Commonwealth Bank of Australia v Bobby Sailesh Anand

Issues 10The issues in the proceedings are these: (a) Does the failure to register the charge within time have any impact on Mr Anand's liability under the guarantee? (b) If so, does Mr Anand have a pro tanto release or a complete release from liability? (c) If Mr Anand is entitled to a pro tanto release, what would CBA have recovered if it had had the benefit of the charge? 11By s 263(1)(a) of the Corporations Act , where "a company creates a charge, the company must ensure that there is lodged, within 45 days after the creation the charge," a notice in a prescribed form setting out certain particulars of the charge. 12Put shortly, the case for CBA is: (a) The effect of the terms of the guarantee, to which I shall refer, and relevant provisions of the Corporations Act is that Mr Anand is not entitled to any discharge or partial release because of the failure to register the charge. (b) Even if Mr Anand were entitled to a partial release, he is at best entitled to a pro tanto discharge based on what CBA would have received if the charge had been enforceable against the liquidator. (c) At the time of the hearing the company's debt was almost $1,700,000. Any pro tanto discharge to which Mr Anand might be entitled would not reduce his liability below the maximum sum secured by the guarantee, $1,491,000. 13Also put shortly, Mr Anand's case is: (a) Lodgement of the charge with ASIC was a fundamental term, express or implied, of the loan agreement, requiring strict performance by CBA. (b) CBA's failure to do so relieved Mr Anand of his obligations as a guarantor. For this proposition reliance was placed upon Ankar v National Westminster Finance (Australia) Ltd (1986-87) 162 CLR 549, to which I shall also refer later. (c) The consequence of CBA's breach was that Mr Anand's right to be subrogated as a surety was lost upon the appointment of the liquidator, and he was deprived of the opportunity to realise the franchised businesses as going concerns.

CBA's case 14Counsel for CBA, Mr Sulan, relied upon a clause of the guarantee exempting the bank from any consequence of the failure to register the charge under the Corporations Act . Clause 10 appears under the heading "Our rights are protected," and cl 10.1 relevantly provides: "10.1 Our rights and your liabilities under this guarantee are not affected by any act or failure to act by us or by anything else that might otherwise affect our rights or your liabilities under law relating to guarantees, including: ... (c) the fact that we release, lose the benefit of or do not obtain any SECURITY or other guarantee; (d) the fact that we do not register any SECURITY which could be registered ..." The term "security" is defined in cl 21 in such a way as to include the charge. 15Mr Sulan referred to the decision of the Court of Appeal in Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703, a case arising from a somewhat similar transaction. The respondents to the appeal were the directors of a company which obtained a loan from the appellant secured by their personal guarantees and, by subsequent arrangement, a charge over the assets of the company. The charge was not registered, as required by a provision of the Companies (NSW) Code equivalent to s 263 of the Corporations Act . For that reason, when the company was subsequently wound up the charge was void against the liquidator. 16A significant difference between that case and the present case is that all three members of the Court found that, at the time of the subsequent arrangement for the charge, the appellant had expressly undertaken to register it. Nevertheless, the majority of the Court (Kirby P and Mahoney JA) held that the respondents remained liable because of an exempting provision in cl 8 of the guarantee. That clause protected the appellant's rights or remedies from any omission on its part to complete a collateral security, and from: "(g) any collateral security held or taken at any time by the creditor being void ..." 17The reasoning of Kirby P on this aspect is to be found at 708-9, and of Mahoney JA at 711-12. The third member of the Court, Handley JA, accepted that the clause was on its face applicable (at 716) but concluded that the appellant could not rely upon it for reasons which are not applicable to the present case. 18Mr Sulan noted that the exemption clause here is even more explicit, referring expressly to the failure to register a security. Credit Lyonnais v Darling , he submitted, is decisive of this case. 19He argued that, in any event, the obligation to register the charge did not fall upon CBA. By the terms of s 236(1)(a), it is the company which creates the charge which must ensure that the notice under the section is lodged with ASIC. Section 270(1) of the Act provides that the notice may be lodged "by the company or by any interested person." However, s 270(2) provides that, in the event of default in complying with s 263, "the company and any officer of the company who is in default each contravene this subsection." 