Equity - rectification - rectification of a mortgage and a guarantee refused where the securities were given as a result of unconscionable conduct on the part of the creditor.

Guarantees - provisions of a deed of guarantee to the effect that the guarantors would not be released if the creditor loses other securities for principal debt even if such loss results from creditor's conduct - the discharge of one guarantor extinguishes a co-guarantor's right to contribution from that guarantor.

Trade Practices Act 1974 (Cth) - s. 51AB

Bank of New South Wales v Roger [1941] HCA 9; (1941) 65 CLR 42

Barclays Bank Plc v O'Brien [1992] EWCA Civ 11; (1993) QB 109

Borg-Warner Acceptance Corp. (Australia) Ltd. v Diprose (1987) 4 BPR (97279)

Broadlands International Finance Ltd. v Sly (1987) 4 BPR (97280)

Buckeridge v Mercantile Credits Ltd. [1981] HCA 62; (1981) 147 CLR 654

Commercial Bank of Australia Ltd. v Amadio [1983] HCA 14; (1983) 151 CLR 447

Credit Lyonnais (Aust.) Ltd. v Darling (1991) 5 ACSR 703

Deering v The Earl of Winchelsea (1787) 2 Bos and Pul 270

Fletcher Organization Pty. Ltd. v Crocus Investments Pty. Ltd. (1988) 2 QdR 517

Louth v Diprose [1992] HCA 61; (1993) 67 ALJR 95

Mahoney v McManus [1981] HCA 54; (1981) 55 ALJR 673

Moody v Cox and Hall (1917) 2 Ch. 71

National Australia Bank v Nobile [1988] FCA 72; (1988) 100 ALR 227

Nolan v Westpac Banking Corporation (1989) 11 ATPR 50,727

Ward v National Bank of New Zealand (1883) 8 App Cas 755

Westwill Ltd. v Heath (1988) 52 SASR 461

C. Reid

Solicitors for the applicant: Smith and Stanton

Counsel for the respondent: R.J Douglas

Solicitors for the respondent: Bain Gasteen and Smith

Solicitors for second

1. The Bill of Mortgage (the "Mortgage"), registered dealing

no. K370402Y dated 1 August, 1990 between Pamela Ann Begbie

as mortgagor and State Bank of New South Wales Ltd. as

mortgagee with respect to land described as:

(a) Lot 1 on Registered Plan No. SL4780, being all

that land contained in Certificate of Title

Volume 4151 Folio 144;

(b) Lot 1 on Registered Plan No. 178222, being all

that land contained in Certificate of Title

Volume 4334 Folio 181;

(c) Lot 1 on Registered Plan No. 178221, being all

that land contained in Certificate of Title

Volume 6408 Folio 170,

is void.

2. The undated contract of Guarantee ("the Guarantee") between

John Brokken, Leslie Matthew Cheers and Pamela Ann Begbie as

guarantors and State Bank of New South Wales Ltd. is

unenforceable as against the applicant, Pamela Ann Begbie.

1. The respondent's claim for rectification of the Guarantee as

against the applicant as first cross-respondent is

dismissed.

2. As against the second and third cross-respondents, the

Guarantee be rectified by omitting the words "Pamela Ann

Begbie" in the first line of the recitals as the description

of the principal debtor and substituting the words "Anivor

Pty. Ltd." in lieu thereof.

3. Judgment in the sum of $623,596.95 be entered in favour of

the respondent as against the fourth cross-respondent.

4. Judgment in the sum of $300,577.06 be entered in favour of

the respondent as against the second and third

cross-respondents jointly and severally.

5. The third cross-respondent's claim for contribution in

respect of the Guarantee against the applicant is dismissed.

6. The second cross-respondent indemnify the third

cross-respondent in respect of any amount in excess of one

half of the sum referred to in the sixth order which the third

cross-respondent may pay to the respondent.

7. The respondent pay the applicant's costs of and incidental

to the application and the cross-claim to be taxed.

8. The second and third cross-respondents pay the respondent's

costs of and incidental to:

(a) the respondent's claim against them for

rectification of the Guarantee; and

(b) the respondent's claim against them for judgment

on the Guarantee.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DRUMMOND J In this action the applicant seeks orders voiding a registered mortgage dated 1 August, 1990 over her Eight Mile Plains land and an undated guarantee signed by her and two other parties, Cheers and Brokken, on the ground of the respondent's unconscionable conduct and conduct in breach of s. 52A the Trade Practices Act 1974 (Cth). She also sought orders voiding, on these same grounds, an undated and unregistered second mortgage over that land and an undated and unregistered mortgage over her land at Toorbul. An additional ground upon which she relied to set aside the second mortgage (but not the mortgage of the Toorbul land) was that her signature to it was a forgery. The respondent cross-claimed against the applicant for rectification of the registered mortgage to show that it was granted by the applicant to secure repayment of all moneys that might be due to the respondent by Anivor Pty. Ltd. (a company of which Mrs. Begbie, Cheers and Brokken were directors), rather than due by the applicant, and for possession of the applicant's Eight Mile Plains lands; it also cross-claimed against the applicant, Cheers and Brokken for rectification of the guarantee to show that it was given by them in respect of moneys due by Anivor rather than by the applicant and for the moneys due under this guarantee. There is a further claim by the respondent against Anivor for moneys due. Mrs. Begbie and Brokken also seek contribution from each other and from Cheers as their co-guarantors.

2. While the registered mortgage and the guarantee, if rectified, would secure repayment to the respondent of all moneys due to it by Anivor, the second mortgage over the Eight Mile Plains land and the mortgage over the Toorbul land purported to secure payment to the respondent of all moneys due in respect of existing and future advances to Snowlake Pty. Ltd., a company with which Cheers and Brokken, but not the applicant, were associated. The respondent did not cross-claim against the applicant on this second mortgage or on the mortgage over her Toorbul land. I was told at the start of the trial the applicant's own claims to have these securities set aside were being resolved. In the course of the hearing, the respondent consented to declarations that this second mortgage was void ab initio and that the applicant was not under any obligation to the respondent pursuant to the mortgage of her Toorbul land.

3. Although the second cross-respondent, Cheers, participated in the action up to the start of the trial and appeared there by his solicitor, the solicitor stated that he did not intend to take part in the hearing and, with leave, absented himself. Cheers did not give evidence. Brokken represented himself. Anivor did not defend the action.

MRS. BEGBIE'S CLAIMS AGAINST THE BANK IN RESPECT OF THE MORTGAGE AND THE GUARANTEE - THE FACTUAL POSITION

4. The applicant is a widow in her mid-40s. In the late 1980s, she and her husband moved from the country to Brisbane, where Mr. Begbie involved himself in property investment. Throughout their marriage, it was Mr. Begbie who attended primarily to the family's financial and business affairs. But while Mrs. Begbie took a comparatively minor role in them, she was by no means excluded from those business activities and the couple regularly discussed such matters. After her husband's death in early 1989, Mrs. Begbie was left with the family home in Clayfield, some units, some shops in Boondall, land at Toorbul used as a crayfish farm and land at Eight Mile Plains. She had no income, apart from that produced by those properties. While the evidence does not suggest that Mrs. Begbie is intimately familiar with the procedures and the documentation involved in the acquisition, sale and mortgaging of commercial and residential property, she was, at the time of the events out of which this action arises, significantly more experienced in such matters than the average person.

5. In May 1990 Mrs. Begbie met Cheers through an introduction agency. From what he told her, she took him to be a successful businessman who owned a number of bakeries and bread shops on the Gold Coast. But despite his outward affluent appearance, Cheers was in dire financial straits. He had no personal assets to speak of; his personal account with the respondent bank was overdrawn and his company, Snowlake, was operating well in excess of the overdraft limit on its account with the respondent.

6. It is clear that Mrs. Begbie very quickly became attracted to Cheers; by July, she said she would have married him had he asked her. Cheers had a different attitude to Mrs. Begbie. Throughout his quite short association with her, during which he met her generally only on weekdays and never at his own home, he maintained his established de facto relationship with another woman. What he saw in Mrs. Begbie was a likely means of obtaining the funds that he then urgently needed. The pair saw a lot of each other and Mrs. Begbie, after initial reluctance, became willing to agree to the propositions Cheers put to her on financial matters. In early June 1990, he suggested that she invest $17,000.00 in his company, Snowlake. She readily agreed, although the $17,000.00 comprised practically all the cash to which she had access; she received only a note written by Cheers on scrap paper as an acknowledgment. She did not seek any information as to the company's financial position or as to the nature of its business activities. She received only one or two payments which Cheers said were by way of the regular interest instalments he had promised on this so-called investment. The $17,000.00 is lost to her.

7. Also in early June, at Mrs. Begbie's home, Cheers noticed a copy of an advertisement for the sale of her land at Eight Mile Plains which she had placed in the press. Her listed price was $550,000.00. After some discussions, Cheers offered to buy the land for $600,000.00. However, rather than buy the land himself, Cheers proposed a scheme whereby, in exchange for a monthly payment of $3,000.00 and a share of the ultimate profits, Mrs. Begbie would sell her land for $600,000.00 to a shelf company, Anivor Pty. Ltd., which would develop the property. Anivor was to complete the purchase from Mrs. Begbie within two years and to develop it in the meantime. Mrs. Begbie was to be a director of Anivor. She says that she was not to receive anything further from the project and that the development costs she anticipated would be involved were to be provided, so Cheers told her, by "the Co-Operative" with whom Cheers said he could negotiate funding.

8. Cheers had something quite different in mind, but this was all that he disclosed to Mrs. Begbie. In reliance on what he told her, she believed that her arrangement with him related solely to the development of the Eight Mile Plains land. She knew that funds were to be borrowed by the new company and that those funds would be used for this particular purpose. But she was unaware that Cheers intended that funds raised by Anivor would be used for the acquisition of a bakery - Cheers was keen for Crust and Crumb Wholesalers Pty. Ltd., another company with which he was associated, to acquire this. She was also unaware that such funds would be used to support both Cheers personally and Snowlake. From the very first, the scheme was a deception perpetrated by Cheers and designed to make Mrs. Begbie's assets available for his benefit and the benefit of his companies, Snowlake and Crust and Crumb.

