Permanent Custodians Ltd v AGB Developments Pty Ltd

Bankruptcy Act 1966 (Cth) Company Law Act 1975 (Qld) LEGISLATION CITED : Corporations Act 2001 (Cth) Evidence Act 1995 Uniform Civil Procedure Rules

BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 Butt v M'Donald (1896) 7 QLJ 68 Cuckmere Brick Co Ltd v Neutral Finance Ltd [1971] Ch 949 Deputy Commissioner of Taxation v Ahern (No. 2) [1998] 2 QdR 158 Gertig v Davies [2003] SASC 86, (2003) 85 SASR 226 Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 Florgale Uniforms Pty Ltd v Orders [2004] VSC 65 CASES CITED : GE Capital Australia v Davis [2002] NSWSC 1146 (2002) 11 BPR 20 529 Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd [2001] NSWCA 93 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 222 Porter v Associated Securities Ltd (1976)1BPR 9279 Proctor & Gamble v Medical Research [2001] NSWSC 183 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114 (2004) 60 NSWLR 646

Permanent Custodians Ltd (Plaintiff) PARTIES : AGB Developments Pty Ltd (First Defendant) Craig Kirrin Gore (Second Defendant) John Edward Atkinson (Third Defendant)

COUNSEL : N Bearup (Plaintiff) M Gunning (Second & Third Defendants)

SOLICITORS : Gadens Lawyers (Plaintiff) WPS Law (Second & Third Defendants)

• 22 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST

2009/0294041 PERMANENT CUSTODIANS LTD V AGB DEVELOPMENTS PTY LTD

JUDGMENT 1 On about 1 March 2004 the Plaintiff and AGB Developments Pty Ltd entered into a loan agreement whereby the Plaintiff lent to AGB the sum of $674,475. On the same day a guarantee was executed by Craig Kirrin Gore (the Second Defendant) and John Edward Atkinson (the Third Defendant) guaranteeing the loan. 2 In addition, on 6 March 2004 AGB mortgaged land at 8 Barrington Road, Terrigal as security for the loan. 3 A default first occurred on about 5 January 2009 which ultimately led to the filing of proceedings against the 3 Defendants claiming possession of the land and seeking a judgment for the amount then outstanding. 4 On 20 August 2009 judgment for possession against AGB was entered and a writ of possession issued on 20 October 2009. 5 In the meantime, on 22 April 2009 demands had been made on the guarantors. 6 On 26 August 2009 the solicitors for the Plaintiff wrote to the solicitors acting for the guarantors in these terms: We are instructed that our client would be prepared to resolve this matter on the following basis. 1. Prior to 12pm on Thursday, 27 August 2009, you must sign and return the following enclosed documents to our office to be held in escrow:- (a) consent judgment; and (b) notice of discontinuance. 2. On Friday, 28 August 2009, our client's notice of motion filed 20 August 2009 must be dismissed with no order as to costs, and the parties will seek to have the proceedings stood over on an ongoing basis until after the Security Property is sold. 3. Our client will withhold from filing and enforcing the consent judgment until after the Security Property has sold, subject to the Court allowing the proceedings to remain on foot. If the Court seeks to dismiss the proceedings as inactive prior to the sale of the Security Property, our client reserves its rights to reapply for summary judgment. 4. If the net sale proceeds from the sale of the Security Property are sufficient to clear the mortgage debt, our client will proceed to file the notice of discontinuance. 5. If the net sale proceeds from the sale of the Security Property are insufficient to clear the mortgage debt, our client will be entitled to proceed to file the consent judgment without further notice to you and enforce the judgment to the extent of the shortfall. Kindly confirm that your clients are prepared to resolve this matter on the above basis by 12pm on Thursday, 27 August 2009. If your clients do not agree to the above, we are instructed to proceed with the application for summary judgment listed on 28 August 2009. Our client reserves its rights generally and including under guarantee . (emphasis added) 7 The Consent Judgment attached to the letter provided for judgment in these terms: Judgment in favour of the plaintiff against the second defendant and third defendant in the amount of $705,093.97, being the amount owing under the Guarantee as at 17 August 2009. 8 On the same day the solicitors for the guarantors wrote back referring to the letter and attaching the duly executed the Consent Judgment and the Notice of Discontinuance. The letter then said: We confirm that the parties have agreed to settle the above proceedings upon the terms set out in your facsimile letter dated 26 August 2009. 9 The land was sold earlier this year with settlement taking place on 1 April 2010. The sale price was $640,000 from which the Plaintiff received $593,251.23. That left a shortfall owing to the Plaintiff of $222,491.98. 10 The matter was listed before me on 10 May 2010 when Ms van Ravels for the Plaintiff sought to enter the Consent Judgment that had been agreed on 26 August 2009. The guarantors resisted the entry of judgment because they said they wished to file a cross-claim that alleged that the Agreement of 26 August 2009 contained an implied term that the Plaintiff would do all it could to achieve the best price when it sold the property, and alleged that there was a breach of that term when the best price was not obtained by reason of a breach of the duties the Plaintiff owed to the guarantors. Some brief submissions were made on that day but it became apparent that the matter would need to be argued more extensively and it was stood over for further argument to 20 May 2010. On that occasion Ms Bearup of counsel appeared for the Plaintiff and Mr Gunning of counsel appeared for the guarantors. 11 Effectively, 3 matters had to be determined. The first was whether there was an arguable case of a sale at an undervalue in breach of the Plaintiff's duties. The second was whether, if that was demonstrated, the guarantors should be permitted to prevent the entry of judgment and to file a cross-claim because of implied terms in the Agreement of 26 August 2009. The third question was whether, in the event that no cross-claim was permitted to be filed in the proceedings, execution of the judgment should be stayed until any claim by the guarantors in fresh proceedings had been determined.