20Unlike Credit Lyonnais v Darling , it is not suggested in the present case that CBA expressly undertook to register the charge. Mr Sulan submitted that it was Mr Anand, as sole shareholder and director of the company, who bore the responsibility to do so. 21Mr Sulan relied upon the decision of Behrens J in Brook v Green [2006] EWHC 349 (Ch) for the proposition that Mr Anand could not rely upon his own failure to meet this statutory requirement to avoid liability under the guarantee. That was yet another case in which the director and beneficial owner of a company obtained a loan secured by a charge given by the company over certain land, together with his personal guarantee. The charge was not registered in accordance with a statutory provision similar to s 263 and, when the company went into liquidation, it was void as against the liquidator. In answer to an argument by the debtor that he was entitled to a (partial) discharge because of the creditor's failure to register the charge, Behrens J noted that the statutory provision placed the duty upon the company to do so, and held that the debtor could not rely on his own illegal act to avoid the consequences of the guarantee: see the judgment at [42] - [49]. 22Mr Sulan also relied upon Williams v Frayne (1937) 58 CLR 710. Reducing the facts of that case to their bare bones, a tenant of business premises borrowed money and, by way of security, purported to assign his interest in the lease to the creditor. The loan was also guaranteed. However, the landlord's consent was not obtained to the assignment, as required by the terms of the lease. In an action by the borrower and the guarantor for a declaration that they were discharged from repayment of the loan, the guarantor argued that he was discharged from his obligation because of the creditor's failure to procure the landlord's consent to the assignment, thereby failing to preserve it as security for the loan. This argument was rejected on the basis that it was the responsibility of the lender as assignor, not the creditor, to obtain the landlord's consent: per Dixon J (as he then was) at 737 - 8. 23As an alternative to these arguments, Mr Sulan referred to the indemnity created by cl 2 of the guarantee. The effect of that clause is that Mr Anand agreed to indemnify CBA for any default by the company in repayment under the loan agreement. The indemnity was to terminate when the maximum amount secured by the guarantee had been paid. Until that time the indemnity was expressed to be "a continuing obligation, separate and independent from your other obligations under this guarantee ... ." 24Mr Sulan submitted that this clause imposed a liability upon Mr Anand independent of that of a guarantor, so that he could not rely upon the principles governing the discharge of a surety, to which I am about to refer. In support of this submission he cited The Fletcher Organisation Pty Ltd v Crocus Investments Pty Ltd [1988] 2 Qd R 517. 25If I were to reject Mr Sulan's primary submission that CBA was under no obligation to register the charge, the question would arise whether Mr Anand became entitled to be discharged, wholly or partially, from his liability under the guarantee. The law on this topic was examined by Fitzgerald JA, with whom Sheller JA and Ipp AJA agreed, in Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd [2001] NSWCA 93, 38 ACSR 282, at [82] - [94]. At [82], his Honour questioned whether it was appropriate to describe a creditor as owing a duty to a surety, and continued: "The primary legal consequence of a creditor's 'breach of duty' to a surety is a discharge of the surety or a reduction in its liability to the creditor to the extent that the value of the surety's rights against the principal debtor if the surety pays the creditor has been impaired as a result of the breach ... . It is unnecessary to explore the reason for this beyond noting that, subject to the terms of any contract between it and the creditor, a surety is entitled by subrogation to have the creditor's rights against the principal debtor assigned to it to the extent of the sum paid by the surety in discharge of the principal debtor's obligation ... ." (References to authority omitted.) 26Mr Sulan submitted that, if in the present case I were to find that CBA had failed to perfect its security by not registering the charge, Mr Anand would at best be entitled to a partial, or pro tanto , release from his obligation. This would be assessed by determining what CBA might have recovered if it had a valid charge. That could have been no more than the value of the company's assets after its liquidation. The only evidence of that value is the amount recorded in the agreed facts for the sale of those assets, $120,000. 27Mr Sulan argued that Mr Anand would be entitled to be credited for no more than that sum, less the liquidator's expenses of effecting the sale. Whatever that amount might be, it would be insufficient to affect Mr Anand's liability under the guarantee. As is also recorded in the agreed facts, at the time of the hearing the accrued debt to CBA was just short of $1,700,000. The maximum amount secured by the guarantee is $1,491,000. After any deduction which might be made for the sale of the assets, that amount would remain outstanding.

