National Australia Bank v Walter [2004] VSC 36

2. In this matter two related proceedings were heard together. In proceeding No. 4486 of 2001 ("the principal proceeding"), Fritz Walter, Ingrid Walter and Carmen Walter, together with an associated company and family trust as plaintiffs, seek orders invalidating certain loan contracts, mortgages, guarantees and debentures executed by them in favour of the National Australia Bank ("NAB"). In proceeding No. 7407 of 2002 ("the enforcement proceeding") the NAB seeks to enforce one of the mortgages, which was executed by Fritz Walter and Ingrid Walter over a residential property of which they are registered proprietors.

6. The plaintiffs in the principal proceeding are Fritz Josef Walter, his wife Ingrid Adelheid Walter, their daughter Carmen Walter (collectively, "the Walters"), the Walter Family Trust and Palatinat Brewery Pty Ltd. Fritz and Ingrid Walker are stated to be plaintiffs in their capacity as natural persons, as sole trustees of the Walter Family Trust and as directors of Palatinat Brewery Pty Ltd.

9. The Walter Family Trust is a discretionary trust. Its beneficiaries are Walter family members, including Fritz, Ingrid and Carmen Walter, and a broad class of additional beneficiaries. Its trustees are Fritz and Ingrid Walter. The Walter Family Trust is not a legal person. It lacks standing to sue. No point was taken on this issue by the NAB at trial.

12. Palatinat Brewery Pty Ltd ("Palatinat") is a company limited by shares, first registered on 1 April 1998. Its directors are Fritz, Ingrid and Carmen Walter. The shareholders are Fritz, Ingrid, Carmen and Roland Walter. Palatinat is in receivership. The residual power of directors of a company in receivership to institute legal proceedings in its name is subject, inter alia, to an indemnity for the costs of the action[1]. There was no evidence of such an indemnity in the present case but no objection was made.

15. The NAB is the defendant in the principal proceeding.

18. Fritz and Ingrid Walter are the defendants in the enforcement proceeding. They are the registered proprietors of a residential property in Wodonga subject to a mortgage in favour of the NAB, which the NAB, as plaintiff in the enforcement proceeding, seeks to enforce.

22. The Walters were not legally represented. They appeared as litigants in person. Their case at trial was conducted by Ms Carmen Walter. Ms Walter presented her case with considerable ability, intelligence and tenacity. Although English is not her native language, she was extremely articulate. Ms Walter is not legally qualified. The Walters' pleadings in both proceedings were drawn, and the associated documents and submissions were prepared, principally by Ms Walter. Ms Walter acknowledged that she had received assistance in research and preparation from Mr Smart, who is not legally qualified but had experience as a litigant in person in a case involving many similar allegations against a mortgagee bank

25. The Walters' pleadings did not comply with the usual conventions or technical requirements of pleadings. In some instances, allegations in the pleadings did not disclose a cause of action. In other cases, there were simply assertions which made no allegation at all. Allegations were not consistently or satisfactorily particularised.

28. During the course of the trial, the Walters' amended statement of claim was supplemented by a document dated 26 May 2003 and proposed amended pleadings dated 24 June 2003 intended to clarify their claims. Ms Walter also orally amended or amplified the Walters' claims at various stages during the course of the trial.

31. Commendably, in recognition of the difficulties associated with litigants in person, counsel for the NAB did not make merely technical objections to the Walters' pleadings or the conduct of their case.

34. The Walters raised a number of unorthodox arguments and challenges to jurisdiction at the commencement of the trial, on which I ruled at the outset. The matters in question included the alleged impact of Freemasonry, an alleged banking practice described as "fractional reserve banking", the invalidity of the Constitution of the State of Victoria, the Walters' entitlement to trial by jury under Magna Carta, and apprehended bias on my part, due to my disclosure of beneficial ownership of a parcel of NAB shares.

37. I determined that none of the Walters' challenges to the Court's jurisdiction was of any substance. I also ruled that the issues of Freemasonry and fractional reserve banking were of no substance and irrelevant to any legitimate claim. Despite those rulings, the issues, which were not clearly defined, were persistently raised by the Walters in various altered guises throughout the course of the trial.

40. The claims and challenges based on Freemasonry, fractional reserve banking, constitutional invalidity and Magna Carta which were raised by the Walters in these proceedings have previously been raised by litigants in person in the course of enforcement proceedings by banks. All have been the subject of some degree of previous judicial consideration and have been dismissed as wanting substance or as nonsense. Although those arguments occupied a considerable time at trial, the Walters also advanced a more conventional claim that the loans and securities were unenforceable on various related equitable grounds, including unconscionable conduct, duress, undue influence and estoppel.

43. In essence, they contend that having incurred liabilities of approximately $1.3 million to the NAB (principally to fund their brewery - reception centre), in December 1998 they agreed to restructure the liability on terms wholly disadvantageous to them. They allege that they were induced to agree to replace their existing, longer-term facilities with a principal loan for $1 million for a one year fixed term and a business-combination loan for $380,000 for a seven year term, by an assurance that the one year fixed term loan would be unconditionally and automatically renewed. They contend that they were presented with the relevant documents for execution in circumstances where their lack of English language skills and their unfamiliarity with Australian commercial practice amounted to a special disability which the NAB exploited in order to perfect invalid or defective existing securities. They allege that the NAB subsequently `fabricated' their default and invalidly appointed a receiver who, in breach of duty, sacrificed their interests by selling the security property (on which they had expended approximately $3 million) for approximately $1 million.

Amended Statement of Claim - Proceeding No. 4486

48. The amended statement of claim dated 9 June 2001 in the principal proceeding was prepared by Ms Walter, a litigant in person, who is not legally qualified. The writ was filed on 16 February 2001. The plaintiffs are Carmen Walter, Fritz and Ingrid Walter as trustees of the Walter Family Trust, Palatinat Brewery Pty Ltd, as lessee of Lot 4, Lincoln Causeway, Wodonga, and the Walter Family Trust.

51. The amended statement of claim alleges the following:

The NAB provided Fritz, Ingrid and Carmen Walter with an overdraft facility for their personal account in September 1997.

In early 1998, the NAB provided the Walters with various loan facilities, including a home loan facility and car lease and hire purchase facilities.

In October 1998 the Walters sought an extension of those loan facilities, which was verbally approved, but was not put in place until December 1998. The completion of paper work took two months.

On 16 December 1998, Fritz and Ingrid Walter, as trustees of the Walter Family Trust, executed two letters of offer for two loans.

(a) a $1,000,000 interest only loan with a one year term; and

The loans were secured by the personal guarantees of Fritz, Ingrid, Carmen Walter and Palatinat, a debenture over Palatinat and mortgages over the Walters' brewery property and residential land.

The above loans were illegal in that they breached ss.32, 36 and 38 of the Credit Act.

The NAB gave no consideration. The Walters met all payments of interest/monthly instalments.

The Walters were not given an opportunity to read the documents. The fact that the Walters were to execute the documents in the capacity as trustees put the NAB in a superior position of advantage.

The Walters were not given the opportunity to obtain independent legal advice. The NAB did not send the documents to their accountant to peruse. The NAB did not inform the Walters of the necessity to seek advice prior to signing, nor explain their legal effect.

The letters of offer were signed under duress. The Walters requested the extension in October 1998, but not until December 1998 did the NAB present the documents for signing. This was illegitimate pressure of an economic nature and "unconscionable conduct".

No interpreter was present at the time of signing. The NAB was in a position of advantage and the Walters were under a disability because they lacked knowledge of the English language and familiarity with the bank's business practices and the cultural background distinguishing Australian and German business practices.

The NAB did not explain the full nature of the documents although it knew that the Walters had been in Australia for only ten months.

The mortgage over the brewery property is unenforceable because it was executed by Fritz and Ingrid Walter in their personal capacity, but in truth, the Walter Family Trust was the owner of the land. The execution of the letters of offer was defective because the letters of offer were not properly dated or initialled and had other defects. As the Walter Family Trust did not execute the mortgage, the owner of the land did not execute it and consequently "no legal mortgage is available to justify a mortgage sale".

There was no default under the mortgages, because the Walters made payments on time.

The receiver's sale of the brewery property was illegal. The Walters apprised the NAB of that, and its "wilful ignorance" amounts to fraud.

The NAB was in a position of advantage. Mr Membrey, the relevant NAB officer, did not disclose the full implications of the documents, and made only brief explanations to Fritz and Carmen Walter, since Ingrid Walter was not present at the outset of the meeting. Mr Membrey explained the facilities "as ongoing for a long term and did not explain, point out nor stress the fact that the defendant would ask the principal sum to be repaid after 12 months. He left the plaintiff in the understanding of a long term loan which was at least as long as seven years". The NAB's conduct therefore amounts to misrepresentation and unconscionable conduct.

The NAB is estopped from commencing proceedings because Mr Membrey, the relevant bank officer, promised an ongoing facility with a year by year renewal on 16 December 1998, "very clearly".

The Walters did not read the documents on 16 December 1998 and were not offered time to read and understand them nor an opportunity to obtain independent legal advice. The NAB did not explain the legal effect of the guarantees.

The guarantees were signed under duress due to the "massive delay" in preparing the documents for execution.

The NAB knew that the brewery mortgage was defective because it was not executed by the Walter Family Trust as the owner of the land and "to cover up their mistake" the bank rushed to appoint a receiver and manager.

The debenture given by Palatinat was executed in relation to an earlier loan but the NAB sought to rely on it for the later loans. The debenture was therefore illegal and the appointment of the receiver was void.

The receiver conducted the auction of the brewery land and chattels "without legal instrument" and the price achieved at auction was significantly lower than previous valuations.

The Constitution of 1975 is "not a source of legal authority".

(c) determination and assessment of "Foreign Power";

(d) determination of authority of all parties involved;

"Magna Carta is current statute law in Victoria" and "we have the Fundamental and Constitutional Right that this matter is heard by Trial by Jury ... "

"Fractional reserve banking is illegal. The NAB is a private banking institution governed by the Federal Reserve Act, the Banking Act, the Credit Act and others. None of these Acts provide a statute, which allows the defendant to pursue fractional reserve banking".

88. By a defence dated 9 June 2001 the NAB admits the making of the relevant loan agreements, guarantees, mortgages, debenture and lease-purchase agreements. It alleges that the bank initially provided financial accommodation secured by mortgages over a brewery property and a residential property owned by Fritz and Ingrid Walter. It also entered lease-purchase agreements with Fritz and Ingrid Walter. The NAB alleges that in November 1998 Carmen Walter requested it to consolidate the liability under the existing loans and lease-purchase agreements. It offered Fritz and Ingrid Walter two restructured loan agreements, being an interest-only loan of $1 million for a one year term and a business combination loan of $380,000 with a 7 year term. The restructured loans were secured by the pre-existing mortgages and securities. The loan agreements were executed on 16 December 1998.

The NAB denies the allegation that it promised "a year by year" or "on-going" renewal of the interest-only loan. It alleges that the Walters acknowledged that the loan facilities were subject to periodic review and to other special conditions.

The NAB denies that it subjected the Walters to duress or unconscionable conduct through exploitation of a special disability or special disadvantage.

It denies the allegations of invalidity of the brewery mortgage due to the existence of a trust and the allegations of the invalidity of the appointment of the receiver. It denies the allegations based on credit legislation, on the ground that it does not apply to the relevant loans. It does not plead to the "allegations" based on Magna Carta, the Constitution, Freemasonry and Fractional Reserve Banking, on the ground that they are unintelligible.

95. In proceeding No. 7407 of 2002 the NAB as plaintiff alleges that Fritz and Ingrid Walter, as defendants, mortgaged the land situated at 13 Sanctuary Boulevard, Wodonga, to the NAB by instrument of mortgage dated 30 April 1998; and that Fritz and Ingrid Walter defaulted on the payment of principal and interest and retained possession of the land. The NAB claims possession of the land under s.78(1)(b) of the Transfer of Land Act 1958 (Vic).

99. By a defence dated 24 October 2002 Fritz and Ingrid Walter, as defendants, admit execution of the instrument of mortgage but deny that it was represented to be a mortgage document. They allege that the mortgage was procured by fraud, misleading and deceptive conduct and unconscionable conduct, in that the relevant NAB bank officer, Mr Wayne Keating, failed to alert the signatories to the possibility of seeking independent legal and financial advice, knowing they lacked understanding of the English language.

102. Fritz and Ingrid Walter further allege that the NAB did not provide consideration for the mortgage and that they did not receive any advances.

107. Fritz and Ingrid Walter migrated to Australia from Germany in 1998. They had conducted a successful Peugeot car repair and dealership business in Germany for over 20 years.

110. Carmen Walter, the daughter of Fritz and Ingrid Walter, migrated with them from Germany. She was educated to tertiary level in Germany. Her education included the formal study of English. At all material times, Ms Carmen Walter was proficient in spoken and written English.

113. From 1981 onwards, the Walters made frequent visits to Australia, where they spent many vacations. They were attracted to Australia and in consequence purchased a property in Western Australia. Despite their frequent visits, from 1981 until their permanent settlement in Australia in early 1998, Fritz and Ingrid Walter were not fluent in English. They relied on their daughter Carmen to translate where necessary.

116. In the late 1980's Fritz and Ingrid Walter attended a Victorian Government promotion at Frankfurt in German, which was aimed at encouraging German business migration to Australia. As a result, they formed the idea of migrating to Australia, establishing a business and settling there permanently.

119. Fritz and Ingrid Walter, during a subsequent visit to Australia, had further discussions with the representatives of the Albury-Wodonga Development Commission and the Albury Wodonga Council about establishing a new business in Australia. Although their business experience was in car repair and dealerships, they were advised that there was no suitable opening for such a business in the Albury-Wodonga area. They therefore decided to establish a combined function centre and boutique brewery in the Albury-Wodonga region, intended to form part of a new tourist development proposed by the Albury-Wodonga Development Commission.

122. Ms Carmen Walter had completed tertiary courses in biotechnology and food technology in Germany which equipped her with the expertise to conduct the brewing and yeast maintenance aspects of the Walters' proposed new business.

126. The Albury Wodonga Rural Council suggested a site for the proposed function centre and brewery in a complex known as the "Gateway Island" which was to be developed as a tourist centre.

129. In March 1996 the Walters selected the land suggested by the Albury-Wodonga Council which was situated at Lot 4, Lincoln Causeway, for the function centre and brewery ("the brewery land"). On 13 May 1996 Fritz and Ingrid Walter executed a contract to purchase the brewery land for $138,000. They paid a deposit of $10,000. They subsequently paid the outstanding balance of $128,000 from their own funds. No funds were borrowed from NAB in relation to the purchase of the brewery land.

132. The Walters had retained Mr Simon Dubois, a chartered accountant based in Western Australia, who advised them to establish a family trust in relation to the purchase of the brewery land. As a result of that advice, the Walter Family Trust was established. Fritz and Ingrid Walter were the trustees of the Walter Family Trust. They retained Mr Warren Judd of McHarg's Solicitors, in Albury/Wodonga, to prepare the trust deed and to represent them in relation to the purchase of the brewery land. The Walters also sought the advice and assistance of an acquaintance, Horst Kempf, who was experienced in the operation of boutique breweries.

135. After the purchase of the brewery land the Walters returned to Germany to complete the necessary arrangements there. During a transitional period they visited Australia periodically whilst based in Germany prior to their permanent settlement in Australia. While they remained resident in Germany it was necessary for the Walters to exchange documents with, and give instructions to, Australian-based agents (including the NAB) in relation to banking, business and legal transactions. They did so principally by facsimile transmission and post.

138. Fritz and Ingrid Walter had not executed the contract of sale for the brewery land as trustees or in any other representative capacity. When the instrument of transfer of the brewery land was forwarded to them for execution in Germany it stated the purchasers to be Fritz and Ingrid Walter. Ms Walter wrote in the words "as trustees for the Walter Family Trust" after Fritz and Ingrid Walters' names on the transfer. The Walters wished the Walter Family Trust to be registered as the proprietor of the brewery land. Their solicitors, McHargs, advised them that it was not possible to register a trust as the proprietor of land under s.37 of the Transfer of Land Act 1958 (Vic). No caveat notifying the existence of beneficial interests under a trust was lodged.