(1) Sale at an undervalue 12 The guarantors read 2 affidavits by one of the guarantors, John Edward Atkinson and an affidavit of Mark Gordon Adamson, the solicitor for the guarantors. 13 In his first affidavit Mr Atkinson deposed to the fact that AGB Developments acquired the property in October 2003 for $793,500. The sale price obtained by the Plaintiff in March 2010 was said to be 80.65% of the original purchase price and Mr Atkinson said he did not accept that the market value of property in Terrigal had fallen to that extent. He further deposed to having made enquiries about the property market between the years 2003 and 2010 and then said, as a consequence of making those enquiries, what, in his view, the movement of the market was. He also set out the sale prices of 4 other properties which he then proceeded to compare with the subject property. 14 Mr Atkinson's occupation in his affidavits was described as accountant but he said that he had undertaken property development on the eastern seaboard of Australia for an excess of 10 years. 15 I rejected the evidence of Mr Atkinson concerning his views about the property market and what he had to say about the other properties that had been sold and how they compared to the subject property, first, on the basis that Mr Atkinson had not demonstrated any expertise as a valuer. Although he claimed to have undertaken property development along the eastern seaboard of Australia he did not explain where that was in the many thousands of kilometres that comprise that seaboard. Secondly, he did not say of whom he had made enquiries or identify who the persons were that provided him with information from which he then purported to draw conclusions without exposing, in any sense, his reasoning to reach those conclusions. 16 Mr Gunning submitted that since this was an interlocutory application I should receive hearsay evidence in accordance with s 75 Evidence Act 1995. However, s 75 provides that in interlocutory proceedings the hearsay rule does not apply to evidence "if the party who adduces it also adduces evidence of its source." A number of decisions have discussed this requirement: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 222 especially at [45]; Deputy Commissioner of Taxation v Ahern (No. 2) [1998] 2 QdR 158 at 163; Proctor & Gamble v Medical Research [2001] NSWSC 183 at [55]. 17 There is nothing in Mr Atkinson's affidavits to identify the source or sources of the evidence he wished to rely upon. But in any event it was not so much that he wanted to give that evidence in a hearsay fashion, but rather that he wanted to analyse and use the material based upon purported expertise that was not demonstrated. 18 In his second affidavit Mr Atkinson attached a copy of a valuation dated 22 March 2004 which was a valuation of a number of properties of which the subject property was one part. The valuation was of the properties 4-8 Barrington Road and 14 Tiarra Crescent, Terrigal. The valuation assessed the value of that combined group of properties without identifying what the value of the subject property was. Moreover, it was a valuation as of 22 March 2004 whereas the issue in the present case was the value of the subject property in March 2010. Those matters all made the valuation of 2004 irrelevant to the issue on the Motion and I rejected that evidence. 19 Mr Gunning also submitted that I should admit the evidence of Mr Atkinson because it was the only evidence which the guarantors had been able to obtain in the time available. In that regard he pointed to Mr Atkinson's second affidavit where he gave some evidence about his bad health. 20 Mr Adamson, the guarantors' solicitor, gave evidence that he found out about the contract for sale at $640,000 in a telephone call of 16 March 2010. Mr Atkinson's affidavits said that from about mid-April 2010 he was being treated for kidney stones, anxiety and insomnia. He said that as a consequence of his medical conditions he had not been able to undertake further searches and locate other materials that might assist his case. 21 He provided no evidence about why he could not have done anything from 16 March until mid-April 2010 nor why his medical condition prevented him instructing his solicitor to obtain a valuation as of March 2010 to support any case the guarantors wanted to make that the property had been sold at an undervalue. 22 The Second Defendant did not swear an affidavit. Mr Atkinson deposed in his affidavit to the fact that the Second Defendant was absent from Australia from 9 to 14 May 2010. No other evidence was given concerning the Second Defendant or about why, in particular, he was not able to do anything about obtaining valuation evidence between 16 March 2010 and 9 May 2010. 