9. On 18 July, 1990, at the request of Cheers, Mrs. Begbie collected the unencumbered title deeds to her Eight Mile Plains land from the office of her solicitor. She did not seek his advice about what Cheers proposed. Later that day she met Cheers at Loganholme and gave him the title deeds so that he could "keep them in safe custody". She claimed he proffered no other explanation for why he wanted the deeds and that she requested none. Before parting, they arranged to meet the following day at Sanctuary Cove so that Cheers could get Mrs. Begbie to sign some documents relating to the proposed development. The next day Cheers arrived quite late for their meeting, in what Mrs. Begbie described as an agitated state. He produced a large bundle of documents for Mrs. Begbie's signature. When she began to read through the first document, she said Cheers became angry and slammed his hand on the document preventing her reading further. Mrs. Begbie claims that at this stage she felt physically threatened. Cheers said that if she considered it necessary to read the documents, that showed that she did not trust him and, that being the case, he was going to end their relationship. She says she was most distressed by his reaction. Thereafter Mrs. Begbie says she made no attempt to read the documents. Cheers showed her where to sign and she signed all of them. One of the documents was the joint venture agreement; clause 4.02 authorised the use of Anivor's borrowings "to fund the purchase of a bakery business". Although when she signed this document she believed it reflected Cheers' development proposal for her Eight Mile Plains land, I accept that she did not read it and this lone reference to a bakery purchase was not mentioned by Cheers. On one of the documents she signed that day, Mrs. Begbie noticed the word "mortgage". She said she complained to Cheers that she had not agreed to mortgage any of her property. Cheers assured her, so she claimed, that she was not mortgaging anything: this was true insofar as the mortgage deed itself cannot have been among the documents that Cheers produced to her to sign that day. This deed (and the guarantee) were not signed by her until some days later, after they had been prepared by the bank's solicitors and brought by Cheers to her for execution. After their meeting at Sanctuary Cove, Cheers produced documents to Mrs. Begbie for her signature on at least three occasions between then and the end of July. The first of these meetings again took place at Sanctuary Cove on 20 July, after the meeting Cheers had with Henshaw, the respondent's manager, earlier that same day to which I refer later. He told her that these documents were "company documents". He was apologetic, but her signature was, he said, required as a matter of formal necessity. After the incident at the initial meeting, Mrs. Begbie said she signed all the documents produced to her without demur, making no real attempt to read any of them.

10. While I generally accept Mrs. Begbie as a witness of truth as to what passed between her and Cheers during the period of their association, I am unable to accept in full everything that she says about the events of late July 1990 in the course of which she signed the mortgage, the guarantee and various other documents that the bank required Cheers to produce before making the advance to Anivor. In her evidence, Mrs. Begbie repeatedly claimed that she was not aware that she signed a mortgage over the Eight Mile Plains land. She also said she was unaware that she had signed the guarantee that bears her signature. Although she undoubtedly signed a large number of documents for Cheers and did not read any of them in any detail, she picked up that her name was misspelt and that her address was misspelt in some of them. The guarantee is one of the documents which she signed in which the name of the street in her address is misspelt. In contrast to her evidence that on 19 July Cheers presented her only with so much of each document to which she needed to have access to sign it and, in effect, prevented her from reading anything, she acknowledged that she filled out the body of the Consent to Act as Director in her own hand. This appears to have been one of the documents she executed on either 19 or 20 July, 1990. She also agreed that Cheers did not pressure her into the arrangement, a concession which is in conflict with her claim that she was in physical fear when she signed the documents Cheers produced to her on 19 July. As I have mentioned, she said she noticed on 19 July that one of the documents had the description "mortgage" on it. This document was never identified in evidence. But her evidence here is particularly unsatisfactory. In evidence-in-chief, she said that when this document was produced to her, she remonstrated with Cheers and said that she was not signing a mortgage; Cheers' reply was that it was not a mortgage. She did not then expressly say that she declined to sign that particular document, but instead left the impression that she went ahead and signed it. In her witness statement she expressly said she signed this document. Initially in cross-examination she said that Cheers had told her "a number of times" that the land was not to be mortgaged before she was asked to sign the documents and came upon the document which she identified as a mortgage. She did not attempt to put these statements by Cheers in any context which could give them any sensible meaning. Later in cross-examination, she gave a quite detailed account of what happened when she objected to signing the document headed "mortgage": she said that Cheers ultimately put it to one side and she never signed it. Moreover, she acknowledges that it is her signature on numerous documents produced to her by Cheers and required by the bank in connection with the advance to Anivor, which are documents that she has signed immediately above the subscription, "mortgagor".

11. Notwithstanding her feeling for Cheers, I do not think that Mrs. Begbie allowed him to blind her completely to what was involved in his proposal. I think Mrs. Begbie is sufficiently knowledgeable about property dealings and is sufficiently cautious that she would have required enough details from Cheers of what he had in mind to have revealed to her the need for the mortgage. She says she gave his proposition a lot of thought before agreeing to it. Moreover, Mrs. Begbie said she knew that Cheers intended to procure the funds he said would be needed to develop the land from a particular financier and she gave him her title deeds soon after she agreed to his proposal. The probabilities are that Cheers did explain that a mortgage of her Eight Mile Plains property for the purpose of raising funds for the project was a necessary part of the proposal that he urged upon her and to which she was receptive, in large part because of the feeling she had for Cheers at the time. I think that, though it is unlikely she read any of the documents she signed at Cheers' behest in any detail, she believed, in a general way, that what she was asked to sign were all documents necessary to enable the project for the redevelopment of her Eight Mile Plains land to proceed and that these documents included a mortgage of her land that was required for that purpose. While I do not find that the Minute of the Meeting of Directors of Anivor was read by Mrs. Begbie (although it was signed by her), I think the section, "Properties at Eight Mile Plains", records the central details of Cheers' proposal to which Mrs. Begbie agreed. The respondent's manager, Henshaw, did not specifically instruct the bank's solicitors to prepare the guarantee ultimately signed by Mrs. Begbie, Cheers and Brokken in respect of the loan to Anivor. That was sought by Ms. Pickford, an employee of the bank's solicitors, because a guarantee by the directors where a loan, even one otherwise secured, was made to a company was a standard bank requirement. She may, however, have sought and received Henshaw's confirmation that it was to be required. I accept that Mrs. Begbie was neither told nor realised she signed a guarantee. But I think that if the need for the guarantee had been explained to her, it is likely that she would willingly have signed it for the same reason that I think she expected to sign and was prepared to sign a mortgage of her Eight Mile Plains land in connection with Cheers' redevelopment proposal and because it merely exposed her, along with Cheers and Brokken as co-guarantors, to the same liability she assumed under the mortgage.

12. I do not, however, think that Mrs. Begbie was by any means hard-headed in her dealings with Cheers. To a considerable extent, she allowed her natural caution to become subordinated, when dealing with financial matters, to her feelings for Cheers: she made a quite improvident loan of the $17,000.00 and she gave her unencumbered title deeds to him without demur. Moreover, the project, such as it was, consisted entirely of Cheers' oral proposal: there were no plans or studies done and there is no acceptable evidence that consultants were ever retained. Any objective assessment of his proposal would have revealed it for what it was, namely, an imprudent arrangement for her in that, if this vaguely described project failed, she could expect to lose her land and not see anything of the $600,000.00 purchase consideration either. A little while later, she was also prepared to risk her Toorbul property in the same way, at Cheers' suggestion. It is clear that Mrs. Begbie was a victim, although not an overly easy victim, of Cheers.

13. By persuading Mrs. Begbie to hand over the title deeds of the Eight Mile Plains property and then to execute the mortgage and associated documents, Cheers was able to obtain very substantial loan funds from the respondent which he then used for his own benefit and for the benefit of his businesses. None of these moneys went into the proposal to develop the Eight Mile Plains property over which Mrs. Begbie executed the mortgage. I find that Mrs. Begbie was never told, and never learned for herself from the cursory perusal that she probably made of the documents when she was signing them, that Cheers intended to use the funds that Anivor would borrow against the security of her land for the purchase of a bakery by another of his companies that Mrs. Begbie knew nothing of, or to repay any of the indebtedness to the respondent of himself and Snowlake.

14. Cheers was urgently in need of the funds that Anivor was able to raise against Mrs. Begbie's mortgage. From early 1990, the bank had become increasingly exposed to Cheers and particularly to Snowlake because Henshaw, the manager of the respondent's Bundall branch with whom Cheers dealt, had allowed these accounts to become very heavily overdrawn although the bank held little in the way of security.

15. I do not accept the evidence of Henshaw as to his dealings with Cheers, in the course of which he procured for the respondent the securities in question from Mrs. Begbie. Counsel for the respondent, in opening its case, said that Henshaw would give evidence that up to July 1990 he had no concerns about Cheers or any company, including Snowlake, that was associated with him and that, although there had been some trading in excess of arrangements before July 1990, that was not a matter about which Henshaw had any concern because everything seemed to him "to be travelling all right"; it was opened that Henshaw would say he only became concerned about what counsel called the "viability" of Cheers and Snowlake much later, in October or November 1990. Henshaw's evidence-in-chief was in conformity with the way his evidence was opened. Initially, only three pages of the bank statements for the Snowlake account were put in evidence through him. The only dishonoured cheques mentioned in these three folios were those dishonoured on 26 July, i.e., after Henshaw had agreed to provide the $250,000.00 loan to Anivor on the security the mortgage given by Mrs. Begbie, but before he was told by the bank's solicitors on 27 July that the mortgage documentation had been finalised. In his evidence-in-chief, Henshaw said of these cheques that he caused them to be dishonoured "because the cash flows (for Snowlake) that were due on 30 June had not been produced and as the account was in excess of their (sic) limit the cheques were dishonoured until such time as those cash flows were produced." He also said: "I had no concerns until then. We were allowing a certain period of time after 30 June for cash flows to be produced."

