National Australia Bank Ltd v Starbronze Ltd [2000] VSC 325

11. Subsequently, negotiations for a loan were conducted with the bank, primarily by Tom Lefkovic.

14. Eventually, on 28 August 1989, a sum of $335,000, (including a $35,000 interest component), was lent by the bank to Starbronze Pty. Ltd. (Starbronze) a shelf company which had replaced Tompet as the recipient of the loan, and which was to be the vehicle for the purchase and ultimate sale of the shares.

17. At this time the directors of Starbronze were Motek (Motti) Kranz, (the fourth named defendant in this action), and Tom Lefkovic's wife Meira. She had apparently replaced her husband as a director of the company on 18 July 1989.

20. The documents evidencing the loan indicate that it was secured by the personal guarantees of Tom and Meira Lefkovic and of the latter's parents Arieh and Channa Muhlbauer and Motek Kranz. A further guarantor was Mansvill Pty. Ltd. (Mansvill) as Trustee for the Kranz Family Trust. The directors of this entity were Tom Lefkovic and Motek Kranz.

23. Apart from these guarantees the loan was secured by a mortgage over property at 912-914 Geelong Road, Ballarat which was owned by Mansvill Pty. Ltd. and A. and C. Muhlbauer as tenants in common. Additionally the bank was to have a lien over the actual shares.

26. It should be noted that the Muhlbauers were the parents of Meira Lefkovic and Motek Kranz's wife Dorith. Consequently Tom Lefkovic and Motek Kranz were brothers in law.

29. One of the conditions of the loan was that the purchased shares were to be sold by Starbronze prior to 31 December 1989. According to the documentation the proceeds were to be applied in clearing the debt of Starbronze and reducing the debt of Tompet to the bank.

32. In the late afternoon of 28 August, the day the bank documents were executed, a cheque for $335,000 was delivered by Tom Lefkovic to the vendors and 2,000,000 shares each at 15 cents were purchased. Despite a subsequent increase in share price, the shares were not sold by 31 December 1989, nor by the extended dates of 31 January and 31 March 1989.

35. Starbronze defaulted on the loan and repayment was demanded by the bank from the various guarantors.

38. Settlements were subsequently reached with various parties to the transaction and, in the course of this trial, judgment was entered against Starbronze. The present case involves the liability of Motek Kranz (the fourth named defendant) upon the guarantee and Mansvill (the fifth named defendant) upon the guarantee and mortgage. In relation to the mortgage, the Ballarat property has apparently been sold and Mansvill's 50% share of the proceeds (some $43,000) has been held in trust pending the outcome of these proceedings.

41. The formal aspects of the plaintiff's claim are not disputed but it is argued that, in all the circumstances of this case, it would be unconscionable to enforce either the guarantees or mortgage against the defendant. It was submitted by Dr. Bleechmore on behalf of the defendants, that the relevant principles to be applied are set out in Garcia v. National Australia Bank Ltd. [1998] HCA 48; 155 A.L.R. 614. Accordingly it is necessary to first examine the circumstances surrounding the loan transaction.

45. In determining this matter I do not propose to canvas all of the facts presented to the Court but rather those I regard as significant. At the outset I should indicate that much of the evidence presented to the Court was unsatisfactory. Whether this was the result of failure of memory due to the effluxion of time since August 1989, a tendency to rationalise and reconstruct past events, or the telling of deliberate lies, it is perhaps not necessary to decide. In the circumstances, the extant documentation may be regarded as the most reliable guide in determining the probabilities of what occurred.

48. The financial difficulties facing Tompet, and hence the Lefkovics, in July/August 1989 are not the subject of dispute. The debt owed was almost $1,000,000 and failure to repay it was likely to result in the loss of both investment properties and family homes. It was in this climate that Tom Lefkovic sought to use the goodwill generated by the business association between his brother Peter and Mr. Laurence Brooke, the then Regional Manager of the South District of the bank. Up to this time Peter Lefkovic had introduced considerable business to the bank. He was also Mr. Brooke's personal accountant. The approaches of the Lefkovic brothers were successful and Mr. Brooke, whilst acknowledging the share proposal was unusual, chose to promote it.

51. Because the original loan was now classified as doubtful, Mr. Brooke had to obtain the approval of the Zone General Manager, Mr. J.K. Dawson. He sought it in a detailed memo dated 9 August 1989. In it, a loan of $600,000 to Tompet for the purchase of 3,000,000 shares at 20 cents each was recommended. The shares were to be held for six months and sold over two to three weeks "so as not to adversely impact on the market". In his evidence Tom Lefkovic disputed the accuracy of this memo, asserting that only $300,000 was sought. It was said that the figure of $600,000 was the potential profit less a 20% gift to charity which had to be made. Why the vendors of the shares would require a gift to charity was never made clear. Moreover, I find it difficult to accept that an experienced bank manager would make an error of this magnitude in describing a loan application; particularly a loan application as unusual as the present one. I note that Peter Lefkovic, the brother of Tom Lefkovic, who was said to have played a role in the initial negotiations, was not called as a witness on the issue of the $600,000. The evidence of Mr. Brooke as to the initial amount of the loan and the requirement to hold the shares for six months is supported by that of Mr. Grantley Haag, the Manager of the Armadale branch of the bank.

54. This portion of the evidence is illustrative of the divergence of accounts of the parties on many aspects of this transaction.

57. It was apparently contemplated that the share deal would be settled on 11 August. However, a file note of Mr. Brooke dated 10 August records that Tony Hart (the Zone Lending Controller) had rejected Mr. Brooke's recommendation in favour of the proposal. The impediments to its consummation included the then requirement that the shares be held for six months prior to sale and a doubt as to whether any increase in market price could be sustained. Brooke notes:

"Advised Tom [Lefkovic] that the deal needed to be sweetened or we could not assist."

