Approval is also subject to the fallowing:
+ Establishment Fee of $1,000 (paid 5 September 1989).
OVERDRAFT LIMIT
+ An interest rate of 22.5% per annum reducible will apply, it is variable and is subject to change without notice in line with the movement in interest rates generally. Interest is charged in March, June, September and December each year and on repayment of the advance.
+ An Overdraft Line Fee will also apply in respect of the Overdraft Limit.
Prior to the issue of each Documentary Credit, we will need to sight the following:
+ confirmed orders.
+ local letters of credit where applicable
With regards to the larger wholesalers/retailers ie with orders of $100,000 or more, a satisfactory Bank Opinion will be required. In this regard, please contact Mr Newton at this office to arrange.
+ Also with your dealer sales imports of no more than $300,000 per month will be permitted.
+ Security is to be to the Bank's satisfaction and is to comprise:
A Guarantee (unlimited as to amount) by Stephen, Rosanna Margaret, Allan John and Anthony George Bakarich.
A Guarantee (Unlimited as to amount) by A Bakarich Industries Pty Ltd, Vitlern Pty Limited and Demson Pty Limited.
A registered equitable mortgage by Demson Pty Limited.
A mortgage by Mary Patricia Bakarich over Lot 3 Cowpasture Road, Hoxton Park NSW
+ This Trade Finance Facility is to be cleared from sales by the end of June 1990.
We are pleased to have been able to assist you on this occasion. Should you have any enquiries regarding the abovementioned do not hesitate to contact this office.
12The memorandum by Mr Fowler of Zone of 18 September 1989 came to decision on allowing credits on imports for which firm orders from purchasers in Australia were not held: this had been referred to in earlier internal CBA communications, as is not altogether clearly. When read with earlier documents the Zone approval imposed a limit of $300,000, part of the lending facility of $2,650,000, which could be advanced for speculative orders meaning importations of air-conditioners for which Demson did not hold firm orders from purchasers. The letter which the Branch sent to Stephen Bakarich of ABI on 19 September departed from the Zone authorisation when it said
"....dealer sales imports of no more than $300,000 per month will be permitted."
13Hodgson JA (CA 62) set out and adopted further history found at paragraphs 54 to 95 of Nicholas J's judgment. I take note of the whole passage, but I particularly mention the following. Demson obtained a further documentary credit on 11 October 1989 for a purchase from ACMA. Tony took some part in Demson's business affairs and in its dealings with ACMA. Stephen complained to ACMA about faulty air-conditioners and the results of the faults on 20 December, 1989. Stephen again complained on 4 January 1990, making lengthy and severely adverse comments about poor quality and the trouble this had caused. He concluded:
"Our existence depends on ACMA, we have at the present no other means of survival, we trusted ACMA's performance, future looks very bleak ."
14Stephen sent a message to ACMA on 16 January 1998 again complaining very fully and in vivid language about the quality of the air-conditioners which had been delivered. In the mean time there was conflict between Tony and Stephen, resolved in a way on 7 March 1990 when Stephen and his wife agreed with Tony about his taking over Demson and also Rutisa. Stephen resigned as a director of those companies and Stephen and Rosanna transferred their shares to Tony, who took control of the companies. Tony continued dealings by Demson with ACMA and with CBA. The change of control must to some extent have been a destabilising influence on conduct of the business.
15Hodgson JA decided (CA126) that the contracts made with Mary and Allan were unjust to the extent that they imposed liability beyond that which CBA determined were appropriate limits for Demson, as stated in the Zone's decision of 18 September 1989. That decision and the letter of 19 September 1989 do not expressly say when the Letters of Credit were to be issued or for how long the contemplated imports were to continue, but these can be understood from the contemplation that orders should be fulfilled by March 1990 and from the requirement that the facility was to be cleared by the end of June 1990.
16The decision of the Court of Appeal appears from these passages:
[127] Prima facie, this would justify an order adjusting the liability of Mary and Allan to what it would have been if their contracts had been limited to guaranteeing repayments of advances made by the Bank to Demson in accordance with the limits determined by the Bank. However, further issues needed to be considered before the question of remedy can be decided....