16. It was only after Henshaw had given this evidence-in-chief that, as a result of the exchange appearing at pp 311-318 of the transcript, the bank belatedly disclosed to the applicant in response to the applicant's belated demand, all the documents relating to the Snowlake account. In my view, the answers Henshaw gave in evidence-in-chief about the cheques he dishonoured on 26 July were untrue and he tried to give the false impression that he then had no concerns about the Snowlake account (apart from the temporary difficulty caused by non-receipt of the cash flow information until after 27 or 28 July). He also was untruthful when he said he had no real concerns with the account generally until September or thereabouts and that the dishonouring of the cheques on 26 July had nothing to do with any concern that the securities provided by Mrs. Begbie had not been finalised until 27 July. The falsity of his evidence became apparent once the full bank records concerning the Snowlake account were tendered. They revealed that, contrary to what Henshaw had claimed, the state of Cheers' account and particularly Snowlake's account must have been a cause of great concern to him throughout most of the first half of 1990. These records show that Snowlake's indebtedness steadily increased from the day the account was opened in early November 1989 with overdraft accommodation limited to $30,000.00. It was never once in credit and after 23 November, 1989, never once below the $30,000.00 limit (save for a period of about a fortnight after 14 December, 1989). By 14 December the account was $133,764.00 in debit. That day, as a result of what is described in the exhibit as an "advance" to the account of $120,000.00 being made, the debit balance fell to $2,538.00. It appears that the bank purchased bakery equipment from Snowlake for $120,000.00 which it then leased back to that company under the lease referred to on page 2 of exhibit "B18". By 10 January, 1990 the account was $79,763.00 in debit. On 11 January, 1990, cheques presented on 9 and 10 January, 1990 were, in effect, dishonoured, bringing the balance of the account down to $72,063.00 in debit. Thereafter, the dishonouring of certain cheques, while allowing others to be paid, became a feature of the way this account was operated up until 9 July, 1990: between 11 January and 9 July, 1990, many cheques were dishonoured while others were paid, with the account always being greatly in excess of the $30,000.00 limit until the new $350,000.00 limit was authorised on 18 June or thereabouts.

17. Henshaw was responsible for "the overall control of the account". He suggested that everything was in order and that what had happened was that, since it was in his discretion to approve loans up to a maximum amount, it should be assumed that, because the bank continued to pay cheques drawn on the Snowlake account, it increased Snowlake's overdraft limit from the initial limit of $30,000.00 each time it met a cheque that put the account further in debit beyond the position that obtained once the previous cheque had been paid by the bank. This explanation is inconsistent with what Henshaw had to say in his "advice of out-of-order account" of 19 March, 1990 in which he noted the Snowlake account limit at that date as $30,000.00 only, the account then being $202,367.00 in debit and $172,367.00 "in arrears". It is also inconsistent with what he had to say in his witness statement about having "cause to make contact with Mr. Les Cheers on a fairly regular basis enquiring when the account would be brought back into order". It is a fanciful explanation made by Henshaw in an attempt to explain either his gross failure to properly monitor the account and his failure to intervene before the bank's exposure increased to the substantial level it did or why, for some other reason not explored in evidence, he deliberately but irregularly allowed Cheers to put the Snowlake account into very substantial debit beyond the initial agreed limit.

18. Further proof that Henshaw tried in evidence-in-chief to create a false impression about when he first became concerned as to the bank's exposure to Snowlake was provided when his "advice of out-of-order account" to which I have referred and the branch submission for write-off were tendered during his cross-examination. Henshaw reported to his superiors in this advice of 19 March, 1990 that the Snowlake account was very greatly in excess of the $30,000.00 limit. He had to make this report. In April 1990, his annual leave was due. He must have realised that the relieving manager would be likely to look at the Snowlake account and report adversely to head office, since the bank's records would reveal only an agreement for Snowlake to draw up to $30,000.00 against the security of the floating charge. This in fact happened. Henshaw said no valuation of the charge was ever obtained and that his initial decision to allow overdraft accommodation to the extent of $30,000.00 to Snowlake was based upon its trading expectations. (The branch submission for write-off records that on the basis of its balance sheet as at February 1990, the value for the bank's lending purposes of Snowlake's assets secured to the respondent was deemed to be $268,000.00. But there is no suggestion that any valuation of Snowlake's assets was ever undertaken. What Brokken said his examination of Snowlake's position in April 1990 revealed suggests that it was then in a position of considerable financial difficulty.) By April 1990, it must have been apparent to Henshaw and he must have realised it would be equally apparent to the relieving manager that, given the history of Snowlake continuously increasing its indebtedness from the day the account opened to well in excess of the initial limit, and given the very limited security the bank held, the bank was likely to be facing a large loss in respect of the advances made to Snowlake. The branch submission for write-off was prepared in February 1991, shortly after Henshaw said he resigned from the bank. He confirmed that he had received the instructions dated 1 May, 1990 noted in this document from his superiors: unless he was able to obtain additional security or otherwise bring the accounts under control by 10 July, 1990, he was required to report to the Queensland Regional Office in relation to those accounts. He was thus under pressure from the bank's hierarchy from May 1990 to reduce the bank's exposure to Cheers and his companies.

19. There is other evidence that gives the lie to what Henshaw had to say in evidence-in-chief. On 12 April the Bundall branch of the bank sought and received a report, which came to Henshaw's attention, indicating that there was a large number of judgments and summonses in respect of Cheers personally. Moreover, Henshaw had once thought, or perhaps more accurately hoped, that certain third party mortgages that Cheers procured for the bank sometime between April and early June 1990 by way of security for Snowlake's indebtedness would retrieve the position. But by 30 June he had learned from the bank's solicitors that these two mortgages were not the second mortgages he had expected, but were, in one case, a third mortgage and, in the other, a fifth mortgage and he had also learned by then that the contracts of sale, which he claimed he had been told by Cheers existed in respect of these properties and which would leave a substantial sum by way of security for the bank, had both fallen through. It was essentially against Cheers' offer of these securities that Snowlake obtained the increase in its overdraft limit from $30,000.00 to $350,000.00. The bank did not attempt to prove either contract in evidence or what the value of either security may have been to the bank at any time: it can be inferred that these securities, like the charge originally granted over Snowlake's business, were practically worthless and that Henshaw knew this at least by late June. By 6 July, the Snowlake account was well in excess of the $350,000.00 limit, with the bank's security being limited, at that stage, so far as the evidence indicates, to an unvalued floating charge over Snowlake's business and to the third-ranking and fifth-ranking mortgages, i.e., its exposure was for practical purposes unsecured. By early July Henshaw was very much concerned indeed at the extent of the bank's exposure to Snowlake and Cheers and for his own position with the bank because of his maladministration of these accounts.

20. Meanwhile, Cheers' demands for yet more funding continued unabated. On 20 July, Cheers approached Henshaw with a proposition, foreshadowed as far back as about April, when Cheers spoke to him of a proposal "to be made by a company Anivor Pty. Ltd. which would cause the (Snowlake) account to be adjusted". According to Henshaw, this proposition involved the loan of $250,000.00 to the new company, Anivor, to assist it in a project to develop the land at Eight Mile Plains. But Henshaw acknowledged that that was only part of what Cheers put to him: he says he was told that the advance to Anivor would also be used for the purchase of a bakery from Snowlake in order to provide cash flow for Anivor pending the development of the property. Henshaw said at one stage that he understood the proposal involved the use of the loan funds for the purchase of a bakery by Anivor, for some form of restructuring of Snowlake or Cheers' bakery business, as well as for the development of the land. He said that Cheers mentioned that a Mrs. Begbie had agreed to provide security for the advance to Anivor over the land at Eight Mile Plains. Henshaw did not then know and never subsequently met Mrs. Begbie. But he satisfied himself that this land provided ample security for the loan sought by Cheers on behalf of Anivor: before making the $250,000.00 available, he got oral advice from a valuer, followed up in early August with written advice, that the land was worth $415,000.00 on the basis of its existing "non-urban" zoning, i.e., without taking into account any development potential of the land. The bank itself was well aware of the need for a person offering third party security to have a clear understanding of the risks and obligations he or she is assuming, if the bank is to obtain a security that is not exposed to being set aside. The bank's own manual issued to its panel solicitors contains numerous instructions designed to ensure that third parties who give security or guarantees to the bank only do so with a full understanding of the obligations they thereby assume. For example, one such instruction states:

"A Guarantee, Third Party Mortgage or an Acknowledgment and

Consent of Mortgagor or Guarantor must not be despatched or

delivered to the Customer for execution."

21. The manual requires the bank's solicitors to give to such a third party when that party is asked to execute security documents a notice in the following terms:

"PLEASE READ THIS NOTICE BEFORE SIGNING THE DOCUMENT(S)

ATTACHED TO IT

The Bank strongly recommends that you take the attached

document(s) to a Solicitor and request that its/their nature

and effect be explained to you.

The Bank seeks to be fair and reasonable in its dealing with

you and would like to be assured that:-

(a) you have signed the document(s) voluntarily;

(b) you understand it/their nature and effect; and

(c) you have:-

(i) compared your obligations and responsibilities

to the Bank with those of any other person named

in the document(s); and

(ii) considered the consequences to you should there

be any default in those obligations and

responsibilities.

Accordingly, the attached document(s) must be signed before

an officer of the Bank or a Solicitor. That person must

complete the certificate enclosed with the documents."

22. The manual also contains this explanation to the solicitors of the reason for requiring this certificate:

"Certificate of Witness

NOTES:

* This document has been introduced by the bank as

a means of ensuring that:

- the signature of the customer, mortgagor

or guarantor to a document was affixed in

the presence of the witness;

- the document has not been signed under duress;

- guarantor's (sic) are fully aware of the

extent of their obligations to the bank.

To this end the bank has a requirement

that a copy of it's (sic) letter of offer

to the customer detailing the terms and

conditions of the loan must also be sent

separately to a guarantor for the

guarantor to sign and return to the bank; and

- where one party to a transaction has a

disproportionate obligation to the bank

compared to other parties, that such party

is aware of the fact.

* The bank does not expect a witness to explain

the provisions of the document, it is only

necessary from the bank's point of view that the

customer, mortgagor or guarantor are aware of

the extent of their liability to the bank and

understand the ultimate consequences if their

(sic) is default.

* If the witness to the document is not prepared

to sign the certificate, the circumstances

should be recorded and written instructions

obtained as to whether the matter should proceed.

* If you are witnessing the signature of a

guarantor or a mortgagor who is not receiving

the benefit of the loan, please ensure that the

person signing the document fully understands

the consequences if the customer is in default.

This is particularly so in the case of a third

party mortgage, under which the mortgagor can be

sued for the balance owing by the customer even

after all the property secured by the mortgage

has been sold."