61. The evidence of Mr. Brooke is that on 11 August, Tom Lefkovic rang with an amended proposal; namely that a total of 2,000,000 shares be acquired at 15 cents each for an amount of $300,000 with the selling of the shares to be permitted in two to three months. After a discussion with Tony Hart it was agreed that the bank would assist up to a maximum of $1.4m. (This included the current Tompet debt). Mr. Brooke told the Court he advised Tom Lefkovic of the loan approval subject to a number of conditions. This conversation is recorded in the file note as follows:

"Advised Tom the approval was conditional upon - Signed blank transfers to be held. - Undertaking to meet the market irrespective of price by 31/12/89 - Undertaking that should Tompet debts not be serviceable by 31/12/89 all properties will be sold - All proceeds of share sales to be in reduction of Tompet's debt."

65. In his evidence Tom Lefkovic denied any conversation with Mr. Brooke on either 10 or 11 August 1989. I do not accept that evidence. There was no challenge to the genuineness of the file notes and they speak for themselves. Indeed, I regard Tom Lefkovic's evidence as frequently unreliable and corroboration of it desirable.

68. According to Tom Lefkovic, on 11 August he was informed by the assistant to the Manager of the Armadale branch of the bank (a Mr. Peter Woolf) that Tompet had been granted approval to write a cheque for $300,000 transferring funds to Starbronze for the share purchase operation. However, I am not satisfied that either Mr. Brooke or Mr. Haag were aware at that stage of the intended use of Starbronze as the share purchasing entity. There is no reference to that company in any of the preceding documentation. Moreover, the documentation is consistent with the evidence of the Armadale branch Manager, Mr. Haag, that the substitution of Starbronze for Tompet was, from the perspective of the bank, a later development. The resignation of Tom Lefkovic as a director of Starbronze is stated in the documentation as having occurred as early as 18 July 1989, and whatever Mr. Lefkovic may have had in mind, that action does not support the contention that it was done with the knowledge of the bank as a prelude to the utilisation of Starbronze in this transaction. Indeed, the cheque drawn on the account of Tompet and the cheque drawn by Starbronze to pay Phoenix were both dishonoured by the bank. The reason for this action was the discovery, in preparing the documentation, that the properties which were to provide the foundation for the bank's security, and which related to the Tompet debt, were subject to caveats lodged by NatWest Australia Bank Ltd. Nor had the other conditions been the subject of formal documentation. The first written reference to Starbronze is contained in a facsimile from Tom Lefkovic to Mr. Haag sent on 16 August 1989. This followed prior discussions between Tom Lefkovic with Mr. Haag and then with Mr. Brooke about the extra security the bank required for the loan. Tom Lefkovic claimed in his evidence that the problem created by the caveats over the securities for the Tompet debt were never revealed to him. In the circumstances of the bank seeking the extra security, that assertion is lacking in credibility. Indeed the unavailability of the original properties was the motivation for the bank in seeking additional security.

71. The additional security initially proffered in the facsimile was the Ballarat property. According to the evidence of Tom Lefkovic his ability to advance this security stemmed from a conversation with Motek Kranz on or about 15 August, in which he outlined the share deal, the need for additional bank security, and his incapacity to provide it. Mr. Kranz unhesitatingly offered his half interest in the Ballarat property, although he said he could not speak for the co-owners, the parents in law (the Muhlbauers). On his own version of events, Tom Lefkovic did not explain to Mr. Kranz that he could not sell the shares for a period of three months. This failure to fully explain the share deal to Mr. Kranz is significant in assessing what later occurred; as is the relationship between the two men. Tom Lefkovic was not only Motek Kranz's brother in law, he was his accountant and a frequent business adviser. He described the nature of that advice as follows:

"Anything that had to do with discussions or financing with the banks, purchasing of cars, real estate. Basically Motti wouldn't scratch himself unless he asked me first if it was alright to do it."

75. According to Tom Lefkovic, Mr. Kranz had previously lent money to him for short periods of time to meet commitments, although Mr. Kranz had no recollection of having done so. Perhaps the explanation for this is to be found in Mr. Kranz's evidence:

"Were you ever director of companies that he was involved with? - Yes, I was often asked to sign forms on his behalf. What sort of forms were they? - Well ... I really don't know, some were blank forms, some were transfer forms, some were directorship forms, there were all sorts of forms, I never really asked him. ... I trusted him."

79. In relation to his own business activities, Mr. Kranz was asked:

"What about the internal books of these businesses, cheques, reconciliation statements, business letters and so forth, how is that accomplished? - Well, it was always carried out between my wife and Tom. Did he give you any financial or investment advice over this time? - Yes, absolutely, I relied upon him in as far as that is concerned. In dealing with third parties in relation to financial matters, such as banks, did he play any part in that kind of transaction? - Yes, he would have to because I just got no real understanding in relation to that. What did he actually do? - Well, if I needed overdrafts or if I needed borrowings or loans he would discuss, he would organise it for me."

83. I will return to the question of Mr. Kranz's business acumen later in this judgment.

86. Mr. Kranz confirmed that he had been approached by Tom Lefkovic about his financial difficulties including the reversal of the Starbronze cheque; the requirement of the bank for more security; and the time constraints. He placed that conversation about 20 August but it was clearly earlier than that.

89. Mr. Kranz stated that he was willing to provide the Ballarat property as security "providing that Mr. and Mrs. Muhlbauer were agreeable to give their half". As to the purpose of the loan as explained by his brother in law, Mr. Kranz deposed:

"Well, he said that he was buying shares at a lower price than they were currently on the market, that the directors of the company were trying to help him out and that the profit from those shares will relieve the pressure from the bank on Tompet which in turn will relieve the pressure of his mother's house. What did you say to this request? - Yes, that I was quite happy to give him my half share of the Ballarat property to try and save the properties."

