Demagogue Pty Ltd v Ramensky & Anor

IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No. QB 2058 of 1994 RE: CONO LISCIANDRO EX PARTE: THE ABOVENAMED Applicant AND: OFFICIAL TRUSTEE IN BANKRUPTCY Respondent CORAM: Kiefel J. DATE: 6 September 1995 PLACE: Brisbane

On 21 October 1994 a sequestration order was made on Mr Lisciandro's own petition. By a letter dated 16 May 1995 the Official Trustee in Bankruptcy advised that the claim by Alminco Pty Ltd ("Alminco") had been admitted as a debt of $106,337.80. Mr Lisciandro filed an application seeking a review of that decision pursuant to s.178 Bankruptcy Act 1966 which however he now asks to be treated as an application under s.99 and there is no objection to that course. Section 99(1) provides: "Where a creditor or the bankrupt considers that, by virtue of a decision of the Trustee under sub-s.102(1), (3) or (4) a proof of debt has been wrongly admitted, he may apply to the Court for an order that the proof be expunged or that the amount of the admitted debt be reduced, and the Court may make an order accordingly."

The Official Trustee had received the parties' representations on Alminco's claim which was based upon a guarantee signed by Mr Lisciandro and dated March 1992. Alminco had earlier filed proceedings in the District Court which were defended by Mr Lisciandro who sought orders that the guarantee be treated as of no effect for the reasons which appear below. The matter came on for hearing in early 1995 and evidence was heard, but no determination made on the facts, since the District Court Judge considered that neither party was able to proceed in the action given Mr Lisciandro's bankruptcy. The correctness of that view is not now relevant. The procedure undertaken before me was not altogether satisfactory. The parties determined to proceed on this application on the basis of the transcript of evidence in the District Court. In that respect the witnesses for the application have confirmed the correctness of the facts stated by them. The witness Sadler then called for Alminco has not, but counsel for the applicant took no issue with acceptance of the transcript as his evidence in these proceedings. As it transpires there is in any event little in that witnesses account which is of great moment since he was not privy to the dealings between Mr Radford, for whose benefit Mr Lisciandro gave the guarantee, and Mr Watkinson, the then sales manager for Alminco who was not able to be called to give evidence in the District Court. The facts are then to be gleaned principally from the evidence of Mr Radford and Mr Lisciandro who however were not required by the solicitors appearing for Alminco for cross-examination. A review of the transcript also reveals that no meaningful challenge was made of their evidence in the District Court and in these circumstances it is not possible for me to make findings against the credit worthiness of their evidence. Attempts were nevertheless made during submissions to cast doubt upon their evidence and whilst I was conscious of the possibility that some other independent evidence, such as documentary material, might be taken into account in an assessment of these witnesses versions, this did not emerge and in other respects it appeared that the matters sought now to be put forward could only be relied upon if the witnesses were given an opportunity to comment. They had not previously been asked to do so and the solicitor for Alminco determined to proceed with the hearing and determination of this application and did not seek an adjournment to enable this course to be taken. Whilst this approach was obliged by dictates of fairness, the course chosen by the parties has left questions, which seem to me to arise from the versions given by Messrs Lisciandro and Radford, wholly unexplained. A summary of the circumstances leading to the execution of the guarantee by Mr Lisciandro, emerging from his evidence and that of Mr Radford is as follows. Mr Lisciandro is an invalid pensioner aged 63 years. He immigrated to Australia in 1950 at the age of 18. He has had no formal education in English and his education in Italy concluded when he was 9 years old. He can read a little Italian but cannot write it. He cannot read or write English and has obtained help in the past from others when completing documents. He has principally been involved in labouring occupations although for a short time he had a tow truck business. During this time it appears he followed the procedure of obtaining advice and advice and assistance from others. Mr Lisciandro did have a company which operated his family trust and of which he was a director, although it may be that he was reliant upon others for advice concerning it and with respect to his obligations. Mr Radford had been a friend of Mr Lisciandro