23. Henshaw said that he was aware of these requirements by his employer and the reasons for them. Henshaw also said he realised when the bank took the first mortgage from Mrs. Begbie in July 1990 that her position was "unusual in (his) experience". He conceded that it was unusual for a person who was not a bank customer but who was providing security for a customer to hand that person's title deeds to the bank before the loan to the customer was made. She was vendor to Anivor yet she was providing the only real security for the $250,000.00 bank loan to Anivor; Henshaw could not see how Anivor could pay her for the land if its speculative development did not succeed nor did he expect that Anivor itself could repay the loan to the bank (which the bank could call up on demand) unless the development succeeded. He considered that the bakery which Cheers wanted to buy could only be relied on to enable Anivor to meet the interest payments due to the bank on its loan, not repayment of the principal. I also think that despite Henshaw's evidence to the contrary, he realised that Mrs. Begbie did not have a solicitor acting for her, i.e., she did not have someone who might be expected to give her independent advice. He got Mrs. Begbie's deeds from Cheers personally, not under cover of a solicitor's letter. He dealt with Mrs. Begbie so far as the execution of the account documents is concerned only through Cheers, yet he never asked Cheers for the name of her solicitor. When Cheers told Henshaw of Mrs. Begbie's offer to provide security for Anivor, Henshaw said that "because it was a third party security I required her consent to what was going on or I needed to know that she was involved in it because (Cheers) had said that she could not come into the bank at the time those discussions were held". In response, Cheers produced a copy of the minute of the meeting of the directors of Anivor of 18 July, 1990 and the title deeds to the property which he had previously obtained from Mrs. Begbie. The minute recorded the meeting's approval of Anivor's purchase of the Eight Mile Plains land from Mrs. Begbie for the purpose of the development on terms that she would be a co-venturer with Anivor in the redevelopment and would receive the purchase consideration for the sale of the land to Anivor on completion of the redevelopment which was to take place within two years.

24. Even if Henshaw was entitled to accept Cheers' say-so that it bore Mrs. Begbie's signature, this minute, which he said he read when Cheers produced it to him, comprised the only material that Henshaw could regard as evidence that she knew what "she was involved in", i.e., as confirmation, independent of what Cheers told him, that Cheers had possession of Mrs. Begbie's title deeds for a purpose authorised by her. Henshaw read the minute as showing that Mrs. Begbie's understanding of Anivor's business was that it was limited to the development of the land at Eight Mile Plains:

"While we are there, Mr Henshaw, what was Anivor's business

on 18 July? What was its - what was the business, as you

understood, say, on 20 July, the business of Anivor to be?

--- To do a development of a property.

What about the purchase of a bakery?---That does not appear

in the minute.

No, it does not. But you understood that, from what you

have said, that Anivor was to use funds for three purposes?

---Yes.

The purchase of a bakery, the restructuring somehow

connected with Snowlake, and the development of the land?

---Yes.

Now, all you know from this minute is that if Mrs Begbie has

signed and read it the most you could infer from it is that

there is something - the company has something to do with a

joint venture of the development of land?---That is right.

There is nothing on the face of its minute to indicate that

the company is involved in bakeries?---No.

And there is nothing to connect this with Snowlake?---That

is correct."

25. Cheers was not specific in his discussion with Henshaw about the nature of the proposed land redevelopment. Initially, Henshaw said he was told that it was to be a form of nursery or garden centre; but later in their discussions Cheers indicated that it was to be a housing development, either units or townhouses. No feasibility study and no development proposal were ever produced by Cheers or sought by Henshaw (although Brokken much later sent him a letter dated 30 October, 1990 signed by Cheers that referred to the site being developed for light industry). In the documents Henshaw caused to be prepared with respect to this loan to Anivor, the purposes for which it is said to be required by Anivor is "working capital" and "purchase of bakery". Henshaw nowhere recorded anything about Anivor wanting this loan for the development of the Eight Mile Plains land. Henshaw cannot have believed that much, if any, of the funds requested would be expended on redevelopment of the land.

26. Moreover, Cheers had originally opened a savings account with the respondent. By some time prior to 24 July, 1990 he had managed to put this savings account into debit to the extent of $26,028.00. Henshaw said that this situation was dealt with by the bank closing down Cheers' personal savings account and transferring the debit of $26,028.00 to a new cheque account which the bank opened in Cheers' name on 24 July, 1990. What appears to have happened, having regard to what Henshaw said in evidence and to the entries in the statements for the Snowlake account is that the overdrawn savings account was brought into credit on 20 July with a transfer of $26,028.00 from the Snowlake account; this had the unfortunate result of sending the Snowlake account well over its limit, to $407,357.00 overdrawn. This position was partially rectified on 24 July by reversing the transfer out of the Snowlake account and by then clearing the overdrawn savings account by closing it off and creating a new current account in Cheers' name, which was opened with a debit balance of the $26,028.70 in question. This was all done after Henshaw had forwarded to the bank's solicitors Mrs. Begbie's unencumbered title deeds with instructions to prepare a mortgage over the lands encompassed in those deeds in favour of the bank and to attend to this as a matter of urgency. This is a significant episode. The bank statement for this new account in Cheers' name indicates that he promptly obtained a cheque book and wrote out a cheque for $1,515.00 on 3 August, 1990 which was dishonoured the same day. It emerged that Henshaw said he told Cheers that he was only permitted to operate on this particular account while it was in credit. In any event, on 7 August, 1990 Cheers drew a cheque on Anivor, the $250,000.00 loan having then been made to it, for $45,000.00 which he deposited to this account of his, bringing it substantially into credit. A day later, further cheques which he wrote on this account exhausted the credit balance and it too went into overdraft to a small extent. But Henshaw dishonoured or caused to be dishonoured a number of cheques drawn on this account thereafter which, if paid, would have pushed this account further into debit. It appears that Henshaw watched this particular account closely. His attention was drawn in cross-examination to the note in the Anivor minute of the directors' meeting of 18 July, 1990:

"Mrs. Begbie has given the company permission to use the

title deeds (to the Eight Mile Plains land) as collateral

security for any borrowings that the company may make in the

normal course of its business."

27. He acknowledged that he would not regard it as being in the normal course of Anivor's business if part of a borrowing by Anivor were to be used to discharge the personal indebtedness of Cheers in the way reflected in this particular account. Two similar transactions whereby Snowlake's indebtedness was also reduced by the use of Anivor's loan funds by $40,000.00 took place within a short period of the loan being made to Anivor.

28. Henshaw never admitted that he was aware that Cheers intended to use or ever in fact used any part of the advance to Anivor to reduce his own personal indebtedness or the indebtedness of Snowlake to the bank. But Henshaw was under pressure from his superiors because of the state of Snowlake's account in July 1990: he had to report to his superiors if the Snowlake account was not put in order by 10 July, 1990, a report which it does not appear from the evidence he ever made. He was aware by the end of June 1990 that the securities over the properties in reliance on which the increase in Snowlake's overdraft limit from $30,000.00 to $350,000.00 had been granted in mid June 1990 had turned out to be much less valuable than expected, if not wholly worthless. He was aware that Cheers was free to draw on the funds available to Anivor solely on his own signature. In his witness statement and in his oral evidence he acknowledged that he was told by Cheers that Anivor was prepared to use its funds to "cause the (Snowlake) account to be adjusted" and for a "restructuring somehow connected with Snowlake". I have already explained why I think it unlikely that Henshaw expected that much, if anything, of the funds loaned to Anivor would be used in the redevelopment proposal. He was personally involved in closing off Cheers' overdrawn savings account and in monitoring Cheers' operations on the new cheque account he opened for Cheers on 24 July in the circumstances I have referred to. I infer from these matters and from the contents of the relevant bank records in evidence that Henshaw believed that Cheers intended to use the loan funds which he sought for Anivor and which were well-secured to the bank by Mrs. Begbie's land, at least in substantial part to reduce the bank's exposure to Snowlake and to Cheers personally, i.e., he expected that Cheers would use the Anivor loan funds in this way for the mutual benefit of Cheers, Snowlake and the bank (and Henshaw himself). I also find that Henshaw either knew that Cheers intended to use the Anivor loan funds for purposes of which Mrs. Begbie was likely to be ignorant, i.e., to assist Snowlake to buy a bakery and to reduce his own and Snowlake's indebtedness to the bank, or that he took Mrs. Begbie's deeds as security for the bank in circumstances in which he was put on enquiry that that may have been the case, but he deliberately refrained from making any enquiry that might reveal that Mrs. Begbie had been misled by Cheers because of his desire to obtain the security against which he would release funds to Anivor, which he expected would be used in substantial part to reduce the bank's exposure to Snowlake and Cheers.

29. Henshaw immediately set about putting Cheers' proposal in place. While Cheers was present, he filled in the forms necessary to establish the loan facility and an account for Anivor, including a form headed "Standard Loan Details", in which the purpose of the advance of $250,000.00 was shown as "working capital", and a form headed "Request for Banking Facilities". Henshaw filled in the latter form, no doubt on Cheers' instructions, in such a manner as to authorise the account to be operated on only one signature. Henshaw was thus well aware that Cheers could unilaterally transfer funds from the Anivor account to the heavily overdrawn account of Snowlake. Henshaw then gave these documents to Cheers so that he could procure the signatures of Brokken and Mrs. Begbie, the other directors of Anivor. He also instructed a member of the bank's panel of solicitors, Messrs. Robinson and Robinson, to prepare the necessary security documentation and to have it executed as a matter of urgency. His explanation for why there was need for haste is unconvincing. The instructions Henshaw gave to the solicitors indicated that the loan was to facilitate the purchase of a bakery: there was no mention that the loan related in any way to a proposed land development, although Cheers separately engaged these same solicitors to prepare the joint venture agreement, another of the documents Mrs. Begbie signed at Cheers' request.

30. I do not accept Henshaw's evidence that he relied on Robinson and Robinson to protect the bank in taking security from Mrs. Begbie by acting in accordance with the bank's standing instructions to its panel solicitors. I do not think Henshaw turned his mind to whether the solicitors might, if they acted in accordance with those standing instructions, frustrate the obtaining by the bank of the security over Mrs. Begbie's land. His overriding concern was for the bank to obtain the mortgage over Mrs. Begbie's land as quickly as possible to reduce its exposure to Cheers and Snowlake and to shore up his own position with the bank - this I think is the true reason for his instruction to the bank's solicitors to deal with the matter urgently - even though he had many indications that Cheers may well have been taking unfair advantage of Mrs. Begbie in offering her property to the bank as security in connection with his proposal on behalf of Anivor, which Henshaw did not, however, mention to the solicitors.

