Pan Foods Company Importers & Distributors Pty Ltd v Australia and

Pan Foods Company Importers & Distributors Pty Ltd v Australia and - [2000] HCA 20 - HCA 2000 case summary — Zoe

[8]

GLEESON CJ, McHUGH AND HAYNE JJ. The central issue in this appeal is whether the respondent bank was entitled to appoint a receiver and manager to the assets and undertaking of the first appellant ("Pan Foods").
The facts, including the relevant provisions of the General Conditions, and of the debenture, are set out in the judgment of Callinan J.
Although the arguments of the parties, in this Court and in the Supreme Court of Victoria, addressed numerous questions said to have been thrown up by the documents in force at various times, we agree with Callinan J that the appeal can be determined, relatively simply, upon the basis adopted by Winneke P in the Court of Appeal.
An Event of Default, within the meaning of 10.1(j) of the General Conditions, occurred. When Pan Foods' facilities came up for review in 1994, an investigating accountant was appointed to report to the bank. It became obvious that Pan Foods was incurring large losses. The bank officer in charge of the account told his superiors that the company was performing "disastrously". The accountant expressed the opinion that, if the bank enforced its security, there would be a substantial shortfall. The evidence makes it plain that circumstances had arisen which, in the opinion of the bank, had a material adverse effect on the business, assets, and financial condition of Pan Foods and on its ability to perform its obligations to the bank. It was submitted that there was no specific evidence of the formation of such an opinion. In truth, on the information before the bank, no other opinion was reasonably available, and what was said and done by the officers of the bank makes it clear that they held such an opinion.
That entitled the bank, under General Condition 11.1(e) to declare (ie to communicate to its customer an expression of its will) that the moneys owing by the customer were immediately due and payable. It did this by giving a notice demanding payment.
The notice was given under General Condition 15.3. The notice was in writing, and was delivered by Mr Bew, who was an Authorised Representative. Having regard to the terms of 15.3, the fact that it was signed by the bank's solicitor, rather than Mr Bew, was immaterial.
That having been done, the bank was entitled, by virtue of cl 19 of the debenture, to appoint a receiver. It did so. The language of cl 19 is clear. The power to appoint a receiver arose "[a]t any time after the moneys … secured (became) payable." No intermediate step was required.
Some confusion seems to have arisen in argument because there were other provisions pursuant to which the bank might also have been, or considered itself, entitled to act. This is not unusual. Lenders may wear both belt and braces. When the bank appointed a receiver, it was entitled to rely on all powers which enabled it to do so. The facts of the case, and the terms of the notice given, fitted within contractual provisions empowering the bank to appoint a receiver. The appointment was effective.
The appeal should be dismissed with costs.
KIRBY J. This appeal from orders of the Court of Appeal of Victoria[1] illustrates the principle to be applied in the construction of commercial documents comprising agreements for loan. As the reasons of the other members of this Court demonstrate, the documents in question in the appeal are those agreed to by a large banking corporation ("the Bank") in relation to the extension of substantial financial credit to the other party, a commercial corporation ("the company") engaged in business with a view to profit for its shareholders. Although the Bank took personal guarantees from, and mortgages over lands belonging to, the directors of the company, it is the loan documents that are in question in the appeal, not the personal guarantees.

[9]

