Capital Securitisation Limited v Jammal

7 Clause 2.7(e) provided that the Loan Agreement and the Mortgage were enforceable notwithstanding that either of them or any obligation arising thereunder was void or unenforceable in whole or in part. The Loan Agreement also included the following: 3.5 Severability of provisions

Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

This Agreement contains all the contractual arrangements of the parties with respect of its subject matter. It supersedes all earlier representations and understandings made by or existing between the parties with respect to its subject matter.

This Agreement may be amended only by another Deed executed by all parties who are affected by the amendment.

(a) that the rights vested in the Lender pursuant to this Agreement shall constitute a caveatable interest in the Property for the purposes of Part 7A of the Real Property Act 1900 (NSW);

(b) the Lender shall be at liberty at any time after the date of this Agreement to lodge the Caveat;

(c) in the event that the Lender elects in its discretion to lodge the Caveat then:

(i) the Borrower shall be liable for all Costs therefor; (ii) the Borrower undertakes not to take any steps nor commence any proceedings in order to extinguish the Caveat and/or to otherwise prejudice the Lender's rights as caveator (and in breach of such undertaking the Borrower shall indemnify the Lender and keep the Lender indemnified in respect of all Costs associated with defending such actions) until such time as all moneys payable to the Lender pursuant to this Loan Agreement have been repaid in full. 8 The Loan Agreement was executed by Joseph as director and by Tony as secretary/director on behalf of OSS. Mr Banovec executed the document for the plaintiff allegedly pursuant to s 127 of the Corporations Act 2001 (Cth) (the Act). Guarantees - 23 June 2005 9 On 23 June 2005 Tony and Joseph, and Nadia and Therese signed Deeds of Third Party Guarantee, the Recitals of which provided: A. One Spencer Street Pty Limited (ACN 198 859 280) ("Borrower") is to be indebted to the lender in the sum of $500,000.00 in terms of a Loan Agreement ("Guaranteed Monies"). B. The Third Party Guarantor has agreed to execute this Deed to secure the repayment by the Borrower of the Guaranteed Monies subject to the conditions below. 10 Although Recital A purported to define the "Guaranteed Monies" as the $500,000 "in terms of a Loan Agreement", the term was also defined in clause 1.1 of the Guarantees as follows: all sums of whatever nature due and payable under the Transaction Documents [defined as "this agreement as read with the Mortgage and the Caveat"] including:

(b) stamp duty and other Government charges associated with the Transaction Documents;

(c) all Costs incurred by the Lender in consequence of any default in payment of any monies or the breach of any of the provisions of the Transaction Documents; and/or

(d) all Costs associated with the enforcement of the Transaction Documents. 11 The Guarantors "unconditionally and irrevocably" guaranteed the "due and punctual payment of the whole of the Guaranteed Monies and the due and punctual observance and performance" by OSS of all of its obligations to the plaintiff (cl 2.1(a)). The Guarantors agreed to pay on demand to the plaintiff the Guaranteed Monies if OSS did not pay them and irrespective of whether a demand had been made for OSS to pay them (cl 2.2). The Guarantees also included the following: 2.6 Continuing Guarantee This Deed is a continuing Guarantee and Indemnity which: (a) shall be irrevocable, continue and remain in force until the whole of the Guaranteed Monies from time to time shall be paid and all of the Guaranteed Obligations shall be performed in full and irrespective of any sums or sums which may at any time or times be paid to or received by the Lender for or on account of the Guaranteed Monies or the Guaranteed Obligations; and (b) will not be wholly or partially discharged by any payment at any time in the future or any of the Guaranteed Monies or by any settlement of account or any other matter; and (c) applies to the present and any future balance of the Guaranteed Monies; and (d) means the Lender shall be at liberty from time to time without any notice or intimation to the Third Party Guarantor to make any advances or loans (without pecuniary limit) to the Borrower in terms and conditions entirely acceptable to the Lender and may also from time to time increase renew or otherwise vary without any restrictions at all the advances and accommodation to the Borrower or otherwise amend or vary or agree to amend the Guaranteed Obligations and may also from time to time vary the Transaction Documents or make any new arrangements with or for or on account of the Borrower in its absolute discretion and in all cases without consent by notice or intimation to the Third Party Guarantor being necessary; and (e) extends and covers all Transaction Documents for the Guaranteed Monies and the Guaranteed Obligations and any arrangements or agreements from time to time in force between the Lender and the Borrower and includes without limiting the foregoing any amendments or variations encompassed by this clause for which no prior consent of the Third Party Guarantor is necessary and also includes variations in the interest rate charged and the terms of repayment including extending the time for repayment and the manner in which payments are to be made under the Loan Agreement. … 2.8 Liability Preserved The obligations of the Third Party Guarantor under this Deed shall be absolute and unconditional in any and all circumstances and the liability of the Third Party Guarantor shall not be abrogated, prejudiced effected or discharged by any one or more of the following: (a) any (i) release, waiver or amendment modification or variation of the Borrower's obligations under the Loan Agreement or Transaction Documents; (ii) any other arrangements now or from time to time in future in force between the Lender and the Borrower; or (iii) or the replacement of any such obligations and/or arrangements with new arrangements or obligations whether those obligations are with or without the consent of the Third Party Guarantor including, but without limiting the foregoing, an increase or reduction in the principal sum secured under the Loan Agreement and the Transaction Documents or other financial accommodation so secured, the variation from time to time of the method of payment under the Loan Agreement or Transaction Documents or any increase or variation in the applicable interest rates charged thereunder; … Financial difficulties 12 OSS did not repay the $500,000 by the Repayment Date and on 28 August 2005 the plaintiff issued a Notice pursuant to s 57(2)(b) of the Real Property Act 1900 and s 111(2)(b) of the Conveyancing Act 1919 in respect of the Fairfield Land. 13 In mid September 2005 Mr Banovec met with Tony, Joseph and Nadia Jammal (referred to jointly as the Jammals). At this meeting Tony advised Mr Banovec that OSS had problems with the valuation of the Fairfield Land and that although there had been an earlier valuation report of $13.5 million that Mr Banovec had seen, Bankwest had valued the land at $8 million. Mr Banovec advised the Jammals that the plaintiff wanted the development to be completed and asked whether he could help and how much was needed. Tony said that between $4 million and $5 million was needed to complete the construction. Mr Banovec said that from what the Jammals had shown him he thought it was a good project but that: "First, we must address the default situation urgently otherwise there is no point talking at all. I will get back to you regarding further funding."

Legal proceedings 14 It is apparent that between mid September and early October 2005 a number of options for finance were discussed between the parties. On 7 October 2005 Mr Banovec sent an email to Tony in the following terms: I understand that you are in a very difficult position, however there is nothing I can do. We discussed a variety of options but you have not proceeded with any one. You have not responded to our notice sent to you in August and the letter sent to you in September. I have tried to give you as much time as I could but my board will not let me proceed further. We have issued Statements of claims against the relevant parties. On Monday a report will be sent to baycorp advantage listing defaults on your company as well as the individuals involved. I understand you are in a very hard position but the only way to keep the lenders happy is if you try to service the interest in any way.

I am only sending you this email as you are not taking my calls any more.

Meeting 20 October 2005 15 On 20 October 2005 Mr Banovec met with the Jammals in North Sydney during which he referred to the plaintiff's legal proceedings to recover the debt. Tony asked if they could try to "work something out". Mr Banovec advised that before that could be done, the outstanding interest needed to be "cleared". Tony advised that $55,000 could be paid that day and that a further $55,000 could be paid in four weeks. Mr Banovec agreed that if the two payments were made the reduced interest rate would apply from the date of the second payment and there would be no interest payable until April 2006, however if the payments were not made the interest rate would remain the same. During this meeting Tony asked Mr Banovec whether it would be possible to obtain further funding to complete the development. He said that $1 million to $1.5 million was needed in the next six weeks and another $1.5 million was needed in April 2006. Mr Banovec said that he was not sure if this could be done but that if the Jammals provided approvals from the financiers of the development, Banksia and Bankwest, and a better marketing plan, the plaintiff would consider the application. 16 On 20 October 2005 Mr Banovec wrote by email to Joseph and Tony in the following terms: I would like to confirm that you will provide us with 2 payments of 55,000.00. One payment is due today and a second payment due within 4 weeks. Only if these payments are received as agreed, we will convert the loan into a second mortgage facility at a rate of 19.95% p.a. Once payments are received we will provide you with a deed. If payments are not received the loan will proceed as is without amendments and will continue to compound and capitalise all interest payments into your account.

We will look into the options of raising further funding for you as discussed. Please allow me some time.

Please don't hesitate to contact me should you wish to discuss any part of our arrangement.