31. Like Henshaw, the bank's solicitors did not have any personal contact with Mrs. Begbie. Ms. Pickford, a solicitor employed by Robinson and Robinson, said in evidence that she was aware of the need to ensure that a third party who provides a security or guarantee to a bank understands the nature of the transaction. Ms. Pickford says she read the respondent's manual but if she had, at the time, a real understanding of its requirements, she approached the task of arranging for the execution and registration of Mrs. Begbie's mortgage and the associated documents in a rather casual way. An indication of the attention Ms. Pickford gave to the task she had to perform is provided by the fact that it is necessary for the bank to obtain rectification of the two critical security documents which Ms. Pickford prepared, the mortgage and the guarantee, before it can enforce them against Mrs. Begbie and the other cross-respondents. She said she recalls being struck by receiving Mrs. Begbie's title deeds at the same time as she got Henshaw's instructions, something that was unusual and which, if she had thought about it at the time, would have indicated that Mrs. Begbie did not have a solicitor acting for her. Yet contrary to the bank's instruction in its manual, she sent the mortgage to be executed by Mrs. Begbie to "The Directors" of the customer. There was also an irregularity in the request to Record Correction of Name form that was returned to Ms. Pickford bearing Mrs. Begbie's signature, but unwitnessed: Ms. Pickford remedied this by returning it and then getting it back with Brokken's signature as witness, but not resigned by Mrs. Begbie. She did not see any particular significance in this irregularity. There was an irregularity in Mrs. Begbie's answers to the bank's requisitions: these came back to Ms. Pickford bearing Mrs. Begbie's signature but with the answers left blank. Ms. Pickford said she did not regard this irregularity as of any significance either. She remedied it by taking it to her principal, Mr. Tony Robinson, who apparently took the same view as Ms. Pickford. Without making any enquiries of Mrs. Begbie, for whom he was not acting, Mr. Robinson completed the answers to the requisitions on her behalf, including the answers to requisitions numbered 4, 5, 10 and 11, thereby purporting to bind her to them should his client, the bank, later wish to hold her to those answers. He could not properly have done this without appropriate authority from Mrs. Begbie and without ascertaining by enquiry of her the information necessary to provide honest and accurate answers. Yet there was neither authority from nor enquiry of Mrs. Begbie. The purpose of the Authority to Complete, which Robinson and Robinson took from Mrs. Begbie, was to facilitate for their client bank the finalisation of the transaction. It could not authorise Mr. Robinson's actions. Notwithstanding the unusual aspects of the matter and the irregularities in the documentation to which I have referred, Ms. Pickford simply went ahead with completion of the documents as soon as possible.

32. But even if the solicitors had complied with their instructions from the bank and sent the mortgage to Mrs. Begbie herself, it may well be that, since she in my view expected to grant a mortgage over her Eight Mile Plains land in connection with Cheers' proposal, she would still have executed it (and the associated guarantee) and returned it to the bank. The operative default in this case was that of Henshaw, who allowed the transaction to proceed in order to benefit the bank when he had good reason for believing that Mrs. Begbie did not know the real use that Cheers intended to make of any advance the bank might make to Anivor.

33. After the Anivor loan facility was established, Cheers promptly proceeded to draw on it. The use he then made of the funds that had just become available to Anivor confirms that he never intended that Mrs. Begbie's land would be redeveloped. The bank records in evidence show that Anivor's account was operated on only in the period 26 July to 9 August, 1990, by which date $223,344.00 of the $250,000.00 facility had been drawn on. The initial $223,344.00 was paid out of the Anivor account on counter cheques, most of which were signed by Cheers as sole signatory but some of which Brokken alone signed. Within a fortnight of the $250,000.00 loan becoming available to Anivor, Cheers and Brokken between them paid $45,000.00 of it into Cheers' personal account, $40,000.00 into Snowlake's account, a further $59,410.00 for the benefit of Snowlake and $47,332.00 for the benefit of Crust and Crumb. Of this last-mentioned sum, $27,000.00 was used to pay the deposit due by Crust and Crumb on its purchase of a bakery not from Snowlake, but from a third party, Jayvale Pty. Ltd.; $7,332.00 to pay for Jayvale's stock and $2,000.00 for rent due by Crust and Crumb on the bakery premises it bought from Jayvale; the remaining $13,000.00 was used for the benefit of Crust and Crumb for a purpose not identified in the evidence. Brokken said that when he finally got Anivor's cheque book from Cheers in early October, he ascertained "to his complete horror" that the Anivor account was in debit in an amount of $289,652.00 and that $205,730.00 had been paid out for the benefit of Snowlake and (inconsistently with his own evidence in cross-examination and with what the counter cheques reveal) only $14,216.00 for the benefit of Crust and Crumb. He did not say where the remaining $50,000.00 went.

34. Only about a third of the $250,000.00 made available to Anivor by the bank against Mrs. Begbie's land was in fact used by Cheers to reduce the bank's response to Cheers personally and to Snowlake. It is somewhat surprising that so little of the $250,000.00 was so used, when I think that Henshaw expected that Cheers would in fact use much more of the loan moneys to reduce Snowlake's indebtedness to the bank than he did (as well as using those funds to clear his own personal indebtedness). But Henshaw had to trust Cheers to do this: he could not ensure that Cheers used the bulk of the $250,000.00 in this way for the benefit of the bank. If he were rigorously to dishonour cheques Cheers drew on the Anivor account in favour of payees other than Snowlake and Cheers himself, that pattern of dishonour of Anivor's cheques would advertise to anyone who looked that Henshaw was well aware that Cheers was simply sacrificing Mrs. Begbie's property for the benefit of the bank. That so little of the $250,000.00 was applied by Cheers in reduction of Snowlake's indebtedness, contrary to what I think were Henshaw's expectations, may explain Henshaw's actions in August soon after Cheers had expended practically the whole of the $250,000.00.

35. It is plain that Henshaw's concerns at the bank's exposure to Cheers and his companies were not stilled once the bank had the mortgage over the Eight Mile Plains land and the guarantee: these protected the bank only in respect of the $250,000.00 advance to Anivor, much of which was quickly spent as I have said, with only $85,000.00 going to reduce the bank's exposure to Snowlake and to Cheers. Henshaw sought security from Cheers in respect of Snowlake's indebtedness in August 1990. Cheers was able to oblige him. Cheers suggested to Mrs. Begbie that her Toorbul land, which had ceased to produce income after a fire, could be "involved with" the redevelopment of her Eight Mile Plains land. He suggested that Anivor would buy her Toorbul land for $200,000.00, paying $5,000.00 per month plus all outgoings and the balance purchase price within two years at most. She agreed and early in September handed Cheers the title deeds to this land. He said nothing to her about giving anyone a second mortgage over her Eight Mile Plains land. As with almost all of the other promises Cheers made to her, she saw none of the promised payments. Cheers then offered Henshaw a mortgage over Mrs. Begbie's Toorbul land and a second mortgage over her Eight Mile Plains land to secure Snowlake's indebtedness; he gave the title deeds for the Toorbul land to Henshaw. The bank of course already held the title deeds to the Eight Mile Plains land. Henshaw arranged for the mortgages to be prepared. Rather than being briefed out to the bank's panel solicitors, the documents this time were prepared by the bank in-house. When the documents were ready, Henshaw gave them to Cheers, asking him to arrange for their execution. The documents were returned to the bank, all purportedly executed by Mrs. Begbie, with her signature being witnessed by a Mr. D.V. McCarthy. Although Mrs. Begbie accepts that she signed the first mortgage of her Eight Mile Plains land and the guarantee (and also the Toorbul mortgage, in circumstances not explored in evidence), she says she did not write the signature "P. Begbie" on the second mortgage of the Eight Mile Plains land. The unchallenged evidence is that this signature is a forgery, as are Mr. McCarthy's signatures as witness to all three mortgages and the guarantee. I find that all these forgeries were made or procured by Cheers.

36. If there were any doubt as to Henshaw's belief in Mrs. Begbie's ignorance of the true character of the scheme when he took the mortgage and guarantee from her in July 1990, it is dispelled by his subsequent conduct in arranging the two mortgages to secure the overdraft of Snowlake. Henshaw knew Mrs. Begbie had no interest in Snowlake yet readily agreed to take these other mortgages in a final, although ultimately futile, attempt to secure the Snowlake advances and thus avoid the consequences of allowing the bank to become further exposed on this account. His conduct here illuminates his state of mind in July. Henshaw acknowledged that it was rare in his experience for a person to offer security for a company when that person was not connected to the company or related to its principals and that he had nothing to indicate that Mrs. Begbie knew of the extent of Snowlake's existing indebtedness to the bank. He claimed, however, he was alert to the need to ensure that such a person's interests were protected. Despite this, he did nothing in that regard. I take his desire to obtain this additional security as further evidence of Henshaw's long-standing deep concern at the extent of the bank's exposure to Cheers and his concern about his own position with the respondent and as evidence of his willingness to seek to protect the bank and himself, although this involved disregarding the interests of the person who was providing the security to the bank in circumstances in which he knew that Cheers was likely to be taking dishonest advantage of Mrs. Begbie in offering her property as security to the bank.

MRS. BEGBIE'S CLAIMS AGAINST THE BANK - THE LEGAL RESULT

37. The relevant principles that govern Mrs. Begbie's claim to relief on equitable grounds are stated in Commercial Bank of Australia Ltd. v Amadio [1983] HCA 14; (1983) 151 CLR 447. They have been repeatedly applied since: see Louth v Diprose [1992] HCA 61; (1993) 67 ALJR 95; National Australia Bank v Nobile [1988] FCA 72; (1988) 100 ALR 227; Nolan v Westpac Banking Corporation (1989) 11 ATPR 50,727; Broadlands International Finance Ltd. v Sly (1987) 4 BPR (97280); Borg-Warner Acceptance Corp. (Australia) Ltd. v Diprose (1987) 4 BPR (97279); Westwill Ltd. v Heath (1988) 52 SASR 461.

38. According to Mason J, in Amadio at p 462, the equitable doctrine which entitles a party to seek relief against unconscionable conduct "may be invoked whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created". His Honour went on to explain that he considered that a party would suffer from a "special disadvantage" only where "the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party". So mere difference in bargaining power between the parties is not by itself enough to put the weaker party at a "special disadvantage".

