Endormer Pty Ltd v Australian Guarantee Corporation Ltd

applicants' claims 3 The first set of claims are based upon breach of s 52 Trade Practices Act 1974 (Cth) ("the TP Act"). The gist of these claims is that Endormer was misled into entering into loan arrangements with AGC and the execution of various security documents, and that the other applicants (all associated in some way with Endormer) suffered collateral damage. 4 The second set of claims are in negligence and overlap the conduct complained about under the TP Act, and also found upon the negligent administration of the loan arrangements. 5 The third set of claims relate to the validity of the deed of charge pursuant to which the Receiver was appointed, and as to the validity of the appointment of the Receiver. 6 The fourth set of claims are against the Receiver, firstly arising out of the alleged invalidity of the deed of charge and of his appointment thereunder, and secondly as to the manner in which assets were disposed of by him.

section 52 tp act and negligence (paras 7-35 third amended statement of claim) 7 It is convenient to take the first and second set of claims together. The first aspect of them is complete by 1 September 1992, by when the transaction with AGC had been entered into. The essence of the case for the applicants may be summarised as follows. 8 The motor car dealership known as Drummoyne Nissan was conducted by Endormer (as trustee of a trading trust). The acquisition of cars for resale was financed by AGC. As the name of the business implies, it had a franchise to sell Nissan motor vehicles. AGC, although a wholly owned subsidiary of Westpac Banking Corporation ("Westpac"), had traditionally been administered as a separate organisation, with a long history of financing motor dealers. In the late 1980s the management of AGC took its eye off the ball in relation to motor dealers, and both it and Westpac fell into financial difficulties. In October/November 1991 Mr Paterson, the financial controller of Drummoyne Nissan, negotiated a wholesale finance package with Barclays Finance ("Barclays"), for the purchase of new and used cars, in the amount of approximately $2.35 million, which enabled the existing loan from AGC to be paid out, and thereafter financing business was done with Barclays. 9 AGC was anxious to win back the account. During February 1992 a proposal was developed between Mr Paterson and Mr Jarrett, who was the general manager of Drummoyne Nissan, and Mr Ross McGilvray and Mr Vic Moore of AGC for a facility of $2.35 million from AGC to finance the acquisition of new and used vehicles on agreed terms and conditions, to replace the Barclays facility. It is claimed that Messrs Paterson and Jarrett were assured that approval of the proposal by the relevant officer of AGC, Mr Don Rowland, had been given, and that formal approval would follow. One significant step which then followed on the basis of this understanding was that, at the suggestion of officers of AGC, Drummoyne Nissan employed a business manager, Ms Jenne Whelan, who was familiar with AGC practices, in anticipation of the changeover, and connected a VALEs computer system via modem to AGC so that she could get quick approval of applications for finance by purchasers of vehicles from Drummoyne Nissan. From this time most of this retail business (as it was called) was done with AGC rather than Barclays, although Barclays continued to provide wholesale finance. Retail financing was a significant part of the overall business which the provider of wholesale finance to a motor vehicle dealer would seek to obtain. It was the icing on the cake. It is said that Barclays was unhappy about the business being done by Endormer with AGC. On 24 June 1992, Barclays gave Endormer a thirty day notice of termination of dealings. Mr McGilvray had continued to assure Messrs Paterson and Jarrett that formal AGC finance approval would be received. 10 On 30 June 1992, Endormer was informed that the AGC finance application had been refused. It learned that the figures which had been put to Mr McGilvray and Mr Moore as part of the original negotiations had been altered in the form of application which went to senior AGC management and was rejected. This placed Drummoyne Nissan in a most awkward situation. Endormer applied to AGC, on 3 July 1992, for a facility of $1.75 million rather than $2.35 million. It is claimed that was done because its officers had been told by AGC officers that no other application would be approved. On the basis of these discussions, Barclays were approached to, and did, extend the time for completion of its facility to 31 August 1992. 11 During August 1992, Mr Gwynne from AGC met Messrs Paterson and Jarrett, and handed to them a developed finance proposal for $1.75 million on terms and conditions not as favourable as those which, it is claimed, were agreed with Messrs McGilvray and Moore in February. It is claimed that Mr Gwynne gave assurances that the conditions would be altered after approval. Because of the urgency of the required payment out of Barclays, Endormer agreed to the proposal, the security documents were entered into, and the monies advanced to pay out Barclays. Mr Jarrett and Jarrett Holdings Pty Ltd were encouraged by the arrangement with AGC to invest $100,000 in the business, and collateral securities were also obtained involving other applicants. 