93. The Muhlbauers were overseas at the time of this conversation and were apparently scheduled to return to Australia on 28 August. Tom Lefkovic deposed to not having apprised them of the situation prior to the date of their return, despite the urgency of the situation, with the new deadline set by the vendors for payment for the shares being 4.00 p.m. the very day of the Muhlbauers' return. The Muhlbauers, in their evidence, confirmed Tom Lefkovic's account that the matter of the mortgage and share transaction was first raised on 28 August 1989. One reason for the lack of contact may well have been an initial intention to use the power of attorney given by the Muhlbauers to Dorith Kranz to execute the mortgage document.

96. When pressed about this approach Tom Lefkovic sought to justify it on the basis that Mr. Kranz believed the Muhlbauers would go along with it. This contradicted his earlier evidence that Mr. Kranz could not speak for the Muhlbauers. Faced with this discrepancy, Tom Lefkovic stated that this was Motti Kranz's initial reaction, but that later discussions had occurred. This response, which I do not accept, exemplifies the glibness and evasiveness of much of Tom Lefkovic's evidence. The fact that he was initially prepared to embark on the course of utilising the power of attorney, (ultimately effectively vetoed by the bank), provides a measure of his desperation to clinch this deal.

99. Indeed the whole history of this matter is one of fluidity in the negotiations and of a deal put together in relative haste under pressure generated by Tom Lefkovic.

102. As I have indicated, following the discovery of the caveats on the properties constituting the Tompet security, the initial proposal aborted. The evidence of Mr. Brooke is that, some days later, Tom Lefkovic rang offering an amended proposal in which his family would provide additional security and guarantees. It was at this time that the name of Starbronze was advanced as the loan recipient, rather than Tompet. The nominated guarantors were Tom Lefkovic and his wife, Kranz, the Muhlbauers, and Mansvill, and the security was the Ballarat property.

105. Tom Lefkovic deposed to speaking to Brooke around 15 or 16 August about additional security but he denied ever being told of the requirement of guarantees. I reject that evidence. It is inconceivable, given the amount of the loan to be advanced, the amount of the existing Tompet debt, the effective unavailability of the four properties as security, and the speculative nature of the share investment, that the bank would not have sought the additional guarantees.

108. In his evidence Tom Lefkovic deposed to the value of the Geelong property - the subject of the proposed mortgage - being $150,000 to $180,000, although I note the attributed value of $116,000 in the Line of Credit Application dated 25 August 1989. The proposition that the bank would advance $300,000 on the basis of such security and against the financial background of Tompet, is ludicrous notwithstanding the bank having a lien on the shares of the speculative share transaction.

111. Moreover, the combination of Tom Lefkovic's desperation to salvage the situation of his family, his confidence that this off-market share deal would be profitable, and the urgent need for finance, make it overwhelmingly probable that he would advance the proposal outlined to the bank. Whether he informed his family of the extent of their obligations is quite another matter.

114. The subsequent documentation is instructive. On 17 August, title details of the Ballarat property were faxed to Greg Porter (Mr. Haag's assistant) at the Armadale branch of the bank. An internal bank memo of 22 August to Security Services Melbourne above the name of G.P. Porter records (inter alia):

"We request that you please peruse enclosed memos and articles of association and trust deeds and advise us of powers of trustees. Circumstances prevent us from formulating LCA [Line of Credit Application] at this stage. However, it is our intention to provide Starbronze Pty. Ltd. ATF ... with a fully drawn advance of $300,000. Security for this facility will be as follows: 1. Letter of Lien over scrip INO [in name of] Starbronze Pty. Ltd. 2. Guarantee and indemnity given by six parties and supported by various landed securities."

Clearly, the bank envisaged guarantors of the loan.

119. As to face to face contact with bank officers during this period, Tom Lefkovic said that he saw no one other than possibly Mr. Haag. An entry in Tom Lefkovic's diary lists such a meeting for 10.00 a.m. on 23 August at the Armadale branch of the bank. I think this is the likely date of that meeting. In fact, Mr. Haag deposed to such a meeting prior to filling out the Line of Credit Application. That relevant documentation is dated 25 August 1989, being the date he said he would have lodged it with Mr. Brooke.

122. As to the subject matter of the meeting between Tom Lefkovic and Mr. Haag, Tom Lefkovic said he had no specific recollection, but it was probably to discuss the property at Ballarat. As noted, the title details of that property had been provided by 17 August so a meeting directed solely to that topic is highly unlikely. Moreover, it is inconceivable, in my view, that the bank would generate paper work relating to guarantors while keeping that fact secret from the person seeking the loan, namely Tom Lefkovic.

125. What is equally significant is the material faxed to Mr. Haag on the afternoon of 25 August detailing the assets and liabilities of both Motek Kranz and the Muhlbauers. When pressed as to the necessity for this documentation, if all that was involved was a simple mortgage, Tom Lefkovic responded that it was because Mr. Kranz was a new customer and, in relation to the Muhlbauers, it was coincidentally because Mr. Muhlbauer was borrowing money for his own private company. As an explanation this is quite unconvincing. The obvious reason for obtaining this information is to assess the credit-worthiness of these people as guarantors.

128. The evidence of Mr. Haag was that such a document is created by the bank whenever a guarantee is required. Accordingly, the production of this document is consistent with Tom and Meira Lefkovic being guarantors. Similarly, the Customer Statement of Position bearing the date 28 August 1989, apparently in Tom Lefkovic's handwriting and signed by Motek Kranz, is consonant with his being a guarantor.