39. Deane J, with whom Wilson J agreed, said at 474:

"The jurisdiction is long established as extending generally

to circumstances in which (i) a party to a transaction was

under a special disability in dealing with the other party

with the consequence that there was an absence of any

reasonable degree of equality between them and (ii) that the

disability was sufficiently evident to the stronger party to

make it prima facie unfair or 'unconscientious' that he

procure, or accept, the weaker party's assent to the

impugned transaction in the circumstances in which he

procured or accepted it. Where such circumstances are shown

to have existed, an onus is cast upon the stronger party to

show that the transaction was fair, just and reasonable".

40. It is apparent from the way both Mason J and Deane J formulated the principle that, for it to apply in a given case, it is not necessary that the party who has benefited from the impugned transaction should itself have created the special disadvantage from which the party claiming relief suffers. See also Louth v Diprose, supra, at 99. It is enough that the first-mentioned party knows (or ought to know) of the other's handicapped situation and takes unfair advantage of the opportunity so presented. Amadio itself was just such a case, at least in the view of Mason J who, at p 464, identified the situation of special disadvantage in which the claimants were there placed as being "the outcome of this reliance on and confidence in their son, who in order to serve his own interests, urged them to provide" the bank with the impugned security. So was Louth v Diprose: see p 99. It is also clear from the statements in Amadio that if one person has either actual knowledge that another occupies a position of special disadvantage in relation to an intended transaction or, without actual knowledge, is aware of the possibility that that situation of special disadvantage may exist or is aware of facts that would raise that possibility in the mind of a reasonable person, then that person's conduct in entering into the transaction from which he benefits against such a background of knowledge or awareness on his part will be unconscionable. See per Mason J at pp 462 and 467 and per Deane J at p 479.

41. Whether Mrs. Begbie was in a position of "special disability" in relation to the transaction which involved the bank taking the mortgage and the guarantee from her in late July is to be determined by an objective comparison of the relative positions of the respective parties and of their ability to protect their own interests. See per Deane J in Amadio at pp 475-477.

42. Such a comparison in this case shows that Mrs. Begbie was under a relevant disadvantage vis-a-vis the bank. The bank by Henshaw knew that Cheers intended that Anivor would use the loan that it was prepared to make to Anivor only because of the security provided by Mrs. Begbie to reduce the debts then owed to the bank by Cheers and by Snowlake and to buy a bakery business, even if it also had some expectation that part of the loan funds might be used at some future time for the redevelopment of Mrs. Begbie's land. Mrs. Begbie on the other hand, was unaware that the loan moneys might be used for any purpose other than redevelopment of the land (purposes, moreover, from which she would obtain no benefit or no significant benefit). It was this disparity in knowledge as to Cheers' intentions for the Anivor loan funds as between Mrs. Begbie and the bank that operated to prevent Mrs. Begbie making a judgment as to her own best interests concerning the provision of the security that put her in a position of special disadvantage with respect to the transaction in question: Amadio at p 462 and pp 476-7. It is unlikely in the extreme that, if Mrs. Begbie did know of the full range of Cheers' intentions for the Anivor loan moneys, she would have proceeded with the transaction and handed over her title deeds to enable Anivor to raise the loan funds in question, notwithstanding her feelings for Cheers at the time.

43. The next question is whether the bank knew enough of Mrs. Begbie's position of special disability to make it unfair for the bank to take from her the mortgage of her Eight Mile Plains land and her promise of guarantee as security for the repayment of Anivor's indebtedness to the bank. The answer to this question is clear, given the conclusions I have reached as to the circumstances in which Henshaw took these securities.

44. Counsel for the bank submitted that this is a case in which the applicant really relies on a failure by the bank to disclose information known to it about the borrower's position, under the guise of an unconscionability claim. But the applicant does not in any way rely on a failure by the bank to make disclosure. A bank may not be in breach of its limited duty of disclosure, but may still be guilty of unconscionable conduct in taking the benefit of a security from a person. Amadio at 463. The applicant's case is that there is unconscionable conduct on the part of the bank in taking security from her because the bank went ahead and took that security knowing that the applicant believed the funds to be borrowed against her security would be used for one purpose which might ultimately benefit her and also knowing that the applicant was unaware that the funds would be used for other purposes that would be of no benefit to her but which would benefit the bank itself as well as Cheers and Snowlake.

45. Mrs. Begbie is entitled to the relief she seeks with respect to the mortgage and the guarantee on the ground of the bank's unconscionable conduct associated with its taking of these securities from her.

46. If Mrs. Begbie provided the security to the bank as a result of the undue influence of Cheers, then if the bank knew or should be taken to know of the facts that gave rise to that relationship of undue influence, it would for that reason be exposed to a charge of unconscionable conduct in taking her security. Amadio at 461; Louth v Diprose at pp 97-98. I am not, however, prepared to hold that Mrs. Begbie's willingness to make her title to the land available to Anivor as security and her willingness to give the guarantee for the loan to Anivor was the result of her being subject to undue influence by Cheers. It was an imprudent decision on her part to agree to sell the land to Anivor on the terms in question, including a term that, pending receipt by her of the purchase consideration, she would make her title deeds available to Anivor so that it could borrow against them. She was influenced by Cheers as a result of the personal relationship between them to do this (just as she was led for the same reason into giving him her $17,000.00). But she agreed that she made a deliberate decision to join in what Cheers proposed, only after she gave the proposal a lot of thought and had decided that: "I was quite comfortable giving it (i.e., her land) over to him." She also agreed that Cheers did not pressure her into the arrangement. She was not without experience in commercial property dealings. Unwise though her assessment was, it was nevertheless her expectation that the proposal would produce a profit for her that also contributed to her decision to go along with the proposal. These conclusions preclude any finding that she was a victim of undue influence: her will cannot be said to have been overborne.

47. The applicant also submitted, in reliance particularly on recent English authority, that the respondent both by its manager, Henshaw, and by its solicitors, Robinson and Robinson, entrusted Cheers with the task of obtaining the execution of the documents by Mrs. Begbie and so, for that reason alone, the respondent was fixed with responsibility for the unconscionable conduct in which Cheers personally engaged, in order to obtain Mrs. Begbie's signature.

48. The critical documents are the mortgage and the guarantee. Henshaw did not entrust these to Cheers for the purpose of having them executed: he left that to the bank's solicitors. However, the evidence is not sufficient to enable a finding to be made that the solicitors did deliver the mortgage and the guarantee to Cheers for the purpose of his procuring the execution of those documents by Mrs. Begbie. The documents left the solicitors' office under cover of a letter dated 23 July, 1990 addressed to "The Directors, Anivor Pty. Ltd., 4 Princeville Court, Robina". This was the address of Brokken at that time. Ms. Pickford could not say whether these documents, which, according to her instructions, were required urgently, were delivered by the solicitors by courier to anyone or were collected from the solicitors' office by someone. I am not prepared to find that the solicitors entrusted Cheers with the task of having the documents executed.

49. It is thus unnecessary to reach a conclusion whether the court will intervene where, without more, a creditor has entrusted the principal debtor, or someone in an analogous position, with the task of obtaining the surety's signature to a guarantee or a mortgage and the debtor obtains the signature by misrepresentation or undue influence.

50. I note, however, that Purchas LJ, in his decision in Barclays Bank Plc v O'Brien [1992] EWCA Civ 11; (1993) QB 109, said of this newly developed concept of agency, at p 144:

"In coming to the conclusion whether it would be

unconscionable for the creditor to enforce the charge

against the surety, all the circumstances involving the

relationships between the creditor, the debtor and the

surety will be taken into account. In Coldunell Ltd. v

Gallon, as with the other recent authorities, I believe that

the results, if not all the specific ratios decindendi, can

be reconciled if this equitable principle is observed, and

the artificial concept of agency is abandoned in all cases

save those where contractual or ostensible agency is clearly

established."

51. In Bank of New South Wales v Rogers [1941] HCA 9; (1941) 65 CLR 42, Starke J, at 55, said:

"(The bank) prepared and left it to Gardiner to procure the

critical authorities ... and must therefore abide the

consequences of his undue influence."

52. However, a reading of his Honour's judgment clearly shows that his decision was not based on any notion of equitable agency. It was the combination of the bank's knowledge of the potential for undue influence of his niece by Gardiner and its standing by, in the light of that knowledge, after providing Gardiner, as the party having the influence, with the opportunity to exercise it, which gave rise to the plaintiff's entitlement to relief in equity there. The other members of the Court, McTiernan and Williams JJ, also decided the case on this same basis. The decision in Amadio is the logical development of the principles discussed in Rogers. It lends no support to the notion that a person who takes a security in respect of a third person's indebtedness will be fixed with responsibility for that person's unconscionable or fraudulent conduct in procuring the security, solely because the secured creditor entrusted or left it to the third person to procure the security, even though there is no evidence that the third person was the creditor's actual or ostensible agent to procure the security.

53. It is doubtful whether, in the light of the principles established in Amadio, there is any room for the special notion of agency here relied on by the applicant.

(D) Section 52A the Trade Practices Act

54. Mrs. Begbie relied on s. 52A the Trade Practices Act for the relief she claims as well as on the equitable principles to which I have referred. This section was re-enacted as s. 51AB by the Trade Practices Legislation Amendment Act 1992. Before the bank can be held to have infringed s. 52A as in force at the relevant time, it must have engaged in unconscionable conduct, in trade or commerce, in connection with the supply of goods or services. Section 52A(5) provided:

"A reference in this section to goods or services is a

reference to goods or services of a kind ordinarily acquired

for personal, domestic or household use or consumption."

55. By s. 4, "services" is defined to include the rights, benefits, privileges or facilities that are provided under a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking. Mrs. Begbie would be entitled to rely on s. 52A to found a claim to the relief she seeks if she can show that the loan moneys the respondent advanced to Anivor, which facility does amount to a "service" for the purposes of s. 52A(5), was a service "of a kind ordinarily acquired for personal, domestic or household use". The borrowing of funds, even substantial in amount, e.g., the borrowing of funds by a person sufficient to enable that person to buy a private residence, can be a service of such a kind. In order to determine whether the service in question in a particular case in which s. 52A (now s. 51AB) is relied on is one within s. 52A(5) (now s. 51(AB)(5)), it is in my view necessary to have regard not just to the activity, here the provision of loan funds, but also to the purpose that activity is intended, in the particular case, to serve. Only then can the true nature of the services in connection with which it is said the respondent has acted unconscionably be identified and a proper answer given to the question posed by s. 52A(5). The provision of such a large sum as $250,000.00 by way of overdraft accommodation for the purpose of assisting a corporation to buy a business, to enable it to assist a director to pay off his own personal indebtedness to another and to assist it to undertake the commercial development of real estate is not a service of the kind referred to in the sub-section.