141. The Walters opened a bank account with NAB in order to facilitate payment for the brewery land and to conduct other banking needs. They deposited $140,000 for the settlement of the purchase of the brewery land. The local NAB manager with whom the Walters principally dealt during the initial phase of their banking relationship with the NAB was Mr Wayne Keating. Prior to the Walters' permanent relocation from Germany to Australia, Mr Keating corresponded with them and communicated by facsimile. He assisted the Walters with the transfer of funds, drawing cheques and related matters.

144. The construction of the brewery and reception centre commenced in July 1997. Ms Walter took an active supervisory role. The Walters acted as owner-builders. It is undisputed that the workmanship and quality of the brewery and reception centre were of a very high standard. Ms Walter estimated that the Walter family expended over $3,000,000 on the construction of the building.

147. The fit-out of the building was also very expensive. All the restaurant and brewery equipment was of excellent quality. At trial, Ms Walter conceded that "we made mistakes" and the Walters consequently experienced cost overruns. She stated that: "We probably spent a lot on things because we thought with our hearts instead of with our heads". Ms Walter conceded that as a result of the cost overruns "we ran out of money".

150. The completion of the building was accelerated in order to meet an official opening date of May 1998 by the then Premier of Victoria. The acceleration to meet the deadline placed further pressure on the Walters.

153. The Walters' restaurant sold only their own "Palatinat" brand of beer. which was brewed on the premises by Ms Walter and was relatively high in price. At first, the Walters intended to concentrate on serving German-style cuisine in their restaurant.

156. The Walters expected a high volume tourist flow through the Gateway Island tourist complex in which their brewery and reception centre was situated. They were confident that the quality of the complex, the boutique beer and a choice of German style cuisine would attract the custom of a sufficient proportion of the estimated annual one million tourists to make their business profitable.

159. Due to the cost overruns in construction and equipment and the failure of further funds expected from Germany to arrive as anticipated, by September 1997 the Walters required financial accommodation to complete the project. In September 1997 they approached Mr Keating of the NAB and obtained an overdraft facility for a three month term. The overdraft facility was secured by a mortgage over the brewery land executed by Fritz and Ingrid Walter on 3 September 1997. The Walters' overdraft facility, initially for three months, was subsequently extended to 31 March 1998.

162. Mr Keating was the principal NAB officer who dealt with the Walters from 1997 until he left Wodonga in August-September 1998. According to Mr Keating, he dealt principally with Carmen Walter in correspondence and in relation to drawing cheques. He stated that he had no difficulty in communicating in English with Carmen Walter. He stated that "there were times when Carmen would stop me and clarify if she did not understand, but no, we held good strong conversations ... if she didn't understand, we would clarify it". Mr Keating saw no reason to use an interpreter when dealing with Carmen but "with Fritz and Ingrid I used Carmen at times as an interpreter" and "Carmen then explained matters to her parents in German."

165. Mr Keating dealt principally with Ms Walter, but observed that she referred to her father regularly for decision-making. He also regularly communicated with Mr Dubois, the Walters' accountant, who was situated in Perth.

168. At trial, Mr Keating did not have a strong independent recollection of the details of his dealings in transactions with the Walters.

171. He handled the Walters' application for a $200,000 overdraft facility with NAB in September 1997 which was required to complete the construction project. The Overdraft Facility Approval Advice dated 3 September 1997 identifies Fritz Walter, Ingrid Walter and Carmen Walter as the customers. The overdraft limit is $200,000. The expiry date is 31 December 1997. The Overdraft Facility Approval Advice sets out the terms of the overdraft facility, including details of the interest rate, events of default and credit fees and charges. It provides that the security of a "first registered mortgage over Certificate of Title Volume 10289 Folio 289 being the property at Lincoln Causeway, Wodonga, [the brewery land] is required to secure the balance of the Facility".

174. By a letter to Fritz, Ingrid and Carmen Walter dated 3 September 1997 Mr Keating confirmed the approval of the overdraft limit.

177. By an internal credit memorandum dated 3 September 1997 Mr Keating approved the Walters' $200,000 overdraft credit limit. The credit memorandum noted that the Walters had reached agreement with Albury-Wodonga Development Corporation to construct a German-style boutique brewery on the Lincoln Causeway. It further noted that "Mr Walter has owned and managed one of the largest motor vehicle dealerships in Germany, which was under contract of sale with a settlement anticipated by 30 October 1997 to result in $3.5 million approximately". It stated that "these funds will be transferred as necessary through this bank to fund the $2 million brewery development. Essentially, it is the settlement of the business that forms the core serviceability of the proposed facility".

"The Walters also have a residential property under negotiation for sale in WA. The return on this should be around $300K. Should this settle then it will be utilised to clear the O/D. [overdraft] Given the estimated worst case settlement scenario it is expected that the debt will reach around $150K before cash is available. This connection has held over $400K in credit during the past 12 months with balances averaging around $25K. We are comfortable with the expected settlements. Having walked the construction site confirm works to date are being completed in accordance with plans. Expected completion date is April 1998. The Walters represent an excellent long term banking prospect."

184. In cross-examination, Mr Keating confirmed that his principal discussions about the sale of the German business interests were with Carmen Walter. He said that he "wouldn't have felt comfortable in holding the extent of that conversation with either Fritz or Ingrid because I really struggled with the German language and I don't think that they were au fait with the English language."

187. In order to secure the overdraft facility Fritz and Ingrid Walter executed a mortgage over the brewery land dated 3 September 1997 ("the brewery mortgage"). The brewery mortgage provided that the provisions contained in Memorandum of Common Provisions No. AA291 retained by the Registrar of Titles were incorporated in the mortgage.

190. The Memorandum of Common Provisions No. AA291, by clause 35, defines "the moneys hereby secured" broadly, to include:

"(a) all moneys owing or remaining unpaid to the bank on any account whatsoever by the Mortgagor, whether alone or jointly with any other person and whether as principal or surety.

(b) moneys which the bank whether requested to do so or not has advanced or paid or become liable to pay to or for on account or on behalf of the Mortgagor".

195. The brewery mortgage was, in short, an "all moneys, all accounts" mortgage.

198. Mr Keating did not recollect whether he was aware, as at September 1997, that the brewery property was owned by the Walter Family Trust. There was no evidence to establish that the Walter Family Trust was brought to his attention at that date. He was unable independently to recollect when he had first heard of the establishment of the Walter Family Trust.

201. At trial, Mr Keating could not independently recollect the circumstances of the execution of the brewery mortgage. He described his uniform standard practice as a banker of twenty-two years' experience, which was to "sit down, explain the document, its impact on the client in case of mortgages and guarantees and other like securities and always suggest that independent legal advice should be taken". He testified that there was no reason why he would not have adhered to that practice with the Walters when the brewery mortgage was executed.

204. In cross-examination, it was not put to Mr Keating that he failed to explain the mortgage documents to Fritz and Ingrid Walter or that he failed to suggest that independent legal advice should be obtained.

207. Mr Keating could not recollect any circumstance which had suggested to him that the Walters were particularly vulnerable or unable to understand the relevant transactions. His evidence was that as at September 1997, he considered that the Walters were able to look after their own interests.

210. Mr Keating stated that in approving an advance of $200,000 credit to the Walters, he relied on Ms Walter's representations and the fact that substantial sums had been deposited and invested in the brewery property.

213. He testified that although he had no independent recollection of the execution of the brewery mortgage and assumed that he had carried out his standard practice, he did not believe that he had referred to any bank manuals. He did not refer to bank manuals for standard transactions. The overdraft and the brewery mortgage were standard transactions.

216. Ms Walter confirmed that she was present when Fritz and Ingrid Walter executed the documents to secure the overdraft in September 1997. She testified that she was "always present when these dealings or meetings took place".

219. She stated that in order to execute the security documents in September 1997, the Walters attended at Mr Keating's office. According to Ms Walter, Mr Keating "asked my parents to sign various documents ... now deemed to be the mortgage over the hotel land and that pursuant to the "all moneys" clause they would now secure the interest-only and business combination loan which comes into the chronology at a later stage but at this point in time it was not explained that the mortgage was an ongoing mortgage".

222. Ms Walter stated that she "saw that documents were exchanged and that my parents were asked to sign the documents". She believed that she would have seen the documents but said that she did not read them to her parents. She stated that she was unable to recall even the substance of what was said.

225. Mr Walter also recalled the establishment of the overdraft in September 1997. He stated that he did not really remember what he signed. He stated that he had a friendly relationship with Mr Keating and signed a document because "Mr Keating said `sign'."

228. Following the initial borrowing of $200,000 in September 1997, in April and May 1998 the Walters' borrowings from the NAB increased very significantly during a short space of time. In April 1998 they borrowed moneys to finance the purchase of a residence and in May 1998 they borrowed further substantial sums under a number of lease-purchase agreements.

232. Initially the Walters occupied rented accommodation in the Albury-Wodonga area. In April 1998 they purchased a local residence at 31 Sanctuary Boulevard, Wodonga ("the residential property"). Fritz and Ingrid Walter obtained a loan of $310,000 ("the home loan") from the NAB in order to purchase the residence. A mortgage over the residential property was executed by Fritz and Ingrid Walter on 30 April 1998 ("the residential mortgage").

235. Mr Keating handled the home loan and the residential mortgage on behalf of the NAB. The home loan contract was signed by Fritz and Ingrid Walter on 30 April 1998. The home loan contract states that the securities taken by the bank were registered mortgages over the residential property and the brewery property. The amount borrowed slightly exceeded the purchase price of the residential property, as it included a further amount for additional costs.

238. The residential mortgage states the mortgagors to be Fritz and Ingrid Walter.

241. The residential mortgage was an "all moneys" mortgage. By clause 31 "the amount owing" was defined to mean -

"at any time, subject to 28.2(a), all money which one or more of you owe the Bank, or will or may owe the Bank in the future, and which by law may be secured by this mortgage, including:

(a) under an agreement covered by this mortgage; and

(b) in respect of any credit provided by the Bank to you other than under an agreement covered by this mortgage; and

(c) otherwise payable under this mortgage".

248. Mr Keating at trial stated that he was confident that he would have advised the Walters to obtain independent advice. However, it was the client's choice whether to do so. He was confident that he would have relied on Carmen Walter to transmit his explanations of the loan and mortgage to her parents, due to the parents' relative lack of fluency in the English language.

251. Ms Walter attended the meeting to execute the residential mortgage and the associated documentation. She stated that she supposed that she saw the mortgage document that day, but that it was very hard to remember. She could recall no relevant details.

254. Mr Walter gave evidence that he signed documents in relation to the home loan, but did not remember what they were. When asked whether he knew that the home loan was also secured by the brewery mortgage he responded, "I don't look at the paperwork. What can I say about this? I trust the bank ... ".

258. Initially, the Walters had purchased the restaurant and brewery equipment with their own funds. The restaurant equipment was owned by Palatinat The brewery equipment was owned by Fritz and Ingrid Walter as trustees for the Walter Family Trust. It was of excellent quality and had required very substantial expenditure Because the Walters subsequently needed cash relief due to the overruns in the costs of construction, in February 1998 Mr Keating proposed the idea of a lease-purchase of the brewery equipment and Palatinat's plant and equipment. At that stage there was optimism about the prospects of the business. The Walters' projected cash flow prepared in March 1998 forecast high profits from their future business operations.

261. Ms Walter's evidence was that "the bank" suggested the lease-purchase agreements "to provide the cash relief and to pay our creditors". She was present at meetings with Mr Keating and at the execution of the relevant documents, including the Palatinat debenture in September 1998.

264. The Palatinat Hotel was officially opened on 7 May 1998 by the then Premier of Victoria.

267. On 28 May 1998 the Walters executed four lease-purchase agreements with the NAB.

270. At trial, Mr Walter stated that he executed the lease-purchase agreements "because the bank offered to us. I can't say why". He agreed that he was aware that the monthly repayments to the NAB on the various loans and facilities would henceforth total over $20,000.

273. By the first lease-purchase agreement dated 28 May 1998, Fritz and Ingrid Walter as trustee for the Walter Family Trust borrowed $388,032 and $33,102 ($411,134) for the brewing equipment. By the second lease-purchase agreement, Palatinat borrowed $332,139 for the restaurant's internal chattels and restaurant equipment. Payments were to commence in August 1998. Palatinat also executed two lease-purchase agreements for two motor vehicles. The lease-purchase agreements were for five year terms.

276. Mr Keating put forward a credit submission to enable the Walters to lease-purchase the brewery and restaurant chattels and equipment in May 1998. He prepared a credit memorandum which accompanied the credit submission.

279. In the credit memorandum, Mr Keating set out the history of construction of the Palatinat brewery. The credit memorandum noted that over $3 million had been invested in the brewery complex, derived from the personal resources of the Walter family. It also noted that the Walters had a further $1 million still invested in properties in Germany, which could not be accessed until May 1999. They also owned a $300,000 property in Western Australia which was currently on the market.

282. The credit memorandum stated that all of the brewery facility and fittings had been constructed at the "top end" of quality. A satisfactory assessment of the quality and value of the equipment had been made.

285. It also stated that Mr Keating had consulted a local valuer, Philip Cosgrave, and, given the expenditure of over $3 million and the projected annual turnover of $2.9 million, "we have at this point placed a conservative m/v [mortgage value] on our security of $2.5M".

288. The credit memorandum noted that the Walter Family Trust "will own the property, brewing equipment and produce the beer". The company, Palatinat, would own the internal chattels of the building. It would lease the building and buy the beer from the Walter Family Trust.

291. Mr Keating noted "Applicants have invested 100% of expenditure to date on this project. They are impressive, well-educated and enthusiastic types who have the necessary mix of expertise and financial acumen to make an outstanding success of this business".

294. Further, he noted that "primarily debts may be cleared (all or in part) from settlement monies from WA and Germany" ... and "the applicants have substantial external resources from which they can draw to support the project".

297. The memorandum also refers to the role of the Walters' chartered accountant, Mr Dubois, who had "extensive industry experience" and the input of the Walters' associate, Horst Kempf, who had operated a number of highly successful "boutique" breweries throughout Australia.

300. Prior to handing over the Walter file to his successor, Mr Membrey, in August 1998, Mr Keating made a file note dated 21 August 1998. The file note stated that the Walters' funds were still due from Germany. A business plan was required.

303. Mr Keating stated at trial that in his dealings with the Walters in September 1997 and in May 1998, he would not have allowed the Walters to sign any document if he had thought that they did not truly understand it.

306. In July 1998 Palatinat received a $100,000 overdraft facility. This was subsequently increased to a limit of $170,000. On 14 October 1998 a further increase to a limit of $270,000 was approved.

309. By June 1998 the Walters' monthly repayments on their various loan facilities and lease-purchase agreements with the NAB amounted to approximately $20,500. They also still had outstanding debts due to contractors. The business was experiencing problems with staff. Money expected from Germany had not arrived. The anticipated influx of tourists had not eventuated. Local custom was limited. The business was not trading profitably. Turnover was not only below the previous estimates but had not reached the "break even" point. The Walters, however, were prepared to work without remuneration in order to get their business on its feet. They were dedicated to establishing the business. They took the view that it was only experiencing teething problems, which could be overcome given time and commitment.

313. In September 1998 Mr Keating requested the Walters to execute the Palatinat debenture over its undertaking, presumably in order to secure its liabilities to the NAB under the overdraft and the lease-purchase agreement. Carmen Walter stated in evidence that neither she nor her father hesitated to sign because they trusted that Mr Keating would "do the right thing".

316. The debenture executed by Palatinat Brewery Pty Ltd as mortgagor on 28 September 1998 was signed by Carmen and Fritz Walter as directors.