12 The case for the applicants is that the amount of the AGC facility was inadequate and the terms and conditions too restrictive, with the consequence that the business was starved of necessary working capital, which was the root cause of the later financial problems which caused the damage complained of. Whilst not all of the foregoing narrative is agreed, many of the objective facts are correct. However, the narrative omits some vital ingredients. 13 The negotiations with Mr McGilvray and Mr Moore in February, which formed the basis of the application which was made for finance, concerned the business of Drummoyne Nissan. Notwithstanding the evidence given by Messrs Paterson and Jarrett on this point, I am quite satisfied that the documents which were produced by them reflected results and projections in relation to that business, and that business alone. On 19 February 1992, Nissan wrote to Endormer, enclosing a notice terminating the dealership, effective late 1992. I am satisfied that this was not disclosed to Mr McGilvray or any other officer of AGC at any time prior to rejection of the application for finance on 30 June. The application which was made in July and approved in August, and led to the impugned arrangements, related not to Drummoyne Nissan, but rather to a new business to be conducted in different locations as a franchisee of Hyundai. There were also to be different principals behind Endormer, in that Mr Crichton, a wealthy and experienced motor dealer, would not be associated with the new business, and Mr Jarrett's interests would be associated with it. I agree with the submission on behalf of AGC that this fact makes most, if not all, of the complaints made by the applicants as to the terms of the loan immaterial. 14 The notice of termination from Barclays is also relevant to another vital aspect of the matter. It is fundamental to the case made by Endormer that, absent the misleading conduct by AGC, it would have continued with the satisfactory arrangements for finance it had had with Barclays and would not have entered into the disadvantageous arrangements which it did with AGC. It claims to have burned its bridges with Barclays because of the misleading conduct of AGC. The contemporaneous documents of Barclays and the evidence of Messrs McDonald and Macoun, who had been the relevant officers of Barclays, tell a very different story. The Endormer account had been troublesome for Barclays from the beginning to the end. There was difficulty in obtaining information and reports, difficulty in accounting for vehicles and concerns about the financial position of Endormer. The notice of termination received from Nissan created a serious problem, and was the precipitating cause for the notice of termination, particularly when it became clear that Mr Neville Crichton did not intend to take any interest in the proposed Hyundai franchise. I am satisfied that the Barclays personnel were delighted to receive the information that AGC would be paying out the Endormer indebtedness, as it relieved them of an anticipated problem. 15 Messrs McDonald and Macoun deny that lack of retail business or that any involvement of Endormer with AGC had any influence upon the decision to terminate the arrangements with Endormer. This is supported by the fact that there is no reference to those factors in the contemporaneous documents. During the hearing I had some misgivings as to whether those factors might have been downplayed, perhaps because of Part IV TP Act fears, as the retail business which had been promised was certainly not achieved. However, I am satisfied with the explanations given by the witnesses. I accept the evidence of Messrs McDonald and Macoun. 16 Non-disclosure of the Nissan termination notice to AGC, and the failure to disclose the true state of affairs with both Nissan and Barclays by Messrs Paterson and Jarrett in their evidence, also seriously affects the credit of each of them. 17 It has been submitted on behalf of AGC that if I accept the evidence of the Barclays' witnesses, and the contemporaneous documents, then the case of the applicants on the TP Act claim and the related negligence claim must fail, as there is no causal link between any misleading conduct or negligence and the loss claimed. I agree. The Barclays' relationship was doomed in any event, unaffected by any conduct of AGC towards Endormer. Barclays was not available as an alternative source of finance. No case has been made for the availability of any other source of finance. There has been no case in contract and no case for specific performance brought against AGC, and nor could there have been. 18 Other formidable barriers to success of these claims have been put forward in the comprehensive submissions on behalf of AGC. I do not mention them all. The following points are relevant:

1. I find that it was known by Messrs Paterson and Jarrett that neither Mr McGilvray nor Mr Moore had authority to approve the facility. 2. I do not accept that Mr McGilvray said that the person authorised to approve the facility had actually done so, although I do not doubt that he said that obtaining the approval could be counted on. Indeed, I find that Mr McGilvray believed that approval would be forthcoming, and forthcoming within a reasonable time. He had not previously had any application of this type rejected which he had supported. 3. There is no evidence which satisfactorily accounts for the delay which occurred in dealing with the application. It is understandable that Messrs Paterson and Jarrett would have a sense of grievance, on the basis that they had been led up the garden path by reason of the belated rejection of the application, particularly as, by then, they knew that they were finished with Barclays, leaving them with no practical alternative but to do the best deal they could with AGC. However, delay and an unexpected outcome - even a change of mind on the part of AGC - do not constitute misleading or deceptive conduct. I should say, however, that there is no proper support in the evidence for the conjecture that there was a change of policy due to internal politics in the affairs of AGC and Wesptac. The decision-maker at the time of the rejection, Mr Rowland, was called by the applicants, but gave no support to that hypothesis. The original application was rejected because of his assessment of the capacity of Endormer to service the proposed loan. 4. In view of the submissions for the applicants, I should also say that I see nothing sinister or irregular in the analysis and revision by Mr Davidson of the figures presented by Endormer to Mr McGilvray. A proposed lender is always free to make its own assessment of the projections by a proposed borrower. The argument for the applicants seems to proceed upon the fallacious basis that the AGC employees (including Mr Davidson) were acting as agents for Endormer rather than as employees of AGC.
2. It is also clear from Mr Rowland's evidence that the amount of the loan which was granted was the most that he would have approved. Thus, even if, as Endormer suggests, the July/August application took the form that it did because of advice they could not resist from AGC, the reality was that this was all that would have been approved because of the assessment by AGC officers of Endormer's capacity to service the loan.
3. I am also unpersuaded that the cause of the financial woes of Endormer was the result of an inadequate loan amount and conditions that were too restrictive. I shall return to this issue. 19 The later representations pleaded (in pars 23 and 24 of the third amended statement of claim) cannot alter the effect of the documents which were executed. I accept Mr Gwynne's denial of the disputed representations but, furthermore, it was known to Messrs Paterson and Jarrett that he was not authorised to bind AGC. As appears by implication from par 25(a), the claim based upon these representations also depends upon the existence of the Barclays alternative. Also, as I have found, the terms approved by AGC were the most that would have been approved. In any event, no failure to honour any pleaded representation caused the loss or damage claimed. 20 The falsification of these representations overlaps with the other complaint in negligence which relates in various ways to the manner in which the loan was administered. In my opinion, this claim is misconceived. No authority was cited to suggest that a duty of care of this kind exists. The relations between debtor and creditor were governed by the contract between them. Whilst in some circumstances tortious and contractual duties may co-exist, this was not one of them. 21 Notwithstanding the severe attack upon a number of AGC personnel, I cannot see that any action was taken which was calculated to do more than reasonably protect the interests of the creditor, whilst doing as little harm as reasonable to the business of the debtor. In particular, I reject the attack upon the bona fides of Mr Rodd. The reality is that the cause of the financial failure was that Endormer at all times was chronically undercapitalised, and, in particular, had a critical shortage of working capital - namely, a deficiency of current assets compared with current liabilities. In my opinion, it was this which caused the financial collapse. The cross-examination by counsel for the applicants, and his submissions, seemed to proceed upon the basis that increasing the amount of the loan would solve the problem of lack of working capital. This is fallacious. Borrowing more on terms of short-term repayment does not increase current assets over current liabilities, ie, liquidity. Indeed, the interest accruing on such a loan may, unless all goes well, cause the capital deficiency to become more pressing as funds need to be found to pay interest. There was no reliable evidence to suggest that lack of finance to acquire cars for resale was, in the circumstances of this business, the cause of any lack of profit. It is not possible to read the story of the dealings between Barclays and Endormer, on the one hand, and the dealings between AGC and Endormer, on the other, without recognising the striking similarity of problems encountered. There were formidable problems for AGC in administering the Endormer account. Obtaining financial information was difficult, there were problems in tracking vehicles, and there was a particular problem in disposing of some used vehicles. Whilst there are great difficulties in entirely reconstructing the financial records of Endormer, the evidence of Mr Bryant, a chartered accountant engaged by AGC to provide independent expert advice, which I accept, is the most helpful analysis of the financial problems of the company and the business it conducted. 22 As might be expected, there were differing opinions among AGC personnel as to how to cope, and Mr Rodd, with his financial background, was more analytical and sceptical than others. He was seen by Mr Paterson as a pedantic accountant, without any real life experience in the motor trade, who was placing unnecessary obstacles in his way, anxious to avoid indirect loss to Westpac. However, I am satisfied that Mr Rodd, and the other AGC officers, were anxious for Endormer to succeed, as were the Barclays officers before them. A failed debtor is a real problem for the creditor. Indeed, Mr Rodd did modify his position following approaches on behalf of Endormer. My view is that the contemporaneous memoranda by Mr Rodd show a much keener appreciation of the financial tightrope that Endormer was walking than some of the other AGC officers, who had faith in Mr Paterson because of his long experience in finance in the motor industry. In my view, the overdraft arrangement which he suggested was sensible as it would help to cope with the inevitable fluctuations in liquidity of an undercapitalised business. 23 In view of my conclusions I do not propose to go through the individual complaints, but I should say that the alleged reduction in the amount available for the acquisition of vehicles in the way originally envisaged was entirely the result of the decision by Endormer to appropriate part of the overall facility for other purposes. 24 Complaints are made about various detailed terms and conditions of the loan which are said to be either contrary to Mr McGilvray's assurances or contrary to industry practice. There is no satisfactory evidence of industry practice. On the evidence, the terms of the loan represented the most that AGC would have approved, consistent with its own interests. No assurances that may have been given in relation to another loan application, in relation to another business, could alter this. 25 I am satisfied that all of the steps that were taken were in accordance with the contractual rights of AGC. During the hearing, I was somewhat troubled by the unilateral increase of interest rate by Mr Rodd, but I am satisfied that there was the power to do so, and that his explanation (increase of risk) is acceptable. 26 I therefore reject the claim against AGC based upon the TP Act and negligence.