Offer from CSL Money 17 A letter dated 28 October 2005 directed to Tony at OSS contained an offer from "CSL Money", described as a Mortgage Funding Programme of the plaintiff, to arrange mortgage finance in the amount of $1.4 million for 6 months expiring in April 2006, the security for which was to be a second ranking registered mortgage over the Fairfield Land. This offer was dependant upon a valuation of the Fairfield Land at no less than $13 million. That letter also advised that it was not an offer of finance but a brokerage agreement outlining the terms on which the plaintiff would endeavour to arrange finance. 18 On about 28 October 2005 Mr Banovec prepared a loan agreement in line with that indicative letter of offer of that date from CSL Money. That loan agreement was in similar terms to the Loan Agreement except that the Principal Sum was $1.4 million instead of $500,000. Mr Banovec claimed that after he reviewed the support documents provided to him by the Jammals it became clear that $1.4 million would not be enough to complete the development and that there would be no justifiable basis to advance a further $900,000 (i.e. in addition to the $500,000 already advanced, making a total of $1.4 million) to OSS or the Jammals.

Meeting November 2005 19 Mr Banovec claimed that in about the first week of November 2005 he met again with the Jammals in North Sydney during which meeting he advised them that he had reviewed the documentation and that it appeared there would be a shortfall of anywhere between $3 million and $9 million. He then advised the Jammals that the plaintiff could not proceed with the proposed $1.4 million loan transaction and suggested they look at other alternatives. Although there is some disagreement with the actual words spoken at this meeting, it is agreed that Mr Banovec said: I think the best way would be for [the plaintiff] to raise funds through a prospectus. In order for us to participate in such a joint venture [the plaintiff] would require a 50% profit share arrangement, and whilst costs would be very high for this venture at the end it could work for all parties. 20 Mr Banovec said that the plaintiff would need to prepare a prospectus, the process for which would cost somewhere between $300,000 and $500,000 and that the plaintiff would be willing to outlay those costs under the joint venture until funds had been raised to reimburse the plaintiff. Mr Banovec advised the Jammals that he would proceed to draft some sort of agreement to reflect the arrangement and that if he needed further information he would send an email. 21 Mr Banovec sent an email to Tony on 24 November 2005 in the following terms: [A]s we discussed here are the information we will require before we can proceed to the raising of funds.

1. You need to provide us with a detailed A&L statement for One Spencer Street Pty Ltd ("OSS") showing all assets, liabilities and also the current position of the mortgages. 2. We will require a detailed feasibility schedule and a new time line for the project. I would suggest we meet and prepare one together. 3. We need a marketing plan, documents and history of marketing campaign including costing and timeline as well as contact details for the marketing agent 4. The DA Determination shown conditions. Please provide a detail costing and timeline to meet all these conditions. 5. The Bankwest approval shows conditions, please provide evidence that all conditions have been met and Bankwest is happy to proceed with this offer. If there are any unmet condition please provide evidence of how these conditions will be met and how much the costs are. 6. Please provide a copy of the building contract 7. Has anything happened with the Court Case against maryland international Pty Limited as it was due for call over on 21st November 2005

Now we are talking about promoting the fund raising:

The biggest part of the information memorandum is about the people involved. We need the following items:

1. A better CV with experiences for Tony, Joseph and Nadia 2. A List of clients for the project management division showing credibility 3. Some more financial information on the project in Blacktown, dee why, Hassal Street 4. How is Austcorp involved? is there anything we could ad? 5. Is there anything we can ad about the development at the Central Coast.

Here is a time line based on the return of the information provided:

1. Completing all conditions for the Funding agreement 24 & 25.11.05. 2. Discussion and preperation of all documenst relating to the development 28.11.05 - 02.12.05. 3. Preperation of Marketing material 05.12.05 - 09.12.05 4. Final Legal Sign Off 09.12.05 5. Presentation to ASIC 12.12.05 6. Fund raising will commence 19.12.05

As we are getting into christmas the time line does not work. I think the time line should be changed.

Item 5 will be delayed till 04.01.05 and item 6 will commence 17.01.05

This will delay the entire project beyond april and the six month timeline with Banksia.

Let me know when you will be available to discuss. 22 Mr Banovec claimed in his affidavit of 3 August 2007 that the conversation that took place at the meeting in November 2005 included the following: Banovec: The only way I can see that we can get this project happening without any further risk, would be to attempt refinancing all your current facilities. Looking at your assets and liability statement I would think we could provide a total amount of $18 million to refinance all debts and construct the Court Road development.

Tony: Would you be able to arrange this for us as this would certainly be the best way for us to proceed? 23 Tony claimed in his affidavit of 7 August 2007 that this was not said at a meeting in November 2005 but that words to this effect were said in a meeting in February 2006. He claimed that the discussion in November 2005 was in relation to the loan documentation for $1.4 million and also claimed that at this time there was discussion about the prospect of the plaintiff providing funding of $9 million ($6 million direct funding of the project and $3 million in related costs) to complete the development in exchange for a 50% stake for the plaintiff in the development. Tony claimed that the proposal for a prospectus was for $9 million and not $18 million. $1.4 million loan agreement 24 On 17 December 2005 Mr Banovec sent a fax to Joseph and Tony attaching "Head of Agreement Funding and Participation Agreement * Variation *" (the Variation), a copy of the CSL Money letter of 28 October 2005 and Heads of Agreement Funding Participation Agreement (the Heads of Agreement). The fax in evidence is 15 pages in length but it is clear that there was an additional page to the Heads of Agreement that is not in evidence. The Variation recorded that the plaintiff would provide OSS with further funding up to a "new loan amount" of $1.4 million subject to draw downs (cl 1). It also provided that $9 million of funding would be raised by the issue of a prospectus (cls 5-8). Clause 4 provided: The developer [OSS] will provide CSL [the plaintiff] with a new signed loan agreement and a variation to the mortgage. CSL may require additional security to be provided. In such event the developer agrees to provide further securities as reasonably required by CSL. 25 The Heads of Agreement contained a plan to repay the plaintiff's loan, then totalling $802,000 and to discharge its mortgage over the Fairfield Land with monies from a loan from Bankwest of $46.237 million due to settle in April 2006. It also recorded that in the interim the plaintiff would approve finance up to a maximum of $6 million for completion of the project in exchange for an entitlement to 50% of the profits from the development. There is no evidence that these particular documents were ever signed, although the loan agreement for $1.4 million was signed by both the plaintiff and the defendants. 26 Tony's affidavit of 27 July 2007 provides that just prior to Christmas 2005 he and Joseph executed the $1.4 million loan agreement and that it was not until January 2006 that Mr Banovec mentioned the refinancing of all of the facilities for $18 million to be secured by mortgages over all of the Jammals' properties. January 2006 27 Mr Banovec claimed in his affidavit of 3 August 2007 that in January 2006 he advised the Jammals at another meeting in North Sydney that there was no chance of the plaintiff being able to raise $18 million, that the current gearing of the properties was too high and that all the facilities were in default. Mr Banovec also claimed that he suggested to Tony and Joseph that the development be adjusted so as to separate the building proposed for Court Road from that on the Horsley Drive and that "an attractive package" be put together. He suggested that there was a need to raise $9 million to cover the shortfall and Mr Banovec also claimed that Tony agreed with this proposal as a "good suggestion" and asked him to prepare an agreement to reflect the new arrangement.

February 2006 28 Mr Banovec claimed that he met with the Jammals in North Sydney on 17 February 2006 after he had become aware that an application had been made to wind up OSS. The conversation that Mr Banovec alleges occurred at this meeting is in contest and is set out below with Joseph and Tony's responses (italicised in brackets): Banovec: Gentlemen, the situation is out of order. I was not aware that a winding up application had been made against OSS. Based on these circumstances we will not be able to proceed with any further funding and we must address the loan situation urgently. (Joseph agreed that the first two sentences were said but denied the last sentence was said (tr 97-98). Tony denied this was said (tr 137) . )

Tony: The party which is trying to wind us up does not have the right to do so, in our view. The company is not insolvent and we have commissioned an accountant to prepare a solvency report. (Both Joseph and Tony agree this was said (tr 98, 137))

Banovec: I am not sure if OSS is still solvent, you are in default with Banksia, you were in default with us at CSL, and you have not made the second 55K payment you promised you would within 4 weeks of the 20 October. Interest on our facility is flying right up there. (This is denied by both Joseph and Tony (tr 98, 137-138) ).

Tony: I understand your concerns. I can assure you that the situation is very concerning for us. Is there anything you can do to help us? ( Joseph originally claimed that it was not said then that he did not recall it and then that it was possibly said (tr 98). Tony agrees that this was said (tr 138) .)

Banovec: First, I have to ask you to provide me with additional security over other real estate. Are you willing to do so?

( This is denied by Joseph and Tony (tr 98-99, 138)) .

Tony: I could arrange a second mortgage over my Hunters Hill property, my house in Chatswood, a commercial shop in Parramatta and a property in Liverpool.

Joseph: I would arrange for you a third mortgage over residential units in Dee Why, two units in Parramatta and my home in Oatlands.

Banovec: Are you suggesting a third mortgage over all these properties?

Joseph: No, a second mortgage over the Parramatta Properties and my house in Oatlands and a third mortgage over the Dee Why properties.

Banovec: How much do you owe on all these properties?

Tony: I owe around $2 mill over the lot but I am thinking of selling the one in Parramatta. I'm not sure on the amounts on the Liverpool property. (This is denied by Tony (tr 139). Joseph said there was some discussion of an amount (tr 99)).