Mr Anand's case 28The agreed facts state that CBA advanced the loan funds to the company under a letter of offer of 24 August 2007. There was an earlier letter of offer, dated 17 May 2007, which was accepted by Mr Anand. The guarantee was signed by him on 7 June 2007. There are some differences between the two letters in the details of the facility offered, but this does not appear to be material for present purposes. In essential respects the letters are to the same effect. The terms of the guarantee made it applicable not only to the loan contract concluded after the letter of 17 May but also to any future loan contract. 29Counsel for Mr Anand, Mr Van Aalst, noted that the letter of offer of 17 May specified as security for the advance a "first registered equitable mortgage" by the company over the whole of its assets (the charge), as well as the guarantee with the two mortgages supporting it. Mr Van Aalst submitted that the provision of a registered charge by way of security was a fundamental term, or condition, of the loan agreement. The guarantee was expressed to secure all amounts owing under the loan agreement, referred to in the guarantee as the "guaranteed agreement." Thereby, as I understand Mr Van Aalst's argument, a registered charge over the company's assets became a condition of the guarantee itself. 30As Mr Van Aalst put it in written submissions, the registration of the charge within the statutory time limit was an express or implied fundamental term of the loan agreement, requiring strict performance by CBA. The bank's failure to do so constituted "a substantial unilateral departure from the condition or fundamental term" which was the basis of CBA's offer, and upon which Mr Anand became surety for the company. The consequence of this breach was that Mr Anand's "right to be subrogated as a surety was destroyed upon the appointment of the liquidator, and his opportunity to realise the franchised businesses as going concerns was lost." 31Mr Van Aalst relied on Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1986-87) 162 CLR 549. The facts of that case are summarised in the headnote: "A surety guaranteed the performance of a hirer under a contract for the hire of machinery. By cl. 8 of the guarantee the owner of the machinery agreed to notify the surety if the hirer proposed to sell or assign its interest in the machinery. By cl. 9 the owner agreed to notify the surety if the hirer was in default under the contract, whereupon the surety and the owner would confer about the course of action the owner would take pursuant to the default. The owner committed breaches of both clauses." 32The hirer was in default in payment of rent under the hire contract. It assigned its interest in the machinery to a related company, and the owner was a party to that agreement. The owner failed to notify the surety of the proposed assignment, as required by cl 8, and to notify the surety that the hirer was in default, as required by cl 9. The High Court held that the effect of the breaches of those clauses was that the surety was discharged from liability under the guarantee. 33In a joint judgment, Mason ACJ, Wilson, Brennan and Dawson JJ held that the two clauses had the status of conditions of the contract. At 557, their Honours noted that, firstly, neither clause was readily enforceable by an action for damages in the event of breach. Secondly, the purpose of the clauses was to oblige the owner to give the surety notice so that the surety could take such action as it could to safeguard its interests. Thirdly, it was "clearly disadvantageous to the surety to be faced with a situation in which it would be liable as surety for a lessee of equipment who no longer enjoyed possession of that equipment, notwithstanding that it remained liable to pay the rent." 34After an examination of authority, their Honours said at 561: "If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety's obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred." 35Mr Van Aalst submitted that CBA's failure to register the charge should be characterised in that way. He argued that the exemption in cl 10 of the guarantee did not prevent Mr Anand's discharge, the obligation to register the charge being a condition of the loan agreement which was guaranteed. He sought to distinguish Credit Lyonnais v Darling on the basis that the charge in that case was not part of the original loan agreement, but was an additional security negotiated after that agreement and the guarantee had been entered into. 36In response to Mr Sulan's argument that the relevant provisions of the Corporations Act placed the obligation to ensure registration on the company and, effectively, Mr Anand, Mr Van Aalst referred to ss 268(1) and 270(3). It is necessary to set those provisions out in full. 37Section 268(1) provides: "(1) Where, after a registrable charge on property of a company has been created, a person other than the original chargee becomes the holder of the charge, the person who becomes the holder of the charge must, within 45 days after he, she or it becomes the holder of the charge: (a) lodge a notice stating that he, she or it has become the holder of the charge; and (b) give the company a copy of the notice." 