registration of deed of charge (paras 37-47 of third amended statement of claim) 27 It is alleged that the deed of charge, pursuant to which the Receiver was appointed, was actually created in July 1993 but was dated 18 March 1994 on behalf of AGC, and lodged for registration with the Australian Securities Commission ("ASC") on or about 31 March 1994, in order to appear to comply with s 263 of the Corporations Law (which required notice within 45 days of creation of the charge). It is said that by these means the priority of AGC as chargee against an administrator or liquidator of Endormer was preserved in circumstances where it was known to AGC at the time of the dating of the deed that an administrator or liquidator would probably be appointed in the near future. The applicants have an arguable case so far. The argument then proceeds to allege invalidity of the deed, the appointment of the Receiver and all that was done to enforce the charge. It is submitted on behalf of AGC that the argument irretrievably breaks down at that point. 28 This is correct. The effect of s 266 is that the charge would have been void as against the liquidator of Endormer unless s 263 had been complied with. This, however, is not an action by the liquidator of Endormer. The distinction between an action by a liquidator and an action by a company in liquidation has been clear since at least Kent v La Communauté des Soeurs de Charite de la Providence [1903] AC 220. See also Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974; Horn v York Paper Co Ltd (No. 2) (1991) 23 NSWLR 622 and Bibra Lake Holdings Pty Ltd (in liq) v Firmadoor Australia Pty Ltd (1992) 7 WAR 1. These claims are misconceived and will be dismissed.

damages 29 As I have found no liability, I do not need to consider damages. In case that issue needs to be considered on appeal, I should say that, having considered the evidence of Mr Li (and the Hilliard report) on the one hand, and the evidence of Mr Bryant on the other, I accept the evidence of Mr Bryant and agree with his criticisms of the methodology of the Hilliard report and with his comments on the reliability of the data upon which it was based.

claimS against the receiver (paras 49-54 of third amended statement of claim)

Invalidity of appointment 30 The first set of claims depend upon the invalidity of the charge, and the consequent invalidity of his appointment thereunder. They fall with the rejection of the allegation of invalidity of the charge.