56. It remains only to consider the bank's cross-claim for the enforcement of Anivor's debt to the bank and for rectification and enforcement of the guarantee, as against Mrs. Begbie, Brokken and Cheers, in respect of that debt and also the claims by Brokken and Cheers for contribution from Mrs. Begbie in respect of the debt owing by them to the bank.

57. No appearance was entered on behalf of Anivor. Nothing emerged in the course of the hearing to suggest that there was other than a valid debt, payable on demand, subsisting as between Anivor and the bank. The bank is entitled, as against Anivor, to judgment for the amount outstanding in respect of the loan made to it.

58. The mortgage of the Eight Mile Plains land by its terms secures to the bank repayment of what is said to be Mrs. Begbie's indebtedness, rather than Anivor's indebtedness to the bank. The guarantee too, is expressed to be in respect of her indebtedness to the bank, rather than Anivor's. By its cross-claim the bank seeks as against Mrs. Begbie rectification of the mortgage to show that it secures repayment to the bank of Anivor's indebtedness and, as against Mrs. Begbie, Cheers and Brokken, rectification of the guarantee to the same end.

59. On the findings I have made with respect to the circumstances in which Mrs. Begbie executed the mortgage there would, subject to one fatal impediment, be a clear case for its rectification. So far as concerns the claim for rectification of the guarantee as against Mrs. Begbie, apart from the existence of this same impediment, the bank's entitlement to rectification is a little less clear, given my finding that Mrs. Begbie never realised she signed a guarantee but probably would have, if she had been told that it, like the mortgage, was required by Anivor's financier.

60. But rectification is an equitable remedy that may be withheld on equitable principles. See generally Equitable Remedies, 4th Ed., Spry, pp 602-603. It is only rarely that a court will refuse rectification on the ground of the claimant's lack of clean hands because, before that will be appropriate, "the dirt in question on the hand, (must have) an immediate and necessary relation to the equity sued for". Moody v Cox and Hall (1917) 2 Ch. 71 at 87-88. I have found that the bank obtained the mortgage and the guarantee from Mrs. Begbie in circumstances in which Mrs. Begbie is entitled to resist enforcement of these securities against her (even if they were rectified) on the ground of the bank's unconscionable conduct. That want of clean hands on the part of the bank in taking the securities from Mrs. Begbie is so directly related to the bank's claim for rectification in order to make enforceable what it so took from her as to justify refusal of this remedy, even if there were no other obstacle in the way of the bank obtaining that relief.

61. The claim against Cheers and Brokken to rectification of the guarantee is not, however, affected by this consideration. There was no suggestion that Mrs. Begbie had any dealings with the bank other than in respect of the Anivor account. It was Anivor and not Mrs. Begbie who both Cheers, Brokken and the bank intended as the principal debtor. The evidence indicates that Mrs. Begbie's name was erroneously inserted in the guarantee as principal debtor by the bank's solicitors. I therefore consider that as against Cheers and Brokken the guarantee should be rectified to show that the principal debtor is "Anivor Pty. Ltd." and not "Pamela Ann Begbie".

(C) The claim against Brokken on the guarantee 62. Brokken, who appeared for himself at the trial, did not argue against rectification but contended that he should not be bound by the guarantee because Cheers exceeded his authority to draw on the Anivor account by drawing on it beyond the $80,000.00 that Brokken says it was agreed between them that Cheers could use for the benefit of Crust and Crumb. Alternatively, Brokken argued that he gave his guarantee in the belief that the loan was to be secured by the mortgage over the Eight Mile Plains land and that Mrs. Begbie would also be a co-guarantor.

63. It is appropriate, in view of Brokken's first argument, to say something of my assessment of the reliability of his evidence. He signed the same documents that Mrs. Begbie signed which were required by Henshaw before causing the respondent to make the $250,000.00 loan to Anivor. Brokken does not know Mrs. Begbie and he only met her once, in late 1990, when she served a notice on him. However, according to his witness statement, he has known Cheers since about 1980 and acted as his accountant prior to April 1990, when Cheers engaged him as accountant for Snowlake. Brokken says that after about eight weeks' work, i.e., by about May or June 1990, his examination of Snowlake's books showed it had made a "considerable loss". He says that in July 1990, Cheers said he could buy a bakery business from a third party, Jayvale Pty. Ltd., for $220,000.00 on a deposit of only $27,000.00 and instalments of $3,800.00 per week. At about the same time, he says Cheers mentioned that a Mrs. Begbie had a development property and would also be interested in a share in the bakery to be bought from Jayvale. Brokken says that the arrangement with Cheers was that Anivor would be set up to develop Mrs. Begbie's property and also to lend moneys to Crust and Crumb so that it could pay the $27,000.00 deposit due on its purchase from Jayvale and to provide it with working capital to a maximum of $50,000.00, nearly $80,000.00 in all. He went on to say:

"Finance for the purchase of Jayvale Pty. Ltd. and the

redevelopment of the property was to be provided by the

(respondent) on an overdraft facility secured on the

properties owned by Mrs. Begbie."

64. Although he did not expressly say so, it appears from his witness statement that the $170,000.00 remaining from the $250,000.00 loan which he joined in seeking for Anivor from the respondent was to go towards the development of Mrs. Begbie's properties. I have already referred to his professed horror at finding that, within a fortnight of the $250,000.00 loan becoming available to Anivor, over $223,000.00 had already been expended.

65. I regard Brokken as an unreliable witness motivated more by a desire to avoid liability on the guarantee than to tell the whole truth of his dealings with Cheers. My reasons for forming this view of him include the following:

(a) In his defence to the bank's cross-claim, he alleged

that the bank's mandate on opening the Anivor account

required two authorised signatories to operate it, but

in breach of that mandate it permitted the account to

be overdrawn to the extent of $295,410.00 by

permitting cheques to be drawn on the account signed

by only one signatory. Yet he was the first signatory

to the "Request for Banking Facilities" dated 20 July,

1990 which clearly authorised operations on the Anivor

account by a single person. He tried to retrieve the

situation in evidence by saying it was only subsequent

to completing this Request, when he had signed the

joint venture agreement which required two

signatories, that he insisted to Cheers (but not

apparently to the bank, which he knew did not see the

joint venture agreement) that the Request be changed.

Yet it appears that he signed at least one cheque for

$2,000.00 on the Anivor account as sole signatory

after he signed the joint venture agreement.

(b) In his pleading, he also says that "he never signed a

cheque on the (Anivor) account". Yet within two weeks

of the account being opened, he signed three cheques

on it as sole signatory for amounts totalling $49,000.00.

(c) In his witness statement, he suggested that the

arrangement with Cheers was that none of Anivor's

funds were to be expended for the benefit of others,

apart from a maximum of $80,000.00 for the benefit of

Crust and Crumb. But when it was pointed out that he

signed the counter-cheque drawn on Anivor's account on

20 July, 1990 in favour of Snowlake for $20,000.00, he

mentioned for the first time that there was also an

arrangement for Crust and Crumb to buy plant from Snowlake.

(d) He was prepared to witness Mrs. Begbie's signature on

a Titles Office request to record correction of name

dated 26 July, 1990 without seeing her sign the

document, without ever having met her and merely on

Cheers' say-so that it was her signature - he claimed

this was not his normal practice as a Justice of the Peace.

(e) Cross-examination produced, for the first time, the

following account by Brokken of the role he and Cheers

intended Anivor would play in assisting Crust and Crumb:

i) Anivor would lend Crust and Crumb the $27,000.00

deposit moneys and a further sum up to

$50,000.00 for working capital, all without security;

ii) Anivor would factor Crust and Crumb's debts on a

weekly basis by buying its receivables at face

value less 10%. This, however, never occurred

because it was only to take place if Crust and

Crumb was trading at a loss and Crust and Crumb

traded profitably, at least until all Anivor's

funds were expended. In short, Brokken's

evidence was that "Anivor was set up to be a

source of any necessary funds that Crust and Crumb

might need", although he insisted that this was

to be so only up to the $80,000.00 limit;

iii) these arrangements were not documented, but were oral only.

66. Why it was Crust and Crumb that was chosen to purchase with Anivor's funds what Cheers and Brokken appeared to have believed to be a profitable bakery business rather than Snowlake was never explained. It may be that Cheers and Brokken had little real hope that the debt-laden Snowlake could survive for long, even with access to Anivor's funds and that it would be more advantageous for them to try to shelter the profitable new bakery business in another of Cheers' companies. It is, however, unnecessary to make a finding as to Brokken's motivations. Although he did not suggest he was to contribute any funds to Anivor or Crust and Crumb (apart from the moneys due by way of share subscriptions) he says the shares in Anivor were held as follows: 400 to Cheers, 400 to himself and 200 to Mrs. Begbie and those in Crust and Crumb as follows: 25% to each of himself, Cheers, a partner of Cheers and Anivor. On his evidence, Mrs. Begbie was thus to have a 5% interest in Crust and Crumb while he and Cheers had 35% each. Brokken, like Cheers, had an expectation of being rather more handsomely rewarded than Mrs. Begbie would have been if Anivor and more particularly Crust and Crumb should prosper, even though it was Mrs. Begbie's property which was to provide all the funds necessary to establish Crust and Crumb (and Anivor) in business. Mrs. Begbie was not questioned about any of this. But I have found she knew nothing of any bakery business being bought with Anivor's funds.

67. The first of Brokken's submissions can be quickly disposed of. For the reasons given, I do not accept Brokken's evidence that Cheers had no authority to draw on the funds made available by the bank to Anivor beyond the $80,000.00 that he claimed was to be used for the benefit of Crust and Crumb. But even if there was, as between Brokken and Cheers, such a limitation on Cheers' authority, there is nothing in the evidence to suggest that the bank should have known of that limitation on the authority of any of the signatories to the account. The bank cannot be affected by any excess of authority on the part of Cheers, unless it had knowledge of the limitation on his authority. That the bank acted unconscionably in relation to Mrs. Begbie does not affect the position, in this regard, of Anivor or of Brokken. I reject Brokken's first submission.

68. Brokken's second submission requires consideration to be given firstly to the consequences of the guarantee being unenforceable as against one of a number of guarantors where, as here, all the guarantors are jointly and severally liable on the guarantee.