RELIEF
[144] The appellants sought to be relieved altogether of liability under the guarantees and Mary's mortgage. However, in my view at most Mary and Allan are entitled to no more than an adjustment of their liability down to what it would have been if their contracts had been limited to guaranteeing repayment of advances made by the Bank to Demson complying with the limits determined by the Zone.
[145] On the figures put by the appellants, the Bank financed importation of air conditioners for which orders were not held to the extent of $1,641,480.00, that is, $1,341,480.00 more than would have been the case if the limit specified by the Zone had been adhered to. That would not translate directly to a reduction by that amount of what the guarantors owed to the Bank, because those air conditioners may have been disposed of for some consideration. Prima facie, the enquiry required would be as to what the ultimate indebtedness of Demson to the Bank would have been, but for excess advances of $1,341,480.00; and how much of the difference between that figure and the actual ultimate indebtedness can be regarded as caused by the Bank's breaches of its conditions. Then, there would be a proportionate reduction of the shares of Mary and Allan, to reflect a reduction by this amount.
[146] There are a number of considerations relied on by the Bank that could count against this adjustment.
[147] One general point made is that the failure of Demson was not due to the excess air conditioners imported, but rather other factors such as problems with the quality of the goods and delivery, as shown by the 1990 letters set out in the primary judge's reasons.
[148] That is a factor to be taken into account in deciding questions as to the difference that compliance by the Bank with its own terms would have made, and how much of that difference should be considered as caused by the Bank's breaches of its own terms; but in circumstances where it is not suggested that this is zero, this point is not sufficient to justify refusal of relief.
[149] Next, there is the acknowledgement and the Bank's making further advances. In my opinion, so long as making further advances is not considered as being caused by the Bank's earlier breaches of its own terms, the Bank will not be adversely affected by this in the result.
[150] This leads to a significant question, namely, how should the "share" of Mary and Allan be calculated, and what if anything should be done about the liability of other guarantors to make up to the Bank any deficiency caused by a reduction in their shares.
[151] I am not aware if the evidence discloses whether the guarantors apart from the appellants made any contribution to the discharge of Demson's liabilities. Originally, there were eight guarantors in all, four individuals and three companies in the two guarantees, and Mary by her mortgage. It is not clear to me if that ever changed, or whether the two individuals and one company not included in this appeal have made and/or are capable of making any contribution. If the number of guarantors did not change, and if the other three have not made any contribution and cannot do so, it would appear that the contributions required from each of Mary and Allan would reduce by one-fifth of the amount arrived at as having been caused by the Bank's breaches of its own terms.
[152] The question then would be whether the Bank should bear that loss, or be able to make it up from the other guarantors, and in particular from Tony, AGI and Vitlern. Their guarantees contained terms to the effect that their liability is not affected by discharge of other guarantors, so the question is whether the Court can and should grant ancillary relief to them under Sch 1 of the Contracts Review Act , noting that cl 3 of Sch 1 provides that the limitations of s 6 do not apply to such relief.
[153] Clause 1 of Sch 1 empowers the Court to "make such order as may be just in the circumstances for or with respect to any consequential or related matter", including among other things the compensation of a person whose interest may otherwise be prejudiced. In my opinion, the power would extend to protecting co-guarantors from increased liability, in the event that some guarantors are released from liability or have some limit placed on their liability.
[154] This gives rise to the question whether the Bank on the one hand, or Tony, ABI and Vitlern on the other, should bear the ultimate loss, if Mary and Allan are relieved of part of their liability.
[155] It is clear that Tony did pay an active part in the business during the period August 1989 to December 1989, when the ordering of excess air conditioners occurred. According to the findings of the primary judge, he signed Demson's application for a documentary credit on 11 October 1989, and travelled to Singapore in both October and November 1989. The primary judge did not make any finding favourable to Tony as to his ignorance of Stephen's ordering of air conditioners. As noted earlier, Tony eventually took over the whole business and attempted to continue it for some time.
[156] Having regard to these considerations, I have come to the view that no order should be made limiting Tony's liability on his guarantee. Tony is the person mainly responsible for the control of ABI and Vitlern, and I am of the view that those companies also should not have the benefit of an ancillary order.