for a few years prior to February 1992. He had operated a business called "Maintenance Programme Engineering" for about eight years and this involved the servicing of high pressure water cleaners and other equipment usually associated with the mining industry or agriculture. He became bankrupt in late 1991. In early 1992 Mr Radford approached Alminco to become the "service agent for North Queensland" for some of its products. This resulted in an appointment as service agent on 24 January 1992. It does not appear that this involved him actively promoting that company's products or the receipt of monies for undertaking servicing contracts. It appears to have been rather in the nature of a licence permitting him to use Alminco's parts and equipment in his business since they were often in demand by his customers. Mr Radford approached Mr Lisciandro and a Mr Tagliapietra in February 1992 with a view to their becoming directors of a company which he desired to set up. He told Mr Lisciandro that he needed to do so because his business was expanding and also because he was a bankruptcy and unable himself to be a director. This explanation does not appear to have caused Mr Lisciandro concern. Mr Tagliapietra had money and skills as an electrician which could be employed in the business. When the company, TAG Industries was incorporated on 21 February 1992, Mr Tagliapietra took 998 shares in it and Mr Lisciandro 2 shares. Mr Lisciandro had been told that he would not be required to take an active part, that he would not be required to put in any money and that he would not be risking the loss of any money in becoming a director. He was told by Mr Radford that there would be a lot of documents to be signed. Given Mr Lisciandro's habit of seeking advice and assistance, which one might think he would not lightly alter since he would be exposed to risks of which he was unaware, it must be said he behaved uncharacteristically in what he later did. Sometimes this may be explained by a level of trust placed in a particular person, but the evidence does not detail much of his relationship with Mr Radford. Then Mr Radford gave evidence that he told Mr Lisciandro that there was here an opportunity for "us" to make money and have a good stable income. It is not clear whether "us" includes Mr Lisciandro. In any event these matters are not capable of resolution by me. In the way it has been presented, it seems to me, I must proceed upon the basis of what Mr Lisciandro said he was told or not told by Mr Radford as factors which were then operating. Mr Radford had not had an association with Alminco prior to becoming a service agent. After that appointment it became obvious to him that he could not carry the necessary supplies of equipment on a cash on delivery basis. He initially sought seven days credit but after the receipt of a large order it was obvious that he needed more and he asked Mr Watkinson for thirty days credit. The company TAG Industries Pty Ltd had been set up by this time. Mr Watkinson told Mr Radford the following day that the credit account was in order. A short time later Mr Watkinson however told him that "we've got a director's guarantee we need you to sign". Mr Watkinson then transmitted a blank form of credit application by facsimile transmission. It included the guarantee upon which Alminco now relies. The typewritten details provided by Mr Radford recorded that credit was to be supplied to the company TAG Industries Pty Ltd "trading as Maintenance Programme Engineering", that each of the three including Mr Lisciandro were directors and that Mr Lisciandro held the position of senior sales manager. The three were listed as directors in a position where the "guarantee" clause referred to them. Mr Radford had been told by Mr Watkinson on his enquiry, that if the form was not completed he would have to return to the payment of cash on delivery. It is not clear whether Alminco knew of Mr Radford's company at the time the credit application was sent. The reference by Mr Watkinson to a "a directors' guarantee" implies that he may have. The form itself differentiates between the proprietor of a business and directors of a company but it is perhaps reading too much into Mr Watkinson's words to draw any real conclusion of knowledge on the part of Alminco given in particular the lack of any other evidence that anyone at Alminco had been advised of Mr Radford's company. It appears only that Alminco knew from its dealings with Mr Radford that he traded as "Maintenance Program Engineering". Upon receipt of the form it became aware of the company. It did not know anything of the other two persons named as directors and having a connection with the company or their circumstances and its enquiries later were limited to a check as to those persons credit worthiness.

