Karam v ANZ Banking Group Limited & 1Ors

INTRODUCTION 1 In my judgment ("the judgment") of 21 August 2001 at [506] to [512] I set out my overall conclusions and summing up. Subsequently on 16 May 2002 I made additional observations following the parties' attempt to settle orders giving effect to that judgment ("the Observations"). What follows represents a further question addressed by the parties, in order now to finalise orders giving effect to the judgment. 2 The effect of that judgment and the additional observations is that the Karam interests (the first to fourth plaintiffs) remain liable under their personal guarantees for what is described as "non-Ingleburn indebtedness of the company". This essentially represents trading indebtedness for ordinary trading debts as distinct from what is described as "Ingleburn-related indebtedness", for which the Karam interests are not liable. The latter consists of non-trading indebtedness which in general terms can be described as property and construction costs in relation to the Ingleburn factory and property (see judgment, paras [506-8] and especially [506(n)]). 3 It was confirmed in the Observations (Para 5(a) and 6) that the Ingleburn Property Account and the Construction Account should be treated as Ingleburn-related indebtedness and that the Equipment Loan should not. It is undisputed that there are five relevant KBF accounts (previously described in the affidavit of R A Green sworn 29 October 2001, and the plaintiffs' submissions re the orders of 16 May 2002, para 7) as follows: (a) Account No. 8332 50418, constituted by a Fully Drawn Advance for the purchase of the Ingleburn Property ("Ingleburn Property Account"), in debit in the sum of $233,839.07 as at 1.08.01; (b) Account No. 8332 69215, constituted by a Fully Drawn Advance utilised for construction of the factory on the Ingleburn Property "the Construction Account"), in debit in the sum of $968,686.04 as at 1.08.01; (c) Account No. 8333 53097, constituted by a Fully Drawn Advance utilised to purchase equipment installed in the Ingleburn Factory ("the Equipment Account"), in debit in the sum of $66,003.17 as at 1.08.01; (d) Account No. 2282 61231, a current account operated in overdraft ("the Overdraft Account") from which business expenses and interest on the Ingleburn Property Account, Construction Account and Equipment Account were paid, in debit in the sum of $1,165,709.60 as at 1.08.01; (e) Account No. 8333 33547, constituted by a Fully Drawn Advance used to convert $1 million of the Overdraft Account into a fixed loan account in December 1993 (called, somewhat inaccurately, the "Working Capital FDA"), in debit in the sum of $543,246.18 as at 1.08.01. 4 It is agreed that (i) the accounts listed under 3(a) and (b) are Ingleburn-related indebtedness in the sense used in the judgment and were established in the early 1990's; (ii) the account under 3(c) above is non-Ingleburn-related indebtedness in terms of the judgment, and was established in the early 1980's; (iii) the accounts in 3(d) and (e) above are likewise non-Ingleburn-related indebtedness and were established in the early 1980's. 5 It is not disputed that first, money being all its trading income was paid by way of deposit by the Karam owned company, Karam Bros Footwear Pty Limited (KBF) into the trading account in 3(d) above, being as I have said, a trading account for non-Ingleburn-related indebtedness. Nor is it disputed that the Bank then debited that overdraft or trading account with the interest on the Ingleburn land and construction debt, so that the money thereby went into accounts 3(a) and (b) above; that is to say it was towards interest on the Ingleburn-related indebtedness. 6 It is not disputed that there was authority on the Bank's part so to debit account No. 2282 61231 being an overdraft or trading account, pursuant to the documents signed by the Karams on 19 October 1992 and subsequently on 4 November 1993. 7 The wording of the authorisation is identical in each case and I set it out below: "Nominated Account The Nominated Account to which the Bank is authorised to debit amounts due and payable by the Customer to the Bank under the Agreement, and any costs, legal expenses and other amounts in respect of which the Customer indemnifies the Bank under the Agreement is: Account No. 2282 61231 Held at the Ingleburn Branch of the Bank (BSB 012-318)." 8 This language does not in its terms preclude the debtor's prior appropriation of a deposit in reduction of the overdraft or trading account to which paid. The facility Agreement of 19 October 1992 and also 4 November 1983 sets out the various facilities and includes both the overdraft facility and the facilities in relation to the Ingleburn property as well as other facilities. 9 The issues remaining to be determined in order to give effect to my judgment are as follows: (a) What proportion of the overdraft account in 3(d) above and the Working Capital FDA is attributable to "non-Ingleburn-related indebtedness" and thus recoverable by the Bank under the guarantee, and what proportion is attributable to "Ingleburn-related indebtedness" and thus not recoverable under the guarantee; and (b) Costs. 10 It is common ground that the issue under 9(a) above involves the determination of what amount of the total interest applicable to the Ingleburn-related indebtedness, if any, must be taken to have been paid in reduction by Karam company, KBF; a question which depends in turn on whether there has been a prior appropriation by KBF as the debtor in reduction of the overdraft, being non-Ingleburn related indebtedness; see Observations para 7. 11 The basis upon which that determination is to be made (Observations para 7) is that: "Subject to ascertaining whether there has been a specific appropriation of monies paid in the relevant account in terms of the principles set out by Giles JA in Healey v Commonwealth Bank of Australia (NSWCA, 8 December 1998, unreported) the applicable rules for running accounts including the rule in Clayton's case should be applied in correctly making the calculation." 12 For the purposes of the argument, the Karams accept the calculations of Mr Carter, who is the defendant's expert, in his report of 10 September 2002, but only on the assumption that a "Clayton's case" approach is applicable, a matter which the plaintiffs dispute. 