23 The net result was that there simply no evidence to suggest that the property had been sold at an undervalue by the Plaintiff. Mr Gunning drew attention to the fact that his solicitor had served a Notice to Produce on the Plaintiff's solicitors for copies of any valuation the Bank had obtained, and for all documents and materials that related to the listing, the advertising and the marketing of the property. The Notice to Produce was said to have been initially given pursuant to r 21.10 UCPR but was notified as also being given pursuant to r 34.1. Mr Gunning said without those documents the guarantors were not able to put forward any proper valuation of the property to show that it had been sold at an undervalue. 24 I doubt that the Notice to Produce was properly given under r 21.10 because, on the state of the proceedings, the documents did not pertain to any fact in issue, nor were they documents that satisfied r 21.10(1)(a). Further, even if, prima facie, the Notice to Produce was able to be served pursuant to r 34.1 it seems to me that it would be liable to be set aside as amounting to a fishing expedition when no evidence had been adduced suggesting that there was any impropriety relating to the sale of the property by the Plaintiff. 25 But in any event, it is difficult to see how it was necessary for a valuer to have those documents to be able to prepare a valuation of the land. The documents sought to be produced would not appear to have been directed to the issue of the value of the land but to the Plaintiff's conduct in exercising its power of sale. 26 There is, as I have said, no evidence to suggest sale at an undervalue or that such sale had been occasioned by any breach of the duties that the Plaintiff owed to the guarantors concerning the sale of the property. In those circumstances it would not be appropriate to permit the filing of a cross-claim when no arguable case has been shown to support it. 27 There are two further reasons for refusing leave to file the cross-claim in its present form. The proposed cross-claim appears to plead 3 causes of action, one of which is said to be a breach of the statutory duty arising from s 420A Corporations Act 2001. 28 Bryson J (as his Honour then was) had occasion to consider s 420A Corporations Act in GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 11 BPR 20,529 where there was a claim by the guarantors in a similar manner to what is sought to be claimed in the present case. I shall consider the express provisions of the guarantee in that case in a later context. For the present it is sufficient to note what his Honour said about the remedies available under s 420A. 29 His Honour first contrasted the provisions of s 420A with s 85 Company Law Act 1975 (Qld), a provision that has no counterpart in New South Wales. His Honour noted at [45] that s 85 expressly conferred a right to damages after having created a duty in the mortgagee in similar terms to the duty referred to in s 420A Corporations Act. 30 His Honour then went on to say in that paragraph: [45] … Subsection 420A(1) is markedly unlike s 85 of the Property Law Ac t 1975 (Queensland) in that s 85 expressly confers a right to damages. On the face of sub-s 420A(1) it was enacted for the protection of the corporation over the property of which a controller exercised power of sale, and it might also be that it was enacted for the protection of other persons who had interests in property owned by a corporation. There is nothing in the terms of s 420A, or elsewhere in the Corporations Act , which indicates that it was enacted for the protection of persons who do not have interests in the property of the corporation, such as guarantors who incur obligations by reference to the obligations of the corporation. Their obligations are not obligations to the corporation, they do not have an interest in its relevant property and they have not entered into any relevant contractual relationship with the corporation, in respect of its property or otherwise; they have guaranteed an obligation of the corporation to a third party. There is in my opinion no basis for the view that s 420A, alone or with the aid of context, operates or was intended to operate so as to confer a right to recover damages or any other right to a remedy on guarantors. The subsection speaks with Delphic simplicity and exemption from interrogation by saying what the controller must do without referring to consequences of failure to comply.