Joseph: I am not sure but I will let you know shortly. (Tony said he could not remember this being said (tr 139) ).

Banovec: OK, I am happy to proceed providing you will provide me with mortgages over all the properties discussed namely the Hunters Hill property, the Chatswood property, the Oatlands property, all three Parramatta properties and the units in Dee Why. I will require a valuation on the Dee Why Units and I want to register the mortgages so that I can be certain that I can get our money back. In the alternative I will have no choice but to join the current winding up proceedings and see what will happen. I would not be happy with this but you will give me no choice. ( Tony denied that this conversation occurred (tr 139). Joseph agrees that all of this was said and that the $18 million was to be provided on that basis (tr 99-100) ).

Joseph: Would you be happy with unregistered mortgages and registered caveats in support of the unregistered mortgages? If you wish to get a valuation done, please let me know when and I will be of assistance.

Banovec: I would agree to that. (Tony denies that this was said (tr 140). Joseph admits that this was said (tr 100)).

Tony: Also, it looks like we have sold the Liverpool property, so would you discharge these properties upon settlement. I am thinking of selling my Parramatta unit so I would also need you to discharge the caveat come settlement time. ( Tony said that he requested Mr Banovec to remove the caveats and that something very close to this was said (tr 140-141 ).

Banovec: I am happy to do this but will I get some money from the discharge or not?

Tony: There should be something available on discharge.

Banovec: Look, I have made a file note of our conversation and will now start to prepare the caveats and mortgage documents. I will not engage a solicitor as I do not want to incur more cost. Are you happy with this?

Tony & Joseph: Thank you for that Oliver.

Banovec: Will you be using a solicitor when signing the documents.

Tony: No, we think not. You will not require us to get independent advice, will you? (Tony agrees that this conversation probably took place except for the denial in relation to using a solicitor (tr 141-142). Joseph agreed that this conversation took place (tr 100-101)).

Tony: The mortgages are only as collateral to the original loan and mortgages. Is that correct?

Banovec: Yes, the new mortgages will be collateral mortgages to the original loan advance and security documents. I will let you know when the documents are ready so that you can sign them.

( This is denied by Joseph and Tony (tr 101, 142)) .

Tony: Thank you Oliver, have a good weekend and give my regards to Isabella. (Tony agreed that it was very likely that he said this (tr 142) ). 29 Mr Banovec claimed that on or about 22 February 2006 he met with Tony and Joseph and George Markos and that "the plaintiff was granted" mortgages as "additional security". The mortgages that Mr Banovec claimed were provided to him on that day were the Oatlands mortgage, the Chatswood mortgage, the Hunters Hill mortgage, the Hassall Street mortgage and a mortgage in relation to a property at Dee Why and a property at Liverpool. He claimed that at the time the mortgages were signed he had the following conversation with Tony and Joseph: Banovec: Here are the documents for you sign. You will see that I have prepared a two page mortgage for every property together with one annexure A to all mortgages rather than having one annexure A for every mortgage. Are you happy with that? (Joseph agreed that this was said (tr 103). Tony said that he could not remember it being said (tr 130)).

Tony: Yes, no problem. So I just wanted to confirm that you will only register the caveats and the mortgages will not be registered. (Joseph agreed that this was said (tr 103-104). Tony denied that this was said (tr 130-131)).

Banovec: That was agreed. I will stamp the caveats as collateral to the initial mortgage and the mortgages documents will not be stamped and registered until we wish to register the mortgages on title. I would not do that till you give me reason to.

Tony: Are the terms of these collateral mortgages different from the initial terms? (This is denied by both Joseph and Tony (tr 104, 131-132)).

Banovec. No, you will see that the Annexure A has been taken out from the first mortgage document, it even still states One Spencer Street Pty Ltd on top of the Annexure A. So this is the exact same annexure just amended to be used in these collateral mortgages. The collateral mortgages will secure the CSL loan to One Spencer Street. When are Nadia and Violet going to join us to sign these documents or do you wish to take the documents home to them? In any event all signatures will need to be witnessed. (Joseph could not recall this being said but said that maybe it was said (tr 104-105). Tony denied that this was said (tr 132)).

Tony: Oliver, we can't go back to our wife's and ask them to sign these documents. Both are very concerned and would not understand how difficult our position is. Is there any chance that only Joseph and myself will sign?

(This is denied by both Joseph and Tony (tr 105, 134))

Banovec: Gents, this was not agreed. I will have to change all the documents for you and I may need to get our solicitor to draft these documents as they are much more complicated now. (Joseph agreed that this was said (tr 105), Tony could not remember but said that it was probably not said (tr 134-135)).

Joseph: Oliver, why don't we just amend these documents here and initial all changes? (Joseph denied that this was said (tr 105). Tony said that it was possibly said (tr 135)).

Banovec: OK, lets do that and then I can get them registered. Tony please sign here and Joseph here please. I have asked George Markos to join us here today to witness your signatures on these documents. Are you all happy for him to witness your signatures? (Joseph and Tony both agreed that this was said (tr 105-106, 135)).

Tony: George, just for you to know what we are doing …

Banovec: Tony, Joseph, George is not here are a party. He is not giving any advice or comment, he is only witnessing your signatures as he is a Justice of the Peace and we all know him so I thought this will make it easier for everyone. (Joseph agreed that this was said (tr 106). Tony said that it was not totally correct (tr 135)). 30 Mr Banovec claimed that on about 24 February 2006 he met with Tony and Joseph and the following conversation took place: Banovec: I now have all the documents signed but I have not been able to register the caveats as there are too many. I will try and get this done on Monday.

Tony: Please make sure you will register them soon. As far as the winding up application is concerned are you able to help us? Would you be able to appear for us at the hearing in support of our solvency.

Banovec: Gentlemen, I think it is important that you get proper advice regarding this. If I may suggest that you meet Hector West from a firm called Armstrong Wily; they are insolvency experts and he may be able to guide you better.

Joseph: Would you please arrange a meeting with him?

Banovec: No problem, I will do this now. What we can do is send our solicitor to the meeting in support of you, explaining that you are not in default of our loan agreement at this time (as you have provided additional security) and we are comfortable at this stage.

Banovec: I will arrange this for you. 31 Mr Banovec lodged the caveats on 27 February 2006. His evidence included the following: Each of the caveats erroneously referred to a "loan agreement and mortgage dated 18.06.05", and the caveats themselves also erroneously bear that date. I cannot now recall how that came about. It is possible that an attempt was made to backdate the documents to the date of the original loan, but that date is 23 June 2005 not 18 June 2005. 32 Mr Banovec's affidavit evidence referred to the commencement of this litigation and the fact that the mortgages had not been registered as at February 2007. His affidavit evidence included the following: Our file on this matter is quite complex. I went through the file looking to determine when the mortgages were executed. After going through the file I somehow came to the erroneous view that the mortgages had been executed on 18 June 2006 - probably from a misreading of the caveats that bore the date 18 June 2005. I then filled in the date of 18 June 2006 on each of the mortgages. $18 million Loan Agreement 33 Joseph, Tony and George Markos claimed in evidence that a loan agreement for $18 million was also signed on one of these occasions in February 2006. The loan agreement for $18 million bears the date 18 June 2005 but it is not suggested by any party that it was executed on that day. I will deal with the question of when it was executed later. This loan agreement was between the plaintiff (as Lender) OSS, Auscorp Constructions Pty Ltd (Auscorp), Daymill, Lukibar, Tony and Joseph (as Borrowers). There was provision for Nadia and Therese to be Borrowers, but these provisions were crossed out. Neither Nadia nor Therese signed this loan agreement. 34 Tony and Joseph executed this loan agreement personally and on behalf of each of the corporate Borrowers. It was signed by Mr Banovec as a director of the plaintiff and by Dr Richard Brauer as manager of the plaintiff. This loan agreement is in similar terms to the previous loan agreements except that "Mortgage" was defined to include mortgages over not only the Fairfield Land but also the Hassall Street, Dee Why, Chatswood and Oatlands properties (cl 1.1). The repayment date was defined as 36 months following the date of execution (cl 2.2). Interest was at the rate of 12.5% per annum for each 30 day period (cl 2.3). Interest for late payment was at the rate of 22.50% per annum on all monies outstanding including accumulated interest (cl 2.4). The mortgages and the Annexure 35 The relevant mortgages still in issue between the parties are the Oatlands Mortgage and the Chatswood Mortgage. The Chatswood Mortgage (Lot 74 DP 14799) purports to be a mortgage between "T & N Jammal" as "Mortgagor" and the plaintiff as "Mortgagee". It is signed only by Tony. The Annexure is headed: THIS AND THE FOLLOWING 28 PAGES ARE ANNEXURE A TO THE MORTGAGE BETWEEN CAPITAL SECURITISATION LIMITED (AS MORTGAGEE) AND ONE SPENCER STREET PTY LIMITED (AS MORTGAGOR) DATED ... 36 The execution pages at the end of the annexure include the words "EXECUTED as a Deed" and "EXECUTION BY MORTGAGOR". Those pages then record that the common seal of OSS was affixed in accordance with its constitution in the presence of Tony as director and Joseph as director, however no common seal is affixed. There is then provision for execution by Daymill pursuant to s 127 and it is signed by Tony as director. On the following page there is execution by Lukibar pursuant to s 127 by Joseph as director followed by execution by Auscorp Constructions Pty Limited (Auscorp) pursuant to s 127 signed both by Tony as director and Joseph as director. Tony and Joseph executed the mortgage in their own right on the final page of the Agreement. The provision for execution by Nadia and Violet was deleted. At the foot of the final page there is provision for signature by Mr Banovec "for the mortgagee" and his signature appears thereunder. The definition of "Mortgagor" in the annexure was as follows: "Mortgagor" means the person or persons named in this mortgage as mortgagor. If there are more than one, "Mortgagor" means each of them separately and every two or more of them jointly. It includes the Mortgagor successors and assigns. In the description of the Amount Owing it also refers to the mortgagor as so defined whether alone or jointly or jointly and separately and whether as a principal or as a surety. 37 The definition of "Amount Owing" was as follows: "Amount Owing" means all amounts that:

(b) for any reason or circumstance in connection with any agreement (including a loan agreement, guarantee, lease or other facility document), transaction, engagement, document, instrument (whether or not negotiable), event, act, omission, matter or thing whatsoever;

(d) and whether or not of a type within the contemplation of the parties at the date of this mortgage:

(e) are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by the Mortgagor to the Mortgagee;

(f) the Mortgagee has advanced or paid on the Mortgagor's behalf or on the Mortgagor's express or implied request;

(g) the Mortgagee is liable to pay by reason of any act or omission on the Mortgagor's part, or that the Mortgagee have paid or advanced in the protection or maintenance of the Property or this mortgage following an act or omission, on the Mortgagor's part;

(h) are reasonably foreseeable as likely, after that time, to fall within any of the above paragraphs. 38 "Property" was defined as follows: "Property " means each one or more of the following that the context allows:

(b) each fixture, structure or improvement on the land or fixed to it; and/or

(c) the Mortgagor's estate and interest in the land. 39 Clause 2 of the Annexure provided relevantly: 2. MORTGAGE (a) By signing this mortgage the Mortgagor undertakes certain obligations. The Mortgagor also gives the Mortgagee rights concerning the Mortgagor and the Property - for example, if the Mortgagor does not comply with the Mortgagee's obligations, the Mortgagee may take possession of the Property, sell or otherwise deal with it, and sue the Mortgagor for any remaining money the Mortgagor owes the Mortgagee. (b) The Mortgagor is liable for all the obligations under this mortgage both separately on its own and jointly with any one or more other persons named in this mortgage as Mortgagor. (c) The Mortgagor shall ensure that the Mortgagor is not in default under this mortgage. The Mortgagor shall also carry out on time all the Mortgagor's obligations to the Mortgagee. (d) The Mortgagor agrees to the pay the Mortgagee on demand that part of the Amount Owing specified in the demand. However, as long as the Mortgagor is not in default this is subject to any contrary agreement in writing between the Mortgagor and the Mortgagee. (e) These obligations and the Mortgagor's other obligations under this mortgage (such as under clauses 21 and 22) continue even if the Mortgagee releases the Property from this mortgage. (f) The Mortgagor may require the Mortgagee to release the Property from this mortgage if there is no Amount Owing. However, even if the Amount Owing is repaid, the Property remains mortgaged to the Mortgagee until the Mortgagee actually releases it from this mortgage.

40 Apart from the problems of the dates in the mortgages, caveats and the loan agreement for $18 million, there is also the question of whether it was agreed that the Annexure would be part of the Mortgage. Joseph was cross-examined about the Annexure and gave the following evidence (tr 106-107): Q. And when Mr Banovec was talking about the annexure A document, he in fact had a document being the document I took you to yesterday afternoon? A. Mmm mmm.

Q. That starts at page 218 of the first volume? A. Mmm mmm. Yes.

Q. Just to make it clear what your answer yes was in relation to, do you agree that when Mr Banovec was talking about annexure A, he had this annexure A document that commences at page 218 with him? A. He could have had this, yes.

Q. And then in the course of the signing of documents that took place shortly after that conversation, this annexure A document at 218 then came to be signed by you and other people, isn't that right? A. Yes. 41 Tony gave evidence that he signed the last three pages of Annexure A but that there was "no way" he could tell whether those pages followed the mortgage (tr 126). Joseph agreed that Mr Banovec said that he had prepared "the one Annexure "A" to all mortgages rather than having one Annexure "A" for every mortgage" and asked them whether they were "happy with that". Tony could not recall this being said and denied that he said "Yes, no problem". However Joseph agreed that Tony did respond in this way. Although Tony said he could not recall Mr Banovec making this statement, I am satisfied Mr Banovec did say that he had prepared "the one Annexure "A" to all mortgages rather than having one Annexure "A" for every mortgage". I am also satisfied that Mr Banovec asked Tony and Joseph whether they were "happy with that" and that Tony said there was "no problem". 42 In the circumstances of the signatures on the Mortgages and Annexure "A" and the agreement of both Joseph and Tony that Mr Banovec advised them about the "one Annexure", I am satisfied that both the plaintiff and the defendants intended that the Annexure was to form part of the Mortgages. Alternatively I am satisfied that the plaintiff has proved clearly and convincingly that the mortgages should be rectified so as to include the Annexure as part of the mortgages: Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329, per McLelland A-JA 345. First set of Caveats 43 A number of caveats were lodged on 27 February 2006. Those caveats refer to the nature of the plaintiff's interest in each of the properties as "Loan Agreement & Mortgage". In each of the caveats the nature of the instrument is referred to as a "Loan Agreement and Mortgage" dated "18.06.05". Each of the caveats is executed relevantly by Tony or Joseph and the statutory declaration of Mr Banovec is witnessed by Mr Markos. The date of the statutory declaration is "18.06.2005" and is in handwriting. That date was not written by Mr Markos and it is probable that it was written by Mr Banovec. The caveats that are in evidence are copy caveats and Mr Markos resisted the suggestion that he could have witnessed Mr Banovec's statutory declaration on 18 June 2005. He asked to see the original of the caveats. They were not produced. It is obvious that the statutory declarations to these caveats were not made in June 2005. 44 Mr Banovec was directed to the date of the statutory declaration in the Caveats and was cross-examined as follows (tr 56-57): Q. Why can you please tell me is your statutory declaration dated June 2005? A. At the time when I signed the document we didn't put any dates in. The date was inserted just shortly before registration. I have attended, I believe it was the Office of State Revenue, and they didn't or had some difficulties because there was no date. So I had to date the documents, and I thought it was appropriate at the time and in accordance with what was agreed that we use the actual date of the initial loan advance.

Q. But I am not talking about a reference to any agreement, I am talking about the statutory declaration. That would have been the date you signed it? A. It says here 18/06/2005, but at the time I signed it wasn't 18/06/05.

Q. What I am saying to you is, can you explain to me how you possibly would have dated your statutory declaration, swearing that a caveat existed over property when the instrument which gave rise to the purported interest in property didn't even exist at that time; not only did it not exist, it wasn't missed by a couple of days, it was missed by about seven months? A. The date was inserted after the documents were signed. Unfortunately, on the day the documents have been signed, we didn't insert the date. That is the only thing I can tell you. I have later reconstrued when they have been signed, but as far as the actual mortgages are concerned, there were - I thought I am doing the appropriate thing by inserting the actual loan it was referring to, especially when I remember there was some difficulties with the Office of State Revenue. They wanted me to pay additional stamp duty, so the document was stamped as a collateral to the initial $500,000 mortgage.

Q. If I could direct your attention to the statutory declaration. … Are you telling us that you did not understand that you were meant here to fill in the date of when you were preparing this caveat? A. Look, I must be very honest with you that I did not look at the importance of the date at that time.

Q. You just put any date down that you feel like? A. No, I didn't put in any date that I felt like, I thought that was the appropriate thing to do and-- 45 This evidence was rather extraordinary. These caveats were lodged on 27 February 2006 and it was obvious that they were signed, probably on 26 February 2006. It is not possible to know whether the statutory declaration was left blank or whether the dates were actually changed after the statutory declaration was completed. The copy documents in evidence do not allow such a judgment to be made. In any event it is not an issue that the statutory declaration was made in February 2006 and not June 2005.

Proceedings to extend caveats 46 The plaintiff was served with lapsing notices in respect of the Chatswood and Hunters Hill properties and brought proceedings for the extension of caveats. McLaughlin AsJ declined to extend the caveats over the Chatswood and Hunters Hill properties on the basis that there was no evidence of any loan agreement and mortgage between the plaintiff and the registered proprietors dated 18 June 2005. New Caveats 47 On 3 May 2007 the plaintiff lodged new caveats over the properties, this time referring to the nature of the plaintiff's interest as "Equitable Mortgage" and the Nature of the Instrument as "Mortgage" dated "18 June 2006".