CONCLUSION
[157] The question arises whether there is any utility in ordering an enquiry which could result in a refund of money to Mary's estate and Allan's estate, in circumstances where Tony, ABI and Vitlern would have to make up any such amount. Mary and Allan are both deceased, and it would appear likely that Tony has a substantial interest in their estates. It seems quite likely therefore that there would be no point in ordering an enquiry, because there would be no ultimate detriment to the Bank or benefit to the appellants.
[158] However, this point was not directly addressed, so the Court should give the appellants an opportunity of submitting either that material before the Court of Appeal show that there would be utility in such an enquiry, or that there is sufficient in those materials to justify remitting the matter to a single judge to determine whether such an enquiry would have any utility. I would direct that any such submissions be provided within 21 days, in which case submissions in response could be provided within a further 21 days.
17Then on 24 April 2008 the Court of Appeal made the remittal order which carried out this decision.
18On 27 June 1990 Tony and ABI provided CBA with security for additional accommodation for ABI. On 15 October 1990 Tony, Allan and Mary gave CBA acknowledgements by letter showing that it was known that CBA was to grant Demson accommodation not exceeding $2,677,249 at any one time against the security already provided. Also on 15 October 1990 Tony and Allan on behalf of Demson, ABI, Vitlern and Rutisa (but not of Mary) by letter requested CBA to provide facilities for Demson for $2,677,249.
19On 21 February 1991 CBA advised Demson of cancellation of the Trade Finance limit and said that no more documentary credits would be established. CBA began pressing for reduction of Demson's debt to it. Much attention was given to the sale of 34 Cowpasture Road, Hoxton Park for the purpose of reducing Demson's debt to CBA. There were many complications, but sale eventually took place with settlement on 2 July 1993.
20At times CBA gave Demson further accommodation in connection with imports of air-conditioners. On 7 November 1991, Tony, Allan and Mary gave letters of acknowledgement to CBA for accommodation to Demson up to $2,416,581 against the guarantees and mortgage.
21CBA served notices on guarantors and on Mary on 28 September, 1992, and Tony had his solicitor draft a letter protesting about this. On 24 November 1992 Tony commenced these proceedings, and on 27 November 1992 CBA made demands on the guarantors and Mary for payment of substantial amounts within 14 days. These demands were later repeated.
22The limits determined by CBA, (referred to by Hodgson JA at paragraph CA127), non-observance of which is the subject of this inquiry, were imposed only on credit to which Zone agreed on 18 September 1989. According to the terms of the letter of 19 September 1989 the Trade Finance Facility agreed to was to be cleared from sales by the end of June 1990. Banking arrangements were no longer being conducted under the approvals of 18 and 19 September 1989 by 15 October 1990 when Tony, Allan and Mary gave further acknowledgements to CBA (Nicholas J at 71) by which time different arrangements for accommodation were being made and acted on. The adjustment contemplated by Hodgson JA (CA127) does not relate to any consequences for the liability of Mary or of Allan of the grant of accommodation or of trading at times after June 1990.
23The remitted questions require me to consider how much more Demson's debt to CBA at the end of the period for which the Trade Finance Facility was granted was, than it would have been if the credit granted without confirmed orders had actually conformed to the limit approved by Zone on 18 September, 1989, that is, had not exceeded $300,000.
24Hodgson JA's view (CA127) contemplates the hypothesis that advances were limited as Zone had actually decided. Those limits were greatly exceeded: Hodgson JA appears to have accepted evidence which established how they were exceeded:
[63] One matter not mentioned in the primary judge's judgment was that there was evidence before him to the effect that the total prices paid for air conditioners imported by Demson for which there were not orders, in each of the months from August 1989 to December 1989 inclusive, were as follows:
August 1989 $164,918.00
September 1989 $406,539.00
October 1989 $121,199.00
November 1989 $533,655.00
December 1989 $415,169.00
These total $1,641,480, an excess of $1,341,480 over Zone approval.
25I regard it as established by the findings of Hodgson JA (CA63) that the grant of credit for which there were not firm orders in the five months up to and including December 1989 totalled $1,641,840, greatly in excess of the approval by Zone, and even in excess of the $300,000 per month referred to in the Branch's letter of 19 September, 1989. Seasonal influences on sales of air-conditioners make it unlikely that significant accommodation for imports was granted after December 1989. Imports in later years and later bank financing arrangements are not my concern when answering Questions (a) and (b).