[46] In s 420A the only allusion to remedies is contained in sub-s 420A(2) which preserves the generality of duties imposed by several other sections; this does not do anything to indicate a legislative intention that there should be any particular remedy for breach of sub-s 420A(1). Counsel did not refer to any general provision of the Corporations Act which created a right of action or entitlement to damages; to my reading there is no provision to that effect which relates to s 420A.

[47] Section 85 of the Property Law Act 1975 (Qld) by sub-s 85(1) creates a duty of a mortgagee in a provision which, from its terms appears to have been a model on which s 420A was based, and goes on in later subsections to regulate the conduct of the mortgagee in detail and in ways not found in s 420A or in any related provisions. Sub-section 85(3) expressly confers a right to damages: (3) The title of the purchaser is not impeachable on the ground that the mortgagee has committed a breach of any duty imposed by this section, but a person damnified by the breach of duty has a remedy in damages against the mortgagee exercising the power of sale.

A guarantor who suffers loss through breach of sub-s 85(1) has a remedy in damages: Higton Enterprises v BFC Finance [1997] 1 QdR 168. By providing for this remedy s 85 indicates the legislative intention as to the persons to whom the duty of a mortgagee created by sub-s 85(1) is owed. Section 420A contrasts strongly as it contains no express statement of remedies intended to be created, and no indication of the persons for whose benefit the controller must act as required, apart from the reference to the corporation property of which is sold. It contains no express indication whether or not a wider class of persons such as guarantors who have involved themselves contractually in the outcome without having any interest in the property of the corporation are intended to be given any protection or remedy. (emphasis added) 31 His Honour then went on to discuss a series of cases that dealt with whether a statute that creates a duty also creates a remedy for a breach. His Honour then said: [53] My view is that the requirement imposed on the controller by sub-s 420A(1) takes the place of, or it may be operates cumulatively to the obligation otherwise existing with the general law of a controller exercising power of sale in respect of property of a corporation. In so doing the section enhances the duty of the controller and the protection afforded to the corporation. This is achieved, and the apparent legislative intention is fulfilled without altering the remedies available to the corporation for breach of obligation in exercising the power of sale, and without altering the means available for obtaining remedies. Where real property subject to a mortgage has been sold and the mortgagor succeeds in establishing that there has been a sacrifice of the mortgagor's interest in the exercise of the power of sale the mortgagor's remedy is to be credited compensation when accounts are taken of the mortgage debt. Subsection 420A(1) alters this scheme by inserting a more stringent rule, but does not otherwise change the scheme.