Sale of assets 31 The second claim is that the Receiver failed to take all reasonable care to sell the property of Endormer for its market value, or, alternatively, the best price that was reasonably obtainable when the said property was sold. 32 Out of the various criticisms of the Receiver on behalf of the applicants, in my opinion, only three require closer examination. The first is the speed with which the sale took place, the second is the previous association between the purchaser of the principal assets and officers of AGC, taken with indications of favourable assessment of that bid as compared with others, and the third is the substantial profit made by the purchaser on resale less than 19 months later. 33 The Receiver was appointed on 13 April 1994. The business of Endormer (excluding used cars) was effectively sold to Twamley Pty Limited ("Twamley"). The sale was agreed on the evening of Friday 15 and concluded (with varied terms) on 20 April. Mr Smithson, one of the directors of Twamley, had previous dealings with AGC through another dealership and was known to at least Messrs McGilvray and Ginane. 34 The essence of the arrangement was that Twamley purchased certain assets and took over certain liabilities (such as leases of premises and equipment, and the new vehicles), agreed to assist in the collection of debts, took over all warranties and guarantees to existing customers, and continued the employment of some employees. No payment was made for goodwill as such. On 21 September 1995, Twamley sold the company for a price which included $900,000 for goodwill, logo and business names. It is put on behalf of Endormer that this illustrates the improvidence of the Twamley transaction, which was entered into with undue haste with an AGC crony. 35 The Receiver paints a very different picture. He says that the arrangement with Twamley was the best that could be obtained in the circumstances, that proper processes were followed, and that the terms of the resale by Twamley nearly 18 months later reflect the successful operation of the business as a going concern by Twamley, compared with an insolvent business when he was appointed. 36 It is the last point which is the key to this issue. On 12 April Endormer had resolved to appoint an administrator. On 13 April a provisional liquidator was appointed to Endormer on the application of the company, based upon an affidavit of insolvency by Mr Paterson. The company was insolvent, and the business was not a going concern. There was no cash in the bank. Endormer was in arrears in relation to leases. There appeared to be discrepancies as to the number of vehicles which could be located, and there was little stock on hand for sale. The franchisor, Hyundai, informed the Receiver that it was considering terminating the franchise, as it was entitled to do under the circumstances. Each day that the business remained open meant incurring significant liabilities (including to staff) without any funds to cover them. AGC was not prepared to lay out more than emergency funds, and was not obliged to do so. If the business closed, or the franchise was terminated, the bargaining position of the Receiver was destroyed. 37 I am satisfied that the Receiver had no alternative but to move urgently. I am also satisfied that he had no practical alternative but to work in co-operation with Hyundai, which had to approve any purchaser. In the event, the Receiver was able to arrange competitive tenders from three bidders by 15 April. There has been no suggestion of collusion between them. There were differences between each bid, and a commercial judgment was required as to which was superior. In my view, the choice of Twamley as superior on the evening of 15 April was bona fide and reasonable. 38 The Receiver was attacked for favouritism to Mr Smithson, not only in the original choice but in what later transpired. The deal was renegotiated before conclusion in ways which lessened the value of it from the point of view of Endormer. The renegotiation was, in my opinion, bona fide as a result of further consideration by Twamley of relevant matters. If the original bid by Twamley had been in accordance with the final result, the choice between bids would have been different, but it does not follow that the Twamley bid might not have succeeded. Relevantly, however, I do not think that the Receiver should have re-opened the process. The extreme urgency of the situation remained. If the processes were re-opened, and one of the other bidders was selected, negotiations and some form of due diligence by it would have followed, with the possibility of further renegotiation by it. The revisions by Twamley were not fundamental, and the main change - not taking over the Cleveland Street premises - was common to the position of the other bidders. The adjusted difference between tenders was not great, and a choice would again have required a business judgment. On any view, the amount to be received was a long way below the amount then owing by Endormer to AGC. The reality was that the secured creditor was the party affected by the transaction, and any interest of Endormer was effectively theoretical. I see nothing sinister in the fact that Mr Smithson was well and favourably known to AGC. Part of the arrangement which was to the benefit of Endormer was the purchaser taking over floor plan liabilities to AGC. This, plus the other ongoing responsibilities of the purchaser under the arrangement, made the relationship of the purchaser with the secured creditor a relevant factor. Indeed, it may have been the relationship with AGC which had the advantage of introducing Twamley as a bidder at short notice. 39 I agree with the submission on behalf of AGC that no relevant conclusions can be drawn from the resale transaction in September 1995, except that the Hyundai franchise was potentially profitable if properly run by a solvent party. The evidence of Mr Bryant assists in coming to that conclusion. 40 I find that the Receiver did take all reasonable care in the circumstances in selling the assets in question, and that the best price that was reasonably obtainable, having regard to the circumstances at the time, was in fact obtained. I therefore reject the claim against the Receiver, whether it be based upon s 420A of the Corporations Law or the general law, whatever may be the content of each (cf Fisher and Lightwood, Law of Mortgage (Aust Ed) par 18.10 with Jeogla Pty Ltd v Australia & New Zealand Banking Group Ltd (1999) NSWSC 563). 41 This conclusion makes it unnecessary to consider a number of other barriers to success of the claims that were raised by counsel for the Receiver in written and oral submissions.

