Pamela Ann Begbie v State Bank of New South Wales Limited; Leslie Matthew Cheers; John Brokken and Anivor Pty Ltd [1993] FCA 579;

Pamela Ann Begbie v State Bank of New South Wales Limited; Leslie Matthew Cheers; John Brokken and Anivor Pty Ltd [1993] FCA 579; - FCA 1993 case summary — Zoe

[37]

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.

[38]

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".

[39]

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.

[44]

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.

[46]

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.

[47]

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.

[48]

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:

[54]

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.

[58]

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:

[61]

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.

[64]

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.

[68]

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.

[106]

(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.

[117]

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.

At a glance

Court

Decision date

Before

Source

Judgment (123 paragraphs)

Pamela Ann Begbie v State Bank of New South Wales Limited; Leslie Matthew Cheers; John Brokken and Anivor Pty Ltd [1993] FCA 579; (1994) Atpr 41-288 (3 December 1993)

Parties

Legislation Cited (2)

Cases Cited (8)