The special rule which the law has applied to the construction of contracts of suretyship has a peculiar historical basis. The surety has traditionally been a specially favoured debtor[2]. Contractual stipulations imposing legal liabilities on sureties have long been construed strictissimi juris[3]. Many a surety has escaped apparent legal obligations by invoking this rule of construction - often without being able to point to the slightest substantive merit. Initially, this approach of the English law was derived from cases of personal, family and other uncompensated guarantees. In the United States of America, it was at first followed. However, by the latter half of the nineteenth century the courts of that country, with appropriate rationality, began to devise a more discerning principle for the new commercial forms of suretyship to which the market economy had given rise[4]. The United States Supreme Court sanctioned this development of the law in Chapman v Hoage, Deputy Commissioner, District of Columbia Compensation District[5]. It is now well established in the United States.
In Australia, the courts have continued to follow the old law, despite the fact that the foundation for it has largely changed[6]. A rule devised by judges to relieve volunteers in a family situation against personal obligations that they have undertaken for relatives and friends, for no benefit or reward save blood or affection, was extended unquestioningly to commercial contracts of suretyship entered between business enterprises for hoped commercial gain. In the New South Wales Court of Appeal I rejected this misapplication of legal doctrine: Tricontinental Corporation Ltd v HDFI Ltd[7]. However, I was in a minority. The majority felt that the authority of this Court, including in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[8], required a continuance of the strict approach to surety contracts generally.
In Tricontinental, Samuels JA even appeared to express a broader proposition that conditions precedent in contractual obligations must always be strictly complied with[9]. With respect, I could never agree with such a sweeping generalisation. I remain of the view that I expressed in Tricontinental. Although that view has been criticised[10], I am "quite impenitent"[11]. The outcome in Tricontinental, by which commercial liability of $13.85 million was avoided because of a wholly technical and minor error in a demand on a compensated surety, stands as an indictment, in my respectful view, of the old law as applied in a business setting[12]. The mistake made in that case was irrelevant to the merits and inconsequential. No prejudice to the surety was proved[13]. Substantially, a notice required by the agreement between the parties was sent to the wrong address[14]. When the law has such disproportionate consequences, it deserves the strongest condemnation and confinement.
This appeal is not the occasion for the reconsideration of all of the matters debated in Tricontinental. But it is an occasion to restrain any attempt to push the strict approach adopted in that case (and other cases) beyond contracts of suretyship into ordinary loan agreements between financiers and business enterprises operating for profit. Whatever might be the approach suitable to agreements between other parties for other purposes, those of the commercial kind must be approached "fairly and broadly, without being too astute or subtle in finding defects"[15].
When such an approach is applied to the loan agreement between the Bank and the company here, there can be but one outcome, in my view, to the construction of the clause of the General Conditions of the Bank (cl 11.1(e)) by which the Bank declared that the moneys owing by the company or its customer were immediately due and payable and the clause (cl 15.3) by which notice was then given to the company.

[13]

The relevant facts were undisputed. The officer of the Bank with responsibility for the company's account, Mr Bew, instructed the Bank's solicitors to prepare the necessary notice. On 15 June 1994, with the document which the solicitors had prepared, Mr Bew attended at the company's premises with a colleague who was also an officer of the Bank, working under him. They there met the company's directors. Of course, those persons knew who Mr Bew was, that he was from the Bank, and that he was on a mission sufficiently serious to occasion his personal attendance. He gave evidence (which was not rejected) that he told those present that "… in view of the circumstances or the changed circumstances of the company that the bank required immediate repayment of the full amount due to the bank, that was the effect of the serving of the demand."[16]
Mr and Mrs Kapobassis, directors of the company, acknowledged that Mr Bew "served" the notice of demand on them[17]. Yet it is said that, for the purposes of cl 15.3, the notice was not "given" to the company. True, it was in writing. True, there was no contest that Mr Bew was an "Authorised Representative" of the Bank. True also, the notice was handed to the company's officeholders at the company's premises with an oral explanation of its purposes. What basis then could be suggested to avoid the operation of cl 15?
Two arguments were advanced. The first was that the notice did not contain Mr Bew's name or signature or, on its face, authorise him to "give" it to the company on behalf of the Bank. This contention rested on an assumption that such an express reference to Mr Bew was necessary. Nothing in the General Conditions say so. It is enough that the notice should be "from the Bank". As Winneke P pointed out in the Court of Appeal, where the General Conditions required the document to be "signed" or "certified" in a particular way, they said so[18].
The second argument persuaded the primary judge (Hansen J)[19] and one judge in the Court of Appeal (Buchanan JA)[20]. It was that the notice was not that of the Bank at all, but of its solicitors. Thus the notice was "from the" solicitors for the Bank, not from the Bank. Mr Bew was thus no more than a messenger of the solicitors' notice.
It is true that potentially serious consequences for the company, its shareholders, employees, creditors and customers flowed from the giving of the notice. The Bank was substantially in charge of its own documentation, including the General Conditions and notices. Few customers would have the power effectively to demand from the Bank a modification of such documents. The requirements of the General Conditions would therefore have to be complied with, in the sense that events would have to occur which fairly answered to the description of a contested clause. But in a commercial setting, and in the context of the other provisions of cl 15.3 and of the General Conditions applicable to the case, it is impossible to deny that this notice sufficiently complied with cl 15.3.
The General Conditions did not forbid the execution of the notice by the solicitors on behalf of the Bank. They did not require execution of the notice in any particular way or by any particular person for the Bank. The purport of the notice was clear enough on its face. The contemplation in cl 15.3(c) that a notice might be given for the Bank by telex denies any general requirement of a particular formality in the execution or signature of an instrument answering to the description of a "notice". And whatever defects might arguably arise from the typed form of the notice, the presence of Mr Bew and his colleague from the Bank, and the words expressed when the notice was handed over, made it clear beyond doubt that the form proffered was a "notice from the Bank". The act of handing it over amounted to giving the required notice for this purpose.