319. "Secured Amounts" (Clause 2.3) is broadly defined to include:

"(b) all amounts which at that time the Bank has advanced or paid, or has become liable to advance or pay, for any reason:

(ii) at the express or implied request of the Mortgagor; or

(iii) because of any act or omission of the Mortgagor; or

(iv) because of any act or omission of the Bank at the express or implied request of the Mortgagor; and

(b) all amounts for which at that time the Mortgagor is or may become actually or contingently liable to the Bank for any reason including all amounts for which the Mortgagor is or may become liable to the Bank in respect of any orders, drafts, cheques, promissory notes, bills of exchange, letters of credit, guarantees, indemnities, bonds, and other instruments or engagements (whether negotiable or not and whether matured or not) which:

(i) have been drawn, issued, accepted, endorsed, discounted or paid by the Bank; or

(ii) are held by the Bank as a result of any transaction entered into by the Bank for, or on behalf of, or at the express or implied request of, the Mortgagor;..."

330. After any Event of Default, the Bank had the following rights under clause 14:

"Subject to Clause 14.2...the Bank may at its option exercisable by notice in writing to the Mortgagor (and notwithstanding there is an agreement in writing or course of dealing to the contrary and notwithstanding any concession or delay or previous waiver by the Bank of its right to demand payment of the Secured Amounts) treat the Secured Amounts as payable immediately and may immediately or at any later time (in addition to any other rights, powers and remedies conferred on a mortgagee by law and so that no delay or failure by the Bank to exercise any of the Rights of the Bank prejudices their later exercise) do all or any of the following things without giving any or further notice or demand to the Mortgagor:

(a) possession: enter upon, and take possession of, collect and get in the whole or any part of the Mortgaged Property and of its rents and profits or both ...

(c) sale: whether in or out of possession, sell the whole or any Mortgaged Property and exercise all other powers conferred upon a mortgagee by law; and

(d) Receiver: whether in or out of possession and whether or not the Bank is entitled to appoint a Receiver under any Statue, appoint any person or persons to be a Receiver of the whole or any of the Mortgaged Property; and

(e) powers of Receiver: whether in or out of possession and whether or not a Receiver has been appointed under this Deed, at any time after the Bank has become entitled to appoint a Receiver and without giving any notice, exercise all or any of the powers, authorities and discretions which may be conferred on a Receiver under this Deed or by law.."

339. Clause 17.4 sets out the powers of a receiver.

"every Receiver appointed under or by virtue of this Deed is deemed at all times and for all purposes to be the agent of the Mortgagor and the Mortgagor is solely responsible for the Receiver's acts and defaults and for the payment of the Receiver's remuneration".

347. In September 1998 Mr Keating left the Wodonga Business Banking Centre. He was replaced by Mr Membrey, who took over the management of the Walters' accounts.

350. By October 1998 the Walters' difficulty in servicing the monthly payments of $20,500 was increasing. The business had continuing cash flow problems and turnover was still below not only the optimistic estimates, but break even point.

353. Although the Walters had dismissed most of the staff and were personally performing the work of both brewery and restaurant without remuneration, they were unable to maintain the monthly repayments of $20,500.

356. Mr Membrey had contact with Simon Dubois, the Walters' West Australian based accountant and financial adviser, in whom they expressed great confidence. Carmen Walter told Mr Membrey that Mr Dubois had experience in relation to breweries. Mr Membrey advised the Walters that it might be preferable to retain a local accountant who understood the local Albury-Wodonga market, but the Walters preferred to rely on Mr Dubois.

359. Ms Walter stated that when Mr Membrey took over from Mr Keating, Mr Dubois discussed the monthly burden of $20,500 with him. She agreed that the Walters were anxious to have relief from the substantial payments. She therefore decided to request the consolidation of all loans and facilities into one loan.

362. On assuming control of the Walters' file, Mr Membrey dealt with their application for an increase of the overdraft (then $170,000) to $270,000. Mr Membrey prepared a credit submission and approved the further credit himself. However, his superior, the NAB regional business manager, Mr Selwyn Wegner, supervised the application. Mr Wegner hand wrote on the application "note increase will clear from confirmed sale of property. Principals need to get debt down to a serviceable level or increase income. Acknowledge teething problems but they need to get it working soon or take a loss and move on."

365. By an internal credit memorandum dated 13 October 1998, Mr Membrey reviewed the Walters' financial position. He prepared the credit memorandum after Mr Dubois had requested "restructuring the leases to a longer term and interest-only facility to give cash flow some breathing space". Mr Membrey stated at trial that it was "clear to us and the accountant that the amortisation of the lease facilities over a five year period was beyond the cash flow of the business". Therefore, it was essential that some action be taken to reduce the outgoings.

368. The credit memorandum noted "Due to vast differences in: (1) estimated costing and final costing which caused original borrowing and (2) projected cash flow and actual cash flow, directors are now in a position that there is a cash flow shortage causing excess in the account."

371. The credit memorandum further noted that "initial repayment of this increase will come from funds due from the sale of property in Germany". It noted that the business was currently losing $8,000 per month.

374. It stated "lending to this connection has in the past been based on security held. We have over the past month held lengthy discussions with Directors and following is evident:

"1. There [sic] integrity, cash inputs and quality of produce are very sound.

2. Directors themselves are very concerned regarding overall position. They are well aware that if they cannot make it work they will be required to sell the business and the premises. They acknowledge this clearly.

3. Given trade to date has been slow, it also encompasses traditional slow winter months and initial start up of the business. Coming summer months should give a better indication of true trade.

4. Within the next month an extensive review will be undertaken. Accountant has requested us to consider restructuring leases to a longer term and interest-only facility to give cash flow some breathing space".

381. A handwritten notation on the letter stated, inter alia, "Whole future this business relies on directors' ability to increase t/o [turnover]. They fully appreciate this. Have indicated willingness to sell asset if unable to turn around."

384. On 13 October 1998 the debenture charge over the undertaking of Palatinat in favour of NAB was lodged for registration.

387. On 14 October 1998 Palatinat's overdraft limit was increased to a limit of $270,000.

390. Mr Membrey gave evidence that in order to discuss banking matters with the Walters, he frequently visited the brewery premises. He recalled frequent discussions with Carmen and Fritz Walter, in which they acknowledged the insufficient cash flow and the necessity to sell assets if it did not improve.

393. According to Mr Membrey, he did not experience any difficulty in speaking English with Carmen Walter and Fritz Walter. He did not have discussions with Mrs Ingrid Walter, other than to order a meal at the brewery restaurant.

396. Mr Membrey testified that he discussed the problems of poor turnover and cash flow with the Walters. He stated "it's outside the bank's responsibility to run the business but you try to offer advice to suggest ways to improve the business". He had suggested that the Walters should vary the restaurant menu by offering Australian-style meals, rather than relying solely on German-style cuisine.

399. As the turnover of the business remained relatively static, Mr Dubois and Mr Membrey discussed an interest-only loan as a means of obtaining relief until cash flow improved. In the circumstances, Mr Membrey considered that this was "the only option to reduce their monthly outgoing payments".

402. According to Mr Membrey, an extension of the five year term of the leases was not an available option offered by the bank. The overdraft of $270,000 was for a three months term, rather than the usual one year term, because a complete review and restructure was planned in the case of the Walters.

405. At trial, Mr Membrey had no independent recollection of the specific conversations leading up to the restructuring of the Walters' loans. He recalled that the NAB recognised that the monthly payments of $20,500 could not continue to be met, and that either a restructure or termination of the relationship was required. He personally considered that the Walters deserved the bank's further support and that they should be granted an interest-only facility. Carmen Walter was the person with whom Mr Membrey principally dealt in relation to the proposed restructure. She expressed confidence in the quality of the Walters' product and its future. She believed that turnover could be built up.

408. Prior to the consolidation, the Walter Family's debt exposure to NAB under the mortgages overdraft and the four lease-purchase agreements totalled $1.38 million. The monthly repayments were $20,500, excluding the overdraft.

411. Financial statements for the year ended 30 June 1998, prepared by Mr Dubois and forwarded to Mr Membrey, indicated that in order to break even, an annual turnover of $858,000 was required. The projected turnover was only about half of that amount ($411,000). By letter dated 15 October 1998 Mr Dubois stated that "the current cash flow of the business cannot support the monthly repayments on the two large hire purchase contracts and the two hire purchase contracts on the vehicles".

414. At trial, Ms Walter conceded that it was necessary either to increase turnover or reduce monthly repayments. She discussed that with Mr Membrey. Their relationship was friendly and the Walters felt at ease with him on a personal level. She conceded that the interest-only loan was attractive, because it would reduce the monthly burden to an affordable amount. Although Ms Walter did not concede it, it must have been apparent at this stage that default was unavoidable unless some action was taken.

417. By letter dated 18 November 1998, Carmen Walter requested the NAB to "consolidate all our existing loans into one fixed interest-only loan totalling $1,4000,000 funded by Commercial Bill Rollovers". The letter also stated "we understand the Bank will review the funding position based upon the performance of the business in April 1999".

420. Mr Membrey testified that he discussed fully with Fritz and Carmen Walter that the NAB was dissatisfied with the business performance and would need to review "how it was travelling" after a certain period of time. At trial, Mr Membrey recalled that the idea of commercial bills originated with the Walters' accountant, Mr Dubois. Ms Walter could not remember whether Mr Dubois or Mr Membrey suggested the idea. According to Mr Membrey, the Walters did not understand the operation of a commercial bill facility. He therefore proposed a straightforward interest-only bank funded loan instead. He testified that there was a sense of urgency, due to the Walters' inability to service the monthly repayments.

423. Mr Membrey considered amortising at least a part of the total amount to be borrowed. He ultimately decided to make an offer which split the total amount borrowed into two loans.

426. Ms Walter denied that she recalled Mr Membrey saying that the restructure would include a larger interest-only loan and a smaller loan, which could be amortised over time.

429. An internal credit submission dated 24 November 1998 was prepared and approved by Mr Membrey. A one year $1 million interest-only loan and a $380,000 business combination loan were proposed.

432. Selwyn Wegner, who supervised the Walters' file, noted on the credit submission:

"Lack of progress is of concern and strict monitoring of actuals to budget monthly is essential. Previous increase was to clear from funds due from o/seas. How will those funds now be used. Valuation needs to be done to establish amount M.V. in light of poor performance. CRS needs to be completed for borrowing entity. Fresh S/P also needed. Non-standard pricing is not appropriate. No excesses or further increase!! Not viable at current level of debt".

"As per prior submission we now propose restructure of facilities on an amortising facility but over a longer term. End result of financing is that Directors are unable to meeting amortisation of leases over proposed five years". ... Debt servicing based on interest-only at 8%. Repayments to be $48,000 p.a. $100K debt reduction from sale of house in Germany remaining a requirement. Directors have advised that sale of a house in Germany remains a requirement. Due to very short history long term viability remains reliant on building sales. As foreshadowed previously this restructure is required to give some chance of ongoing viability."

[A handwritten note beside this comment states "no chance on current performance":]

"Integrity and quality remains of the highest standard. Accountant for the connection has just completed a review of operations. Changes in marketing personnel are to be made with a view to increasing sales".

"Request for valuation agreed verbally to but deferred until new year. Also verbal agreement to provide f/s (financials) and lodge further $100K in first half next year also held".

444. Mr Membrey testified that he had two or three discussions with Ms Walter (at times accompanied by Mr Fritz Walter although he could not recall individual meetings) which took place in Ms Walter's office at the brewery between the date of approval of the restructured loans on about 24 November 1998 and 16 December 1998 when the Walters executed the documents.

447. He testified that during those discussions he "verbally discussed what the bank was proposing with the Walters, including the valuation". The Walters were concerned about the $2,000 cost of the valuation, for which they would be liable."

450. Mr Membrey's evidence was that Fritz and Carmen Walter, on being informed of the 12 month term of the interest-only loan, remarked upon it and "our response was that it is a 12 month term and the bank will review its position in 12 month's time and if trade is to the bank's satisfaction the bank would consider renewing it."

453. According to Mr Membrey, initially the Walters were concerned that it was a 12 month term but after the discussion and explanation of the 12 month term, Carmen and Fritz Walter "accepted the bank's position" although Mr Membrey in cross-examination could not recall what they said. He recalled that the Walters' "outlook for the future remained very positive".

456. Mr Membrey testified that he experienced no difficulty in speaking English with either Carmen or Fritz Walter and, in any event, "in my opinion you couldn't find anybody that could speak better German/English than Carmen could, I could not find a better interpreter".

459. Although the bank would not have financed the Walters had it not already been committed to them, Mr Membrey still considered them very competent and was "hopeful that they could achieve what they wanted to do. We believed it was worth a chance."

462. According to Mr Membrey, the Walters visited Mr Selwyn Wegner to obtain dispensation from obtaining a valuation prior to executing the loans on 16 December 1999. He could not recall that they complained about delay in the period leading up to the execution of the documentation.

465. Mr Membrey testified that the usual practice was to forward documents where possible, to give the customer time to read them before executing them. He stated that a "summary" letter to the borrowers, dated 15 December 1998, enclosing copies of the loan documents and guarantees would have been prepared only for the purpose of forwarding it to the customer and would either have been delivered or mailed.

468. He stated that to the best of his recollection he delivered the letter by leaving it at the brewery, but conceded that he could not say one hundred per cent. "I can't remember the drive down there because I went there often".

471. Mr Membrey gave evidence that the usual practice, which was mandatory bank policy, was "to table the documents, ask customers if they understand and are comfortable with them and advise them to seek legal advice if they wish." He did not recall questions being asked about the amount or the term but said "that had all been worked out in discussions previously".

474. He testified that he explained the guarantees, drew attention to the warnings and asked whether the Walters understood. He did not recall any indication that the Walters were uncomfortable or did not understand.

477. Ms Walter denied that Mr Membrey visited the brewery premises and advised her of the split loans. Although conceding that she was awaiting news of the restructuring application, she stated that she could not remember whether the Walters heard from Mr Membrey at all between the date of her letter on 18 November 1998 requesting consolidation and 16 December 1998 when they executed the transaction documents. At one point, she stated "I could have or I could not have". Ultimately she stated that "I could say that there could have been contact". She conceded she could not dispute it if Mr Membrey deposed to discussions having occurred. Ms Walter appeared evasive and unresponsive in relation to that issue.

480. She conceded that she had visited Mr Wegner during the relevant period. She denied that the visit occurred because Mr Membrey had informed her that the NAB required a sworn valuation as a precondition of the loan and that she visited Selwyn Wegner in order to obtain his consent to the deferral of a sworn valuation.

483. Ms Walter stated that she did not know the date of the events "and could not confirm or deny it". At one point she "simply could not say" whether the valuation was a point of discussion prior to the consolidation of the loans. Ms Walter ultimately conceded that she spoke to Mr Wegner but testified that it was only after the consolidation and not in relation to the valuation.

486. In my opinion, Ms Walter visited Mr Wegner to discuss deferral of the sworn valuation prior to the consolidation.

489. I also accept Mr Membrey's testimony that his discussions with the Walters about the proposed restructure took place. Ms Walter's testimony on this issue was vague and equivocal. It is improbable that Mr Membrey would have failed to inform the Walters of the proposed terms of the restructure during the three week period between the date of the submission and the execution of the documents. It is equally improbable that the Walters would not have taken the initiative to contact Mr Membrey if he had failed to contact them during that time.

493. The letters of NAB (Mr Membrey) dated 15 December 1998 to Carmen, Ingrid and Fritz Walter respectively, stated that:

"We enclose the following documents relating to the above Guarantee and Indemnity. Copy of guarantee and indemnity marked "For Guarantors Information only". Information sheet "what a Guarantee is". Copy of Fixed Interest Rate Interest Only Loan Letter of Offer dated 15 December 1998. Copy of Business Combination Loan Letter of Offer dated 15 December 1998. We wish to draw to your attention to the warning clause printed on the front cover of the Guarantee and should you have any questions relating to the execution of the above documents, please seek independent legal advice."