48 Although Mr Banovec seemed to admit fault in respect of the wrong date of 18 June 2005 in the first set of caveats (tr 54), his evidence in relation to the wrong date of 18 June 2006 in the second set of caveats was that he thought it was the relevant date, being the date of the initial loan of $500,000 (tr 54). However that was a loan made in June 2005, not June 2006. When asked why that date was placed in the second set of caveats he said (tr 54-55): A. To be quite honest, I can't give you an answer to this because this caveat was fully prepared by the solicitors, and after the court has not agreed to extend the caveats, with the greatest disappointment I went to the solicitors and asked them for advice. That is what they came up with. Subsequently, I am aware that it has been challenged again, but see, before you asked me a question is this the same thing. This time I did spend money for people who were supposedly to provide me advice, and even they don't get it right sometimes, so I can't give you any other answer.

Q. Whatever the solicitors may have done, they would have done it from a starting point of documents you would have given them? A. I would have hoped, yes. 49 Mr Banovec was asked whether he was concerned to make sure that the second set of caveats were done properly. His evidence was as follows (tr 58-59): A. The question was, was I concern that these documents are done properly. Look, everything effectively depended on these caveats being done properly, especially when the unthinkable happened and we lose or not lose but the caveats were not initially extended, so I was told there was absolutely no chance these cannot happen. So I was more than just concerned that the second set was 100% accurate, and I thought the solicitors would take 150% care in making sure that these are correct. And it is all I can tell you to be quite frank so, yes, I was very concerned.

Q. As part of your concern did you review these documents before they were lodged? A. I look at them, yes, and I lodged them.

Q. Do you recall sighting the date 18 June 06? A. I did not question the date.

Q. Do you recall sighting it? Do you recall looking at it? A. Not specifically at the date, no.

Q. Were you ever advised by your solicitors that the reason why the initial caveats were not extended had to do with the nature of the mortgage interest described? A. There was a confusion in relation to the dates. I was advised that much. I remember a meeting at my solicitor's office where we said: Look, let us amend, let us put the proper date in, and let us relodge the caveats.

Q. So you knew the date was an issue but you didn't bother checking into the accuracy of the date of the second caveat? A. I didn't question the date, and I didn't question the documents the solicitors prepared.

Q. Can I draw your attention to paragraph 38 of your 12 June 2007 affidavit. If we could look at paragraph 37 first, please. You testified that when it came time to date the mortgages which are the subject of these proceedings, that you asked Derek Ziman what date to put in; is that your testimony? A. Yes.

Q. Shouldn't you as the principal of the transacting body know what date this mortgage should bear? A. Look, I should have dated the document the day they were executed. 50 The failure of Mr Banovec to adopt the approach referred to in this last answer has caused not only confusion about the documents but also doubts about whether he has recalled events and conversations accurately in his evidence. Consideration 51 The uncontested facts are that the plaintiff and OSS executed the Loan Agreement; that Joseph and Tony, Nadia and Therese, each executed guarantees in respect of that loan; that OSS executed mortgages over the Fairfield Land to secure the $500,000 advance; that the Fairfield Land has not as yet been sold by the first mortgagee; and the loan agreements relating to the $1.4 million and $18 million advances were executed by the parties but that no funds (in addition to $500,000 originally advanced) were advanced under those agreements. 52 The plaintiff's case is that the defendants agreed to provide the additional Mortgages over their properties to better secure the plaintiff's loan of $500,000 at a time when a third party was moving to wind up OSS. Joseph agreed that Mr Banovec said in February 2006 that he was concerned about the winding up application and that he "wanted to better secure his position" (tr 102). He also agreed that Mr Banovec said that if he did not get better security he would be joining in the winding up application and that the only way for him to improve his position would be to take more securities (tr 103).

53 The plaintiff submitted that its "scenario" is that the Loan Agreement entered into in June 2005 for the loan of $500,000 remained in force; that the $1.4 million and $18 million loan agreements were executed but never settled; and that on or about 26 February 2006 there were Mortgages that were entered into to give additional security for the loan of $500,000 plus the interest that had accrued on that loan. The plaintiff submitted that the defendants' "scenario" seemed to be that there was a $500,000 loan that was subsumed in a $1.4 million loan, which was to cover the existing money advanced plus interest; no further money was advanced under the $1.4 million agreement; there was then a further loan agreement for $18 million; however part of the $18 million was the amount already owing ($500,000 plus interest) and the Mortgages were executed to secure that amount. 54 The plaintiff submitted that under either of the two scenarios, the Mortgages were entered into as security for a loan agreement that included $500,000 plus interest. It was also submitted that on either version of events it was the common intention of the parties to enter into Mortgages that were to be security for at least, inter alia, $500,000 plus interest. The defendants submitted that the $18 million loan agreement was executed in February 2006 and that the additional mortgages were given as security for that loan. The defendants submitted that the additional mortgages are null and void because no funds were ever advanced under that agreement.

55 In support of this submission the defendants relied upon the following passage of Hely J's judgment in HCK China Investments Limited v Solar Honest Limited (1999) 165 ALR 680 at 726-727: 257. … In Handevel Pty Ltd v Comptroller of Stamps (Victoria) (1985) 157 CLR 177 at 192; 62 ALR 204 a 214 the High Court held: The classic definition of a mortgage is that given by Lindley MR in Santley v Wilde [1899] 2 Ch 474 at 474: '… a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given'. As neither document was effective to create any debt or any obligation in HCK to Solar Honest, the transaction cannot take effect by way of mortgage.

258. The proposition that a mortgage cannot exist in the absence of a debt or some other obligation is not novel. In Jacobson v Williams (1919) 48 DLR 51 a purported mortgage was executed to secure repayment of a loan which was never advanced. Walsh J stated (at 57): If the question is asked 'how much is owing on this mortgage?' the answer undoubtedly would be 'nothing' … For this reason his Honour held that the mortgage was null and void and directed that it be removed from the alleged mortgagor's certificate of title. GM Industries Pty Ltd (in liq) and the Companies Act (1980) ACLC 40-665 is a somewhat similar case. In that case a company attempted to grant a charge over its assets to secure a loan which was never made. Needham J held (at 34, 424): The purported creation of a charge over property to secure a debt where there is no debt and no contractual liability to raise one is, in my opinion, an act without legal effect. The very nature of a charge is a security for a debt or other legal or equitable obligation. One cannot have a charge in vacuo. 56 The defendants submitted that the plaintiff's contention that the mortgages were given as collateral security to better secure the original loan advance of $500,000 should be rejected for the following reasons: (1) the evidence establishes that the defendants signed the $18 million loan agreement on 26 or 27 February 2006; (2) the defendants executed the additional Mortgages at about the same time including the Oatlands and Chatswood Mortgages; (3) the Oatlands and Chatswood Mortgages are specifically referred to in the definition of "Mortgage" contained in the $18 million loan facility; and (4) given the number of mortgages that were in fact executed on 26 and 27 February 2006, it is implausible to infer that the defendants would have provided all of the additional Mortgages to secure the original loan advance of $500,000. It was submitted that it was far more plausible that the Mortgages were given in connection with the $18 million loan intended to be used to discharge the existing mortgage facilities held by various lenders over the Jammals' properties and to provide funding for the Court Road Development. $1.4 million loan agreement 57 The plaintiff clearly intended to loan OSS an additional $900,000 to assist with the completion of the development in the hope that sales might be made and it could recoup its money. That advance was going to be made under a new loan agreement for $1.4 million that included the original advance of $500,000. However that intention changed when the plaintiff obtained more information about OSS, the defendants' financial position and what would be needed to complete the development. The timing of when the $1.4 million loan agreement was signed is rather obscure. The letter of offer for the loan from CSL Money was dated 28 October 2005 but the fax to Tony was sent on 17 December 2005. 58 Mr Banovec's original affidavit sworn on 12 June 2007 made no reference to a loan document for $1.4 million. It was only in response to the defendants' evidence that Mr Banovec in his affidavit of 3 August 2007 referred to this loan agreement and claimed he prepared it "on or about" 28 October 2005. During cross-examination Mr Banovec gave the following evidence (tr 66): Q. But isn't it correct that the $1.4 million loan agreement wasn't even signed until just before Christmas 2005? A. It was not signed. The $1.4 million agreement was never signed.

Q. It was never signed? A. No. 59 Consistently with Mr Banovec's claim that the $1.4 million loan document was not signed, Mr Young elicited evidence from Joesph in cross-examination that he did not see a $1.4 million loan agreement that had been signed by Mr Banovec. After documents were produced on subpoena from ASIC, the loan agreement for $1.4 million was shown to Mr Banovec and he agreed that his signature appeared on it. He gave the following evidence (tr 111): Q. So in other words the testimony you gave yesterday wasn't truthful, is that correct? A. I don't recall ever signing that document. I am surprised you show me this document. I don't recall ever signing it. That's all I can tell you.