[15]

The arguments of the company (and the directors supporting it) represent nothing less than an attempt to import into the construction of cl 15.3 the same strict approach which has produced such artificialities in the case of commercial agreements with compensated sureties with which I began these reasons. It will be clear that I would not favour such an approach. That is why this appeal ultimately turns on the way in which the commercial documents between the Bank and the company should be construed.
In my view, such documents should be construed practically, so as to give effect to their presumed commercial purposes and so as not to defeat the achievement of such purposes by an excessively narrow and artificially restricted construction. The law facilitates and upholds commercial contractual obligations and the expectations that derive from them. Statute and equity may sometimes come to the aid of parties where various forms of unfairness or inequality can be shown. None was invoked in this appeal. But as between a commercial enterprise and a finance provider, such as a bank, the law should be the upholder of agreements. It should eschew artificialities and excessive technicalities for these will not be imputed to the ordinary businessperson. Business is entitled to look to the law to keep people to their commercial promises. In a world of global finances and transborder capital markets, those jurisdictions flourish which do so. Those jurisdictions which do not soon become known. They pay a price in terms of the availability and costs of capital necessary as a consequence of the uncertainties of the enforcement of agreements in their courts[21].
Who could doubt that a reasonably informed businessperson, looking at the notice in this case, and how and by whom it was handed to the company, would conclude that it was "a notice from the Bank to the Customer … given by an Authorised Representative, in writing"? If this is so, for the law to come to a contrary conclusion it would need to have substantial, persuasive and practical reasons. In this case, there are none.

[46]

At the foot of the notice were written the words "Freehill Hollingdale & Page" above the same words in typescript, followed by the words "Solicitors for Australia and New Zealand Banking Group Limited".
Pan was unable to comply with this demand.
A request by Mrs Kapobassis on 15 June 1994 to give the company a respite of six months to deal with the demand was refused by Mr Bew. On the following day he did however agree to defer the appointment of a receiver to give the directors an opportunity to sell Pan's business to a competitor, Delta.
The third respondent (Mr McLellan) who was the author of the reports provided by Carson & McLellan and the person whom the Bank intended to appoint as receiver of Pan, discussed with the directors of Pan the prospect of a sale to the competitor. He afterwards reported to Mr Bew that it was unlikely that there could be a sale for some time, and, on 28 June 1994 the Bank appointed Mr McLellan as receiver and manager of the assets and undertaking of Pan pursuant to the debenture. By September 1994 Mr McLellan had sold all of the assets of Pan. There was a shortfall between the proceeds of those sales and the total indebtedness of Pan.
These proceedings were brought in an attempt to forestall the respondent Bank's enforcement of the mortgages over the personal appellants' residences. The proceedings were brought in the Supreme Court of Victoria against the Bank and the accountants claiming damages on a number of bases, including breach of contract, trespass and conversion. The appellants alleged that the respondent Bank was not entitled to appoint a receiver and that any steps taken by him were not validly taken. They also sought an injunction to restrain the sale of the guarantors' lands which had been mortgaged to the Bank.
In this appeal, this Court is not concerned with the claims that were also made against the accountants, in negligence, trespass and for breach of s 11 of the Fair Trading Act 1985 (Vic).
Central to the claim against the Bank were three matters: the proper construction of the contractual documents; whether the notice of demand was valid; and, whether the Bank was entitled to appoint a receiver.
The trial judge, Hansen J[22], found for the appellant directors. His Honour held that on a proper construction of the facilities agreement entered into between Pan and the Bank, the Bank was not entitled to terminate the agreement and demand repayment of money outstanding under the facilities in the absence of default, without giving 30 days' notice in accordance with cl 11.1(a) of the General Conditions. In so far as cl 5.2 of those conditions might suggest the contrary, it had to give way, his Honour held, to the specific terms in the letter of offer. Further, his Honour held, that in any event the notice dated 14 June 1994 and signed by the Bank's solicitors, was not "given" by an "Authorised Representative" of the bank as required by cl 15.3 of the General Conditions.
Another holding of his Honour, that the appellants had not waived, nor were they estopped from contending, that the receiver had been invalidly appointed by remaining silent and co-operating with the receiver in the sale of Pan's assets, need not, for reasons which will appear, be considered by this Court.
The Court of Appeal (Winneke P, Kenny and Buchanan JJA) allowed an appeal by the Bank to that court.[23]
Because I am in substantial agreement with Winneke P I will set out some portions of the reasons for judgment of his Honour in respect of the issues which were resolved in favour of the Bank, and were sufficient to dispose of the appeal to the Court of Appeal. His Honour said:[24]