Mr Radford took the guarantee to Mr Lisciandro and advised him that it would enable him to obtain supplies of equipment and would not cost Mr Lisciandro anything. Mr Lisciandro said that that was the view he then took of the document. The problem created by words missing from the terms of the guarantee appearing in the document is something I shall later turn to. For present purposes I proceed on the basis that it was operative as a guarantee of TAG Industries indebtedness to Alminco and was intended to take effect as such. Mr Lisciandro did not, for the reasons stated above, know that he was signing a guarantee. He relied upon his friendship and the trust he placed in Mr Radford in doing so. The conduct of Mr Radford was misleading and deceptive within the meaning of s.52 Trade Practices Act 1974 and, on the evidence before me, Mr Lisciandro executed the guarantee document on the assurances of Mr Radford that it would not cost him anything and because he was not told of the true nature and effect of it: see Demagogue Pty Ltd v. Ramensky & Anor (1992) 39 FCR 31. Further, there seems little doubt that Mr Lisciandro's circumstances were such as to constitute the special situation of disadvantage spoken of in The Commercial Bank of Australia v. Amadio & Anor (1982-3) 151 CLR 447. In this respect his illiteracy and trust of Radford combined with misrepresentations, both positive and by omission, to place him in that position. But the question here is whether Alminco is affected by the wrongful advantage taken of that situation and argument centred upon the extent of Alminco's knowledge of Mr Lisciandro's personal position.

I shall consider firstly the position, as in Amadio's case, where the wrong-doer is not the agent of the company who later seeks to enforce the document thereby obtained. In Amadio's case Mason CJ. (466) suggested that the first enquiry in the process of deciding whether the bank itself could be said to have taken unconscionable advantage of the parents was: "What knowledge did the Bank have of the parents situation?" After referring to Owen & Gutch v. Homan [1853] 4 HLC at 997, 10 ER 767 His Honour held (467) that if a third party is aware of the possibility that wrongful advantage had been taken or was aware of facts which would have raised such a question in the mind of a reasonable person, the result for the third party will be the same as if it had actual knowledge of the true situation (and see Deane J. (479)). That is not to say that, absent notice of any facts bearing upon the matter, a creditor or other party seeking to take advantage of the transaction created is automatically put upon enquiry. The facts in Amadio were that the bank manager knew sufficient of the personal circumstances of the parents and the relationship with their son, of the son's financial difficulties and that it was obviously a highly improvident transaction for the parents. A question as to how they had come to sign a guarantee was therefore raised and the Bank put upon its enquiry. The Court did not however state, as a matter of principle, that absent such information enquiry would be necessary. The need to make further enquiry arose in the context that a proper enquiry as to whether the transaction had been entered into fairly might conceivably afford protection to a third party, but without it it would be unable to shelter behind the lack of actual knowledge.

The principles explained in Amadio relating to notice of facts or circumstances which will affect the ability of a third party to later enforce a transaction do not require reference to authorities in the United Kingdom for further clarification. In Australia the principles in Amadio's case have been applied without the need to do so, and recently in Akins v. National Australia Bank (1994) 34 NSWLR 155. The authorities in the United Kingdom in any event have proceeded along different routes, although it might be thought that Barclays Bank PLC v. O'Brien & Anor [1994] 1 AC 180 comes closer to the Australian position, at least since it seeks to apply general equitable principles and not special protection for some classes of persons and because the focus upon the notification to a third party is similar to that in Amadio's case. In that respect Lord Browne-Wilkinson, in giving the judgment of their Lordships, (195, 196) held that a third party will have constructive notice of an innocent party's rights where the third party knows of certain facts which put it upon enquiry as to the possible existence of the rights of another and there is then a failure to make enquiry. Barclays' was not reported at the time of the decision in Challenge Bank Ltd v. Pandya & Ors (1993) 60 SASR 330, upon which the applicant relies. There King CJ., referring to cases where documents had been entrusted to another to obtain execution, such as Bank of Credit and Commerce International SA v. Aboody [1991] QB 923, formulated a rule that the Court: " ... will not enforce a guarantee at the suit of a creditor if it can be shown that the creditor entrusted the task of obtaining the alleged debtor's signature to the relevant