497. The Guarantee and Indemnity Document states -

"Warning This is an important document. By signing it you become personally responsible instead of, or as well as, the customer up to the amounts which the customer owes the Bank even if you have given the Bank separate security."

501. The letter of offer of NAB to Mr and Mrs F.J. Walter ATF The Walter Family Trustee dated 16 December 1998 for the fixed interest-only loan states:

"Fixed Rate Interest Only Loan. We are pleased to advise approval of your application for a Fixed Rate Interest Only Interest in Arrears Loan of $1,000,000."

505. The terms and conditions were stated to be in the enclosed letter of offer.

508. The letter requested "We request that you read the Letter of Offer carefully and familiarise yourself with the terms and conditions of the loan and then ring for an appointment to sign the relative (sic) documentation and attend to the other formalities."

"Clause 3 Loan Amount and Term - The Bank will lend to the Borrower the Principal Sum which must be repaid in full with interest together with any other moneys payable under this Agreement by the Maturity Date."

515. The letter of offer for the fixed interest-only loan dated 15 December 1998 states the customer to be Fritz Josef Walter and Ingrid Adelheim Rosa Walter as trustee for the Walter Family Trust. Relevant terms include:

* Clause 6 "Subject to Condition 7, The Balance Owing shall be repaid in full on the Maturity Date".

* By clause 10, "Events of Default" include (b) if the Borrower fails to pay any sum due under this Agreement on the due date".

* By clause 1: "Balance Owing means the Principal Sum, interest fees charges and all moneys owing or payable by the Borrower under the Agreement, including the amount of any Economic Cost; `Principal Sum' means the amount so described and set out in Item 2 of the Schedule, or so much thereof as may be owing from time to time;

* "`Maturity Date' means the date specified in Item 3 of the Schedule".

* Item 2 of the Schedule states the principal sum to be $1,000,000.

* Item 3 of the Schedule states the Maturity Date to be 12 months from the date of actual draw down of the loan.

* Item 7 states the guarantors to be Fritz Josef Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat Brewery Pty Ltd.

* Guarantee and indemnity for $1,380,000 given by Fritz Josef Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat, Brewery Pty Ltd.

* Registered mortgage debenture over the whole of the assets of Palatinat.

* First registered mortgage over 13 Sanctuary Boulevard, Wodonga.

* First registered mortgage over property situated at Lincoln Causeway, Wodonga.

532. The further letter of NAB to Mr and Mrs F.J. Walter dated 16 December 1998 for the business combination instalment loan relevantly stated:

"We are pleased to advise approval of the following facility. Business Combination Loan - Instalment Loan Amount: $380,000 Term: 7 years The terms and conditions which will apply to your facility are set out in the attached Business Combination Loan Letter of Offer".

536. The Business Combination Loan Letter of Offer dated 15 December 1998 was addressed to "Customer - Fritz Josef Walter and Ingrid Adelheim Rosa Walter as Trustee for the Walter Family Trust".

"Item 1: Borrower: Fritz Josef Walter and Ingrid Adelheim Rosa Walter as trustee for the Walter Family Trust."

543. The principal sum is stated to be $380,000 and the loan to be drawn down by 15 February 1999.

546. The maturity date/loan term is stated to be seven years from the date of actual draw down of the loan.

549. Repayment details stated that interest is included in instalments.

552. The working account is Palatinat Brewery Pty Ltd's account No. 68-534 - 4737 Wodonga, Vic.

555. The guarantors are Fritz Josef Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat Brewery Pty Ltd.

558. The customer acceptance states "I/we accept the Loan upon the Terms and Conditions herein outlined". It is signed by Fritz and Ingrid Walter and dated 16 December 1998.

561. The securities listed in the annexure are the same securities as for the interest-only loan.

564. Ms Walter denied that the Walters received copies of any of the letters or loan documents prior to their execution on 16 December 1998.

567. At trial, Ms Walter stated that she and Mr Walter went to Mr Membrey's office on 16 December 1998. (Mrs Walter was delayed and arrived at the meeting somewhat later.) When the Walters arrived, Mr Membrey produced the loan documents. The Walters claim that it was the first time that they had been presented with the documents or had been aware of the split loans.

570. Ms Walter agreed that the meeting in Mr Membrey's office lasted for 30 to 45 minutes. When asked whether Mr Membrey went through the fundamental terms of the two loans, Ms Walter replied that "there were some discussions about it" and "she could not say that he went through it item by item".

573. She contended that Mr Membrey said that the interest on the interest - only loan was fixed for one year and that there would be a year by year renewal.

576. Ms Walter conceded that Mr Membrey discussed the total amount of $1.38 million and the reasons for the split into two loans.

579. She recalled that Mr Membrey said words to the effect that the split into the two loans was the best for the business. She "couldn't say" whether the Walters read the documents. She stated "we questioned Mr Membrey concerning the fixed term of the interest rate and it was explicitly expressed that it's fixed for the term of one year, so we understood that the term was fixed but it was not explicitly explained or stated that this would include that after one year we had to pay the principal back and it was expressed and apprehended of myself and also of my father that at the finish of that one year term the interest would be re-negotiated".

582. She did not have any difficulty in conversing with Mr Membrey during the meeting. She agreed that she could have asked Mr Membrey any question which arose. If it were necessary to explain anything to her parents, she could have translated it into German. She could not point to anything more that a professional interpreter could have done.

585. She did not dispute that she and her father looked at the two loan agreements. She denied that they had not requested an interpreter because they understood the documents. Rather, she stated that it was "because we had to get this deal over and done with as fast as we could".

588. In an affidavit sworn 22 February 2001 Ms Walter deposed that she and her parents had not read or understood the letters of offer "except for the fundamental conditions". At trial, she stated that by "fundamental conditions" she meant "the ongoing nature" of the loan, although conceding that that was not a written term.

591. In an affidavit sworn 19 April 2001 Ms Walter deposed to the production of the two letters of offer at the meeting in Mr Membrey's office for the first time. She stated that "after looking at the loan contracts, Fritz and I asked Barry Membrey as to why there were two loans and why the interest-only loan was for 12 months? When I asked these questions Barry Membrey indicated that the interest rate would be refixed at the end of the 12 months and by fixing it only for 12 months this loan could also be restructured as a Principal and Interest Loan to reduce debt. Barry Membrey said words to the effect, `Maybe next year interest rates will go down or up.' At no stage did Barry Membrey advise us that the fixed rate loan must be repaid within/after 12 months nor that the defendant had the right to force the full repayment at all. It was always our understanding that the interest rate would be refixed automatically after the 12 months according to the then actual interest rate and that the loan would be automatically rolled over and continue for an extended period".

594. The affidavit indicates that Ms Walter clearly noted the one year term. She did not depose that Mr Membrey represented that it would not have to be repaid within that term. Rather, she deposed that he did not positively reiterate that the 12 month term meant that the loan was repayable at the end of a 12 month period.

597. In the affidavit Ms Walter further deposed that Mrs Walter arrived at the meeting somewhat later than Mr Walter and Ms Walter and observed the two separate loan documents. Mrs Walter immediately noted that the date of 15 December 1998 was incorrect and amended it to 16 December 1998. Mrs Walter also noted that the "interest rate of the loans was only for 12 months". She asked why. Ms Walter then gave her the explanation that "I had understood from Mr Membrey's explanation of the loan facilities". She told Mrs Walter in German that the period of the loan was fixed for one year and that it was going to be rolled over or renewed, which is "what was said to us". Ms Walter deposed that the Walters then signed the documents. The affidavit stated: "At no stage was there any discussion with Barry Membrey about repayment of the principal".

600. At trial, Ms Walter denied that Mr Membrey told the Walters that the $1 million loan was for 12 months with interest fixed for one year, which could be renewed if the NAB was satisfied with performance. She stated "He never explicitly, or never explained this to an extent".

603. Ms Walter was evasive in cross-examination as to what Mr Membrey did say. Rather, she referred constantly to the Walters' understanding that the loan would be renewed indefinitely and eventually converted into an amortising loan at "some stage".

606. Ms Walter, during the course of 2000, met with and wrote to a number of NAB officers to protest about the bank's refusal to renew or increase funding. She did not state, in the course of any meetings or correspondence, that Mr Membrey had promised an unconditional year by year renewal of the loan. It was not until the writ was issued that the Walters made the allegation of that representation. Ms Walter explained that she had not had legal advice at the relevant time.

609. At trial, Ms Walter initially stated that she did not believe that the Walters would obtain a renewal regardless of financial performance. Rather, she had assumed that the business would become more profitable, and the loan would be adjusted. When cross-examined on whether she believed that the $1 million loan would be renewed indefinitely, regardless of trading performance, Ms Walter was evasive. She did not respond to the question. She stated that she "could not say yes or no". She conceded that she could not say for how long the automatic renewal would be made but "this would be a very indefinite time ... the indefinite time would probably be reasonable to think on a seven year basis ... ".

612. Mr Walter also gave evidence on the execution of the loan documents on 16 December 1998. He said that he had been contacted and asked to come in and sign the loan. He could not recall what Mr Membrey said at the time of executing the documents. He did not ask his daughter any questions. He did recall asking Mr Membrey questions. He was presented with documents to sign. He heard Carmen Walter speaking with Mr Membrey but could not understand it.

615. In cross-examination, Mr Walter appeared to agree that he had noticed that the $1 million loan was for a 12 months term. He also stated that Mr Membrey had indicated that it did not matter that the loan was for 12 months, because "after then we negotiate, we roll it over or we make a new loan with principal and interest, but it depends how the business go ... ". He agreed that he knew that the bank required security for the loan.

618. Mr Walter was evasive and unco-operative when cross-examined on what Mr Membrey said at the execution of the documents on 16 December 1998.

621. A letter of Mr Membrey to Fritz and Ingrid Walter as trustees of the Walter Family Trust advised draw down of the interest-only loan on 24 December 1998. It stated the term of the facility to be 12 months. The maturity or expiry date was stated to be 31 December 1999.

624. A letter of Mr Membrey to Fritz and Ingrid Walter as trustees of the Walter Family Trust dated 30 December 1998 advised the details, including the draw-down date of 24 December 1998, of the business combination loan of $380,000 and the maturity date of 31 December 2005, (being seven years from the drawn down date).

627. As a result of the restructuring of their loans and facilities in December 1998, the Walters' monthly repayments were reduced to about $14,200.

630. The principal loan of $1 million was repayable on 31 December 1999. The pre-existing sale and lease-back agreements had been repayable over a five year term. The Walters, at trial, submitted that the exchange of a five year term for a one year term of repayment was wholly disadvantageous to them and they would not have knowingly agreed to it. It is clear, however, that the reduction in the monthly repayments entailed by the restructure was necessitated by their urgent cash flow problem.

634. The Walters made the reduced monthly payments of about $14,200 on time. However, they continued to experience problems with the business and its financial affairs. By October 1999 the NAB was sufficiently concerned to attribute a "Listed" status to the Walters' account. From that point, Mr Harris, the officer who had replaced Mr Membrey in September 1999, was required to report on the account to the NAB's Asset Structuring Unit.

637. The Walters were requested to provide financial information in order to permit the NAB to review their loans. They informed Mr Harris that, due to the financial pressures, they had decided to sell the restaurant and function part of the business.

640. In February 2000 a letter of Mr Harris of the NAB notified the Walters that the interest rate had risen from 9.25% to 12.25%.

643. After some delay, the Walters provided the requested financial information which, in Mr Harris' opinion, did not justify a renewal of their facilities. The NAB put in place an "exit strategy" for the Walters' accounts. On 12 April 2000 Mr Harris informed the Walters that the NAB would allow them until 30 June 2000 to re-finance or to sell. The Walters informed Mr Harris that the brewery and their residence was on the market. They nevertheless continued to maintain that the business could succeed given time and banking support. They sought additional funding to develop the brewery further and to improve facilities on several occasions.

646. The Walters did not meet the NAB's scheduled deadline of June 2000 to sell or re-finance. They met with Mr Harris in July 2000 and renewed a request for additional funding. Mr Harris agreed to consider their financial statements and cash flows, which were provided to him in late August 2000. The financial information revealed an annual turnover of approximately $550,000 for 1998/1999 and $477,000 for 1999/2000. The annual turnover required to break even was $850,000 on Mr Dubois' estimate. That was almost double the actual turnover of the business.

649. By letter dated 15 September 2000 Mr Edney, head of the NAB Asset Structuring Unit, informed the Walters that their facilities would not be renewed and required them to re-finance by 18 November 2000.

652. The Walters did not re-finance by the required date.

655. Although they had paid the monthly repayments on time they were in default under the interest-only loan, which had been scheduled for re-payment on 31 December 1999 and extended on several occasions. Default on the interest-only loan constituted a default under the home loan.

658. Ms Walter had discussions with Mr Poulter, the customer service officer of NAB and arranged a meeting with Mr Hunter who visited Wodonga to inspect the brewery.

661. On 6 September 2000 Ms Walter met with Mr Ben Edney, the head of the NAB's Asset Structuring Unit in Melbourne. Ms Walter presented Mr Edney with a business plan, aimed at stabilising the business. According to Ms Walter, at the meeting Mr Edney informed her that NAB did not want to continue the banking relationship with the Walters. He indicated that the bank would take action. The letter of Mr Edney to the Walters dated 15 September 2000 provided:

"Notwithstanding the representations made at the meeting, we remain very concerned about Palatinat's short and long term viability and your own personal equity being eroded to fund trading losses. Accordingly: 1. The Bank is not prepared to continue providing facilities and requires you to refinance Palatinat's and the Walter Family Trust's facilities by 18 November 2000 (ie. 60 days). 2. The Bank will continue to make available the existing facilities which formally expired on 31 December 1999, until 18 November 2000 provided you operate within your facility limits. 3. The Bank will maintain the current interest rates and not the default rates...".

665. Ms Walter wrote to Mr Frank Cicutto, the managing director of the NAB, complaining of Mr Edney's conduct and requesting a meeting, which never ensued.

668. She arranged to meet Mr Ray Pridmore, the NAB's Global Head of Asset Structuring, in November 2000. At the meeting on 8 November 2000 with Mr Pridmore and Mr Hunter, Mr Pridmore stated that the figures presented to him by the Walters in the balance sheets did not add up. He suggested that an investigative accountant be appointed. As an investigative accountant would cost around $12,000, which would be paid by the Walters, Ms Walter rejected the proposal. Mr Pridmore mentioned the appointment of a receiver at the meeting.

671. On 30 November 2000 the Walters received a notice of demand under the debenture from NAB.

675. On 30 November 2000 NAB appointed Mr Geoffrey Handberg receiver over the property of Palatinat under the Palatinat debenture and agent for the mortgagee in possession under the brewery mortgage. Palatinat was the lessee of the property. For the avoidance of doubt, on 21 December 2000 Mr Handberg was appointed receiver over the brewery land pursuant to the brewery mortgage.

678. Mr Handberg took possession on 1 December 2000. He determined to auction the property in March 2001 but permitted the business to continue to trade. He employed the Walters to run the business. He introduced the Walters to Tally Konstas, a person with expertise in hospitality business management. With the receiver's agreement, Mr Konstas attempted to negotiate a joint venture with the Walters with a view to obtaining re-finance and averting the scheduled auction. The negotiations did not result in an agreement and re-finance was not obtained.

681. Mr Handberg obtained a valuation dated 6 December 1998 of the Palatinat chattels and equipment from Taylor Lockwood and a valuation of the brewery property dated 5 December 1998 from G D Sutherland Pty Ltd.

684. On 2 March 2001 the brewery property and the restaurant equipment were sold at public auction for $1,030,000. Mr Handberg paid $600,000 to NAB from the proceeds of sale at auction. That sum was applied rateably to the two loans. The costs expenses and outgoings of the receiver's administration totalled $719,476.