26It is plain on the evidence that there was over-trading and that Demson ordered more air-conditioners than could be sold and cleared by June 1990 as the Zone approval contemplated. However, it is also obvious, from the vivid terms of Stephen's messages to ACMA set out by Nicholas J that the poor quality of the air-conditioners delivered by ACMA and difficulties flowing from poor quality including returns of air-conditioners by retailers, cancellation of orders by retailers and the need to furnish service in the field made large contributions to the failure of the business.
27There were other factors which contributed to the indebtedness of Demson to CBA in October 1993 and in June 1994. These included that Demson continued to trade in later years to which the Trade Finance Facility of 18 and 19 September 1989 did not relate. Further, Demson's credit was used to support ventures of other companies. Losses, debts and payments related to the debts and trading of other companies or at later times are outside the terms of the inquiry and there is no reason why Allan or Mary should be relieved in respect of them.
28During the hearing I expressed dissatisfaction with Mr. Rea's having treated all Letters of Credit financed by 30 June, 1990 by CBA without sighting confirmed orders as representing imports for which there were no confirmed orders. This treatment seemed unsatisfactory because it was based solely on records kept by CBA of the issue of Letters of Credit, not on records kept by Demson of the confirmed orders that Demson held a register of orders held or some stock control ledger would have been a better source, but Demson did not have one. If CBA was prepared to issue Letters of Credit without sighting written confirmation it seemed to me unlikely that Demson would go to the trouble of producing them to CBA, or even of obtaining them in writing when orders existed, because Letters of Credit could be obtained without them. I still regard it as poor reasoning to equate written confirmations which CBA actually saw with proof showing exhaustively for which orders written confirmations actually existed, but the huge amount, $1,641,480, for which Letters of Credit actually were issued without seeing written confirmations in five months, taken with the Closing Stock unsold at 30 June 1990 the end of the trading period, $1,380,475.80 as calculated by Mr. Rea, has blunted this concern. These figures suggest that $300,000 or so of stock ordered without written confirmation was actually sold. If the $300,000 limit had been enforced there probably would have been little or no unsold stock and the overdraft at 30 June 1990 would have been $1,000,000 or so less than it was.
29The Court of Appeal addressed (CA154 to 156) whether Tony (and also ABI and Vitlern) should bear the ultimate loss if Mary or Allan were relieved of part of their liability, and concluded that no order should be made limiting Tony's liability on his guarantee. His liability on his guarantee would increase if Mary or Allan were relieved of part of the liability on their mortgage or guarantee; Tony's liability to CBA is not limited in amount, and the Court of Appeal decided explicitly not to limit it; nor is his liability for contribution to Mary limited. I would depart from determinations which the Court of Appeal has already made if I made some decision by which Mary or Allan were relieved of part of their liability, CBA bore the ultimate loss and Tony was relieved of it.
30Where question (a) asks to what extent the sums paid by Mary which were not beneficially owned by her "otherwise count as payments" by her, the question refers not to legal entitlement but to what the Court considers it just to do in exercise of the powers in section 7(1) of the Contracts Review Act after deciding, as the Court of Appeal has, that the covenant in the "all moneys" mortgage which in effect made her a surety for Demson's debts to CBA was unjust. In considering question (a), section 8 and Schedule 1 operate and section 9 does not. An adjustment of the liability of Allan or of Mary or of their estates is ancillary relief referred to in Section 8 and in the opening words of Schedule 1:
"...such orders as may be just for or with respect to any consequential or related matter..."
The relevant circumstances include the circumstances which exist at the time the order is to be made, and include the deaths of Allan and of Mary and entitlements of creditors and beneficiaries in their estates.
31In July 1993 a property at 34 Cowpasture Road, Hoxton Park was co-owned by Allan, Tony and ABI in joint tenancies. ABI was the owner of a one third share, and Allan, Tony and ABI co-owned a two-thirds share, so that in effect Allan had a 2/9 th share. The co-owners had given security to CBA to support guarantees of debts which they had given to CBA, including debts of Demson. The property was sold by its owners and the proceeds of sale were received on 3 July, 1993. On settlement CBA released the property from security. The vendors caused $2,740,000 of the proceeds to be paid to CBA. $2,047,090.95 of this was applied to debts of Demson, and it is agreed that $585,556 of this should be treated as paid by Allan towards the guaranteed debt of Demson to CBA out of money which Allan beneficially owned.