131. I am satisfied that the document entitled Customer Statement of Position dated 28 August 1989 listing Tom Lefkovic's own assets and liabilities, was not obtained by the bank as a mere update of his financial situation because he had an overdraft facility, (as claimed by the witness), but rather, was obtained as part of the assessment of his capacity as a guarantor. I should add that no explanation was advanced by the witness as to why the financial situation of his wife Meira was required by the bank.

134. All this prevarication is directed to bolster the assertion by Tom Lefkovic that he had no idea that he, or his relatives, were signing guarantees on 28 August.

137. Apart from the meeting with Mr. Haag (probably held on 23 August 1989), there was evidence from the Regional Manager Mr. Brooke that, between 15 and 25 August, he convened a meeting at which Tom Lefkovic and his wife and Motek Kranz were present. Mr. Brooke said that the Muhlbauers did not attend, being overseas. It was his evidence that, as a result of their absence, he insisted on the creation of a letter in which the guarantors acknowledged the speculative nature of the venture. Both Tom and Meira Lefkovic swore that such a meeting never occurred, as did Mr. Kranz. It was put to Mr. Brooke that he was mistaken about such meeting and he responded that he did not believe so. Once again, it is difficult to ascertain where the truth lies. Mr. Brooke said a file note was kept of the meeting. It cannot be produced. He said that either John Riddiford or Ian McDonald (both bank employees), were present. Neither was called to give evidence. It was said by Mr. Brooke that he could not recall if he told Mr. Haag of the meeting, Mr. Haag claims that Mr. Brooke had never informed him of it. The plaintiff bears the onus of proving that such a meeting occurred and I am unable to be satisfied on the balance of probabilities that it did so. However, that is quite a different matter from asserting that Tom Lefkovic was unaware of the bank requirements that there be guarantors of the loan.

140. I have already referred to a meeting between Tom Lefkovic and Mr. Haag on 23 August 1989 in the latter's office. It was Mr. Haag's evidence that this meeting was held prior to the filling in of the Line of Credit Application and that Mr. Kranz was also present. He deposed to a 20 minute discussion in which details of the loan were canvassed, including the speculative nature of the transaction and the security documentation for it. Mr. Haag stated that Mr. Kranz was very supportive of Tom Lefkovic. This evidence is completely contrary to that of Mr. Kranz who deposed to seeing Mr. Haag for the first time on 28 August 1989.

143. Once again, there is no file note of the details of this meeting and of those persons present at it. Nor is there any information in the subsequent Line of Credit Application which Mr. Haag claimed to have filled out after the meeting had concluded, which could not have been provided solely by Tom Lefkovic. Furthermore, had these details been provided at the 23 August meeting, there would seem to be little purpose in the facsimile of 25 August from Tom Lefkovic detailing the assets and liabilities of Motti Kranz. Given the effluxion of time and the tendency of witnesses (including bank managers) to rationalise their business conduct, I am not satisfied that Mr. Kranz was present at any meeting that Tom Lefkovic had with Mr. Haag.

146. It follows that I am not satisfied that either Mr. Brooke or Mr. Haag explained the transaction to Mr. Kranz prior to 28 August 1989. Nor, on the evidence, were the Muhlbauers informed by bank personnel of the full nature of the transaction.

149. The documents relevant to the transaction were prepared by the Armadale branch of the bank. These were the mortgage of the property at Ballarat to the National Australia Bank; the guarantee and indemnity in favour of the bank; the bank lien over the share certificates; the letter to the bank acknowledging the speculative nature of the transaction and confirming the guarantees and mortgage; and an undertaking by the directors of Starbronze (including, erroneously, Tom Lefkovic) to dispose of the Phoenix Oil and Gas scrip on 31 December 1989 and utilise part of the proceeds in reduction of the Tompet debt.

152. It is common ground that these documents were initially signed on 28 August 1989. I use the term "initially" because there is some evidence, for example from Mr. Kranz and Mr. Muhlbauer, that each attended on the next day to further sign altered documents. Mr. Kranz said it was because the $300,000 was altered to $335,000. Mr. Muhlbauer said it was because names were typed incorrectly in several documents. This was not pursued further by counsel and certainly was never put by the defence to Mr. Haag. It remains a curiosity.

155. Whilst the documents were signed on 28 August 1989, there is a vast discrepancy in the evidence as to who was present at the signing and what occurred at that time.

158. The evidence of Mr. Haag was of a mid to late morning meeting at his office at which all of the signatories were present. His clerk, Mr. Greg Porter, came in and out during this time. Mr. Haag deposed to a meeting lasting one hour. In the course of that meeting he explained the speculative nature of the venture, the need for the guarantee and its ramifications for each signatory. He went through each document one by one before it was executed.

161. The evidence of Mr. Kranz is that, as requested by Tom Lefkovic he went to the bank about midday and, in a period of about five minutes, he signed the loan documents. At that time he had Mrs. Lefkovic senior with him and she also signed some documents.

164. Mr. Haag agreed that Mr. Kranz had Mrs. Lefkovic senior (Mrs. Clara Lefkovic) with him at the bank, but his evidence was that this occurred a couple of hours after the initial signing procedure. On that occasion Mrs. Lefkovic senior had to sign a document concerning Tompet. Interestingly, Tom Lefkovic deposed to taking his mother to the bank in the early afternoon because Mr. Haag requested that she re-sign a document. It may well be that Mr. Haag is confused about the time and that Mr. Kranz did in fact have Mrs. Lefkovic senior with him on that morning and that she attended a second time in the afternoon.