687. Mr Handberg gave evidence at trial that he had made at least twelve appearances in court proceedings or applications initiated by, or in relation to, the Walters. He stated that the amount of staff time required by the receivership had significantly exceeded his expectations. It had been necessary to obtain legal advice on many occasions. The legal costs incurred in relation to the receivership were between $200,000-$250,000.

690. I am satisfied that the litigious and uncooperative conduct of the Walters, to which Mr Handberg testified, significantly contributed to the high costs and burdens of the receivership.

693. As at 12 June 2003 the shortfall on the relevant loans was estimated at $1,063,942 which remained unpaid.

697. At the outset of the trial, the Walters submitted that the Court had no jurisdiction to hear the proceedings on the ground of apprehended bias, by reason of my interest as the beneficiary of a trust which held approximately 8,000 shares in the NAB and a standard banker-customer relationship. I disclosed those matters at the commencement of trial.

700. In reliance upon the principles expressed by the High Court in Clenae Pty Ltd v ANZ Banking Group Ltd[2] and Ebner v Official Trustee in Bankruptcy[3], for reasons expressed in detail at pp.12 - 14 of the Transcript, I concluded that a fair-minded observer with knowledge of the material facts would not reasonably apprehend that I might not bring an impartial mind to the resolution of the questions to be decided in the proceedings. I therefore declined to disqualify myself.

704. By paragraph 1 of the defence in the enforcement proceeding, the Walters denied that the NAB is duly incorporated. They sought "particularised details pursuant to the plaintiffs incorporation and certificate of authorisation to act as a Bank".

707. Late in the course of the trial, the Walters filed and served a proposed amendment in relation to the allegation that the NAB lacked corporate status. They argued that the NAB was incorporated pursuant to an 1859 Act which prohibited it from lending on the security of land, and which remained in force.

710. The National Australia Bank of Australia was incorporated pursuant to An Act to Incorporate the Shareholders of the National Bank of Australasia, 22 Victoria, No. 74 (24 February 1859) ("the 1859 Act"). Section 8 of the 1859 Act provided that (subject to certain exceptions) it was not lawful for the Bank to lend, inter alia, on the security of land. The Walters argued that the 1859 Act (including the prohibition on lending on the security of land) remained in force and was applicable to the NAB. Their argument appeared to be one of ultra vires in the traditional narrow sense, rather than an allegation of want of corporate status. They contended that the NAB lacked the constitutional power to lend on the security of land. The various lending and security transactions at issue in the proceedings were therefore said to be unenforceable.

713. "An Act to Amend an Act intituled "An Act to incorporate the shareholders of the National Bank of Australia and for other purposes" No. DCXLI 29 September, 1879 ("the 1879 Act") repealed an interim Act amending the 1859 Act. It also introduced an amendment to a section of the 1859 Act.

716. Section 4 of the 1879 Act stated that the passing of the 1879 Act should not be deemed to exempt the National Bank of Australasia "from the operation of any general Act which is now in force or which may be hereafter passed relating to banks or banking in Victoria."

719. An Act to Facilitate the Carrying Out of the Reconstruction Schemes of Certain Companies and the Compromise Schemes of Certain Societies, No. 1356, 6 November 1893 ("the 1893 Act") referred, in its preamble, to compromises and arrangements of several companies under the Companies Act 1890, sanctioned (in the case of companies incorporated by an Act of the colony of Victoria) by the Supreme Court of Victoria and (in the case of other companies) by United Kingdom Courts. The preamble further provided that "whereas each of the companies so reconstructed is now an incorporated company incorporated under the Act specified in the third column of the schedule to this Act opposite the name of the company . . . "

722. The third column of the schedule to the 1893 Act lists the company prior to reconstruction, National Bank of Australasia, as incorporated under the Companies Act 1890. The fourth column lists the company after reconstruction as "The National Bank of Australasia Limited".

725. Therefore, pursuant to a statutorily-effected and curially-sanctioned scheme of corporate reconstruction, the company incorporated under the 1859 Act was reconstituted with an altered name, incorporated under a different Act (which was the general incorporation Act then in force).

728. The Acts Enumeration and Revision Act 1958 (Vic) was passed in order, inter alia, "to provide that certain enactments of the Legislature of Victoria shall be repealed".

731. Section 7(b) of the Acts Enumeration and Revision Act provides that the enactments set out in chronological order in the Second Schedule to the Act shall continue to have statutory force and effect.

734. Section 9 of the Acts Enumeration and Revision Act provides that "save as aforesaid, every enactment enacted before 1 September 1958 so far as the enactment is at the commencement of the Act in force in Victoria shall be repealed in and for Victoria." The Second Schedule refers to only three 1859 Acts, which are saved by force of s.7(b). The National Bank of Australasia's incorporating Act is not included in the Second Schedule. It is hence repealed.

737. In summary, having been initially incorporated under an individual Act of Parliament, the bank was, following reconstruction in 1893, incorporated pursuant to the general incorporation legislation which was then in force.

740. The NAB is now certified as having been registered under the Corporations Act 2001. A certificate issued by ASIC notes that the date of commencement of its registration is 23 June 1893.

743. Section 1274(7A) of the Corporations Act 2001 provides that a certificate issued by ASIC stating that a company has been registered under the Act is conclusive evidence that:

(a) all requirements of the Act for its registration have been complied with; and

(b) the company was duly registered as a company under the Act on the date specified in the certificate.

749. Section 9 of the Corporations Act 2001 relevantly defines "company" to include "a company registered under this Act."

752. Section 124 of the Corporations Act 2001 provides that a company has the legal capacity and powers of an individual both in and outside this jurisdiction. It also has all the powers of a body corporate.

755. That provision confirms the abolition of the narrow corporate doctrine of ultra vires. The NAB, as a company registered under the Corporations Act 2001, has the capacity to make loans on the security of land. Section 125 of the Corporations Act 2001 recognises that the individual constitution of a company may contain a restriction on the company's exercise of its powers. The Walters do not point to any such restriction in the present case.

758. There is no basis for the contentions that the NAB lacks corporate status, is prohibited by statute from making loans on the security of land or otherwise lacks the power or capacity to make such loans.

761. The Walters' contention based on the NAB's want of corporate status, and (in so far as it is relevant) the doctrine of ultra vires, fails.

765. The Walters sought, at the outset of the trial, to have the proceedings tried by jury. They submitted that the denial of a trial by jury was contrary to Rule 47.02 of the Supreme Court Rules and to s.80 of the Commonwealth Constitution. Further, they contended that they were entitled to have the proceeding tried by jury pursuant to Magna Carta.

768. Master Evans, by order made on 27 April 2001, ordered that the principal proceeding was to be tried by judge alone without a jury. The Walters contended that at the hearing of their application for a trial by jury, Master Evans had declined, in response to their enquiries, to disclose whether he was a Freemason. (This is discussed below).

771. Although they did not appeal from Master Evans' order, the Walters claimed that at the time, they were ignorant of the possibility of an appeal. At the commencement of the trial, they renewed their application for a trial of both proceedings by jury.

774. For reasons set out in the Transcript, pp.23 to 28, I ruled at the outset that both proceedings should be tried by judge alone. The order of Master Evans had not been appealed within the time permitted by the Supreme Court Rules. Further, the order of Master Evans was soundly based. The nature of both proceedings rendered a trial by jury inappropriate. There was no constitutional entitlement or any entitlement under Magna Carta for a trial by jury of the proceedings in question.

778. The Walters contended that the Court lacked jurisdiction to hear and determine the proceedings and was unlawfully constituted because certain judges and other Court officials are, or are suspected to be, Freemasons. They alleged that Freemasons administer and swear unlawful oaths, including oaths of allegiance to a foreign power, contrary to s.316 of the Crimes Act and s.321 of the Crimes Act. Further, the Walters contended that Freemasons are party to conspiracies to commit criminal acts and are otherwise implicated in criminal conduct.

781. Ms Walter read to the Court some oaths allegedly administered to, and taken by, Freemasons. The Walters served a subpoena on an associate of a judge of the Court, requiring him to produce documentation which would reveal the identity of any judges, masters or other Court officials or employees who were Freemasons.

784. The Walters contended that Freemasonry is a brotherhood of persons who habitually take unlawful oaths and who owe obedience to foreign powers. They alleged that in the course of their dealing with the NAB, Mr Fritz Walter (who is not a Freemason) failed to respond to a secret Masonic handshake made by an unidentified bank officer. The Walters claimed that in consequence, the NAB thereafter acted to the Walters' detriment and ultimately sold their property. No evidence of the alleged handshake incident was adduced at any stage. However, the Walters asserted that alleged Freemasonry within the Court precluded a fair trial of their claims. Ms Walter stated: "If the judge hearing the case were a Freemason, and the other party was a Masonic member as well and they had discussed the court case previously and made their decision while they were in the lodge" then "a litigant could not win."

787. Master Evans, whom the Walters believed to be a Freemason (as he would neither confirm nor deny membership) had made an order in the principal proceeding for trial by judge alone. Master Evans' order was said to be of no effect, due to his alleged status as a Freemason.

790. Although I stated that I was not, and had never been, a Freemason, the Walters contended that the status of the individual judge hearing the proceeding was irrelevant. They claimed that the Bench of the Supreme Court of Victoria was infested with Freemasons who were guilty of criminal acts, indictable offences and other unlawful conduct which contaminated the entire Court. Although Ms Walter preferred to characterise it as a "question", she essentially submitted that the Court lacked jurisdiction to determine the proceedings on the ground of Freemasonry.

793. In reliance upon Re Shaw & Another[4], in which the Court of Appeal considered almost identical arguments about Freemasonry to those raised in the present matter, I ruled from the outset that Freemasonry had no bearing on any legitimate issue to be determined in the case. The reiteration of such allegations and the associated baseless attack on the Court's personnel and processes were, in my view, irresponsible and regrettable.

797. Paragraph 25 of the Walters' amended statement of claim states -

"Fractional Reserve banking is illegal - Particulars - The defendant is a private banking institution governed by the Federal Reserve Act, the Banking Act, the Credit Act and others. None of these Acts provide a statute which allows the defendant to pursue fractional reserve banking."

801. The Walters served a subpoena on Mr Frank Cicutto, the managing director of the NAB, requiring him to attend to give evidence concerning fractional reserve banking and "credit creation". They contended that Mr Cicuitto was an expert on those practices.

804. The term "fractional reserve banking" was not defined in the Walters' pleadings. There was no allegation, in terms, that the NAB engaged in fractional reserve banking. No legal consequence of engaging in it was alleged in the pleadings.

807. The conduct comprehended by the term "fractional reserve banking" and its alleged legal consequences were identified incrementally in oral submissions by Ms Walter during the course of the trial.

810. Broadly, she submitted that fractional reserve banking is a term applied to the practice of making loans and advances to customers which exceed the value of a bank's shareholder equity or other reserves. In such circumstances, the loans made in excess of the bank's beneficially owned funds are said to be mere book entries, and "artificially created". Therefore, it is contended that the bank gives nothing of value in making such loans. There is thus no consideration given by the bank in the loan transaction, which is unenforceable on the dual bases of illegality and want of consideration.

813. The Walters called Mr Smart to give evidence on their behalf. Mr Smart had experience as a litigant in person against a major bank. Mr Smart stated that he had researched fractional reserve banking and had discussed the practice with the Walters. During the course of the trial, he met them daily. He testified that the practice of fractional reserve banking and credit creation was "the most evil face in this country". He stated: "Credit creation is the greatest evil. Credit creation has many names. It is commonly referred to as fractional reserve lending, fractional reserve banking, Douglas credit, manufactured credit, social credit. It has many pigeonholes. I prefer to use the word credit creation". Mr Smart further stated that "what I do have trouble with is the corruption of the judiciary supporting the banks and allowing the banks to do what they do. Without a corrupt judiciary, then the banks would be nothing ... ". He attributed the existence of credit creation to the complicity of a corrupt judiciary.

816. The Walters pointed to the NAB annual financial report for the year 2001 which showed the NAB to have made loans and advances of approximately $207 billion, compared with its equity of $23 billion.

819. They submitted that the loans and advances shown as assets of the NAB were "manufactured" and "simply made by book entry. They are not funds that the bank has readily available to make them as a loan". In that context, the Walters submitted that it is necessary first physically to possess an amount of money in a material form before it is possible to make a valid and enforceable loan. That submission is evidently based on the view that the chose in action constituting the right to repayment of the loan is valueless, as it lacks a tangible form. On that basis, a bank which has made multiple advances has no assets corresponding to those advances.

822. The Walters relied upon the decision of First National Bank of Montgomery v Jerome Daly[5], a decision of one Martin V. Mahoney, a Justice of the Peace in the Township of Credit River, State of Minnesota.

825. It appears from the brief reported judgment in First National Bank of Montgomery v Jerome Daly that a "jury of talesmen" in that case concluded that the plaintiff bank had not provided lawful consideration in making secured advances to the defendant. The jury accepted the defendant's argument that the bank "created" the money and credit upon its own books by bookkeeping entry, as the consideration for the defendant's promissory note and mortgage.

828. Justice of the Peace Mahoney declared that the mortgage was null and void, due to a failure of lawful consideration. An attached memorandum by Martin V. Mahoney, dated 9 December 1968, stated that the plaintiff bank had admitted that it created the amount advanced in money or credit upon its own books by bookkeeping entry. It noted that "The money and credit first came into existance (sic) when they created it". It further noted that the plaintiff bank admitted that "no United States Law or Statute existed which gave [the bank] the right to do this".

831. The memorandum concluded that the bank's "act of creating credit is not authorised by the Constitution and Laws of the United States, is unconstitutional and void, and is not a lawful consideration in the eyes of the Law to support anything or upon which any lawful rights can be built."

834. The Walters submitted that the NAB likewise merely creates book entries of loans instead of providing lawful consideration for the promise to repay. They say that the practice amounts to "credit creation" and "fractional reserve banking", because the NAB keeps in reserve funds which amount to only a fraction of the total amount of loans and advances made. The loans and advances made by the NAB are thus simply book entries ... ". Ms Walter pointed to an NAB account statement for the Walters' home loan in which the "purported loan" was not shown as a credit to the borrower, but immediately shown as a debit and submitted "So there was no credit given at any time ...".

837. Ms Walter did not, however, dispute that the loan amounts in question were paid either to the Walters or to third parties at the Walters' direction or order, so that the NAB provided moneys to pay the vendor of the Walters' residential property and to discharge the Walters' liabilities to their creditors.

840. A similar argument based on "credit creation" was advanced in National Australia Bank Ltd v McFarlane.[6] In that case, the defendant mortgagor contended that unless the lender in a security transaction hands over "bullion, banknotes or coin", the mortgage is invalid. Byrne J stated:

"It is apparent to me that this is arrant nonsense. It has no regard to the legal obligations created by a bank loan; it ignores the reality of modern commerce where it is money, in the broad sense of the term, including choses in action, and not only gold, banknotes and coin, or indeed legal tender, which plays a most important part."[7]

844. Byrne J noted that he had read the Daly[8] decision and considered its logic "bizarre". He was neither bound by the decision nor persuaded that its reasoning was valid. His Honour noted that, in so far as the Daly decision depended upon the impact of provisions of the United States Constitution, the Constitution of the State of Minnesota and other United States laws, such provisions had no application in Victoria.[9]

847. In Smart v ANZ Banking Group Ltd[10] the appellant, Mr Smart, who gave evidence in the present case, contended that the loan secured by a mortgage was not a real loan but "a paper transaction. Actual money doesn't change hands, cash money". Batt JA at p.4 observed that:

"The argument thus seemed to be that no moneys were lent, but only credit was created by book entry, which, it was said, was unlawful because the only mode of payment was by legal tender .... Mr Smart's argument overlooks banking and credit altogether. Indeed, it seems to take no regard even of an undoubted fact of commercial life, the use of cheques and bills of exchange. It may be that in economic terms, the respondent bank "lends" its credit by way of fractional reserve banking but it cannot be doubted that in point of juristic analysis money was lent. That is so even in the case of the housing loan; some funds advanced to Mr Smart pursuant to it were by his direction paid to the solicitors for the vendors .... Moreover, there can be no doubt that Mr Smart received value in this and the other funding transactions. A legal liability in Mr Smart sounding in money was created for good consideration. What was done was not unlawful, was real and was not devoid of legal effect. Arnold v State Bank of South Australia (1992) 38 FCR 484 at 485 and 486".