[63]

The Bank has filed a Notice of Contention that the decision of the court below should be affirmed on various grounds other than (and additional to) those relied upon by the court below. It is unnecessary to refer to that notice to resolve this appeal.
It remains the respondent Bank's case that it was entitled to appoint a receiver upon either or both of two bases: the occurrence of an Event of Default of the kind to which cl 18(q) of the debenture referred; and, the happening of an Event of Default as defined by cl 10.1(j) of the General Conditions and notification in accordance with cl 11.1(b), (d) and (e) and cl 15.3 of the General Conditions.
The relevant provisions of the two documents upon which the respondents rely are not inconsistent. The debenture is the document which directly protects the lender's security and is designed to facilitate action to prevent its loss or erosion, if need be, in great haste, if it is in peril. Clause 18 of the General Conditions therefore provides for the secured money to become immediately due and payable upon the occurrence of default without demand or notice. The Bank was therefore entitled to enforce its rights under the debenture without demanding repayment of money under the facilities agreement on notice pursuant to cll 11.1 and 15.3 of the General Conditions[30]. That cl 11.1 of the General Conditions may make provision for the termination of obligations and rights by a different and further process does not give rise to any inconsistency between the two sets of rights possessed by the Bank[31]. As the Privy Council advised in China & South Sea Bank Ltd v Tan Soon Gin[32] in respect of the availability to a creditor of different remedies for enforcement, the creditor may exercise them, "simultaneously or contemporaneously or successively or not at all"[33].
The observations of Winneke P with respect to the satisfaction of the requirements of cl 11.1(e) of the General Conditions are correct. The declaration required by the clause is not a declaration in the formal, legal sense of a declaration made by a court. In context, the declaration which the clause requires is a clear expression of the reaching of a state of satisfaction of the mind of the respondent Bank that a relevant Event of Default in fact has occurred, and that the Bank has resolved to act by taking steps that it is entitled to take consequent upon that. The fact that the Bank has so acted indicates the formation of the requisite state of mind. A declaration was therefore at least implicit in the decision of the Bank to give notice, and the giving of the notice with the content, and in the form that it did.
The evidence to which Kenny JA referred and which has been summarized, of the parlous state of Pan's business, including its deteriorating trading position and the unmarketability of its assets, amply entitled the Bank (Mr Bew) to form the opinion that Pan was carrying on the business at a loss, and that further prosecution by it of the business would endanger the Bank's security, and that the Bank had in fact formed that opinion.
Winneke P in the reasons quoted fully covered the question of the adequacy of the notice and its delivery to Pan as required by both cll 11.1(e) and 15.3 of the General Conditions. With those reasons and his Honour's conclusions I am in agreement.
The appeal should be dismissed with costs.

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