Q. Having that document in front of you right now, would you say that that document has been executed by you? A. It appears that the document has been executed, yes. 60 This evidence supports the defendants' claims that Mr Banovec's memory of the events surrounding the execution of the various loan agreements may be mistaken. When was the $18 million loan agreement executed? 61 The defendants submitted that it was significant that Mr Banovec was at pains to have the Court believe that the $18 million loan agreement was temporally disconnected from the execution of the Mortgages in February 2006. In relation to this last submission, it is of significance that Mr Banovec's evidence in his affidavit of 3 August 2007 included the following: 16. I recall that just prior to Christmas 2005, that Tony, Joseph and myself met in North Sydney and I provided them with $18 million loan agreements and all mortgages.

17. I recall that the signed $18 million loan agreement and the signed mortgages were returned to my office in North Sydney the next day. 62 Mr Banovec's claim that the "signed" Mortgages and the $18 million loan agreement were returned to him in December 2005, if true, would mean that the Mortgages were executed twice, at least by the Jammals; once in December 2005 when the plaintiff claims the $18 million loan agreement was executed; and then again in February 2006. Mr Banovec's oral evidence in relation to the return of the signed Mortgages in December 2005 is at odds with his affidavit evidence. It was (tr 38-39): Q. But you are telling me that that [the $18 million loan agreement] was executed at the time but the mortgages weren't entered into in conjunction with that? A. I don't recall ever receiving the signed mortgages back because I have handed the documents to the Jammals for execution. Then Christmas came. I have received the documents back shortly thereafter but the transaction never proceeded so I did not keep the $18 million loan agreement, nor the mortgages, nor have I signed the mortgage.

Q. Are you telling me that you executed and exchanged this loan document but you didn't bother to get the mortgages at the same time? A. Well, that is correct, yes.

63 Tony's affidavit evidence of 27 July 2007 was that on Sunday 26 February 2006 he and Joseph met with Mr Banovec in a café in Chatswood and were joined by George Markos. He claimed that at this meeting he believed that he and Joseph signed the $18 million loan agreement and on the same day or the next day he signed mortgages over the Hunters Hill and Chatswood properties and that Joseph signed mortgages over the Oatlands property and the Hassall Street properties. He recalled that George Markos was personally in attendance to witness the signing of the loan agreement and the Mortgages. Joseph gave similar affidavit evidence. 64 Mr Markos had introduced the Jammals to Mr Banovec and after the Jammals defaulted on the $500,000 loan Mr Banovec asked Mr Markos whether he knew about their "situation". Mr Markos in his affidavit of 8 August 2007 claimed that in a conversation in late 2005 Mr Banovec informed him that he had agreed with the Jammals that the plaintiff would raise $9 million by prospectus to fund the Court Road project and take a 50% equity stake in the project. This is consistent with the Variation that was prepared in conjunction with the offer from CSL Money. 65 Mr Markos went to the cafe in Chatswood at Mr Banovec's invitation who, Mr Markos claimed, said "you are going to witness mortgages for CSL to refinance all of the Jammals' facilities for $18 million". Mr Markos claimed that, at least in his presence, Mr Banovec did not make any statements that the mortgages were meant to be additional security for the $500,000 loaned to OSS in June 2005. He said that in the numerous conversations he had with Mr Banovec about the Jammals between the making of the loan in June 2005 and the signing of the additional Mortgages in February 2006, Mr Banovec did not inform him that he was going to seek additional mortgages to secure the $500,000 loan. 66 Mr Markos' affidavit evidence included the following: 8. Also at or about the time I witnessed the signatures on the mortgages, I witnessed signatures in connection with a loan agreement whereby the Jammals were to borrow $18 million from CSL. …

9. I have been advised … that the Plaintiff claims that there was a 29 page annexure attached to the mortgages which were signed on 26 February 2006 and witnessed by me. I deny this. I do not recall annexure attached to the mortgages or otherwise present in the room. I also do not recall any discussion of annexures to the mortgages. 67 Mr Markos' oral evidence was that he recalled witnessing Tony's signature on the $18 million loan agreement at the café in Hyde Park on the second day that documents were executed (tr 157). In cross-examination Mr Young drew Mr Markos' attention to the fact that he did not actually witness the execution of the loan agreement but rather Tony's signature on the Uniform Consumer Credit Code Declaration accompanying the loan agreement (tr 164). Mr Markos' attention was also drawn to the fact that the section of the Declaration in which he witnessed Tony's signature had provision for the place at which the Declaration was made as well as the date on which the Declaration was made. Both the place and the date were left blank except for the year which was typed in as "2005". Mr Markos was asked whether it was the case that he did not notice the date "2005". He did not agree with that and suggested that he would like to see the "originals" of the documents (tr 164). He denied that the document first came to his attention in 2005 (tr 164). He said that he was only with Mr Banovec and the Jammals at the coffee shop in Chatswood for less than 15 minutes and in the coffee shop in Hyde Park for less than five minutes (tr 166-167). 68 A letter in evidence from Mr Markos to Tony dated 20 February 2007 is in the following terms: I am in receipt of the copies of a Notice of Caveat issued by the Department of Lands as well as a copy of the Caveat which was lodged by Ziman & Ziman Solicitors on behalf of Capital Securitisation Limited.

I note that the caveat is signed by you and witnessed by me on page 2.

Please be assured that I did not date the document on that day, as the date is not executed in my handwriting.

The day on which I witnessed your signature on various mortgage documents in the presence of Mr Oliver Banovec was on Sunday the 26th February 2006 at Chatswood sitting outside a coffee shop in Victoria Avenue.

I recall the caveat document was then signed and witnessed the next day at Hyde park in Sydney after you rang me on short notice to come past and witnessed the additional document for you.

I trust this clarifies the date issue for you Tony and please be assured that my recollection of the dates is accurate and I am prepared to state the fact under oath in a court of law if required or sign an affidavit to that effect 69 There is no mention in this letter of the $18 million loan agreement. However, as Mr Young submitted, very fairly, it may well have been that Mr Markos was not asked to address the $18 million loan agreement in this letter. Certainly, Mr Markos was not cross-examined about the contents of this letter. 70 Mr Markos' affidavit evidence that he "witnessed signatures in connection with a loan agreement, whereby the Jammals were to borrow $18 million from CSL" is slightly inaccurate. He only witnessed one signature on the Uniform Consumer Credit Code Declaration. That was certainly a document "in connection with" the loan agreement and to that extent Mr Markos' affidavit evidence is accurate. The only documentary evidence of a date upon which the $18 million loan agreement was executed is the type written year "2005" on that Declaration. It is odd that Mr Markos would not have changed that date to 26 or 27 February 2006, or even "2006", when he witnessed Tony's signature. Mr Markos was witnessing the document as a Justice of the Peace and, it seems to me, he did not attend to his duties in this regard with a great deal of care. Although Mr Markos' suggestion that he would like to see the original Declaration inferred that there may have been a date on the original, it seems to me that the presence of the type written date, "2005", leads to the irresistible conclusion that he did not insert a date on the document. 71 Mr Young relied upon the fact that the $18 million loan agreement was signed for the plaintiff by both Mr Banovec and Dr Richard Brauer to submit that it was not signed in February 2006, because Dr Brauer was not present on either date in February 2006 when the various documents were signed. The fact that Dr Brauer's signature appears on the document does not necessarily lead to the conclusion that it could not have been signed in February 2006. It is feasible that he could have signed it at a later time. However, it is apparent, having regard to the type written "2005" date in the Declaration that the $18 million loan agreement was drafted in 2005. Mr Banovec made a file note of a meeting that he had with Tony and Joseph on 17 February 2006. Although parts of it are difficult to read it includes the following: Collateral mortgages to be provided to … CSL loan. … have mortgages over

Hunters Hill (Daymill) Chatswood (Tony & Joseph) Dee Why Unit (Lukibar & Joseph) Liverpool property (OSS) Oatlands (Joseph & Lukibar)

… to prepare Caveat and Motges to be signed next week. Only caveats to be registered.

… probably needs to be discharged on request as property will be sold. … 72 There is nothing in this file note suggesting that the loan agreement for $18 million was to be signed the following week. The reason things were done quickly and without the benefit of the intervention of a solicitor at this time was because the winding up application was returnable before the court the following week. The defendants claim that it was intended that Mr Banovec would be able to persuade either the court or the creditors that OSS was not insolvent because the plaintiff had agreed to loan OSS $18 million. Tony gave the following evidence (tr 140): Q. How do you explain the timing of the mortgages then? A. The timing of the mortgages, when we had the wind up application against the company, and we are - we were in the process of about a week to pay the initiator of the wind up, we had a contract of sale on foot and about to go and we had a risk of the incoming party to - to settle, not settling on time and this is where Mr Banovec, he stepped in and he said: "Guys, you have plenty of equity, you have very good projects here. How about if I step in and refinance all your properties for all your companies for $18 million?" That exactly what happened and that led to the 26th of February 2006 to that meeting in the afternoon and next morning so we made sure we signed all the documents and Mr Banovec was quite happy, prepared to walk into court in case to say, "I have got a loan approved, they are solvent, here is the money". 73 Although the defendants did not agree with Mr Banovec's claim that he suggested a refinance of $18 million in late 2005, it was conceded that he did discuss this figure in January 2006. Joseph claimed in his affidavit of 27 July 2007 that in January 2006 Mr Banovec claimed that the plaintiff could provide $18 million "to discharge all of the mortgages" and that such funds could be obtained from a "major investor at a lower interest rate to discharge all your loans on all your properties". Joseph also claimed that Mr Banovec said that to "secure the $18 million I will need to take mortgages over all of your properties". Tony's affidavit evidence was that in January 2006 Mr Banovec said that the plaintiff could arrange for the "refinancing of all your existing loan facilities" and that he could "organize loan financing of $18 million to be secured by mortgages over all of your properties, which will discharge all of your existing loan facilities and mortgages".