[54] Section 420A can readily be given full and effectual operation without resorting to any implication of an intention to confer a remedy in damages on corporations which mortgage their property, still less to confer such a remedy on guarantors of the debts of those corporations; section 420A can readily take a place in the existing remedies without supposing that it was intended to confer or that it does confer any rights at all upon guarantors. [55] In my view s 420A was plainly enacted for the protection of the corporation the property of which is referred to, and the implication that the duty created by sub-s 420A(1) should be enforced by a remedy conferred on the corporation is irresistibly clear, notwithstanding that the legislation does not specify what that remedy is to be. In the context of the exercise of a power of sale in a mortgage over property of a corporation the corporation had, before s 420A was enacted, a remedy against the mortgagee, and an efficacious and reasonable operation can be attributed to sub-s 420A if the duty in that subsection takes the place of the test of entitlement of the corporation to what would otherwise be its remedy. There is no context of an existing entitlement under Common Law to damages, and no reference in the legislation to any such entitlement, in strong contrast to the Queensland legislation. The intention of the legislature should be understood to be that the corporation as mortgagor was to have the remedies already available to it, but the availability of the remedies was to be tested by reference to the duty in sub-s 420A(1). In reasoning in this way I echo the last passage I have set out from the judgment of Dixon J in O'Connor ; a specific rule for the protection of the interests of corporations is prescribed in a matter where the mortgagee is under the general law already subject to a duty in favour of the corporation, and the effect of s 420A(1) is to redefine the duty and what must be done to protect the corporation and its property when affected by exercise of a power of sale. [56] In my view there is nothing to indicate that it was the intention of the legislature that sub-s 420A(1) should confer any right or remedy on guarantors or other persons who involve themselves contractually in consequences of the exercise of the power of sale, but the guarantor is entitled to rely on the availability to the mortgagor of a remedy, whether the remedy was that previously established by Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 or is now the remedy available to the mortgagor on breach of the duty declared by sub-s 420A(1); the guarantor is entitled to have an equitable remedy on the basis that the mortgage accounts are taken on whatever may be the principle truly applicable to taking mortgage accounts. In my opinion the equitable remedies which in an earlier state of the law were available to a guarantor where there was a breach of the mortgagee's duty to a mortgagor corporation are now to be tested by reference to whether there was a breach of the duty stated in sub-s 420A(1). (emphasis added) 32 This view of Bryson J has been followed by Young CJ in Eq (as he then was) in Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114, (2004) 60 NSWLR 646 at [87] and [94], and Florgale Uniforms Pty Ltd v Orders [2004] VSC 65 at [388]. 33 The second cause of action pleaded is based on what is said to be the Plaintiff's general duty to exercise its power of sale as a mortgagee in good faith "and to take reasonable care to ensure that it obtained the market value or the best price obtainable". A notion that a mortgagee owes a duty based on negligence (which must be what a duty to take reasonable care as alleged in the proposed cross-claim amounts to) has been rejected again and again in New South Wales. 34 The idea that a mortgagee owes a duty of care derives from the decision of the English Court of Appeal in Cuckmere Brick Co Ltd v Neutral Finance Ltd [1971] Ch 949. The Cuckmere approach was rejected by Needham J in Porter v Associated Securities Ltd (1976) 1 BPR 9279 and again in Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 at 835. Young CJ in Eq in Lord discussed the authorities and concluded that there is no common law duty in negligence on a mortgagee in NSW which makes a mortgagee liable in common law damages if he fails to get a good price for the mortgaged property - see at [26]. 35 If, of course, s 420A is engaged then that impacts on the nature of the duty owed by the mortgagee but, for the reasons already discussed, does not in itself provide a remedy. Nor does the existence of the duty in s 420A result in there being a general duty independent of that section. The causes of action pleaded in this regard are misconceived.

(2) Implied terms 36 The result of my conclusion above is that leave will not be granted to file a cross-claim. The result will be that the Consent Judgment will be entered. However, if there are implied terms as alleged by the guarantors it may be able to be argued that a stay should be granted on execution of the judgment. For that reason, I shall consider the issue of whether the Agreement contains the implied terms alleged. 37 It can be accepted that there is an implied duty in the contract to do all such things as are necessary on one party's part to enable the other party to have the benefit of the contract: Butt v M'Donald (1896) 7 QLJ 68 at 70-71. However, as the High Court made clear in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 that may depend on whether one is speaking of the performance of a fundamental obligation. It is not that term which the guarantors say is implied. 38 The implied terms are set out in the proposed cross-claim as follows: At all material times Permanent owed to Gore and Atkinson. a. an implied duty, as part of the Agreement, to: i. ensure that it did all things reasonably necessary to sell the Security Property for the best price obtainable, and to enable Gore and Atkinson to have every reasonable chance, under the Agreement, to mitigate or avoid altogether any shortfall in the net sale proceeds; and ii sell the Security Property having regard to the interests of Gore and Atkinson under the Agreement; ("the Implied Duty") 39 The guarantors say that the terms should be implied into the Agreement because the Plaintiff ought to have known that its efforts in selling the property and achieving a certain price would directly impact upon the existence and extent of the guarantors' liability under that Agreement. The guarantors submit further that the parties could not have accepted when they entered into the Agreement of 26 August 2009 that the Plaintiff could sell the property for any price and still have the right to enter the consent judgment. That was because it was obvious that the parties, had they thought about it, would have agreed to a term that at least required the Plaintiff to use its best endeavours or take reasonable steps to sell the property for the best price it could. 40 There seems to me to be a number of difficulties with the implication of the terms alleged. First, it scarcely satisfies a number of the criteria that need to be satisfied to imply a term in accordance with what has been said in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 and the cases which have followed it. The contract is effective without the implication of such term and (despite what was submitted) it is not so obvious that it goes without saying that there should be such a term in the contract. 41 Secondly, since the Plaintiff has duties both under the general law and by virtue of s 420A Corporations Act 2001 (Cth) (as the guarantors plead elsewhere in paragraph 12 of the proposed cross-claim) it is not at all clear why it would be necessary to imply terms into the contract such as those contained in the proposed cross-claim. The terms sought to be implied go beyond the general law duty and the duty under s 420A. 42 Thirdly, the terms sought to be implied are not capable of clear expression or clear understanding in a way that would permit those terms to be enforced. What does it mean to say that the Plaintiff was to ensure that it did all things reasonably necessary to enable the guarantors to have every reasonable chance to mitigate or avoid a shortfall in the net sale proceeds? What does it mean to say that the Plaintiff was to have regard to the interests of the guarantors in selling the property? 43 Indeed, as the Court of Appeal made clear in Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd [2001] NSWCA 93 at [91] a creditor does not have a general obligation to act in the best interests of a surety. That is further reason that that term, at the least, would not be implied. 44 In my opinion, no such terms as alleged can be said to be implied into the Agreement of 26 August. The Agreement was a straightforward agreement to resolve a dispute between the parties in relation to a summary judgment application. For such terms to be in the contract they would have to have been agreed expressly. The guarantors did not seek the inclusion of such terms and it seems doubtful that they would have been agreed to by the Plaintiff had they been sought.