38Section 270(3) provides: "Where a person who becomes the holder of a registrable charge fails to comply with subsection 268(1), the person and, if the person is a body corporate, any officer of the body corporate who is in default, each contravene this subsection." 39Mr Anand gave evidence that after he signed the deed of charge, he gave it to the lending manager of CBA dealing with the matter and left it in his possession. Mr Van Aalst argued that the manager then became the "holder" of the charge for the purpose of s 268(1), that expression meaning a person who comes into possession of the document in registrable form. 40In this context, Mr Van Aalst pointed out that it was clearly in the interests of the bank, lending such a large amount of money, to protect its position by registration of the charge. He referred to a passage in the judgment of Handley JA in Credit Lyonnais v Darling at 714 - 5, where his Honour observed that it was "common knowledge that lenders, for their own protection, normally arrange for registration." A similar observation was made by Behrens J in Brook v Green at [47]. 41To demonstrate that CBA's failure to register the charge was a substantial breach warranting Mr Anand's discharge as guarantor, Mr Van Aalst led evidence of the value of the company's franchises as going concerns. This was in the form of expert reports from a chartered accountant, Mr Peter Small, and a registered valuer and business broker, Mr Michael Ozich, together with some evidence of Mr Anand himself. Mr Sulan objected to this evidence, primarily on the basis that it was irrelevant, and I admitted it provisionally. In the event that I determined that it was relevant, Mr Sulan relied upon the evidence of another chartered accountant, Mr Brian Silvia. 42The effect of the evidence of Mr Small and Mr Ozich was that, as going concerns, the value of the franchises was well over $1,000,000. Mr Van Aalst submitted that that was the value of the security that would have been provided by the charge if it had been registered, and was the measure of the prejudice to Mr Anand by becoming exposed as surety for the difference between the amount realised by the liquidator on the sale of the company's assets and the amount owing to CBA under the loan facility. 43The effect of Mr Silvia's evidence was that these valuations failed to take into account the liquidation of the company. Upon liquidation, the franchise arrangements were liable to be terminated (as, indeed, they were). Mr Sulan pointed out that it was the liquidation, which followed the petition of a creditor other than CBA, which was the foundation of the company's breach of the loan agreement. There was no evidence to suggest that, if the charge had been valid, CBA would have enforced it prior to liquidation. The fact of liquidation could not be ignored in assessing its value as a security.

Decision 44At the hearing of this matter a substantial amount of time was devoted to the admissibility and weight of this evidence concerning the potential value of the charge as a security. It is for that reason that I have referred to it and recorded the competing positions of the parties. In the event, however, this not an issue which I find it necessary to decide. 45Mr Sulan's submissions concerning the statutory duty upon Mr Anand to register the charge, and upon the effect of the indemnity in cl 2 of the guarantee, are persuasive but they also raise issues which need not be determined. I should say, however, that Mr Van Aalst's argument based upon s 268(1) and s 270(3) of the Corporations Act has no foundation. Clearly, those provisions deal with the situation where a charge is assigned and place certain obligations upon the assignee. That is not the case here. 46Ultimately, I accept Mr Sulan's submission that the decision in Credit Lyonnais v Darling is decisive. It is not relevantly distinguishable from the present case. Ankar v National Westminster Finance , on the other hand, is. As Mr Sulan pointed out, the creditor in that case failed to comply with express terms of the guarantee itself, which were held to be essential terms of that contract. Moreover, the guarantee in that case did not contain an exemption clause such as that here. Indeed, Kirby P (at 707) noted that Ankar was a foundation of the argument of the respondents, which was rejected. 47Even if one were to accept that it was a condition of the loan agreement that CBA register the charge to ensure its security, the notion that such a condition was in some way imported into the guarantee must be rejected. The loan agreement was between CBA and the company. The guarantee was a separate contract between CBA and Mr Anand in his personal capacity. There is no clause in the guarantee which could reasonably lead to that conclusion. The terms of the exemption in cl 10 are unequivocal, and are a complete answer to Mr Anand's defence. As Mr Sulan put it, on the crucial issue in this case Credit Lyonnais v Darling is on all fours with it. 48Accordingly, CBA is entitled to the relief which it seeks. There will be judgment for the plaintiff in the sum of $1,491,000, and for possession of the property at 349 North Liverpool Road, Bonnyrigg Heights. I shall consult the parties about any other order which should be made and, if necessary, hear argument on costs.

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