167. In any event, the evidence of Tom and Meira Lefkovic and the Muhlbauers is that the meeting at the bank occurred after 3.00 that afternoon. It could not have taken place earlier because the Muhlbauers did not clear customs after disembarking from their international flight until about midday. Thereafter, at the Muhlbauers' Elsternwick home, Tom Lefkovic explained the transaction to the Muhlbauers and obtained their consent to it.

170. A diary entry of Tom Lefkovic for 28 August 1989 has the time of the bank meeting at 3.15 p.m. and, incidentally, those present as himself, his wife and the Muhlbauers. This entry has probably been made retrospectively since there was no specific 3.15 appointment with Mr. Haag. However, there is no reason not to accept that it was a relatively contemporaneous notation and reflects the actual situation in regards to time. Consonant with the diary entry the Lefkovics and the Muhlbauers asserted that Mr. Kranz was not present at that meeting. Although there is some evidence that Mr. Kranz was later at the Elsternwick house, the preponderance of evidence (save that of Meira Lefkovic) is that he was not present that morning at the airport.

173. In my view the probabilities are that Mr. Kranz did sign the various documents on the morning of 28 August. There is some independent support for the proposition that Mr. Kranz signed at a different time to be found in the documentation itself. In particular the guarantee and indemnity document has reference to the first, second, fifth and sixth guarantors in one handwriting, (apparently that of Greg Porter), whilst the notation in relation to the third guarantor, namely Mr. Kranz, is in the handwriting of Mr. Haag. The Bank Manager could proffer no explanation for this apparent anomaly. Nor was Mr. Porter called to give evidence about it. No file notes of the meeting were produced. There would seem to be no point in Mr. Kranz lying about this matter, since his position in relation to the documents is the same as the other family members whatever time the signing occurred. In light of the factors I have outlined, I am not satisfied that Mr. Kranz was present when the documentation was signed by the other guarantors.

176. This being so, I need not canvas in great detail my findings as to what did occur at the afternoon meeting. It is, however, necessary to briefly refer to it.

179. At the outset, I reject the evidence of Mr. Haag that the meeting occupied one hour. Even without the time pressures on Tom Lefkovic to pay for the shares by 4.00 p.m. that day, the transaction would not have occupied such a time frame. Moreover, given the exigencies of time, I regard it as probable that the meeting was relatively short. Both Tom Lefkovic and Mr. Muhlbauer speak of the documents being signed after a preliminary exchange of pleasantries about the Muhlbauers' overseas trip, whilst Meira Lefkovic estimates that the meeting took 10 to 15 minutes. In the circumstances outlined I do not accept Mr. Haag's evidence that the documents were explained to the parties. Rather, the likelihood is that Mr. Haag assumed that the family members were well aware of the commitment they were making. In any event, on this matter I prefer the evidence of the Lefkovics and the Muhlbauers as to the procedure adopted.

182. It may well be that Mr. and Mrs. Muhlbauer and their daughter Meira were unaware of precisely what they were signing, but this was not, in my view, the situation applicable to Tom Lefkovic. I have already indicated my findings that he was well aware of the terms and conditions of this loan. Not only was Mr. Lefkovic an experienced accountant, but he was also a person familiar with these types of financial documents. He had signed a number of guarantees in favour of the National Australia Bank including having done so in April and November 1987. His explanation that he was unaware of the nature of these documents and that he signed blindly and in haste, is totally disingenuous. The fact is that Tom Lefkovic did not need to read these documents since he was already aware of their contents.

185. Attention was drawn to the fact that Tom Lefkovic signed the undertaking to sell the shares by 31 December 1989 as a Director of Starbronze. Since he had resigned that position on 18 July 1989 it was asserted that this demonstrated his ignorance of the documents. On the contrary, it is my view that, given the urgency of obtaining the loan, and the belief that it was the guaranteed passport to profit and the salvation of the family's parlous financial state, Tom Lefkovic would have willingly signed anything. It is probable that, for the same reasons, he was prepared to use family members as guarantors without personally explaining to them the extent of their commitment. Certainly Mr. Kranz swore that he was unaware that he was doing more than mortgaging Mansvill's interest in the Ballarat property to assist his brother in law.

188. I have already touched upon the evidence of the financial relationship between Tom Lefkovic and Motek Kranz. Tom Lefkovic was a financial adviser to Mr. Kranz in relation to a number of companies of which Mr. Kranz was a Director. I am prepared to accept that Mr. Kranz relied upon Tom Lefkovic's financial advice to a considerable extent. It should not, however, be assumed that he lacked business acumen. For example for eight years he had conducted two shops under the name Delmonte Suits in Richmond and Ascot Vale. Subsequently he had commenced a career as a builder and land developer. He was a licensed builder and a member of the Master Builders Association. He was involved in the management of companies which had nothing to do with Tom Lefkovic and was used to making commercial decisions. Moreover, Mr. Kranz had previously signed mortgage documents and acted as the guarantor of loans in other dealings with the National Australia Bank. At first blush, therefore, it is difficult to accept that on 28 August 1989 Mr. Kranz did not know the precise nature of the documents he was signing. This is particularly so when he was able to assert that the document produced as the guarantee was not dated when he signed it. It was also claimed that some of the documents were folded. This could not, of course, apply to various letters including, for example, the letter acknowledging the speculative nature of the transaction and the parties' financial obligations, which Mr. Kranz signed twice. Nonetheless, Mr. Kranz maintained he did not appreciate that he was signing in his personal capacity as well as a director of Mansvill. His evidence was, in effect, that although he signed a number of documents, he had never been involved in a transaction where shares were part of the security and he trusted Tom Lefkovic in signing the documents that his brother in law had caused the bank to prepare. Although on its face, and given Mr. Kranz's background in business, this account seems improbable, I am not prepared to reject it. In this regard I am influenced by his evidence that, whilst he was prepared to participate in the share transaction by providing the Ballarat property as security in order that Tom Lefkovic might avoid selling his house and Mrs. Lefkovic senior could remain in her house, he would not have jeopardised the financial interests of his own family. This is the more compelling because there was no financial benefit accruing to Mr. Kranz from this transaction. I am also prepared to accept Mr. Kranz's evidence that he relied upon Tom Lefkovic in this matter.