cross-claim 42 AGC seeks to enforce various securities it claims were taken from the cross respondents. The orders sought include possession of the homes of Messrs Paterson and Jarrett, and the payment of a substantial sum from all cross respondents in respect of monies owing in relation to bailed motor vehicles. The first issue is the enforceability of securities.

Bailment plan 43 The basic document is the 1994 Bailment Plan between AGC, on the one hand, and Endormer and Kwikday Pty Limited ("Kwikday"), on the other, pursuant to which new and used motor vehicles were bailed for sale. Endormer and Kwikday agreed that they would not, without the consent of AGC, sell or dispose of the goods bailed in any manner inconsistent with the terms of the Plan. If any of the goods bailed were converted, then AGC was entitled to recover as liquidated damages an amount equal to the price paid by AGC for the goods, plus any sales tax paid or payable by AGC in respect of those goods. AGC claims that Endormer and Kwikday have failed to account for, and have converted, a number of bailed motor vehicles. 44 The cross respondents allege that Endormer and Kwikday were induced to enter into the Bailment Plan by misleading or deceptive conduct by AGC. The cross respondents rely, in this respect, upon matters which formed the basis for the TP Act claim in the proceedings, which I have rejected. The Bailment Plan is binding according to the terms of it. 45 I am satisfied that a substantial sum is due to AGC pursuant to the Bailment Plan. I shall return later to make findings as to quantum. This conclusion makes it necessary to consider the other securities. 46 Late in his submissions, counsel for the cross respondents sought to raise a new issue as to the party making the demands under the charge, but this was satisfactorily answered by counsel for the respondent.

Guarantees of supplier 47 The next instruments relied upon by AGC are Guarantees of Supplier claimed to bind Kwikday, David Paterson, Tracy Paterson, Glenn Jarrett and Deborah Jarrett to guarantee the due performance by Endormer of obligations under agreements with AGC and indemnify AGC from loss arising out of those agreements. These parties, with the exception of Kwikday, alleged in par 14 of their defence and cross claim that they were each induced to enter into the agreement by conduct of AGC which was misleading or deceptive and was unconscionable, relying again upon the same matters as were said to avoid the Bailment Plan. As I have rejected the factual basis for that, the claim of misleading or deceptive conduct must fail and I will return to the claim of unconscionability. The cross respondents also plead (in par 21) an apparently identical claim, which is rejected for the same reason. 48 There is also a repeat of an allegation that (inter alia) the guarantees were harsh and unconscionable in the circumstances in which they were procured such that they should be set aside in equity or, alternatively, pursuant to the Contracts Review Act 1980 (NSW). As to the latter point, in Murphy v Overton Investments Pty Ltd [2000] FCA 801 Emmett J held that this Court has no jurisdiction in respect of that Act. Katz J found the same thing in Blacker v National Australia Bank Ltd [2000] FCA 681. As these decisions are not plainly wrong, I should, and do, follow them. See also the Full Court's decision in Westpac Banking Corporation v Paterson (1999) 95 FCR 59 at 63. 49 There is no particularisation of the claim of unconscionability and it is rolled up with allegations of duress and pressure. The gist of it appears in par 21.3 of the defence to amended cross claim: "In the circumstances in which Barclays had terminated its agreements with Endormer, the Cross Defendants had no practical choice other than to accept whatever obligation or liability the Cross Claimant sought to impose upon them, as a condition of retaining the Cross Claimant as a supplier of funds for Endormer's business;" 50 This depends upon acceptance of the proposition that the conduct of AGC improperly forced Endormer into a corner. As I have rejected that view of events, there is no basis for the claims of unconscionability and duress, which are accordingly rejected. There is also an allegation of undue influence which is not particularised, and was not pursued at the hearing. The terms of the Guarantees of Supplier are apt to pick up the liability of Endormer to AGC under the Bailment Plan.