(3) Should a stay be granted? 45 Even if it is accepted that the guarantors have no right to cross-claim in the present proceedings the guarantors submit that there should be a stay on either the entry of judgment or its enforcement to enable them to bring proceedings alleging a breach of the general law duties of a mortgagee's exercise of the power of sale and/or a breach of s 420A Corporations Act. It is in this context that the terms of the guarantee are significant. 46 The guarantee relevantly provides: 1.1 Guarantee You unconditionally guarantee the punctual payment to the Lender of the Debt on the due date. The "Debt" is all money owing at any time by the Borrower to the Lender on any account whatever, including money due in relation to any loan documents specified in the Schedule. (A guarantee is an obligation to pay money owing by another person).

1.2 Indemnity You also indemnify the Lender against all loss, damage, costs, and expenses incurred by the Lender as a result of any failure by anybody to pay the Debt on the due date. (An indemnity is an obligation to pay that money even if the other person is not obliged to pay for any reason). …

2.2 This guarantee continues despite what happens to the Borrower Your obligations under this guarantee continue and remain unaffected despite anything that happens to the Borrower and despite the Lender allowing the Borrower any time to rectify any default. For example, your obligations continue even if: … we release any security held for the Debt.

2.5 The Lender's rights continue unaffected The Lender does not lose the power to exercise any of its rights under this guarantee because of delay, any written or verbal statement, anything the Lender does, or anything else, other than an express written statement by the Lender that the Lender waives that right. … 6.6 Payments without deductions All money payable by you under this guarantee must be paid free of all deductions in the same manner and the same currency as the Borrower is obliged to pay the Debt Payments will be credited to you only when actually received by the Lender. You must make payments without deducting or setting off any money you think the Lender owes you for any reason. The Lender may apply any money it receives in reduction of the Debt in the order the Lender decides. 47 In Davis Bryson J made clear that although the obligation of a guarantor to the principal creditor arises under the contract of guarantee made between them, equity extended its protection to the guarantor so that the guarantor could raise an equitable defence, in part or in whole, against a claim for its contractual liability. He went on to say (at [85]): The protection extended to the guarantor in Equity is related to the guarantor's right to be subrogated to the rights of the principal creditor against the security if the guarantor pays out all the secured debt. The protection extended in Equity may have had its origin in this right of subrogation. The availability of protection is subject to any provision in the contract between the guarantor and the principal creditor which qualifies or limits the guarantor's rights; in this case the qualification is of high importance, because of provisions of the guarantee with which I will deal. The guarantor cannot complain of any conduct of the creditor, or of any dealing with the secured security property which was authorised by the terms of the contract of guarantee, or by the terms of the security granted by the debtor. 48 Similarly, the Court of Appeal in Graeme Webb Investments at [90] said that a surety's equitable rights are subject to the terms of the contract between the creditor and the surety. 49 It is necessary, therefore, to examine the provisions of the guarantee in the present case to see whether those provisions override the protection that equity provides. 50 Clause 8.1 in the guarantee in Davis was entitled "Suspension Of Guarantor's Rights". It relevantly provided:

8.1 As long as the Guaranteed Money or other money payable under this guarantee and indemnity remains unpaid, the Guarantor may not without the consent of GE Capital: (a) in reduction of its liability under this guarantee and indemnity, raise a defence, set-off or counterclaim available to itself, the Debtor or a co-surety or co-indemnifier against GE Capital or claim a set-off or make a counterclaim against GE Capital; or … (d) claim to be entitled by way of contribution, indemnity, subrogation, marshalling or otherwise to the benefit of a Security Interest or guarantee or a share in it now or subsequently held for the Guaranteed Money or other money payable under this guarantee and indemnity. 51 Clause 9 in that guarantee entitled "Payments" relevantly provided: 9.1 The Guarantor agrees to make all payments to GE Capital under this guarantee and indemnity in immediately available funds to the account and in the manner notified by GE Capital to the Guarantor. 9.2 The Guarantor agrees to make payments without set-off or counterclaim and free and clear of any withholding or deduction for Taxes unless prohibited by law. 52 Bryson J said at [19] that these clauses appeared to deal wholly or partly with the same subject and should be read together and complement each other. In considering the effect of those clauses on any rights the guarantors might have to cross-claim or set off, Bryson J said this: [93] The effect of the obligations in cl.8.1 is that the guarantors were contractually bound to pay the amount of money owing by the debtor when it was demanded. It was a contract to make an amount of money available when it was demanded. It was not an element of the obligation that it was subject to or limited by any process of ascertaining whether the debtor should be allowed any credits or set-offs, in respect of the security or of any other matter. Irrespective of the existence of security, and irrespective of the state of progress of any attempt at realising the security, it was and remains the obligation of the guarantors to provide to GE Capital the money amount of the debtors' obligation. The provisions relating to suspension of the guarantor's rights including cl.8.1 give effect to the amplitude of this obligation, and remove the possibility that the guarantors might in any way compete with GE Capital in attempts to recover from the debtors. Clause 8.1 does not bar the guarantors from making any claims or enforcing any rights against either GE Capital or the debtors; it suspends those rights so long as the guaranteed money remains unpaid, and the suspension can be ended at once if the guarantors meet their contractual obligation and pay the amount of the guaranteed money. Once they do that, they can bring any proceedings they wish against GE Capital or against the debtors, notwithstanding cl.8.1; but the effect of cl.8.1, and of cl.8 generally, is that until they make that payment they are contractually bound to the proposition that they are not entitled to bring any claims or proceedings or to act in any of the manners referred to. The jurisdiction of the Court is not ousted in any respect, the rights of the guarantors are suspended but otherwise not impaired, and they can pursue their rights as they wish if they first comply with what the Guarantee and Indemnity makes their primary obligation.

[94] The guarantors' counsel contended and the plaintiff's counsel accepted that provisions of this kind are to be construed strictly against the interest of the plaintiff. Adopting this approach is significant if the language used yields an ambiguity, but not otherwise. … The guarantors have unequivocally agreed to the effect that they will not make such claims as they now make in their cross-claim unless and until they have paid the whole of the guaranteed moneys, which they have not done. 53 He then dealt with the submission that such clauses were against public policy and unenforceable or invalid because they created a negative restriction upon the right of a person to invoke the jurisdiction of the Court to determine a dispute. He considered a number of cases, noting that provisions in building and engineering contracts relating to progress payments can if appropriately expressed make progress payments payable without deduction for cross-claims and set-offs, and said that those provisions are enforced. He then said: [97] The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off.

[98] The effect in substance of the provisions of the guarantee including cl 8.1(a) is that there is no limit on the right to resort to the courts if the guarantor first meets the obligation the protection of which is the primary purpose of the guarantee and indemnity, and pays the amount of the debt. It is well established in this area of the law that the guarantor can have recourse to securities given by a principal debtor to indemnify himself, but that he cannot do so until he has paid the whole debt. The validity of modifications of what would under the general law be the rights of guarantors is well established. These contractual provisions extend the ways in which the guarantors' remedies are postponed, and extend the creditor's freedom from competition in enforcement of its rights. The condition which must be fulfilled is directly related to the purposes of the agreement.