191. If his account is correct he signed the documentation without bothering to read it, in reliance on his brother in law's statement as to the ambit of his liability. Indeed, I am driven to the conclusion that Tom Lefkovic, motivated both by financial desperation and the belief in a sure fire profit, misled him.

194. A further insight into the perceptions of both men may be gleaned from the aftermath of these events. On 9 October 1989 Mr. Haag sent a letter to the Secretary of Starbronze at Tom Lefkovic's address. That letter set out the full terms of the loan transaction. No protest as to the accuracy of its contents was ever voiced by Tom Lefkovic. His explanation for this was that, of all the letters delivered to his address in the course of his business, this particular one had not been received. Nor was he alerted by a subsequent letter dated 27 December 1989, which he did admit receiving, which referred to the terms and conditions set out in the 9 October letter. I reject that evidence. I am prepared to draw the inference that the reason that Tom Lefkovic did not contact the bank after the receipt of the 9 October letter (or indeed after 27 December letter), was that the original letter accurately encompassed the terms of the transaction.

197. A letter dated 28 February 1990 was received by Mr. Kranz indicating that the Starbronze loan account was $338,000 overdrawn. Significantly, he took the letter to Tom Lefkovic who informed him that he was negotiating with the bank. In effect he left that aspect of the matter to his brother in law. Similarly, he regarded Notices of Demand from the bank in February 1990 and February 1991, (which he also gave to Tom Lefkovic to handle), as relating to his one fifth of the debt being the amount he had guaranteed through the mortgage. It was the evidence of Mr. Kranz that he believed that if he gave the bank that one fifth portion, the bank would not execute upon the mortgage. I am disposed to accept that this was Mr. Kranz's understanding of the loan documentation.

200. Accordingly, the factual situation, as I find it, is that Motek Kranz signed the various documents in a mistaken belief as to their effect. He did so without properly reading them and in reliance upon the advice of his brother in law Tom Lefkovic as to the financial obligations he was undertaking. I proceed on the basis that Mr. Kranz was not specifically instructed by the bank as to the financial effects of the transaction upon him. However, I do not accept that there was any effort by the bank to conceal the true nature of the transaction. To suggest that the bank would somehow deliberately seek to hoodwink these experienced businessmen (including Mr. Muhlbauer) is fanciful. If Mr. Kranz had read the documentation the precise extent of his financial obligations would have been manifest to him.

204. I now turn to the legal implications of these factual findings.

207. A person of full age and sound mind who executes a voluntary deed by which they strip themselves of their property is bound by their own act and must prove some substantial reason for setting aside the effect of the transaction. Authority for such proposition, (if authority be needed), may be found in such cases as Henry v. Armstrong (1881) 18 Ch.D. 668 at 669 and in Yerkey v. Jones [1939] HCA 3; (1939) 63 C.L.R. 649 at 679. Further, insofar as any plea of non est factum is concerned the specific principle is found in such cases as Petelin v. Cullen [1975] HCA 24; (1975) 132 C.L.R. 355 at 359-360. In that case the Court stated:

"The importance which the law assigns to the act of signing and to the protection of innocent persons who rely upon a signature is readily discerned in the statement that the pleas 'which must necessarily be kept within narrow limits' [case cited] and in the qualifications attaching to the defence which are designed to achieve this objective. The class of persons who can avail themselves of the defence is limited. It is available to those who are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing; it is also available to those who through no fault of their own are unable to have any understanding of the purport of a particular document. To make out the defence a defendant must show that he signed the document in the belief that it was radically different from what it was in fact and that, at least as against innocent persons, his failure to read and understand it was not due to carelessness on his part. Finally, it is accepted that there is a heavy onus on a defendant who seeks to establish the defence."

211. It is common ground that Mr. Kranz signed the various documents comprising this transaction. Prima facie he is bound by his signature to the mortgage and the guarantee. Moreover, it was not asserted that he did not understand that, on 28 August 1989, one of the documents he was to sign was a mortgage executed by Mansvill. Nonetheless, he also seeks to be relieved of the effect of signing that document.

214. In certain limited circumstances, equity will relieve a person from the transactions into which such person has entered. One such example is where a party makes unconscientious use of their superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage. Such a case was Commercial Bank of Australia v. Amadio [1983] HCA 14; (1982-83) 151 C.L.R. 447. It is not necessary to analyse that case in any detail. The facts, as set out in the headnote were as follows:

"Two elderly migrants who were unfamiliar with written English were asked by their son to execute a mortgage in favour of a bank over land which they owned to secure the overdraft for a company which the son controlled. The son had told his parents that the mortgage was to be limited to $50,000 and to be for six months. The bank and the company had been selectively dishonouring the company's cheques to preserve the company's appearance of solvency. The bank and the company agreed that the overdraft the mortgage was to secure would be reduced and cleared within a short time, but these matters were not disclosed to the prospective mortgagors. The mortgage instrument which the bank submitted for execution contained a guarantee. The mortgage and the guarantee secured all amounts owing or which might be owing to the bank on the company's account. The mortgagors executed the deed mistakenly believing it was to be limited to $50,000. The bank was aware that they had been misinformed about the contents of the instrument they were executing."

218. In the High Court it was held by the majority (Mason, Wilson and Deane, JJ.) that the mortgagors were under a special disability when they executed the deed containing the guarantee. The disability was sufficiently evident to the bank to make it prima facie unfair or unconscientious for it to be allowed to rely on the guarantee. The onus lay on the bank to show that the guarantee should not be set aside and had not been satisfied.