Mortgages 51 As no relevant payment has been made under the Guarantees, AGC claims that this triggers the default under second mortgages registered in relation to the Paterson and Jarrett homes. The claims of unconscionability, duress and undue influence which were relied upon in relation to the Guarantees of Supplier are also relied upon in relation to each mortgage, and are rejected for the same reasons. 52 It was separately claimed that the Paterson mortgage had been induced by the same misleading and deceptive conduct by AGC in 1992 as has been alleged in relation to the Guarantees of Supplier. This claim is rejected for the reasons already given. Additional matters relating to 1993 are referred to in pars 3.5 to 3.13 of the defence to amended cross claim. I cannot deduce any defence which arises from these paragraphs which effectively admit execution of the mortgage which was registered. Paragraph 4 of the defence to amended cross claim takes the matter no further. The submissions on behalf of the cross respondents on this issue were, to say the least, opaque. No basis for denying the enforceability of mortgage registered number U297313 has been established. 53 Separate defences based upon misleading or deceptive and unconscionable conduct and duress based upon the events in 1992 are made in relation to the Jarrett Mortgage (registered number U297314), and are rejected for the reasons already given. 54 A separate issue is raised in relation to the Jarrett mortgage, which requires examination. The copy of the mortgage which was registered had the date completed by a solicitor for AGC, who also altered the description of the number of the prior encumbrance from the number of a mortgage in favour of Advance Bank, which had previously been the first mortgage, to the number of a mortgage in favour of Westpac, which was the registered first mortgage at the time of registration of U297314. The Jarretts say that the solicitor was not authorised to do this, and that, effectively, the instrument registered was not their instrument by reason of a unilateral and material alteration to it. 55 The mortgages had been duly executed by the Jarretts, with appropriate certificates, and returned to Clayton Utz, the solicitors for AGC. It was then realised that the number of the prior encumbrance was incorrect, and one copy was returned to the Jarretts for the purpose of having them initial the alteration to the encumbrance number. Not only was the alteration not initialled, the form of mortgage was destroyed. It is argued for AGC that the solicitor was entitled to date the document and alter the encumbrance note for three reasons: 1. he held an authority to complete blanks; 2. he held an undertaking to provide securities; 3. the alteration was not material. 56 There is, in my opinion, no problem about the completion of the date. I am not persuaded by arguments (1) and (2) in relation to the alteration. This was not completing a blank, and there is a difference between an undertaking by a debtor to provide securities and the act of a creditor in perfecting a security. This situation is not the same as that in Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259, relied upon by AGC. The solicitor for AGC knew at the time of the alteration that, in point of fact, the debtors were unwilling to make the relevant alteration, and any implied authority was thereby revoked. 57 Was the alteration material within the meaning of the rule in Pigot's Case (1614) 11 Co Rep 26b; 77 ER 1177? In my opinion, it was not. It merely recorded a fact which existed. It did not disadvantage or impose any greater liability upon the debtor. It was not fraudulent in any sense. See Farrow Mortgage Services Pty Ltd (in liq) v Slade & Nelson (1996) 38 NSWLR 636, 640, 649; Ryde Joinery Pty Ltd v Zisti (1997) NSW Conv R 55-812; and Mitchelson v Mitchelson (1979) 24 ALR 522 at 526-7. As the creditor was in lawful possession of an executed copy mortgage, a non-material alteration did not avoid the document. The implied withdrawal of consent to use involved in the non-return of the original copy could not override the contractual obligation to provide the security. It is unnecessary to consider the effect of the Real Property Act (1900) (NSW) (see Morton v Black (1986) 4 BPR 9164). The Jarrett mortgage is enforceable.