74 The difficulty in ascertaining the date upon which the $18 million loan agreement was signed is exacerbated partly by Mr Banovec's very sloppy business practices in relation to the dating of documents and partly by Mr Markos' failure to date the documents that he witnessed. Mr Banovec said he believed that he signed the loan agreement in January 2006. I do not have any real confidence in Mr Banovec's capacity to recall events accurately having regard to: (1) his failure to recall that he signed the $1.4 million agreement; (2) his robust, although mistaken, claim in his cross-examination that the $1.4 million agreement was "never signed"; and (3) the conflict between his affidavit evidence that the "signed" mortgages were returned to him in December 2005 and his evidence in cross-examination that he did not recall receiving the signed mortgages. 75 There are also some peculiar features to Tony and Joseph's conduct in relation to the $18 million loan agreement. Although Joseph claimed that he believed that OSS had an enforceable loan agreement for $18 million, there was no complaint made or letter sent to the plaintiff requesting the advance of those monies, notwithstanding that OSS was apparently in dire financial difficulty. The plaintiff relied upon this inertia in support of a submission that the defendants well knew that the $18 million loan agreement was not going ahead and that Mr Banovec had advised them in January 2006, that there was no chance of raising that amount of money for OSS for the development. I am of the view that this conduct does not weigh heavily in the plaintiff's favour. The inertia is explicable on the basis that the plaintiff and the defendants engaged in subsequent negotiations and discussions in relation to financing the completion of the development. 76 Mr Markos' claim that Mr Banovec had informed him that he would be witnessing mortgages in relation to the plaintiff's $18 million refinancing of the defendants' position is a matter that needs to be taken into account. It was established that Mr Markos was acquainted with both the plaintiff and the defendants and there would seem to be no motive for him to fail to do his best in recalling accurately what occurred in respect of the witnessing of the documents. I have already commented upon his failure to date the documents properly which compounded the failure by Mr Banovec to do likewise. However it seems to me that, notwithstanding this failure, Mr Markos' memory of the reason Mr Banovec asked him to come to witness the documents is probably accurate. This conclusion is supported by a number of features to the documentation suggesting that the $18 million loan agreement was signed at about the same time the mortgages were signed in February 2006. 77 Mr Banovec dated the $18 million loan agreement "18.06.05", the same date that he dated the original caveats and the same date of the alleged loan referred to in those caveats. If that loan agreement had been signed in January 2006 and had become an irrelevancy, there would have been no need to date the $18 million loan agreement as 18 June 2005. The original caveats, it seems to me, referred to the $18 million loan agreement. It is not at all clear that the $18 million loan agreement was in evidence before McLaughlin AsJ, when the application was made to extend the operation of those caveats. 78 There is a further matter that convinces me that the $18 million loan agreement was executed in February 2006 when the mortgages were signed. The agreement had provision for both Nadia and Therese to be Borrowers and to sign the document. Mr Banovec claimed that in February 2006 when the mortgages were signed, Tony and Joseph advised him that they could not go back to their wives to have the mortgages signed. The mortgages also had provision for the signatures of Nadia and Therese. Those provisions were crossed out on the mortgages and the annexures thereto and the provisions for Nadia's and Therese's signatures on the $18 million loan agreement were also crossed out. Additionally the $18 million loan agreement was the only agreement referring to the particular mortgages that were signed in February 2006. 79 Mr Banovec's claim that he would advise the creditors that the defendants were not in default because they had provided the plaintiff with further security is peculiar. The fact that additional security was provided would not mean that a party was no longer in default. It would merely mean that the lender was better secured against the default. It is far more probable that the way in which the plaintiff was to support the defendants and not join in the winding up application against OSS, was the execution of the $18 million loan agreement and the provision of the additional mortgages as defined in that loan agreement. 80 I am satisfied that the $18 million loan agreement was executed in February 2006.

Advances under $18 million loan agreement 81 Part of the defendants' case is that no monies were advanced under the $18 million loan agreement. The evidence did not support this claim. Joseph gave the following evidence (tr 87): Q. Do you say that the $18 million loan was to replace all previous loan agreements? A. The $18 million loan was to refinance our whole portfolio. Q. And it was -- A. And all mortgages, including first, second, on Court Road, correct. Q. And it was to refinance also any existing obligations that One Spencer Street had to Capital Securitisation, isn't that right? A. That's correct. Q. Even though it is only a fairly small part of the $18 million, that was one part of what was to be done to in effect refinance the existing commitment for $500,000 plus interest? A. That's right. 82 Tony gave the following evidence (tr 152-153): Q. You say, do you, that on 26 February you entered in to a binding agreement for the lending of $18 million, is that right? A. Yes.

Q. And you say that part of that binding agreement was that the $500,000, plus any interest on that that had previously accrued, was to be refinanced as part of that 18 million, is that right?

A. It wasn't so specific that the idea of the whole properties, and I would imagine that includes all mortgages, all borrowing, all money owed.

Q. So it is your understanding then that the $500,000 was rolled over into the 1.4 and the $1.4 million agreement in turn was rolled over under the $18 million agreement? A. I believe so.

Q. What had happened by 26 February was that there was still $500,000 plus some interest owing but now that was owing under the $18 million agreement rather than any previous agreement, is that your understanding? A. I would say, yes.

Q. You understood that you had executed mortgages to secure all of the money owing under the $18 million agreement, that's what you say you understood on 26 February, isn't that right? A. My understanding, yeah, we are securing the $18 million loan. 83 I am satisfied that all parties intended that the amount of $500,000 (together with the interest that had accrued to 26 February 2006) that had been loaned to OSS was to be treated as an advance to OSS, Auscorp, Daymill, Lukibar, Tony and Joseph under the $18 million loan agreement. The mortgages were executed as the "mortgage" defined in that loan agreement. I am also satisfied that the common intention of the parties was that the Mortgages would include Annexure A, also signed in February 2006. Effect of execution of $18 million loan agreement 84 The $18 million loan agreement provided that it contained "all the contractual arrangements of the parties with respect to its subject matter" and that it superseded "all earlier representations and understandings made by or existing between the parties with respect to its subject matter" (cl 3.9). The relevant mortgages as defined were provided to secure the "Principal Sum" of $18 million, interest at 12.50% per annum each 30 day period and interest at 22.50% for late payment plus costs of enforcement (cl 2.6). 85 The defendants submitted, although not with much apparent conviction, that the $1.4 million replaced the Loan Agreement and that no funds were advanced under that agreement. Their real case is that the $18 million Loan Agreement is the applicable agreement between the parties and that the Mortgages provided as security for that loan are null and void because there were no funds advanced pursuant to the agreement. The $1.4 million Loan Agreement was between the same parties to the Loan Agreement, the plaintiff and OSS. The "Variation" documentation that accompanied the offer from CSL Money combined with the terms of $1.4 million Loan Agreement suggests that this Loan Agreement was intended as a "replacement" of the obligations and/or arrangements between the parties. However there is no evidence that the "Variation" documentation was ever signed, albeit that the $1.4 million was signed but not dated. The accompanying Variation documentation made clear that this was not to be a loan for $1.4 million in addition to the $500,000 that had already been advanced to OSS, but rather a loan of $1.4 million inclusive of the $500,000. The rates of interest under this Loan agreement were far more attractive to OSS than under the Loan Agreement. Instead of 5% per month and 11% per month for late payment, it was reduced to 19.95% per annum and 29.95% per annum. There is no evidence that these new interest rates were applied and there is no evidence that the defendants made any payment pursuant to this loan agreement. There was also the provision in the accompanying documents for the plaintiff to take a 50% stake in the development and this was all subject to the raising of finance by way of prospectus. I am satisfied that although the parties signed this Loan Agreement they did not intend to be bound by it.

86 The original Loan Agreement was between the plaintiff and OSS. It was the loan of $500,000 to OSS that each of the Jammals guaranteed. The $18 million loan agreement was between different parties. The liability for repayment of the advance of $500,000 was not on OSS alone under this agreement but on all the Borrowers, being OSS, Auscorp, Daymill, Lukibar, Tony and Joseph. This agreement was something quite different to the Loan Agreement and indeed the $1.4 million Loan Agreement. The original and only debtor, OSS, under the Loan Agreement was released from its sole and principal obligation to repay the $500,000 plus interest and the other Borrowers, including OSS, became responsible under the $18 million loan agreement to repay the moneys advanced under that agreement.