221. This case was subsequently referred to in Garcia v. National Australia Bank Ltd., the case on which the present defendants relied. In the course of the joint judgment of Gaudron, McHugh, Gummow and Hayne, JJ. they stated [para.30]:

"In Amadio there was actual misconduct on the part of the son of the respondents which affected their entry into the mortgage and guarantee and the bank was on notice of that misconduct ... What Mason, J. identified as 'the critical issue' [in Amadio] was whether the plaintiffs were entitled to relief on the ground of unconscionable conduct. The transaction was not enforced against the respondents because it would have been unconscionable for the bank to do so. And it was unconscionable for the bank to enforce it because the bank's employee had shut his eyes to the vulnerability of the respondents and the misconduct of their son."

225. A key aspect of this case is the demonstrated special disability of the guarantors.

228. The facts which faced the Court in Garcia's case were of quite a different character. Again I quote from the headnote:

"The appellant Mrs. Garcia, and her former husband executed a mortgage over their matrimonial home in 1979 to secure all moneys owing to the respondent [the National Australia Bank Ltd.] including moneys owing under future guarantees given by either of them to the respondent. The appellant subsequently signed four guarantees in favour of the respondent between 1985 and 1987. The guarantees related to loans made to businesses conducted by the appellant's then husband. The appellant was a director of these companies, but was not involved in the management or affairs of the companies. The appellant and her husband were divorced in 1989. She then commenced proceedings in the Supreme Court of New South Wales seeking to have the guarantee set aside. The evidence disclosed that the appellant did not understand that the guarantees were secured by the all moneys mortgage. The appellant had signed the guarantees at the request of her husband so as to allow him to deal in larger amounts of gold. She gave evidence that he had told her there was 'no danger' because 'if the money isn't there the gold is there'. The appellant also gave evidence that when she executed the guarantee, the bank officer did not explain the effect of the document to her."

232. For completeness, I should add that the appellant knew what a guarantee was and that this was the document she was executing. She had previously had her own professional business as a physiotherapist.

235. The analysis by the Court of the relevant law was, to some extent, complicated by a consideration of the precise meaning of the judgment of Dixon, J. in the earlier case of Yerkey v. Jones. Referring to that case in general terms, the Judges remarked [para.21]:

"So far as Yerkey v. Jones proceeded on the basis of the earlier decision of Cussen, J. in Bank of Victoria Ltd. v. Mueller [[1925] V.L.R.642] it is based on trust and confidence in the ordinary sense of those words between marriage partners. [My emphasis.] The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse. In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect and incomplete, if not simply wrong. That that is so is not always attributable to intended deception, to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation because of emotional involvement. It is, at its core, often a reflection of no more or less than the trust and confidence each has in the other. [22] It may be that the principles applied in Yerkey v. Jones will find application to other relationships more common now than was the case in 1939 - to long term and publicly declared relationships short of marriage between members of the same or of opposite sex - but that is not a question that falls for decision in this case. It may be that those principles will find application where the husband acts as surety for the wife but again that is not a problem that falls for decision here. ... [My emphasis.] The resolution of questions arising in the context of other relationships may well require consideration of other issues. Thus to take one example, if co-habitation is taken as a criteria, what should a lender know or seek to find out about the nature of the relationship between the parties."

"In his reasons for decision in Yerkey v. Jones, Dixon, J. dealt with at least two kinds of circumstances: the first in which there is actual undue influence by a husband over a wife and the second, that dealt with in Mueller, in which there is no undue influence but there is a failure to explain adequately and accurately the suretyship transaction which the husband seeks to have the wife enter for the immediate economic benefit not of the wife but of the husband, or the circumstances in which her liability may arise."

241. It was noted by the Court that the instant appeal concerned the latter type of case, (as is the situation in the present case.) Their Honours later stated [33]:

"... the second kind of case identified in Yerkey v. Jones is not one which depends upon any presumption of undue influence by the husband over the wife. As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife's agreement to the transaction. Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction's purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable."

245. Despite the submissions to the contrary by Dr. Bleechmore, the passages to which I referred make it clear, in my view, that the majority judgment is referring to the relationship of husband and wife while allowing for a possible extension of the concept to other intimate relationships. That theme is taken up in the judgment of Kirby, J. His Honour sought a broader exposition of the principle than that enunciated by Dixon, J. in Yerkey's case. At one stage in his judgment, [para. 73], he suggested the following formulation:

"Where a person has entered into an obligation to stand as surety for the debts of another and a credit provider knows, or ought to know, that there is a relationship involving emotional dependence on the part of the surety towards the debtor: (1) the surety obligation will be valid and enforceable by the credit provider unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor; (2) if there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the credit provider has taken reasonable steps to satisfy itself that the surety entered into the obligation freely and in knowledge of the true facts, the credit provider will be unable to enforce the surety obligation because it will be fixed with notice of the surety's right to set aside the transaction; (3) unless there are special exceptional circumstances or the risks are large, a credit provider will have taken such reasonable steps to avoid being fixed with constructive notice if it warns the surety (at a meeting not attended by the principal debtor) of the amount of the surety's potential liability, of the risks involved to the surety's own interests and advises the surety to take independent legal advice. Out of respect for economic freedom, the duty of the credit provider will be limited to taking reasonable steps only."