[99] In my opinion the operation of cl 8.1 and cll 9.1 and 9.2 of the Guarantee according to their terms is not contrary to any principle of law. 54 In my opinion, the effect of clauses 2.5 and 6.6 in the present guarantee are substantially the same as clauses 8.1 and 9 in the guarantee in Davis. 55 Those provisions of the present guarantee have the effect that the guarantors are obliged to pay the whole of the shortfall to the Plaintiff and may not set off any claim or amount that they have or may have against the Plaintiff. Clause 2.2 gives the guarantors the right to release any security held for the debt but leaves unaffected the obligations of the guarantors in that regard. That would seem to me to embrace a sale at an undervalue. 56 Similarly, cl 2.5 refers to the Plaintiff's rights under the guarantee even if the guarantors did not obtain an appropriate price for the sale of the land ("anything the lender does"). The Plaintiff's liability in that regard would have to be determined at a later time. Similarly, cl 6.6 prevents any set off even if what the guarantors now claim can be regarded as a set off. 57 The guarantors submit, however, that the Agreement of 26 August 2009 has replaced the guarantee, and the guarantee does not govern the arrangements between the parties. This is said to arise because of the amount claimed in the Agreement of 26 August 2009. That amount (to be found in the Consent Judgment) was an amount of $705,093.97. That figure is the same as the figure demanded in the Notice of Demand on the guarantors dated 22 April 2009. 58 However, on 19 August 2009 the Plaintiff gave a Lender's Certificate saying that as of 17 August 2009 the amount outstanding was $736,881.37. Mr Gunning submits that because the amount that was owing at 19 August 2009 exceeded what was contained in the Agreement of 26 August 2009 that was an indication that there was a wholly new agreement between the parties with the result that it is that Agreement alone which governs the rights of the parties and not the guarantee. He conceded, in this regard, that this meant the Agreement of 26 August not only contained the implied term or terms concerning the Plaintiff obtaining the best price for the property but also had to contain an implied term that the guarantee giving rise to the Agreement was no longer binding between the parties. 59 I do not agree with this submission. Not only is there nothing in the Agreement of 26 August 2009 to suggest that the guarantee is to be replaced by the Agreement, the letter of 26 August sent by the Plaintiff's solicitors (its terms being expressly agreed by the letter in reply from the guarantor's solicitors) said "Our client reserves its rights generally and including under guarantee". Moreover, the amount contained in the Consent Judgment was expressed as being "the amount owing under the Guarantee". It seems to me that those are clear indications that so far from the Agreement replacing the guarantee or bringing it to an end, its terms remained binding on the parties. 60 In my opinion, the terms of the guarantee continued to govern the rights of the parties with the result that: (a) the right of the Plaintiff to release the security property (cl 2.2) meant that there was no implied term in the Agreement of 26 August 2009 as set out in the proposed cross-claim; (b) the guarantors are under the obligation to pay the whole amount of the indebtedness still owing pursuant to the guarantee (cl 2.5); (c) until such amount is paid they may not bring any claim against the Plaintiff for damages or otherwise in relation to the sale of the property (cl 6.6). 61 The result is that the Plaintiff is entitled to entry of the Consent Judgment and there will be no stay on execution of that judgment. 62 After I announced the orders in this matter I was informed by Mr Gunning the Third Defendant became bankrupt on 27 May 2010. Section 58(3) Bankruptcy Act 1966 (Cth) relevantly provides: (3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

… (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. 63 The making of an order is a step in the proceeding taken by the Plaintiff and notwithstanding that the application was made, and the hearing conducted, prior to the making of the sequestration order: Gertig v Davies [2003] SASC 86, (2003) 85 SASR 226 at [64]-[66]. In those circumstances leave would need to be obtained from the Federal Court for the making of an order and the entry of judgment against the Third Defendant. Against the possibility that the Plaintiff wishes to obtain that leave so that it has a judgment that can be proved in the Third Defendant's bankruptcy I will grant liberty to apply to my Associate on 2 days notice so that proof of the Federal Court's order granting leave can be provided to me. 64 In the meantime, I make the following orders:

1. Judgment for the Plaintiff against the Second Defendant in the amount of $705,093.97.

2. The Second Defendant is to pay the Plaintiff's costs of this application and the costs associated with the obtaining of judgment.

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