851. I agree with and adopt the above observations of Byrne J and Batt JA.

854. No statutory basis, or any authority other than the Daly decision, was cited in support of the proposition that the making of loans is unlawful, and any associated security invalid, unless the purported lender has in current possession, bullion, or a net amount of money, corresponding to the amount of the loan. In making a loan, the lender advances money, or gives a promise to pay it to, or at the direction of, the borrower. The borrower obtains the benefit of the advance or the promise.

857. I ruled at the outset that fractional reserve banking was not a relevant issue in dispute. Further, I set aside the subpoena served upon Mr Frank Cicutto, as being an abuse of process, for the reasons set out in the Transcript at pp.129-132.

860. Despite the ruling that fractional reserve banking was not a relevant issue, the Walters subsequently raised the want of consideration claim in various different guises. For example, they alleged that because the $304,000 home loan was not shown in NAB bank statements as a credit to Fritz Walter and Ingrid Walter, but was paid to the vendor of the property from whom they took a transfer, at their direction and on their behalf, Fritz and Ingrid Walter did not receive a credit. Hence, they claimed that no consideration was provided for the home loan by the NAB.

863. The Walters' Proposed Amendment dated 26 May 2003 stated that the bank statements provided did "not show any evidence that the bank in fact deposited any funds to the purported loan accounts of the Walters and such conduct amounts to fraudulent conduct on behalf of the Bank". It was alleged that the NAB deceived the Walters by leading them to believe that they would receive a deposit of legal tender into their accounts. It is further alleged that in consequence, the NAB converted the Walters' security documents and the Walter Family Trust was thereby constituted a lender to the NAB.

866. There is no basis in authority, statute or recognised legal principles for that absurd assertion.

869. I am satisfied that the NAB paid the relevant loan amounts to the borrowers, or to third parties, at the Walters' direction. The NAB therefore provided lawful consideration for the legal obligation to repay such amounts, together with interest and charges pursuant to the loan contracts and for the mortgages and charges securing the liabilities under the loan contracts. There is no basis for the Walters' claim that the NAB was guilty of wilful deception or fraudulent conduct due to the absence of a credit in their bank statements of amounts paid to third parties at their direction.

872. There is no substance in the Walters' allegations of want of lawful consideration. The associated allegations of fraud are also without foundation and were irresponsibly and reprehensibly made.

876. Although I ruled at the outset that fractional reserve banking was not a relevant issue, the Walters, during the course of the trial, complained of another banking practice which may have been comprehended within fractional reserve banking. The Walters complained that following default, the NAB's statements of account were no longer forwarded to them. Further, they complained that while some bank documents showed interest and fees still accruing on the Walters' accounts, other internal bank documents did not. They described this as "double-account keeping". The Walters had become aware of the different statements or records of accounts only as a result of discovery by the NAB.

879. It was not clear whether the Walters characterised this practice as an instance of "fractional reserve banking" or whether it was advanced as an independent ground of complaint. The Walters alleged that it involved fraud, dishonesty or want of lawful consideration, or that it indicated an inaccuracy in, or uncertainty about, the amount for which the NAB purported to hold the Walters liable. They alleged that the NAB's practice of withholding statements from the customer was sinister, indicating an intention to "conceal such statements from the customer and the tax department".

882. Mr Aldous, a legal services manager of the NAB, gave evidence on behalf of the NAB in relation to this matter. He did not deny it was standard practice for some internal bank records or statements compiled after a borrower's default to reflect fees and interest still accruing, while other internal records did not. He explained that different bank records are prepared for different internal purposes.

885. Mr Aldous deals with the recovery of debts and legal proceedings. He instructs solicitors in relation to legal proceedings by or against the NAB. He was familiar with the two loans at issue in the case.

888. He referred to relevant internal bank memoranda which showed the raising of a provision, being the estimated shortfall on the loans.

891. Mr Aldous explained that according to the NAB's practice, once a potential loss on a loan is recognised, and a provision is raised, an internal instruction is sent to the relevant branch account manager setting out an action plan. A "memorandum account card" is also prepared and maintained. A memorandum account card is a summary of the customer's position on the basis that interest and fees payable on the loan continue to be calculated.

894. On 18 December 2000, the NAB made provisions for the estimated shortfalls on both of the Walters' loan accounts, which were frozen.

897. Mr Aldous gave evidence that once a provision is raised on a loan account, the NAB no longer issues the normal monthly statements to customers. The monthly statements are issued to the account manager instead. The monthly statements show the account as frozen and interest and fees are not shown as accruing. A notation is made on the bank's computer records so that statements will no longer be issued to the customer. They are marked "Do not mail - refer to manager". Interest and fees nevertheless continue to accrue. They are shown on the memorandum account card. The "bad debt" memorandum account cards show the "true picture". They are continually updated as fees and interest continue to accrue.

900. The Walters also alleged that certain account statements revealed that NAB had in fact received an overpayment which entirely extinguished their debt.

903. In my opinion, the allegations are without foundation.

906. I am satisfied that the differences between the monthly statements and the bad debt memorandum account cards are explicable by legitimate internal record-keeping and accounting requirements of the NAB. The differences identified by the Walters do not constitute evidence of absence of consideration, inaccuracy, deception or other illegality or impropriety. There is no basis for the allegation that the NAB was "deliberately misleading to conceal a willful (sic) deceit of the real transactions to the detriment of the Walter Family and their associated Trust or Company".

910. During the course of the trial Ms Walter alleged that the NAB had assigned one or more of the Walters' loans or mortgages to a third party, Homeside. The principal ground advanced to support that allegation was a reference in an NAB internal profit report, which referred to the acquisition in February 1998 of Homeside Inc. in the United States, which, inter alia, manages the creation of mortgage-backed securities.

913. According to the available evidence "Homeside Lending" is or was a division of the NAB which dealt with the servicing of home loans and personal loans. The names "Homeside" and "Homeside Lending" were both registered under the Business Names Act with the NAB as proprietor. The staff of "Homeside" were or are employed by the NAB. Homeside is not a separate legal entity.

916. Mr Aldous, the NAB legal services manager, gave evidence that he was familiar with the Walter loan files and that none of the mortgages in this case was assigned to a third party.

919. There is no evidence to establish that any of the loans or mortgages was assigned to a third party at any time. Assignment therefore does not constitute an impediment to the recovery of the loans or the enforcement of the mortgages.

923. The Walters advanced a constitutional argument which has been raised and considered in a similar form in a number of cases in which litigants in person have sought to defend claims for possession or enforcement of mortgages by banks[11].

926. First, they apparently contended that the Constitution Act 1975 (Vic) is invalid, on the ground that there is no proof that Queen Elizabeth II signed the Constitution Act, which therefore did not receive royal assent. The Walters tendered a copy extract of the signature page of the Constitution Act which they stated they had obtained from Parliament House. It did not disclose the signature of the monarch. They contended that by the 1855 Constitution, the personal signature of the monarch was required.

929. Subsequently, the Walters resiled from contending that the Constitution Act 1975 was invalid, but instead posed the hypothetical question of its validity.

932. The Walters' submissions in relation to the validity of the Constitution were confused. Ultimately, it was unclear to me whether any allegation or submission was being made, or whether the Walters were merely raising hypothetical issues which the Court should not determine. Further, it was unclear what the impact of any such allegations or hypothetical issues on the present case would be.

935. As I apprehended it, the Walters initially contended that the Constitution Act 1975 was invalid, due to absence of royal assent. Further, they asserted that the terms of the 1855 Constitution Act were not complied with, as s.24 of the Constitution Act 1855 renders vacant the seat of any member of the Legislative Council or Legislative Assembly "who shall take any oath" or, broadly, who acknowledges allegiance, adherence or obedience to any foreign power. The Walters submitted that the possibility that members of the Legislative Council or Legislative Assembly were Freemasons had an impact in this context. I had ruled that Freemasonry was not a relevant issue, for the reasons set out above.

938. It was not clear whether the Walters were contending that the State of Victoria has no valid constitution. However, they submitted that as a practical consequence of any constitutional invalidity the NAB was unable lawfully to engage in banking practices, and possibly that its incorporation was unlawful. On a broader level, it was that the Supreme Court was not validly constituted and had no jurisdiction to determine the present proceedings.

941. There is no basis for alleging the invalidity of either the Constitution Act 1855 or the Constitution Act 1975. The Constitution Act 1855 was proclaimed on 23 November 1855, the 1854 bill having received assent on 21 July 1855. The Constitution Bill entitled the Constitution Act 1975 was assented to by Queen Elizabeth II on 22 October 1975, and by proclamation published in the Victorian Government Gazette of 19 November 1975, the Governor signified that assent.[12]

944. The Walters have failed to establish any constitutional basis for invalidating the loans or mortgages or for challenging the jurisdiction of the Court.

BREACH OF FIDUCIARY DUTY - SALE AT AN UNDERVALUE

948. The amended statement of claim in paragraph 19 pleads breach of fiduciary duty by the NAB in respect of the auction sale.

951. The particulars allege that the receiver, on 2 March 2001, conducted an auction sale of the brewery land, restaurant land, buildings and chattels of the company.

954. The basis of the allegation of breach of fiduciary duty appears to be that the brewery land and associated chattels were sold at an under-value.

957. The price achieved at auction on 2 March 2001 was $1,030,000. The sale price was significantly lower than the estimate of value of the brewery property made by Dixons First National Real Estate, Wodonga, May 1999, ("the May 1999 valuation") in which the brewery was valued at $3.5 million. However, it exceeded the value ascribed to the property in a valuation obtained by the receiver from G.D. Sutherland Pty Ltd in December 2000 ("the G.D. Sutherland valuation") which estimated a value range of $800,000 to $1 million.

960. In exercising its powers of sale or other security rights, a mortgagee is not subject to fiduciary obligations but is entitled to exercise the power for its own benefit.

963. By s.77 of the Transfer of Land Act 1958 (Vic):

"... the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract."

967. The standard of care required of a mortgagee exercising its power of sale is measured by reference to the equitable test of good faith.[13] The mortgagee is required to deal fairly with the interests of the mortgagor and to act without fraud and without wilful or reckless disregard of those interests. Relevant authorities establish that the mortgagee, in exercising the power of sale, "must take reasonable steps to ensure that at the time of sale, he is getting the best price then available for the mortgaged property".[14] On one view, the mortgagee will not be liable for mere negligence or carelessness pursuant to the general law duty[15].

970. In Carver v Westpac[16] Austin J recently stated succinctly the relevant general principles as follows:

"1. The power of sale is given to the mortgagee for its own benefit, and is not held by the mortgagee in a fiduciary capacity.

2. Moreover, the fact that the mortgagee's sale is for a price disadvantageous to the mortgagor is itself no ground for judicial intervention: Warner v Jacob (1882) 20 Ch D 220, 224; Haddington Quarry Co v Hudson [1911] AC 727; Adamse v Broadway Credit Union Ltd (1999) NSW Conv Rep 55-876.

3. Nevertheless, in exercising the power of sale, the mortgagee is subject to an equitable duty to act in good faith: Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676; Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477. The mortgagee's impropriety is sometimes described as a fraud on the power, and sometimes as a wilful or reckless disregard of the interests of the mortgagor, and sometimes as a sacrificing of the interests of the mortgagor. Whatever description is used, it is clear that the commission of actual fraud (in the sense of an intention to defraud the mortgagor, or corruption, or collusion wit the purchaser) need not be shown: Forsyth v Blundell at 496-7, per Walsh J.

4. It is unclear whether, as a matter of Australian law, the mortgagor and the mortgagee stand in a relationship of proximity under which the mortgagee owes the mortgagor a common law duty to take reasonable care in the exercise of the power of sale: cf Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971[ Ch 949; 2 All ER 633. So far the Australian cases have analysed facts suggesting failure to take reasonable care by recourse to the equitable principles concerning good faith, rather than common law negligence.

5. Nor is it clear whether different practical results flow from the application of equitable duty of good faith and the principles of common law negligence. Fisher and Lightwood's Law of Mortgage (Australian edn, 1995), p 459, states:

`There may be some practical differences between the two tests, such as in the extent of the mortgagee's duty to others besides the mortgagor, but it is doubtful whether in most cases the result would be different whichever test was applied. In Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477 at 481 it was said that to take reasonable precautions to obtain a proper price is but part of the duty to act in good faith.'

6. The following are some of the incidents of the mortgagee's duty of good faith:

(a) the onus of establishing breach of the duty lies on the mortgagor: Forsyth v Blundell at 499;

(b) a mortgagee fails to act in good faith if it looks after its own interests alone and sacrifices or absolutely disregards the interests of the mortgagor: Pendlebury at 680-1 per Griffiths CJ;

(c) action which is unfair would normally be regarded as action in bad faith; Pendlebury, at 694 per Barton J;

(d) the mortgagee cannot discharge its duty by delegating the exercise of the power of sale to an agent (such as a real estate agent), since the duty requires the mortgagee not only to select a competent contractor but also to give adequate instructions, and to exercise some surveillance over the contractor or to inspect the work he is doing: Commercial and General Acceptance Ltd v Nixon (1981) 152 CLR 49, 498 per Gibbs CJ, 500 per Mason J;

(e) where the mortgagor's case of breach of duty is based on sale at an undervalue, it is not necessary for him to prove that any particular individual would have paid a higher price for the property: Nixon v Commercial and General Acceptance Ltd [1980] Qd R 153 (not disturbed, on this point, on appeal to the High Court); McKean v Moloney [1988] 1 Qd R 628."

985. The Corporations Act s.420A which applies in terms to `controllers', is in addition to the general law duty of good faith and modifies the position that mere negligence may not give rise to liability.

988. In the present case, the Walters did not particularise the alleged breach of duty. They did not allege that the advertising of the sale was inadequate or inaccurate, that the sales period was too short or otherwise inappropriate or that the auctioneer misconducted the auction process. They did not attack the principles or methodology of the GD Sutherland valuation. Rather, they pointed to the disparity between (a) the price achieved at auction for the brewery land and the value estimated in the May 1999 valuation and (b) the price achieved at auction for the plant and equipment and the value estimated for it in the Taylor Lockwood valuation dated 6 December 2000.

991. The May 1999 valuation expressly acknowledged that it was "simply an overview and given thorough researching a different scenario may emerge". It stated that "in a forced sale situation I would doubt if the property would exceed $2,000,000. As a viable operation its value may be in the area of $3,000,000 to $3,500,000."

994. The Taylor Lockwood valuation dated 6 December 2000 was obtained on the instructions of Mr Handberg. It valued the Palatinat equipment as "owned equipment" at $940,350 on a market value for existing use basis, at $258,330, on an "auction realisation on site" basis and at $136,055 on an "auction realisation in rooms" basis. If valued the equipment as "lease equipment" at $108,000 on a market value for existing use basis and at $87,500 on an "auction realisation on site" and "in rooms" basis.

997. When seeking a consolidation of their existing loans in November 1998, the Walters had objected to the NAB's usual requirement for a sworn valuation. They wished to avoid the expense of a sworn valuation, for which the borrower is liable. Ms Carmen Walter approached Mr Selwyn Wegner, the NAB regional business manager of Wodonga. Wegner agreed to defer the requirement for a sworn valuation until the new loan facilities were put in place. (Although at trial, Ms Walter did not concede that the meeting with Mr Wegner preceded the restructuring, I am satisfied that it did.) Mr Membrey's evidence was that the NAB agreed to follow up with a market appraisal at a later date. Unlike the sworn valuation, a market appraisal is usually performed at no charge.