Later in the judgment [para. 76] his Honour stated the principle in this form:

"A credit provider will be put on inquiry by a combination of two factors: (1) the transaction is not on its face to the personal financial advantage of the party offering the security; and (2) there is a relationship which is known, or which ought to have been known, by the credit provider involving an emotional dependency on the part of the surety towards the debtor. [My emphasis.] The relationship of emotional dependency is singled out because of the possible effects of the sexual and/or relationship ties between the parties, on their financial dealings with each other. The 'fear of destroying or damaging the wider relationship' between persons makes these ties 'a ready weapon for undue influence'. Moreover, the informality of business dealings raises a 'substantial risk' of misrepresentation as to the nature of the liability concerned. A credit provider will therefore be put on inquiry if it is aware that the surety reposes trust and confidence in the debtor in relation to his or her financial affairs. Co-habitation, as such, may alert the credit provider to the need for further inquiry. So may marriage, de facto marriage, or long term relationships with respect to sureties and borrowers of either sex. So may other information as to the relationships of the parties which comes to the notice of the credit provider or which it, out of prudence, requests and obtains. A rudimentary question as to the address of the parties and the discovery that they are (or have been) co-habitees would ordinarily be enough to set alarm bells ringing. This is because of the added vulnerability which co-habitation may bring to a relationship, otherwise unexplained, under which one person guarantees the debt of another by assuming their risks if things go wrong."

251. In the event, applying the principles to which I have referred, the Court unanimously allowed the appeal and set the guarantees aside.

254. The position may be summarised as follows: Apart from the situation where the signing of a mortgage or guarantee was procured by undue influence, which is not the situation asserted in the instant case, it may be regarded as unconscionable to enforce a guarantee where, by reason of the relationship of trust and confidence between the principal debtor and the surety, being husband and wife, (1) the surety did not understand the purport and effect of the transaction; (2) the surety was a volunteer obtaining no financial benefit from the transaction; (3) the bank may be taken to have appreciated that, because of such relationship the surety may not have received a sufficient explanation from the principal debtor as to the purport and effect of the transaction; and (4) where the bank itself has neither explained the transaction nor ascertained that an independent third party has done so.

257. The judgement of Kirby, J. would extend the relationship of trust and confidence between husband wife to other intimate relationships involving emotional dependency including de facto relationships and same sex relationships. Otherwise, the relationships attracting this type of equitable intervention on the grounds of unconscionability are circumscribed as I have outlined.

260. In the course of his submissions on extended relationships Dr. Bleechmore referred to the case of Burke v. State Bank of New South Wales (1995) 37 N.S.W.L.R. 53, a decision of Santow, J. This case involved elderly parents mortgaging their house as security for a bank loan to their son in ignorance of the amount of the loan. This is not a case of undue influence, as was submitted by Mr. Clarke, on behalf of the plaintiff, but rather it evinces an approach which may be brought under the rubric of Amadio's case. The elderly parents may be seen to have been in a disadvantaged position. In this regard the remarks of Santow, J. at p.74 of the judgment could be seen as apposite. Even if Burke's case may be seen as creating a new relationship to which the equitable doctrine may be applied, it goes no further than the intimate relationship of parent and child.

263. In general terms the Amadio approach to unconscionability encompasses situations where a mistaken surety, being a volunteer is, to the knowledge of the creditor, labouring under a special disability. In that case the principal debtor was a son and the sureties were his elderly illiterate parents. Another possible example could be where the surety is a disabled person and the principal debtor is that person's carer.

266. The Garcia approach covers another aspect of unconscionability. It may be invoked where the mistaken surety, again a volunteer, is married to the principal debtor (or perhaps involved in a similar long term relationship) and the creditor is taken to have appreciated the potential effect upon the understanding of the transaction by the surety of the trust and confidence inherent in such an intimate relationship.

269. In each case, the lack of advice, provided by the creditor or an independent third party, could make enforcement of the transaction unconscionable.

272. In my view, therefore, the current state of the law is that relationships of trust and confidence do not extend beyond the most intimate of family relationships. The fact that a person may have trust and confidence in another, (which trust and confidence may prove to be misplaced), cannot, without the added dimension of intimacy, attract this aspect of the equitable doctrine of unconscionability. Could it be said, for example, that the relationship should extend to a solicitor who persuades a grateful wealthy client whose confidence and trust he has won, to assist him by going surety in a particular financial transaction? I think not. Nor could a creditor such as a bank be expected to divine from such a relationship the need for a specific explanation to the surety or for independent legal advice.

276. In the present case the bank was faced (inter alia) with two businessmen, one, Tom Lefkovic, an accountant, the other, Motek Kranz, a property developer.

279. Tom Lefkovic advised Motek Kranz on many, but not all, of his financial dealings. Their relationship was no more intimate than that of brothers in law. There was nothing in their association to put the bank on notice that the property developer would not receive adequate explanation from the accountant of the proposed transaction or that he necessarily required an independent explanation of it. In any event, in consummating the transaction, the bank placed all of the documentation - including a letter setting out details of the loan and its speculative nature - before Mr. Kranz as the property developer. No document was hidden from him. His past experience made him well aware of the documentation constituting both a mortgage and a guarantee. On his evidence he chose not to read those documents. Relying, (as I have found), on the misleading statements of his brother in law as to their purport and effect, he signed them. It follows from what I have said that Mr. Kranz can not avail himself of any equitable relief.

282. For completeness I should mention an argument that was advanced by Dr. Bleechmore that the bank was aware that the share transaction involved insider trading and on this ground alone should have advised Mr. Kranz to obtain independent advice about it. It was put that the transaction may well have fallen foul of s.128 of the Securities Industries Act 1980 (the relevant Act at that time). It is not necessary for me to set out the legislation. It is sufficient to indicate my view that the factual situation revealed by the evidence does not attract the operation of that section.

285. Accordingly, the plaintiff, having proved the loan and the liability of the fourth and fifth defendants pursuant to the mortgage and the guarantees, is entitled to judgment in its favour.