document to someone who, as the creditor knew or ought to have known, was in a position to influence the debtor or had a motive or interest in ensuring the execution of the document, and who procured the signature of the debtor by means of undue influence or by means of fraudulent misrepresentation". (Such an approach was not accepted as correct by Santow J. in Burke & Anor v. State Bank of New South Wales Ltd, (unreported, 17 October 1994)). Given the statements of principle in Amadio it seems to me, with respect, that there is no room for, nor the need for additional rules to apply in particular types of cases. The proper inquiry posed in Amadio will in a given case require simply a finding of fact, namely whether it is such that the possibility that something untoward may have occurred or which can be said to alert a creditor to the particular circumstances of the party to sign the security, is raised. The fact that someone has a motive to obtain a guarantee or other security might not itself be sufficient if, for example, the other parties to provide security also have an interest in obtaining the funds. It may be quite different however if that party has no known connection with the business or account of the principal debtor so as to alert them to the risk, or where it can be seen to be clearly contrary to their interests to do so. In the present case Alminco could not be said to have known of any financial difficulties experienced by Mr Radford or that he was unlikely to be able to meet payments on the account. It knew little of his background. It knew nothing of Mr Lisciandro's personal circumstances, save that he was a director of the company TAG Industries, as in fact he was, and that he had in that sense an interest in the company. It knew nothing of the trust he placed in Mr Radford nor indeed of any relationship between Mr Radford and Mr Lisciandro save for the business relationship appearing from the information provided. It made no enquiry, but there was in my view nothing apparent from the circumstances to raise a question as to Mr Lisciandro's circumstances or understanding of the transaction. Whilst it would obviously be desirable if creditors made enquiries as a matter of course I do not understand the law to have proceeded to the point where it is required in all cases before a security document obtained can be enforced. Many of the cases in the United Kingdom, which have held that a third party is liable because it required execution of security and left the obtaining of it to the person who then acted with impropriety, contained material from which it was possible to draw the conclusion that, in any event, that wrong-doer acted as the agent of the creditor in obtaining the security, as Heerey J. noted in Alderton & Anor v. The Prudential Assurance Company Limited (1993) 41 FCR 435, 446. In that case, which differed from the facts of the present, the agent had been given the specific task of obtaining the signatures of his sister and brother-in-law to a mortgage to secure the debts of his company in which they had no interest. The applicants' case was considered by his Honour to be made out, either on principles relating to agency or applying to unconscionable bargains. But in many of these cases, as Lord Browne-Wilkinson in Barclays pointed out (194, 195), an imputation of agency is artificial and came to be utilised no doubt because the Courts laboured under the need for statements of general principle. At 194 his Lordship said: ".... As the Court of Appeal in this case point out, in the majority of cases the reality of the relationship is that, the creditor having required of the principal debtor that there must be a surety, the principal debtor on his own account in order to raise the necessary finance seeks to procure the support of the surety. In so doing, he is acting for himself not the creditor". And here what was apparent to Mr Lisciandro was that Mr Radford was acting for himself by the medium of a company and that what was asked of him was to enable him to obtain supplies for what was his business. Nowhere was it suggested by Mr Lisciandro that he was told anything to suggest that Mr Radford was acting on behalf of Alminco in obtaining the documents. Counsel for the applicant also relied upon s.84(2) Trade Practice Act 1974 as rendering Alminco responsible for the misleading and deceptive conduct on the part of Mr Radford. That sub-section provides: "(2) Any conduct engaged in on behalf of a body corporate - (a) by a director, servant or agent of the body corporate within the scope of the person's actual or apparent authority; or (b) by any other person at the direction or with the consent or agreement (whether express or implied) of a director, servant or agent of the body corporate, where the giving of the directions, consent or agreement is within the scope of the actual or apparent authority of the director, servant or agent, shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate." It may be accepted that the sub-section was intended to extend, and not merely reflect, the common law: see Trade Practices