Quantum 58 I must now return to the proof of conversion and the calculation of the amount outstanding. From the point of AGC, the process is one of deduction - cars bailed, less cars accounted for as either still present on the lot or paid out - together with some financial adjustments. Messrs Paterson and Jarrett say they can add little to the process because once the receivership commenced they lost access to both cars and records. 59 The evidence satisfies me that the methodology of reconstruction which has taken place from business records together with the stocktake on receivership was appropriate, that it has been implemented in a proper fashion, and that the result relied upon by AGC in final submissions should be accepted. Counsel for the cross respondents devoted considerable attention to this issue in cross examination, and Mr Jarrett, in evidence, also analysed the documents produced, drawing attention to various deficiencies. In my view, such deficiencies as were revealed have been taken account of in the revised claim by AGC. This is not to say, of course, that the documentation was perfect, but proof beyond reasonable doubt is not required. 60 Apart from exploring deficiencies in the documents, counsel for the cross respondents pointed to the inherent improbability of hitherto undetected conversions on the scale alleged - 44 new vehicles and 31 used vehicles - when AGC was actively supervising the account. He suggested that there was no evidence of funds on that scale having been diverted to the benefit of the individuals concerned, bearing in mind their current parlous position. That submission has some attraction, but it fails to acknowledge the extent to which the financier is in the hands of the dealer in situations like this. The dealer operated from more than one location, with a considerable turnover of new and used vehicles. I have already commented upon the great difficulty which both Barclays and AGC had in keeping track of vehicles and in obtaining timely information. I have also remarked upon the chronic lack of working capital in the business. Failure to account to AGC for proceeds does not imply diversion of all of the funds to private pockets - they may have been used to meet pressing business commitments. I also note that sufficient funds were found from somewhere to pay to Westpac to pay out the guarantee and to relieve those who guaranteed repayment of it. 61 I am satisfied that the adjustments by AGC are appropriate, and that the amount claimed in final submission of $975,143.69 is outstanding.

credit of messrs jarrett and paterson 62 I have rejected the evidence of each of Messrs Jarrett and Paterson at various points in this judgment. As counsel for AGC made a comprehensive attack upon the credit of each of Messrs Jarrett and Paterson in oral and written submissions, which I need not reproduce here, I should say something generally as to that. There were undoubtedly many inconsistencies in the evidence, both between each other and within the affidavit and oral evidence of each of them. In a complex matter such as this, going over events and transactions over a period of time some years ago, some such inconsistencies are to be expected. I am bound to say, however, that this is not a satisfactory explanation for the anomalies here. They reinforce impressions I gained from observing the witnesses give evidence. 63 Mr Paterson was the witness who was closest to those aspects of the business and the events which are of relevance to the case. He conducted virtually all of the negotiations with Barclays and AGC. He is an intelligent person, with experience in the field, who has a considerable sense of grievance over the failure of Endormer and the consequent effect upon the personal finances of his family and the Jarrett family. I have indicated that he had some cause for disquiet from time to time, but my impression is that he has much exaggerated these issues in his own mind and has been reluctant to face up to his failure to manage a grossly undercapitalised business. I think he is also conscious of the fact that he encouraged the financial involvement of Mr Jarrett in the business, with dire consequences for him and his family. Whilst I have no doubt that Mr Paterson consciously gave some evidence which he thought would help the case regardless of the truth, I think he has convinced himself of the correctness of his position and gave evidence accordingly. 64 Mr Jarrett was an unsatisfactory witness. His knowledge of relevant events was sketchy and unreliable. From time to time he endeavoured to tailor his evidence to suit the case, but had little grasp of what was required to be effective in that endeavour. He undoubtedly had faith in Mr Paterson's financial and management ability and experience, and effectively left the arrangements with AGC to him.

orders 65 I propose to stand the matter over for a short period to enable the respondents to bring in short minutes of the orders that should be made to give effect to this judgment, and to enable the parties to remind me of any essential matter I have overlooked or obvious mistakes I have made. This will also enable the relevant applicants to consider their position in relation to the claim under the Contracts Review Act 1980 (NSW) in the meantime. Subject to any contrary submission, the applicants should pay the costs of the respondents. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Counsel for the Respondent: SJ Rushton SC, RJ Brender

Date of Hearing: 6-10, 13, 15 September 1999, 27 September-1 October, 11-15, 19, 22, 25, 29 October 1999, 1-4, 24-26 November 1999, 1-3, 13-17 March 2000