32Another large payment under guarantee liabilities for debts of Demson and other debts was made to CBA on 22 October, 1993. The source of this payment was money which ABI borrowed from National Mutual Trustees Ltd, sometimes referred to as the Global Funds loan. Before ABI borrowed this money, CBA had taken some steps towards enforcing its securities over various properties; CBA had served notices under section 57 (a) of the Real Property Act and one of these required Mary to give possession of Lot 3 Cowpasture Road, which she owned and over which she had given CBA an "all moneys" mortgage as collateral security for Demson's debt to CBA.
33Security for the loan to ABI was given to NMT in a number of ways. Tony, Allen, Mary and Vitlern gave guarantees. ABI gave a registered charge. Mary gave a mortgage over Lot 3 Cowpasture Road Hoxton Park. ABI gave mortgages over 23 Burbank Avenue, East Hills and 1 Enterprise Drive Padstow, which ABI owned. Vitlern gave a mortgage over a property in Queensland which Vitlern owned. ABI was contractually bound to NMT to use the money lent for payment to CBA.
34The NMT loan was advanced on 22 October 1993 when $2,059,536.47 was available, and part of the proceeds of the loan was paid to CBA on account of a number of debts including $1,369,741.94 debts of Demson, and also of debts for which Mary had not given security. The loan money was lent to and became the property of ABI and not of Mary, and of course was immediately paid on settlement to CBA and to others. The loan moneys were in no sense owned or at the disposition of Mary in any way. By giving security for the NMT advance Mary joined in enabling $2,059,536.47 to be borrowed by ABI, and only $1,369,741.94 of that went towards debts of Demson to CBA.
35On settlement CBA released a number of mortgages and guarantees, including the mortgage from Mary over Lot 3 Cowpasture Road which it held as collateral security. Provision by Mary to NMT of security over Lot 3 Cowpasture Road and discharge by CBA of its security over that property were necessary for the success of the borrowing from NMT. After 22 October 1993 Mary had no obligation to CBA and CBA held no security over any property she owned.
36On 24 June 1994 $2,997,979.95 was raised by sale of these properties:
(1)Lot 3 Cowpasture Road, which was owned by Mary and most of which was sold to Landcom and realised $1,999,912.52;
(2)Lots 101, 102 and 201 Cowpasture Road, which were owned by other family members and realised $998,067.43.
Of the sums raised, $1,989,508.88 was paid to NMT which discharged various mortgages, not only mortgages over the land sold. The $1,989,508.88 paid to NMT was treated as in some way repaying the $2,059,536.47 available from the NMT loan in October 1993.
37The balance of the money raised was not paid to NMT and was paid in 15 different payments on various debts not shown to be obligations of Mary. These included $306,523.68 to discharge a mortgage over Lots 101 and 201, not owned by her and not money owed to NMT, and $45,048.09 to EA Langdon to discharge a mortgage over Lot 102. Tony, Allan, Mary and ABI signed or sealed a written authorisation for these payments.
38In reasoning put forward by Mr Rea all the $1,369,741.94 paid to CBA for debts of Demson in October 1993 is treated as paid by Mary in the form of her contributing Lot 3 Cowpasture Road as security for the borrowing from NMT, and the same amount is treated as borne by Mary when Lot 3 was sold in June 1994 and the proceeds went towards repaying NMT as well as the payments.
39Mr Rea's reasoning does not produce a just answer to the second part of Question (a) for two reasons. The first reason is that although debts of Demson to CBA totalling $1,369,741.94 were paid out of the moneys borrowed from NMT, only $1,042,701.80 of this was debt of Demson to CBA on account of imports of air-conditioners, the first item in the list of payments in document Exhibit C 1-8, and not the sum of the first three items. The second reason is that much more than Demson's debt to CBA was paid with money raised from NMT in October 1993 and much more than the debt to NMT was paid out of the money raised by sales in June 1994.