"21. If the whole or any part of this Agreement or

Guarantee be now or hereafter unenforceable against one or

more of us or void or voidable for any reason whatsoever

this Agreement and the Guarantee shall nevertheless be and

remain fully binding upon or enforceable against the other

or others as if it had been made by such other or others of

us to secure the liabilities of the Debtor and of the said

other or others of us as Guarantors to the Bank severally

and amongst such others jointly and such liabilities shall

not be affected or prejudiced by any express or implied

condition precedent thereto or the non-fulfilment thereof

and such condition precedent which would otherwise affect

such liabilities to any extent is waived to that extent."

70. It is well established that the principles of equity generally applicable to the relationship between creditor and surety, and between co-sureties, may be limited or qualified by the contract between them. See, e.g., Fletcher Organization Pty. Ltd. v Crocus Investments Pty. Ltd. (1988) 2 QdR 517 at 534-5. By its express terms, clause 21 records an agreement between each guarantor and the bank that that guarantor is not to be released from liability to the bank in respect of the guarantee even if a co-guarantor can escape that liability on any ground, including conduct by the bank towards that co-guarantor. The closing words of this clause would also exclude the operation of the presumption referred to in the Modern Contract of Guarantee, 2nd Ed., Phillips and O'Donovan, at pp 81-84: see p 331. That the bank by its own conduct has produced a situation in which Mrs. Begbie is entitled to be released from the guarantee cannot therefore confer on either Brokken or Cheers any right to escape from their obligations under the guarantee.

71. Brokken's alternative submission raises the question whether, given that the mortgage over Mrs. Begbie's land is now lost to the bank as a result of its own manager's misconduct, the bank can nevertheless enforce the guarantee against Brokken. Equity gives to a guarantor who has paid off the whole of the principal debt a right by way of subrogation to an assignment of all the securities held by the creditor in respect of that debt. This right of subrogation extends to all such securities, whether or not the guarantor was aware of their existence and whether or not he relied upon them when he provided his guarantee. It is not even necessary for the securities to be in existence at that time. See the Modern Contract of Guarantee, supra, at pp 570-1. Not only does Brokken say he signed the guarantee in the expectation that the bank would have security for repayment of the guaranteed debt over Mrs. Begbie's land, but the guarantee in clause 4 itself recognises that the bank may have securities for repayment of that debt to which this right of subrogation would extend. There is also an equitable principle which applies where the actions of the creditor result in the loss of part of the security which the creditor had for the principal debt. In such circumstances, equity will release each surety from liability to the extent to which the surety is prejudiced by the loss of his right to look to the security released by the creditor: Buckeridge v Mercantile Credits Ltd. [1981] HCA 62; (1981) 147 CLR 654 at 675.

72. However, all these rights conferred by equity on guarantors can be lost if they bargain them away. Clause 5 of the guarantee provides:

"5. This Guarantee shall not affect or be affected by any

other or further security or securities now or hereafter

held or taken by the Bank or by any loss by the Bank of any

collateral or other security or securities or by the Bank

failing or neglecting to recover by the realisation of any

collateral or other security or securities or otherwise the

moneys hereby secured or by any other laches or mistakes on

the part of the Bank." (emphasis added)

73. The words "This Guarantee shall not ... be affected by" in this clause should be read as meaning "the liability of the guarantors under this guarantee shall not be affected by". Clause 5 covers the circumstances of the present case where the bank has security additional to the guarantee in respect of the principal debt, but, by reason of its own conduct, is prevented from having recourse to that security: the guarantors (other than Mrs. Begbie) are to remain liable to the bank. The clause is thus effective to prevent Brokken and Cheers escaping from their liabilities to the bank under the guarantee, either in whole or in part, even though the bank by its own misconduct towards Mrs. Begbie has deprived Brokken and Cheers of their right of subrogation in respect of Mrs. Begbie's land which she mortgaged to the bank to secure the guaranteed debt. In Credit Lyonnais (Aust.) Ltd. v Darling (1991) 5 ACSR 703, a clause in a guarantee in terms similar to the opening words of clause 5 was held sufficient to prevent guarantors escaping liability on a guarantee where the creditor negligently allowed a security taken by it in respect of the guaranteed debt to become void. I do not think there is any reason to assume that the parties must have intended that the wide words of clause 5 are not to operate to preserve the guarantor's liability where a security taken by the creditor in respect of the guaranteed debt has been lost due to the creditor's own misconduct. Cf. Credit Lyonnais at 712.

74. Brokken's defence to the cross-claim on this basis must also fail. In my view, there is nothing which would suffice to prevent the bank enforcing the guarantee against Brokken to the full extent of the liability imposed on him by the provisions of the guarantee.

75. Brokken also claims contribution from Mrs. Begbie as his co-guarantor. It is always open to a guarantor to agree to modify or exclude his right to contribution from his co-guarantors, just as it is open to him to bargain away the other rights that law and equity confer on sureties. See the Modern Contract of Guarantee, supra, at 527. Clause 21 is designed to exclude the rule that the discharge of one co-guarantor by the acts of the creditor will discharge the other co-guarantors. Where guarantors are jointly liable or, as here, jointly and severally liable, the reason why release of one by the actions of the creditor releases all, is not based upon the release depriving the other co-guarantors of their right to contribution from the one released, but on wider contractual grounds. See Mahoney v McManus [1981] HCA 54; (1981) 55 ALJR 673 at 677, citing Ward v National Bank of New Zealand (1883) 8 App Cas 755 at 764. (In contrast, the reason why the release by the actions of the creditor of one guarantor who was only severally liable with another guarantor releases that other is based on the narrow ground that the release of the one would deprive the other of his equitable right to contribution from the other. See Ward v National Bank of New Zealand, supra, at 765, 766.) Clause 21 cannot therefore be read as an agreement between the three guarantors to give up their right to contribution from one of them who is released from the guarantee. It might be thought that clause 21 does not in any event deal with the rights of the three co-guarantors as between themselves at all, only with their individual relationships with the principal creditor. But the release by act of the creditor of one of a number of co-guarantors whether they be jointly, jointly and severally or only severally liable, necessarily operates to destroy the equitable right to contribution inter se that co-guarantors possess, because a co-guarantor is only entitled to claim contribution from another if that other shares with him "a common burthen", to use the language of Deering v The Earl of Winchelsea (1787) 2 Bos and Pul 270 at 272-3. That is, before the right to contribution can exist, "the co-sureties must share a common obligation and be liable to a common demand": Modern Contract of Guarantee, supra, at 529. That clause 21 does not deal with the rights of the three co-guarantors as between themselves but only with their individual relationships with the principal creditor, and that it can only operate, where one of the co-guarantors has been discharged by the actions of the bank as creditor, to ensure that the other co-guarantors remain liable on the guarantee does not detract from the fact that the event that triggers the operation of the clause also destroys any rights to contribution that the remaining guarantors previously had against their co-guarantor who is released. The unconscionable conduct of the bank which operates to release Mrs. Begbie from all liability on the guarantee by the very fact of releasing her from the "common burthen", necessarily destroys the right to contribution that Brokken, as her co-guarantor, would, up to the time of the release, have prima facie been entitled to claim against her.

76. The claim made by Brokken to contribution from Mrs. Begbie in respect of their liability on the guarantee to the bank must be dismissed.

77. Brokken did not claim in his pleadings, nor did he argue that if he remained liable on the guarantee and if he was also disentitled to contribution from Mrs. Begbie after her discharge from liability thereon, then he was entitled to partial relief from the full amount of the bank's claim, given that it was the bank's own conduct that deprived him of his right to contribution from Mrs. Begbie. But since the point was not raised, it is unnecessary to peruse this matter further other than to note that, if Brokken were involved in Cheers' fraudulent conduct in procuring Mrs. Begbie to enter into the guarantee, that would not only operate to deprive him of any right to contribution he might otherwise have had against Mrs. Begbie, it might well also operate to deprive him of any right to partial relief against the bank's claim on the guarantee against him.

78. The bank also cross-claimed against Mrs. Begbie, Cheers and Brokken, as directors of Anivor, pursuant to s. 556 the Companies (Queensland) Code or, alternatively, s. 592 the Corporations Law. But these provisions only apply to a company that is either under some form of administration or has "ceased to carry on business" within the very limited meaning of that expression in s. 553(2) the Code and s. 589(3) the Law respectively. See s. 553(1) the Code and s. 589(3) the Law. By paragraph 8B of her answer to the respondent's cross-claim, Mrs. Begbie expressly raised this issue. The respondent did not seek to adduce any evidence to show that Anivor was a company to which these provisions apply. Nor did its counsel seek any opportunity to re-open his case for that purpose when the point was again raised by counsel for Mrs. Begbie in closing argument. This claim must be dismissed.

79. The bank is entitled to judgment on the guarantee against Cheers and Brokken. Their liability under the guarantee is limited by clause 7 to:

"... the sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS

($250,000.00) (where the Guarantee otherwise is for a

limited amount) and a sum equal to one (1) year's interest

thereon at the rate for the time being charged by the Bank

to the Debtor in respect of the Debtor's accounts ... and

the costs and expenses incurred in obtaining payment of the

said sums respectively together with interest on the said

sums respectively from the date when demand for payment

shall be made until payment at the rate of one per centum

(1%) higher than the rate of interest last hereinbefore

mentioned."

80. Anivor and Cheers did not take part in the trial. Brokken appeared in person. It is necessary to calculate the amount now due by Anivor and the amount due on the guarantee by Cheers and Brokken before formal judgment can be pronounced. I therefore direct that by 26 November, 1993 the respondent file an affidavit to be sworn by one of its officers deposing to the amount due as at 22 November, 1993 by Anivor and to the amount due as at that same date by Cheers and Brokken and showing how those amounts are calculated. I further direct that the respondent serve a copy of this affidavit upon Brokken forthwith upon filing the original. The hearing will be adjourned to 3 December, 1993 when formal judgment will be given, including judgment against Anivor, Cheers and Brokken in the amounts set out in the respondent's affidavit, unless Brokken shall by 1 December, 1993 file and serve on the respondent a statement disputing the amount so claimed by the respondent against him and setting out his reasons for disputing the correctness of the respondent's calculations. In that event, I will decide on any evidence that the bank and Brokken put before me what is the amount to which the bank is entitled to recover from Brokken (and Cheers) pursuant to the guarantee.