1000. At trial, Mr Grant Sutherland of G.D. Sutherland, a certified practising valuer, gave evidence. In his opinion, the May 1999 valuation was an "assessment of value" which lacked the depth of investigation or analysis associated with a full valuation. Mr Sutherland considered the basis of the May 1999 valuation (adding up the cost of the land, the building and the fit out) inappropriate for valuing the brewery land. He concluded that the rental figure of $12 per square foot applied to the premises was high, based on the potential trading performance of the operations.

1003. In December 2000, Mr Handberg, the receiver, obtained an independent valuation of the brewery land from G.D. Sutherland Pty Ltd, valuers and estate agents. The G.D. Sutherland valuation valued the property inclusive of freehold, goodwill, plant and equipment (excluding the brewery equipment) at $800,000 to $1 million, on a going concern basis as at 5 December 1998.

1006. The G.D. Sutherland valuation assessed the value of the brewery land on the bases of the "current realisable value of the property considered upon a going concern basis" and "the current realisable value of the property considered upon a vacant possession basis". Due to the poor trading performance, the business entity was considered to have no value and there was thus no identifiable difference between the two bases of valuation. Both assessments took into account, and were "inclusive of the freehold, licence, goodwill and plant and equipment, excluding any plant and equipment associated with the brewery component, which does not form part of the freehold premises". The G.D. Sutherland valuation stated that while the "building is of substantial proportions" and that "little expense was spared in completing the structure" the cost of the land, buildings and other improvements did not necessarily have any direct impact on its potential profitability. Accordingly, the value was geared more to its potential net profit return.

1009. The G.D. Sutherland valuation of the brewery land, relied on "an assessment of the achievable potential trading performance of the operation, under alternative management and with a refined business focus" in conjunction with the valuer's expectation of prospective purchasers' assessment of the property's potential.

1012. At trial, Mr Sutherland's evidence was that the net profit performance of the operation, (which affects its potential rental return) is a significant factor in determining the level of value of a hotel or licensed premises. Potential purchasers consider the operation's profitability, which is reflected in the goodwill a purchaser attaches to the premises. Due to the poor trading performance of the Walters' business, little if any value was attributable to the goodwill.

1015. Mr Sutherland also gave evidence that the brewery land's location hampered its trading performance and turnover levels. It was remote from the main residential and commercial catchments of the cities of Albury and Wodonga.

1018. The G.D. Sutherland valuation did not refer to specific comparable sales. At trial, Mr Sutherland testified that comparable sales references were inappropriate, due to the unique nature of the brewery land, its location, circumstances and the trading performance of the business. He relied instead on general sales evidence and industry averages. The G.D. Sutherland valuation concluded that the valuation range provided was "somewhat greater than that considered normal for a property of this nature, noting the uncertainties and lack of available sale evidence".

1021. The May 1999 valuation's estimate of $3,000,000 to $3,500,000 was expressly conditional on a "viable operation" and conceded that thorough research might produce a different scenario. It had no application to the conditions prevailing by December 2000. Further, I accept the evidence of Mr Sutherland that the basis of the May 1999 valuation was inappropriate. The G.D. Sutherland valuation took into account the operation's performance. The price of $1,030,000 achieved at public auction on 2 March 2001 was well above the lower estimate and slightly exceeded the higher estimate of value in the G.D. Sutherland valuation.

1024. Although the Walters did not expressly allege misfeasance in the conduct of the auction they called Mrs Savery, a personal friend who had attended the auction, to give evidence on their behalf. Mrs Savery testified that she did not consider the conduct of the auction to be irregular but simply found it "odd that it was knocked down for $1,030,000". Mrs Savery's evidence does nothing to support allegations that the brewery land and associated equipment were sold at an undervalue, or that there was any impropriety, negligence, irregularity or breach of duty in the conduct of the auction.

1027. The receiver is not a party to the proceedings. The Walters, however, alleged that the receiver owed them a fiduciary duty in exercising his powers of sale and that the receiver's breach of duty is attributable to the NAB on the basis that the receiver was agent of the NAB.

1030. In Jeogla v ANZ[17], Einstein J observed:

"A receiver appointed to enforce a security is primarily responsible to the appointing security holder. The receiver's primary purpose is to gather in and realise the charged assets of the company to which he or she has been appointed and to apply the proceeds of sale to the satisfaction of the claims of the appointing mortgagee. Notwithstanding this primary consideration, a receiver is obliged also to have regard to the interests of the company. This obligation arises by virtue of the receiver being also the agent of the debtor company. The interests of the appointing mortgagee and the debtor company are not necessarily synonymous."

1034. In Expo International Pty Ltd (Receivers and Managers Appointed) (In Liq) and Another v Chant and Others[18], the incidents of a receiver's duty were summarised by Needham J as being a: "duty to exercise his powers in good faith (including a duty not to sacrifice the mortgagor's interests recklessly); to act strictly within and in accordance with the conditions of his appointment".[19] His Honour considered a receiver's duty as akin to that of a mortgagee in exercising a power of sale.

1037. Mr Mukhtar QC, for the NAB, submitted that the receiver was at all times acting as agent of the mortgagors. The NAB was thus not liable for the receiver's conduct, if (which was denied) the receiver had breached his duty.

1040. Clause 17.8 of the Palatinat debenture provides:

"Every Receiver appointed under or by virtue of this Deed is deemed at all times and for all purposes to be the agent of the Mortgagor and the Mortgagor is solely responsible for the Receiver's acts and defaults ... and the exercise of any right, power or remedy by the Receiver do not render, or deem the Bank liable as, a mortgagee in possession".

1044. Clause 9(b) of the Memorandum of Common Provisions attached to the brewery land mortgage states that the NAB is empowered to appoint a receiver who "shall be the agent of the Mortgagor and the Mortgagor shall be solely responsible for the acts of or defaults of the Receiver".

1047. In Expo International Pty Ltd (Receivers and Managers Appointed) (in Liq) and Another v Chant and Others[20] it was held that where a receiver is expressed to be the agent of the mortgagor, even though he or she is appointed by the mortgagee, the latter is not responsible for the actions of the receiver and manager. The duty owed by the receiver to the mortgagor is directly enforceable by the mortgagor. The receiver was not a party to this action.

1050. Although the conceptual contradictions of the receiver's status as the agent of the mortgagor is frequently acknowledged, the validity of the special limited agency is well-established. In consequence, any breach by the receiver would not give rise to liability in the NAB unless the receiver were acting at its direction. A mortgagee who appoints a receiver and manager is liable for the receiver's acts only if the mortgagee has directed or interfered with those acts.[21]

1053. The Walters in this context relied upon the NAB's instruction to sell the brewery land. Mr Handberg acknowledged that the NAB authorised him to proceed with the sale and marketing program. That circumstance does not constitute direction or interference, so as to render the receiver the agent of the NAB[22].

1056. Further, whether he were acting as agent of the mortgagor or of the NAB, for the reasons set out above, there is no evidence that the receiver, or any other party, breached any duty in relation to the sale.

1059. At trial, Mr Handberg gave evidence that he engaged G.D. Sutherland due to its specialised experience in insolvency and familiarity with the duties of insolvency practitioners under the Corporations law. He engaged Taylor & Lockwood Pty Ltd to complete a detailed valuation of the plant and equipment based on an "on site" auction basis. Mr Handberg also engaged local real estate agents, G. & A. Dixon, in order to have an agent to conduct inspections of the premises when required, and for their knowledge of potential local buyers. He chose to auction the property because he determined that it was the best means to obtain the best possible price.

1062. The Walters also subpoenaed Mr Thomas William Christian who purchased the brewery property at auction on behalf of himself and other family members. Previously, in the course of the trial, the Walters had made allegations that Mr Christian was implicated in a fraudulent purchase. No evidence whatsoever was advanced to support such contentions, which were not persisted with. At trial, Mr Christian testified that he thought that the auction was well conducted and that the price he paid was higher than he had anticipated. He stated that the property was "not expected to make that sort of money". His evidence did not support the Walters' claim.

1065. A video tape of the auction was played in Court. It revealed a considerable attendance and a conventional bidding process, conducted by an attentive and competent auctioneer. The video tape did not disclose any unusual or untoward occurrence or circumstance. It did nothing to assist the Walters' claim.

1068. In my opinion, there is no evidence that the auction was improperly conducted, that there was negligence or a failure to take reasonable steps to sell the brewery land or associated equipment for the best price then available or that any party breached any duty or obligation in relation to the sale.

1071. There is no evidence to support the allegation that the receiver or the NAB failed to discharge the power of sale in good faith or that the property was sold for less than the best price then available and in disregard to the Walters' interests.

1074. The Walters' allegation that the NAB breached its duty by sale of the property must fail.

1078. By the amended statement of claim, paragraph 13, the Walters also alleged that the brewery mortgage was unenforceable on the basis that it "was not signed in the Trust's name" although "the Trust was the owner of the [brewery] land". They allege that because the borrowers under the overdraft facility were Fritz, Carmen and Ingrid Walter in their personal capacity and the Walter Family Trust did not guarantee the overdraft, the owner of the land did not execute the mortgage.

1081. In the course of the trial, the Walters developed that line of argument. They alleged that the NAB, aware that its existing security was unenforceable, deliberately exploited or engineered the loan reconstruction in December 1998, in order to perfect it. That allegation was apparently based on a different, nebulously articulated assumption, namely, that the brewery mortgage was unenforceable because it was executed by the trustees in order to secure their own indebtedness rather than trust liabilities. In December 1998, Fritz and Ingrid Walter were borrowers in their capacity as trustees of the Walter Family Trust. Presumably, the Walters contend that the brewery mortgage was thereby "technically" enforceable because it now secured trust liabilities but, that it remained unenforceable due to the unconscionability involved in procuring the execution of the loans in December 1998.

1084. In the December 1998 loan transactions Mr and Mrs Walter were borrowers on behalf of the Walter Family Trust in their capacity as trustees. The fact that they were borrowers in the capacity of trustee does not, of course, exclude their personal liability for the debt although in the usual course, there would be a right to be indemnified from the trust property for liabilities properly incurred[23]. In their personal capacity they gave guarantees for $1,380,000. Further, Palatinat and Ms Walter gave guarantees and indemnities for $1,380,000.

1087. Although the guarantees gave rise to a personal liability which was prima facie unsecured, any personal indebtedness of Mr and Mrs Walter, whether pursuant to guarantees or otherwise, was secured by previously executed registered first "all moneys" mortgages over the residential property and the brewery property. Palatinat's liability under the guarantee was also prima facie unsecured. However, it was supported by a prior registered mortgage debenture.

1090. The Walter Family Trust was established by deed dated 15 March 1996. The settlor was Simon Clarke Dubois. The trustees were Fritz Josef Walter and Ingrid Adelheim Rosa Walter. The beneficiaries were Fritz, Ingrid, Carmen, Roland and Sophie Walter, Andreas Knierim spouses, children and grandchildren, corporations in which directors or beneficial shareholders were beneficiaries, and a number of other broad categories of beneficiary.

1093. The trust is a discretionary trust. Clause 4 provides for the distribution at the trustees' discretion.

1096. By clause 12(1) the trustees have, subject to any contrary provision, "all the powers over and in respect of the trust fund and the investments thereof which it would exercise if it were the absolute and beneficial owner and shall exercise that diligence as an ordinary prudent man of business would exercise in conducting his own affairs."

1099. The powers in clause 12(2)(g) include express powers to acquire and carry on "any manufacturing, trading, primary production or other business in Australia or elsewhere" and to make loans "whether secured or unsecured" [clause 12(2)(i)].

1102. There is power to "sell ... mortgage, charge, sub-charge, or otherwise deal with ... any item or asset comprising the whole or part of the trust fund" [Clause 12(4)(a)] and "to acquire, dispose of ... mortgage, sub-mortgage, lease, sub-lease", and "let ... real property or any estate " [clause 12(4)(b)].

1105. There is power under clause 12(4)(i) to "raise or borrow moneys ... on terms and conditions and for purposes as the trustee may decide, and to secure the repayment of any monies or other indebtedness by mortgage, charge, security or other encumbrance over the whole or any part of the trust fund as the trustee in its discretion may decide. No lender shall be concerned to enquire as to whether the necessity for any such borrowing has arisen or as to the purpose for which it is required, or as to the application of monies borrowed".

1108. Clause 12(4)(k) provides the power to "enter into alone or with others any agreement or arrangement for obtaining credit upon such terms and conditions as the trustee may see fit ...".

1111. By contract of sale dated 13 May 1995, Fritz and Ingrid Walter purchased the brewery land for $138,000.

1114. Although the Walters subsequently requested that the property be registered in the name of the Walter Family Trust, they were registered as proprietors of the brewery land. No caveat notifying the interests of the beneficiaries of the Walter Family Trust or beneficial interests under any other trust was lodged. There is no evidence of a declaration of trust by Fritz and Ingrid Walter complying with the formalities required by the Statute of Frauds. There is no evidence of any basis on which to conclude that the property was held on constructive or resulting trust. I am not satisfied that the brewery land was held by its registered proprietors on trust.

1117. The bank's mortgage over the brewery land was registered on 4 May 1998. Pursuant to s 42 of the Transfer of Land Act 1958 (Vic) it is indefeasible, unless the registration was procured by fraud or it is subject to an in personam claim. The NAB, as registered proprietor of the mortgage, would not take subject to any interest (save for paramount interests) unless fraud or an in personam claim were established.

1120. There is no evidence that Mr Keating or any other bank officer was aware, at the date of the mortgage, that the brewery land was held, or alleged to be held, on trust. However, notice of the existence of a prior equitable interest is not in itself fraud.

1123. If, contrary to my finding, the brewery land were subject to the trust, the trustees had power to mortgage it. Borrowing for business purposes, acquiring property and giving security over trust property for such purposes as the trustees think fit, is clearly within power. Lenders are expressly exempt from any obligation to inquire as to the purpose of the borrowing or the application of borrowed funds.

1126. It would not a breach of the terms of the Walter Family Trust for the trustees to use trust property to secure funds advanced to Mr and Mrs Walter personally. In terms the trustee had the power under clause 12(4)(a) to:

". . . mortgage, charge sub-charge, or otherwise deal with, dispose of or transfer any item or asset comprising the whole or part of the trust fund, or otherwise held by the trustee under the terms of the Trust for such consideration and on such terms as in its discretion it may think fit".

1130. The trustees had power under clause 12(4)(i):

"to raise or borrow moneys either alone or jointly with another or others, from any person including a firm or company, either bearing or free of interest and on terms and conditions and for purposes as the trustee may decide, and to secure the repayment of any monies or other indebtedness by mortgage, charge, security or other encumbrance over the whole or any part of the trust fund as the trustee in its discretion may decide; or to have the repayment secured over property of a third party which may include property of a trustee or beneficiary, whether such third party collateral security is given alone or jointly with property of the trust fund".

1134. It is not disputed that the borrowed moneys were applied to construct and fit out the buildings on the brewery land, which the Walters assert to be trust property. It is not alleged, and there is no basis on which to conclude, that the borrowing would constitute a breach of trust or fiduciary duty.

1137. It follows that there is no evidence to establish that the NAB, through its officers, had knowledge of any breach of trust or fiduciary duty by Fritz and Ingrid Walter. In MacQuarie Bank Ltd v Sixty-Fourth Throne Pty Ltd[24] the Court of Appeal rejected the view that the concept of constructive notice "should be given a broad application so as to extend to cases in which a reasonable honest man would have had knowledge of circumstances telling of the wrongful disposition of trust property". Winneke CJ and Tadgell JA (Ashley AJA dissenting) took the view that protection of the central concept of Torrens indefeasibility required "that the registration has been achieved as a result of conduct by the mortgagee amounting to a want of probity before [a] registered interest can be defeated."[25]

1140. In summary, there is no evidence that the brewery mortgage was unenforceable on any basis. There is no evidence that the registered proprietors held the brewery land as trustees for the Walter Family Trust, but if they did, under the trust deed they had the power to mortgage it. No breach of duty by Fritz and Ingrid Walter is alleged, but if it were established, that circumstance would not displace the indefeasibility of the registered mortgage.