40Mary joined in enabling $2,059,536.47 to be raised in October 1993, and $1,042,701.80 of that was used to pay relevant debt of Demson to CBA. If she is treated as having contributed to raising and paying that $1,042,701.80 on the "otherwise count as payments" basis referred to in Question (a) her contribution to that payment is ascertained by an apportionment of her contribution towards raising the $2,059,536.76: about half of whatever she contributed towards raising $2,059,536.76 went towards paying $1,042,701.80: to be exact 1,042,701.80 2,059,536.47 = 0.5062798.
41There was no appropriation of the payment attributed to Mary and made in June 1994 to NMT as paid to CBA on any particular account: there could not be, as the payment only occurred notionally and not in reality. The fair and the only rational view is that the payment should be appropriated rateably to all debts which were paid out of the funds raised by the sale of the land.
42There is no evidence of any appropriation made at the time of these payments. Any appropriation attributed to those who made the payments is fictitious: and in particular, it would be fictitious to appropriate money contributed by one of those who bore the burden of contributing to payment of that person's own debt in full before attributing any of it to payment under a guarantee liability, thereby increasing the payment towards the guarantee liability attributed to a co-surety. Unless some appropriation is shown to have been made at the time, the only course available to the court is to treat each contribution as paid rateably towards each obligation which was paid.
43Mary contributed $1,999,912.52 of $2,997,979.95 raised by sales in June 1994, ie about two thirds of the total amount raised. $1,989,508.88 of the total money raised was paid to NMT and in some way repaid the $2,059,536.47 borrowed from NMT in October 1993. So about two thirds of the money raised was paid to NMT: to be exact: 1,989,508.88 2,997,979.95 = 0.663616
44If the debt to NMT is to be thought of as representing the $1,042,701.80 of the funds repaid to CBA out of the advance which NMT made in October 1993, I see no justice in allocating all of it to the part of the NMT repayment which Mary bore. Mary's contribution to the repayment to NMT flowed in part from the characteristics of her mortgage to CBA, which has been held to be unjust. It should at least to some extent be treated as a payment by her to CBA in October 1993. In my opinion, answering Question (a) on the "otherwise count as payments" basis by reference to section 7(1), the part which counts as payment by her is approximately one third, or to be exact $350,322.13, calculated in this way: $1,042,701.80 (0.663616 x 0.5062798) = $350,322.13.
45Mary was entitled to contribution from co-sureties, bore a disproportionate and excessive part of the total liability and had entitlements to rateable contributions from the other sureties. Her entitlement to contribution should be assessed on the notional basis that her liability was limited in the way the Court of Appeal regarded as appropriate, and that Allan's liability was similarly limited, but the liability of other sureties was unlimited. Nothing in the evidence enables me to calculate what contribution she was entitled to, or enables me to decide whether she could or could not receive all those entitlements, but it seems clear that she had entitlements against Tony, ABI and others. There is no sign that she pursued them. It should not be assumed that none of the sureties was ever able to pay her anything, or was not able to make a larger contribution than was made in October 1993 or in June 1994. In particular, it should not be assumed that Tony was or is unable to indemnify her estate, and he should not get any advantage on the basis that he cannot do so, or has not done so. It should not be assumed against CBA that there were no such entitlements or that they were worthless. The Bank has no practical access to evidence of such matters: if anyone does it is Tony. If Mary made no claims or left entitlements unenforced against her son Tony or others associated with him or with her, CBA should not bear that.
46I answer Question (a) as to Allan. The whole sum paid to the respondent by Allan on 3 July 1993 was beneficially owned by him. I answer Question (b) as to Allan: the sum paid by Allan related as to $585,556 to obligations of Demson guaranteed by Allan by his guarantee of 18 August 1989.
47I answer Question (a) as to Mary. No part of the sums paid to the respondent in October 1993 was beneficially owned by Mary. I answer Question (b) as to Mary: $350,322.15, part of proceeds of sale of part of Lot 3 Cowpasture Road which Mary owned and were applied to payment to NMT on 24 June 1994, should count as payments by Mary related to obligations of Demson for which she was liable under her mortgage of 18 September 1989.