to which the guaranteed obligation was discharged on 11 September 1975. That is a matter of fact. The trading losses and Mr. Twogood's fees reduced the sum available for payment in partial satisfaction of the mortgagor's debt, and the fact is that there was no other payment than the payment by Mr. Twogood on 11 September 1975, made in discharge of the obligation which the appellants had guaranteed. The payment of the proceeds of the sale to Mr. Twogood was not a payment to the respondent, for Mr. Twogood was not the respondent's agent to receive them. Unless the appellants succeed upon a submission next to be mentioned, they cannot require the respondent to allow credit for an amount which it did not receive. (at p674)

11. Next it was submitted that the exercise of powers under the debenture had worsened the appellants' position as guarantors by diminishing the value to them of the mortgage to the benefit of which they were entitled, and that they were discharged from their liability to the extent to which the respondent's conduct had worsened their position. It was not argued that the appellants were entitled to be discharged because of breach of their agreement with the respondent, but it was submitted that the present case is of the kind to which Lord Watson referred in Taylor v. Bank of New South Wales (1886) 11 App Cas 596, at p 603 :

"The present case would, in such event, have been within the rule of Pearl v. Deacon [1857] EngR 639; (1857) 24 Beav 186; 1 De G & J 461 (44 ER 802) , where the creditor had, by his own act, rendered unavailable part of the security, to the benefit of which the surety was entitled, and the latter was held to be discharged, not absolutely, but only pro tanto." (at p675)

12. In a case where the act of a creditor does not discharge a surety, but the creditor has nonetheless sacrificed or impaired a security, or by his neglect or default allowed it to be lost or diminished, the surety is entitled in equity to be credited with the deficiency in reduction of his liability (Williams v. Frayne [1937] HCA 16; (1937) 58 CLR 710, at p 738 , per Dixon J.). The surety's entitlement is lost, however, if he bargains away his right to complain of the act which occasions the deficiency (cf. Perry v. National Provincial Bank of England (1910) 1 Ch 464 ; Bank of Adelaide v. Lorden [1970] HCA 59; (1970) 127 CLR 185 ). The respondent submits that the appellants, by the terms of the guarantee, had precluded themselves from complaining of any deficiency consequential upon the respondent pursuing against the mortgagor its remedies under the debenture. If that submission be right, the case is distinguishable from Pearl v. Deacon, where a creditor by exercise of a paramount right, sacrificed a security to the benefit of which a surety was entitled, and the surety had not agreed to the exercise of the right or to accept the prejudice flowing from the sacrifice of the security. (at p675)

13. The guarantee describes the debenture as "first collateral" to the mortgage, the guarantee being "second collateral". The respondent was therefore at liberty to exercise its rights under the debenture either concurrently with or prior to the exercise of its rights under the guarantee. Availing itself of the remedies given by the debenture, the respondent is said to have prejudiced the appellants as sureties by appointing a receiver and manager whose sale yielded a smaller sum to be credited against the mortgagor's debt than would have been yielded by an earlier sale of the land and buildings alone. But the appellants had agreed that the exercise of those rights should not affect their obligation under the guarantee and that a failure to realize the land and buildings to the best advantage would not diminish their liability. Their agreement is to be found in the second covenant of the mortgage which provided, inter alia, "this security shall not in any way affect or be affected by any other security now or hereafter held by the Mortgagee . . . or by the Mortgagee failing or neglecting to recover by the realisation of any collateral or other security or otherwise any moneys owing or to become owing to the Mortgagee by the Mortgagors . . . ". The respondent was thus entitled to the benefit of the appellants' obligation in full without reduction in respect of any deficiency occasioned by the respondent's failure to realize to the best advantage the mortgaged land and buildings. Assuming that there were a deficiency in the realization of the land and buildings, the second covenant disentitles the appellants to any relief on that account from the liability to which the guarantee subjected them. (at p676)

14. In any event the appellants, who bore the onus of establishing any deficiency occasioned by the course of realization adopted by the respondent and the receiver and manager (Carter v. White (1883) 25 Ch D 666, at p 670 ; Re Wolmershausen; Wolmershausen v. Wolmershausen (1890) 62 LT 541, at p 547 ), failed to establish that there was any dificiency. On the case which the appellants sought to make, it was incumbent upon them to show that a sale by the respondent shortly after 7 March 1975, for whatever the land might have fetched at that time would have left the appellants liable in a smaller amount than the amount for which they turned out to be liable after the sale by Mr. Twogood in September of the business and assets as a going concern. Lavan S.P.J. rejected a submission that the hotel was readily saleable for $251,000 in April 1975 and he expressed the view that the optimum price of the licensed premises was to be gained by its sale as a going concern. In the absence of proof of the sum which the land and buildings might have fetched shortly after 7 March 1975, the appellants failed to prove that there was any deficiency occasioned by the course which the respondent and the receiver and manager adopted. (at p676)

15. The respondent was therefore entitled to judgment against the appellants for the amount for which the mortgagor was liable and for interest on that amount. It is agreed that that conclusion results in the dismissal of the appeal. The appeal should be dismissed with costs. (at p676)