13 The plaintiffs contend that the Clayton's case approach has no application. The starting point is the principles set out by Giles JA in Healey v Commonwealth Bank of Australia [1998] NSWSC 678 at p3 (to which reference was made in my Observations at para 7): "When a debtor who owes distinct debts to a creditor makes a payment to the creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly; if the debtor does not direct an appropriation at the time he makes the payment , the right of application devolves on the creditor." [emphasis added] 14 It will be noted that the appropriation must be made by the debtor at the time of payment to the creditor and, I would add, or "by" the time of payment. If then made that precludes any contrary appropriation by the creditor. Clearly an appropriation cannot be made after that payment by the debtor unilaterally. 15 The plaintiffs' submissions then proceed as follows: "10. Here, the relevant trading accounts (leaving aside the Equipment Account) were the Overdraft Account and the Working Capital FDA (the latter established by debiting $1 million to a new account to reduce the Overdraft Account by an equivalent amount); the Ingleburn related accounts were the Ingleburn Property Account and the Construction Account. The present task is to ascertain how much of the Company's indebtedness on the Overdraft Account and working Capital FDA (totalling $1,725,590.83) was derived from [or is represented by] monies paid or applied to interest on the Ingleburn Property Account and Construction Account. 11. On each occasion on which KBF relevantly paid money to the Bank, it did so by depositing funds into its Overdraft Account. At each such point, there was an appropriation by KBF to the trading account of the Company (i.e. a reduction of the trading indebtedness). 12. These appropriations of monies paid into the overdraft Account have had the consequence of reducing continuously the trading indebtedness. Payments from the Overdraft Account in satisfaction of interest (totalling $2,277,092.17) were for Ingleburn-related indebtedness. They exceed the indebtedness on the Overdraft Account and Working Capital FDA (totalling $1,725,590.83). There is thus no resulting liability by the Karams on their guarantee. 13. Incidentally, the debits against the Overdraft Account in reduction of Ingleburn debts (though made with KBF's authority) were not "appropriations" for present purposes - they did not purport to constitute "appropriations" of any particular payment(s) made by KBF to its Overdraft Account. 14. The proposition of Mr Carter [Carter Report, 23.4.03, para 10], that the debiting to the Overdraft Account of interest relating to Ingleburn represents payment by KBF of its normal trading expenses (having regard to (allegedly) usual business practice, and the debit authorities given by KBF), is not in point. The Court has already determined that interest applicable to either the Ingleburn Property Account or the Construction Account "should be treated as Ingleburn related indebtedness" [Observations paras 5(a), 6]; it must therefore be indebtedness of KBF not covered by the Karams' guarantee. 15. In the result, the Bank fails on its cross-claim against the Karams personally (other than for $63,549.00 on the Equipment Account); but the Bank is liable to the Karams for $1,235,575.00 (as at 14.1.03) with respect to the residential properties." 16 The defendant puts its case in these terms: "1. Claytons Case establishes that where there is an account into which receipts and payments are carried in order of date there is a prima facie presumption that the first item on the debit side of the account is intended to be discharged or reduced by the first item on the credit side, and that the various items are appropriated in the order in which the receipts and payments are set against each other in the account. 2. Whilst Claytons Case accepts that a customer can direct the Bank as to the manner of appropriation of payments within a current account it establishes that in so far as the customer does not so appropriate the silence of the customer after receipt of his banking account is regarded as an admission of its being correct. 3. In the present case the rule in Claytons Case applies to each of KBF's accounts with the Bank referred to above. Each time that a payment is effected by the company by it authorising the transfer of funds between its respective accounts the rule is triggered in respect of that account into which the transfer is made. ……… 7. The deposit by the company of funds into its overdraft account from time to time is insufficient by itself to constitute an appropriation of those funds exclusively to the debt attributable to that account. If however it is considered to be sufficient for this purpose then so too must each transfer of funds by KBF (that is pursuant to its authority and direction) from that account to the FDA account or accounts be an appropriation by the company of part of its available working capital towards reducing the debt in that account or those accounts. As explained by Mr Carter in his 2nd report, the periodical debiting of an operating account pursuant to the customer's authority or direction so as to satisfy the repayment or interest servicing regime of a fully drawn advance account is the form such payments most commonly, indeed almost universally, take. There is no distinction in principle between this method of payment and any other, such as the drawing and payment of a cheque, the withdrawal and deposit of cash, or a transfer by the internet or by other electronic means. 8. Mr Carter at paragraph 10(b) of his report in reply, which is dated 23rd April 2003, refers to KBF's nomination dated 1st December 1992 and a further nomination enclosed with the Letter of Offer dated 14th November 1993. there can be no argument that these nominations constituted an authority and direction to the Bank by KBF in express terms to effect payments from the company's operating account in order to reduce and eventually discharge KBF liabilities in respect of its loan accounts. In so doing KBF was adopting the usual method of making such payments, just as it might have done in respect of any of its operating costs. None of this appears to have been considered by Mr Bell [the Plaintiffs' expert] in his report, and this indicates the flaw in the approach he has adopted. As previously noted, apart from this matter, Mr Bell agrees in the methodology and result of Mr Carter's calculations."