87 The plaintiff submitted that, notwithstanding a finding that the Loan Agreement was no longer in force and that the $18 million loan agreement was applicable, the Jammals are still bound by the guarantees by reason of the fact that they were continuing guarantees which, inter alia; were irrevocable and continued and remained in force until the whole of the Guaranteed Monies were paid in full; and applied to any future balance of the Guaranteed Monies (cl 2.6(a) and (c)). 88 The Guaranteed Monies were specifically defined as "all sums of whatever nature due and payable under the Transaction Documents". The "Transaction Documents" were defined as "this agreement" (the Guarantee) "as read with the Mortgage and the Caveat". The Mortgage and Caveat were over the Fairfield Land. The Recitals made clear that the Guarantee was in respect of the $500,000 "in terms of the Loan Agreement". The "amount owing" under the Mortgage was defined very broadly (extracted earlier) and included all amounts "payable" or "owing" or "remain unpaid" by OSS to the plaintiff in "connection with any agreement". The Guaranteed Monies were specifically tied to that Loan Agreement and were only the $500,000 "in terms of that Loan Agreement". 89 The plaintiff relied upon the provisions of clause 2.6 (Continuing Guarantee) and clause 2.8 (Liability Preserved) (both extracted earlier) of the Guarantees to submit that the Jammals' guarantees of OSS liability under the Loan Agreement continue in respect of OSS liability under the $18 million Loan Agreement. I disagree with that submission. The character of the "Guaranteed Monies" disappeared once the Loan Agreement was brought to an end by entry into the $18 million loan agreement. The Mortgage was no longer the same Mortgage and there were new Caveats provided. This $18 million loan agreement was not a replacement of obligations or arrangements, or a release or amendment as provided for in clause 2.8 of the Guarantees. This new loan agreement with the requirement to provide new mortgages including new mortgages over the Fairfield Land was a different regime altogether to that which pertained in 2005 between the plaintiff and OSS. The Guarantees were specifically linked to the Loan Agreement, the Mortgage that had been provided over the Fairfield Land in 2005 and the Caveat that the plaintiff was entitled to register it on the Fairfield Land at that time. 90 In support of the plaintiff's submissions that the guarantors are still liable, Mr Young relied on Winstone Limited v Bourne [1978] 1 NZLR 94; Wood Hall Limited v Pipeline Authority (1979) 141 CLR 443; and Burnes v Trade Credits Limited (1981) 34 ALR 459. In Winstone Limited v Bourne, directors of a construction company were guarantors for a loan to the company. A variation of the loan agreement was executed, which the directors themselves signed. The directors' claim that they had not assented to the variation in their personal capacity as guarantors was rejected by Mahon J on the basis that it was clear on the facts that they knew of and consented to the deed variation, in spite of it arising in their capacity as directors. In Wood Hall Limited v Pipeline Authority, a bank provided guarantees for a contractor in respect of a contract for the construction of a pipeline. The guarantees contained a provision that the liability of the bank would not be discharged or impaired by reason of any variation of the construction contract. In those circumstances, the High Court held that there was no discharge of the bank's liability under the guarantee on the basis of variation. In Burnes v Trade Credits Limited, a guarantee provided that it would continue in the event of variation of the mortgage or further advances under the mortgage. A variation to the mortgage was made to which the guarantor did not consent. In construing the guarantee, the Privy Council held that increasing the rate of interest was a variation that went beyond what was contemplated by the guarantee and the guarantors were discharged from liability under the guarantee. 91 It is understandable that Mr Young would rely upon these authorities in advance of the Court making findings of fact in relation to the applicable loan agreement. However having regard to the fact that the original Loan Agreement was brought to an end, rather than modified or varied and that the "Guaranteed Monies", as understood in the guarantees no longer existed, and that the principal debtors were different, these authorities are inapplicable certainly in relation to the guarantees provided by Nadia and Therese. It may be suggested that because Tony and Joseph were parties to the $18 million loan agreement, they consented to expanding their guarantees to include the new principal debtors, including themselves, as being subject to their obligations under the guarantee, and that the definition of "Guaranteed Monies" under the guarantee was to somehow include the different amount and the different interest regime. There is no evidence to suggest that the parties intended this was to occur. It would also seem a little absurd that Tony and Joseph would each be providing a guarantee of their own principal liabilities. 92 There was no request for any guarantees in relation to the new regime under the $18 million loan agreement. The entry into the loan agreement and the provision of the mortgages was a very rushed exercise to stave off a winding up application in respect of OSS. There were additional parties to the relationship with the plaintiff and I have no doubt that Mr Banovec saw the prospect of obtaining the additional mortgages as a much more secure position for the plaintiff. I am satisfied Mr Banovec was totally comfortable with the provision of the mortgages and the parties intended that the guarantors be discharged. 93 I am satisfied that Loan Agreement (and if it had been applicable, the $1.4 million Loan Agreement) was terminated by the entry into the $18 million Loan Agreement in February 2006. I am also satisfied that the guarantors were discharged. Section 127 of the Corporations Act 94 The defendants submitted that the loan agreements and Mortgages were not executed in accordance with s 127 of the Act. It was submitted that they were signed by Mr Banovec either personally or purportedly as agent for the plaintiff and in either case by their manner of execution they did not operate as a deed so as to bind the plaintiff. It was also submitted that as the mortgage instruments could not take effect as deeds, to the extent the mortgages were granted to secure the past indebtedness of the defendants, they failed because no consideration, or only past consideration, was ever given for the grant of the mortgages. Had the instruments of mortgage been registered, the mortgages would have acted as a deed: s 36(11) of the Real Property Act. 95 Section 127 of the Act provides that a company may execute a document without using a common seal: if the document is signed by two directors; or a director and a company secretary of the company; or, for a proprietary company that has a sole director who is also the sole company directory, that director. Where a document appears to have been signed in accordance with s 127(1) of the Act, a person may assume that the company has duly executed that document (ss 128, 129(5)). This "indoor management rule" provides protection to those parties dealing with a company and prohibits a company from asserting that the document was not "duly executed" by it. In this particular instance it is the defendants who wish to challenge that assumption at a time after which they have taken the benefit of the assumption by receiving the $500,000 loan pursuant to the Loan Agreement. I am not satisfied that this challenge is sound. Mr Banovec was entitled to act as the Company's agent and to enter into contracts on behalf of the Company (s 126(1) of the Act). The evidence establishes that he was the plaintiff's agent in Australia and that he was authorised to enter into contracts on its behalf. That entitled him to enter into those contracts "without using a common seal" (s 126(1)). In any event he was, it seems to me, authorised as the agent to sign the document as agent for two directors of the company thus complying with s 127(1)(a) of the Act.

96 In any event, both Mr Banovec and Dr Richard Brauer signed the $18 million loan agreement. Penalty? 97 It was submitted by the defendants that the default interest provision of the Loan Agreement providing for the payment of interest at a higher rate for late payment is unenforceable as a penalty: O'Dea v Allstates Leasing System (WA) Pty Limited (1983) 152 CLR 359; Beil & Anor v Pacific View (Qld) Pty Limited [2006] QSC 199. In Beil Chesterman J analysed the relevant cases before deciding that a provision in an agreement for an increase in interest for late payment from 16% to 25% was a penalty. His Honour referred to Ringrow Pty Limited v BP Australia Pty Limited (2005) 224 CLR 656 in particular at [32] where the Court emphasised that before a provision is held to be a penalty it must be judged to be extravagant and unconscionable in amount and out of all proportion. 98 In the present case the Loan Agreement did not stipulate a percentage by which the interest rate was to be reduced for payment on time, but rather a percentage by which it was to be increased for late payment. The increase from 5% per month to 11% per month (or at least 132% per annum) is in my view totally extravagant and out of all proportion in the circumstances of this case. The plaintiff held guarantees in respect of OSS' performance under the Loan Agreement and there was, at the date of execution of the Loan Agreement no identifiable risk to warrant such an extravagant increase. 99 I am satisfied that the provision in clause 2.4 of the Loan Agreement is a penalty and is unenforceable. I am also satisfied that such provision is severable under the Loan Agreement (cl 3.5 and 2.7(e)). By reason of this finding, at the time the $18 million Loan Agreement was executed in February 2006, the only amounts that were then secured by the mortgages provided at that time were the $500,000 original advance and the interest thereon excluding late payment interest. Thereafter the interest regime under the $18 million loan agreement applied.

Relief 100 The plaintiffs conceded that there is nothing in the Mortgages or Annexure that directly or expressly states that the Mortgages secure the amount owing. However it was submitted that clauses 2(d), (e) and (f) of the Annexure refer back to the amount owing which includes all amounts owing at any time for any reason. Thus it was submitted that the Mortgages secure all monies owing from the mortgagors to the mortgagee. I agree with that submission. 101 The plaintiff is entitled to entry of judgment against the defendants as Borrowers under the $18 million loan agreement and is also entitled to the appointment of trustees for the sale of the properties the subject of the mortgages provided pursuant to the $18 million loan agreement. 102 The parties are to bring in Short Minutes of Order including this relief and an agreed order as to costs. If the parties are unable to agree on a costs order I will hear argument when the matter is listed for the filing of the Short Minutes of Order on 4 October 2007 at 9:30 am.

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