1143. It follows that the Walters' arguments based on trust issues fail. There is no basis for the allegations that the NAB instigated the December 1998 restructuring of loans in order to perfect a hitherto invalid security.

1147. The Credit Act ceased operation from 1 November 1996. From that date the Consumer Credit (Victoria) Code applies, in circumstances where credit is provided wholly or predominantly for personal, domestic or household purposes. In the present case, the credit was predominantly for business and commercial purposes.

UNCONSCIONABLE CONDUCT - SPECIAL DISABILITY; UNDUE INFLUENCE; ECONOMIC DURESS; ETOPPEL

1152. The validity and enforceability of a contract may be impugned, and the contract rendered voidable, on the basis of duress, undue influence, estoppel, unconscionable conduct through the unconscientious exploitation of a special disability and other equitable doctrines.

1155. The Walters allege that in the present case, they should be relieved of liability under the loans, guarantees and mortgages on the various equitable bases, including the above.

1158. Where one party to a transaction is subject to a special disability or is at a special disadvantage in dealing with the other party by reason of a characteristic such as illness, ignorance or inexperience, which affects the person's ability to judge and protect his or her own interests, and the other party unconscientiously exploits the disadvantage in a transaction, it may be set aside on the basis of unconscionable conduct.[26] Although the concept of `special disadvantage' bears some resemblance to the doctrine of undue influence, it is distinct. Undue influence is the improper use of control, domination or influence over a weaker party, to the benefit of the stronger party or a third party. It indicates that the will of the innocent party is not independent and voluntary, because it is overborne[27]. "Special disadvantage" implies that the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which that party is placed and the other party's unconscientious exploitation of that position.[28] Economic duress signifies the procuring of contractual assent by illegitimate pressure or threat, which vitiates the assent[29]. A threat to exercise legal rights appropriately although "driving a hard bargain" will not necessarily constitute duress. It is established that estoppel exists where, to his or her detriment:

"the party raising the equity has acted or abstained from acting on an assumption or expectation as to the legal relationship between himself and the party who induced him to adopt the assumption or expectation."[30]

1162. The Walters' contentions on equitable doctrines evolved and shifted somewhat during the course of the trial. The associated legal argument was nebulous and appeared to be based on misconceptions of relevant legal principle and authority. Ultimately, the principal allegations, as I understand them, were:

(a) The NAB unconscionably exploited its superior bargaining power and the Walters' special disadvantage constituted by:

the Walters' lack of knowledge of English,

the Walters' lack of knowledge of the NAB's business practices,

the Walters' lack of knowledge of the cultural background distinguishing Australian and German business practices.

(b) Messrs Keating and Membrey, the relevant officers of the NAB with whom the Walters dealt in the principal transactions, exercised undue influence over the Walters by reason of a relationship of reliance, ascendancy and trust which had been established. The Walters also allege that the bank officers, including Mr Membrey, acted as their financial advisers.

(c) The NAB exerted economic duress in relation to the execution of the December 1998 guarantees and loans. The economic duress was occasioned principally by the alleged "massive delay" in approving the restructured revised loans and presenting the documentation for execution to the Walters.

(d) The NAB presented the December 1998 loan and guarantee documents to the plaintiffs for execution in pressured circumstances, without providing the documents for examination in advance. It is said that there was no disclosure of the full extent of the liability under, or implications of, the revised loans. The explanations provided by Mr Membrey were "in brief". No interpreter was provided or made available. No opportunity to obtain independent advice was provided. The execution of the relevant documents was hurried. Mrs Ingrid Walter arrived late and did not hear Mr Membrey's brief explanation.

(e) Mr Membrey, at the execution of the loans in December 1998 some way misrepresented the terms of the fixed interest-only loan or induced the Walters to believe, that it would not be repayable within a one year term but would be indefinitely and unconditionally renewed, irrespective of the performance of the business.

1168. Ms Walter is a graduate in biotechnology from the Technical University of Manheim. Her work experience included biotechnological laboratory work and hospitals.

She studied English at school in Germany. At trial, she agreed that in 1997 she was competent in reading and speaking English. She stated "The every day language I would be able to handle very competently".

She stated that she was not, however, conversant with legal terminology. She gave the example of the word "debenture" with which she was unfamiliar. On receiving the debenture booklet she consulted a dictionary to ascertain the meaning of the word.

1173. Ms Walter has, and at all material times had, significantly superior English language skills to those of her parents. She agreed that their family bonds were strong and that she always assisted her parents in understanding transactions and documents.

1176. Although she was reluctant to concede that she dealt competently and confidently with professional advisers, the evidence establishes that Ms Walter was competent and confident in relation to such dealings.

1179. Ms Walter agreed that she was careful or "considerate" about her financial and other affairs. Having observed her conduct at trial, I am satisfied that the intelligence and astuteness exemplified by her perusal of the debenture booklet and independently ascertaining the meaning of an unknown technical term, would be characteristic of Ms Walter's approach to, and conduct of, business transactions.

1182. Although Ms Walter did not, in terms, concede it, I am satisfied that she would not execute, or allow her parents to execute, a document committing them to a significant transaction unless she were satisfied that the Walters understood its nature and effect.

1185. Ms Walter acknowledged that she had made a number of court applications, appearances and appeals. She had prepared the pleadings, court documents, interrogatories and discovery. Her conduct of the present proceedings on behalf of the plaintiffs demonstrated energy, intelligence and an impressive command of language.

1188. In the course of the banking relationship, Ms Walter, either alone or with Mr Fritz Walter, organised communications and contact with senior banking officials, showing a remarkable degree of persistence and confidence.

1191. Mr Fritz Walter operated a very successful car repair dealership in Germany for 25 years. He had a master's degree in mechanics from a German technology college. The business had an annual turnover of 7 million Deutschmarks. There were about 20 employees. Mr Walter was the managing director of the company and handled the business' finance.

1194. Mr Walter stated that he had received no formal education in English. He claimed that he did not speak English in 1996 although his fluency improved after the Walters settled in Australia. He claimed that he could not read or write English. When he needed to read or understand English, he relied on Ms Walter who translated for him. Although Ms Walter sometimes needed to look up technical English words, he had great confidence in her as a translator. He also had access to another translator who had lived in Australia for 45 years.

1197. Mr Walter conceded that in the course of his business in Germany, he had dealt with banks and had acquired commercial experience. He understood the notice of security for bank loans and the concept of a mortgage.

1200. He had visited Australia frequently for holidays from 1981 and on establishing the business, his language skills were significant to deal with customers behind the bar and to welcome them, as the restaurant host.

1203. On setting up the brewery business he retained the services of the accountant Mr Dubois. When he and his wife purchased the property, solicitors acted for them.

1206. At trial, Mr Walter initially acknowledged that he knew that the NAB required security for the home loan, but ultimately denied that he knew, at the time, what the mortgage was. Mr Walter also denied at one point that he knew what a guarantee was. At another point he stated that he knew the bank needed a guarantee, but did not know that it required a mortgage.

1209. I consider that Mr Walter had a greater understanding of English and a much greater understanding of the relevant transactions, than he was willing to acknowledge. He also had access to the services of qualified professional advisers and a competent translator in Ms Walter.

1212. Mrs Ingrid Walter had eight years of formal education in Germany. She had no formal English language education. She had spent vacations in Australia since 1981 but stated that she did not understand much English at the "really early time when we were in Australia".

1215. For the first ten years of its operation, Mrs Walter was actively involved in the Walter family's Peugeot business in Germany. She carried out the banking and handled cheques and payments. She ran the business together with Mr Walter and understood the business. She understood the concept of a mortgage. She participated in the decisions to establish a business in Australia. She worked full time in the business, managing the kitchen operations. Mrs Walter understood that a business structure of a company and a trust had been established, but did not know the details.

1218. Mrs Walter stated that she would attempt to understand when people spoke English and trusted Ms Walter to translate when required. So long as Ms Walter understood what the bank officers were saying, Mrs Walter was content to sign anything which Ms Walter approved.

1221. In the circumstances, I am satisfied that the Walters, individually and collectively, were not subject to a special disability or in a position of special disadvantage. They were, and are, intelligent, resourceful and experienced business people who had access to independent professional legal, financial and business advice in entering transactions designed to advance their own interests. The allegation of unconscionable conduct based on the unconscientious exploitation of special disability or special disadvantage, or any other basis, is not made out.

1224. The fact that borrowers are not fluent English speakers does not constitute a special disability in circumstances where they have access to competent translation, access to qualified professional advisers and extensive collective business experience and education. Similarly, local variations (if established) in banking or commercial practice do not constitute a special disability for experienced, competent business people who have access to local professional advisers.

1227. In my opinion, Messrs Keating and Membrey were disinterested and honest witnesses. While neither claimed to retain a specific detailed memory of individual transactions, each witness testified that he followed his ordinary and usual practice of explaining documents and advising the borrowers of the opportunity to obtain legal advice. I accept that evidence, in accordance with the principle recognised by Batt JA in Smart v ANZ[31] that "in order to prove an act has been done it is admissible to prove any general course of business or office, whether public or private, according to which it would ordinarily have been done, there being a probability that the general course be followed in the particular case...".

1230. The testimony of Messrs Keating and Membrey is also supported by the contemporaneous documentation and is consistent with the undisputed surrounding circumstances. In contrast, the conflicting testimony of Ms Walter and Mr Walter, in particular, was evasive, unresponsive, inconsistent with contemporaneous documentation and inherently improbable. I consider that both Ms Walter and Mr Walter sought to portray a vulnerability, passivity and unquestioning trust which were at odds with their assertive, questioning and self-reliant demeanour at trial. Where there is a conflict of evidence, I prefer that of Mr Membrey and Mr Keating.

1233. I am satisfied that, as he testified, Mr Keating believed that the Walters understood the documents they executed, and the nature and terms of the transactions I am satisfied that the Walters presented to Mr Keating as he described them in his contemporaneous diary notes - well-educated, resourceful and experienced business people.

1236. I also accept Mr Membrey's testimony that he had several discussions with Fritz and Carmen Walter prior to 16 December 1998 in which he apprised them of the proposed split loans and their fundamental terms, including the one year term of the $1 million fixed interest-only loan. I am satisfied that (in circumstances where, as the contemporaneous documents reveal, Mr Membrey, his superior and the Walters themselves were all well-aware of the troubled and precarious state of the business) he did not assure the Walters, or induce them to assume, expressly or implicitly, that the one year term of the loan would be automatically and indefinitely renewed.

1239. I accept his evidence that he informed the Walters that any renewal would be conditional upon the performance of the business and that Fritz and Carmen Walter clearly indicated to him their acceptance of that position. I consider that each of the Walters understood that the loan would not be renewed automatically or indefinitely, irrespective of trading performance, although they did not entertain the possibility of business failure.

1242. I consider it probable that Mr Membrey arranged for the delivery of the documents to the Walters prior to 16 December 1998 but it is unnecessary to determine that issue, as I conclude that the documents were, in any event, adequately explained and understood prior to their execution.

1245. Mrs Walter acknowledged in her letter dated 18 November 1998 that the position would be reviewed based on performance, but at trial would not acknowledge that she recognised that there might be an adverse review resulting in a termination of funding "because I wasn't thinking of these negative things".

1248. I am satisfied that Fritz and Carmen Walter had considerable business experience and possessed a good understanding of financial and banking affairs and security transactions. While Mrs Ingrid Walter's experience of such transactions was not as extensive, she was familiar with business procedure and basic banking and security transactions.

1251. I am satisfied that Ms Walter at all relevant times was able to understand fully all but technical legal terms. She was capable of ascertaining the meaning of technical terms, whether independently, through inquiry to Mr Membrey or Mr Keating or inquiry to the Walters' legal and financial advisers. I am satisfied that she was at all material times available competently to translate, and did translate, all relevant oral or written communications from the NAB to her parents when required.

1254. Although both Mr Keating and Mr Membrey enjoyed an affable relationship with the Walters, there is no evidence to establish that either bank officer exercised any ascendancy, domination or influence over them. Further, there is no evidence to suggest that either Mr Keating or Mr Membrey acted as a business or financial adviser to the Waters or otherwise exceeded their arms-length professional role.

1257. There is no evidence to establish that the NAB pressured the Walters to restructure their loans, unduly delayed the approval or preparation of the loan documents or otherwise exercised duress, whether economic or otherwise. The loan restructure was initiated by the Walters themselves. It was necessitated by their urgent need to reduce the burden of their monthly repayments. The NAB's response to their request was accommodating and relatively prompt.

1260. Following the expiry of the initial one year term of the fixed interest-only loan, the NAB did not take immediate action but continued to consult and negotiate with the Walters, who were unwilling to accept the apparently reasonable proposal that an investigative accountant be appointed. The NAB did not appoint a receiver until 6 November 2000. Following the appointment of the receiver, there was a further opportunity to refinance the loans and thus avert the sale.

1264. Regrettably, despite dedication, hard work and the commitment of considerable resources, the Walters' brewery and restaurant enterprise did not succeed. They emigrated from their own country and encountered business failure and financial disaster. While their consequent distress is understandable, their baseless accusations of fraud and conspiracy, and the persistent re-ventilation of discredited legal arguments during the course of the trial, were regrettable. The financial and business misfortunes of the Walters cannot be attributed to any legal wrong or morally reprehensible conduct of the NAB. There is no recognised legal or equitable ground on which to set aside the liability under the relevant loan agreements, guarantees, mortgages and debenture.

1267. It follows that Proceeding No. 4486 of 2001 must be dismissed.

1270. The NAB is entitled to the relief claimed in Proceeding No. 7407 of 2002.

[1] Newhart Developments Ltd v Cooperative Commercial Banks Ltd [1978] QB 814 c/f Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53.

[2] [1999] VSCA 35; [1999] 2 VR 573

[3] [2000] HCA 63; (2000) 205 CLR 337

[4] [2001] VSCA 175

[6] [2002] VSC 116 (leave to appeal refused in McFarlane v NAB, No. 6450 c/f 1994, 20 September 2002 VSCA).

[9] [2002] VSC 116 at 4.

[10] 19 July 2002 [2002] VSCA BC 200204274.

[11] See: McFarlane v National Australia Bank MI791/2002 (25 February 2003); McFarlane v Eastern Pastoral Co M104/1999 (26 May 2000); Knight v Bell and Falconer M43 and M46 at 2000, 13 September 2002.

[12] Proceedings of the Legislative Assembly, No. 90, 25 November 1975, para 4; Parliamentary Debates (Hansard) vol 125 p.9184; Government Gazette vol 338, p.3819.

[13] Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676.

[14] Goldcel Nominees Pty Ltd & Ors (Provisional Liquidator Appointed) v Network Finance Ltd [1982] 2 VR 257 at 261.

[15] Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 at 834

[16] [2002] NSWCA 431 (31 May 2002) at p.4.

[17] [1999] NSWSC 563 (11 June 1999).

[18] [1979] NSWLR 820.

[20] [1979] NSWLR 820.

[22] C/f American Express International Banking Corporation v Hurley [1985] 3 All ER 564.

[23] Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 139 at 324-325; Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367.

[26] Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at 415.

[27] Union Bank of Australia Ltd v Whitelaw [1906] VicLawRp 119; [1906] VLR 711 at 728; Allcord v Skinner (1887) 36 Ch D, 148.

[28] Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at 461; Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621; Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457.

[29] Crescendo Management Pty Ltd v Westpac (1988) 19 NSWLR 40 at 456; Wardley Australia Ltd v McPharlin (1984) 3 BPR 9500

[30] Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1987-1988) 164 CLR 387 at 420.

[31] BC 200204274 17 July 2002 VSCA at 3.