Commission v. Queensland Aggregates Pty Ltd & Anor (No.3) (1982) 61 FLR 52, 66 and Walplan Pty Ltd v. Wallace (1985) 8 FCR 27, 37. It is, as Lockhart J. commented in the last mentioned case, designed to attribute to a corporation conduct of others for which the corporation would not necessarily be otherwise responsible. It is therefore possible that the conduct of someone such as Mr Radford who is associated in business with Alminco but not authorised as its agent for the purposes in question, could render the company liable. But such a conclusion depends not only upon the extension to such persons but that their conduct be engaged in "on behalf of" the company, and "at the direction or with the consent or agreement of" a servant such as Mr Watkinson. Whilst the phrase "on behalf of" is not one with a strict legal meaning, as Lockhart J. held in Walplan v. Wallace (37), there is a limit to how loose the connection can be. It still conveys that something is done "for" the company (Trade Practices Commission v. Queensland Aggregates (66)) or something similar to "in the course of the body corporates' affairs or activities". In the present case Alminco was dealing with Mr Radford as it would with any potential purchaser. It was not asking him or directing him to pursue its own activities in the supply of equipment. Rather, as a potential purchaser on credit, it required him to fulfil certain conditions. From that point it was up to him to fulfil them or not, if he wished his company to transact business on that basis with Alminco. In reality he was acting for them in the course of TAG's business or his own affairs and activities in obtaining the guarantees. To hold otherwise, it seems to me, would render responsible every company who required potential customers to satisfy particular conditions. There remains the additional question of the terms of the guarantee itself. The document in its relevant part provides: "Guarantees "I/We, whose name/s appear in the Schedule herein being the Proprietor(s)/Director(s) of TAG INDUSTRIES PTY LTD (the customer) request Alminco Pty Ltd to enter into agreement with the Customer to supply goods and materials from time to time and in consideration of Alminco /* the due payment by the Customer of all monies which the Customer may be liable to pay you on any account whatever and the punctual performance of all obligations under any such services, sale of goods and materials provided and in the event of any default by the Customer, I/We shall be deemed to become there upon the principal debtor(s) to Alminco Pty Ltd the granting of time or any other indulgence to the customer will not affect liability, hereunder and this guarantee shall not be limited to the amount of credit limit requested by the Customer."

The symbols /* have been inserted by me. At that point it is clear that words are missing. To render it operative as a guarantee, Counsel for the applicant submitted that words such as ".... so supplying I/We hereby guarantee" would need to be inserted by a process of construction and the court would not do so since it would be supplying the promise itself. This submission however overlooks that there is in any event later expressed a promise to assume the obligation of Alminco to pay if that company defaulted. This appears by the words "and in the event of any default by the Customer, we shall be deemed to become thereupon the principal debtor to Alminco Pty Ltd". It was then submitted that those words refer to some obligation different from that arising under a contract of guarantee, although I was not told what that obligation might be. A contract of guarantee is usually described as "...a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or become liable to the person to whom the guarantee is given ..." (Sunbird Plaza Pty Ltd v. Maloney (1987-8) 166 CLR 245, 254, Mason CJ). The provision here did not render the applicant a debtor or the principal debtor at all times. His liability was dependent upon the liability of the company TAG. So long as it is clear that he will answer for it, that the performance of TAG's obligation is thereby to be secured, the necessary elements of a guarantee are present. How a person will answer for it and the nature of the promise made may differ and in this respect the cases referred to by Jordan CJ in Jowitt v. Callaghan (1938) 38 SR(NSW) 512, 516-7 are instructive. The contract here takes effect as a guarantee by the applicant of TAG's obligation to pay monies due by it to Alminco arising upon default, and without the need to resort to a construction of other parts of it. It follows in my view that the Trustee was right in admitting the claim of Alminco as a debt. The application will be dismissed. I certify that this and the preceding fourteen pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel. Associate Date: 6 September 1995 Counsel for the applicant: Mr P Hack Solicitors for the applicant: Bill Cooper & Associates Solicitors for the respondent: Bennett & Philp Date of Hearing: 21 August 1995 and 4 September 1995 Place of Hearing: Brisbane Date of Judgment: 6 September 1995