Plaintiff v Defendant

[2003] VSC 31

MORTGAGES - Liabilities secured by guarantee and "all moneys" third party registered Torrens mortgage over residential property of director and shareholder of corporate borrower - Lender seeks repayment and possession of mortgaged property.

CONTRACT - Guarantee and third party mortgage - Whether mortgage discharged by variation of principal contract which materially prejudiced surety's interests - Variation - Offer and acceptance - Original loan offer conditional upon valuation of security property to bank's satisfaction - Mortgagor aware of condition - Valuation unsatisfactory - Original offer withdrawn - Revised loan offer more onerous entailing greater business risk - Revised offer an independent agreement rather than variation of original offer - Whether fresh advance or further loan constitutes a material variation in context of an "all moneys" guarantee - Funds advanced and used, inter alia, to discharge mortgagor's existing mortgage - Debtor accepted, and mortgagor acquiesced in, revised offer - Valid contract on terms of revised offer - No material variation of contract.

EQUITY - Unconscionable conduct - Claim for possession of property and recovery of moneys outstanding on loan secured by mortgage - Mortgagor claimed ignorance of financial affairs of debtor company and terms of loan made by bank - No misrepresentation by bank to mortgagor or debtor - Mortgagor not mistaken about purport and effect of transaction - Enforcement of relevant guarantee against mortgagor not unconscionable - Ankar Pty Ltd v National Westminster Finance Australia Ltd considered - ASIC Act not applicable - No unconscionable conduct pursuant to ss.51AB, 51AC Trade Practices Act.

1 In this proceeding, the plaintiff bank seeks to enforce rights pursuant to its registered mortgage dated 24 August 1999 over the defendant's residential property. The mortgage is a "third party" mortgage expressed to secure advances to Concert Music Retailers Pty Ltd ("CMR"), a company in which all the issued shares are held by the defendant and her son in equal proportions. The plaintiff seeks orders including orders for the recovery of possession of the mortgaged property and payment of the sum of $342,499.31, together with interest from 25 May 2001 to the date of judgment. Alternatively, the plaintiff seeks to be subrogated to the rights and interest of Westpac Banking Corporation ("Westpac") pursuant to Westpac's mortgage registered in January 1998 over the defendant's property.

2 The plaintiff is the Commonwealth Bank of Australia ("CBA"). The defendant, Mrs Loris McArthur, formerly Loris Synan, is a professional singer and singing teacher, who, in addition to work in various academic appointments, conducts lessons from her residence, the property subject to the mortgage, which is situated at 182 Mont Albert Road, Canterbury and described in Certificate of Title Volume 7911 Folio 006, of which she has been the sole registered proprietor for some years ("the property").

3 The plaintiff, by Statement of Claim filed 6 September 2001, pleads that pursuant to an agreement made on or about 13 September 1999 between the plaintiff and CMR, the plaintiff agreed to provide financial accommodation totalling $363,000 to CMR by way of two loan facilities. Pursuant to the alleged terms, the first loan was in the sum of $315,000 and the second loan was in the sum of $48,000. The loans were repayable by monthly instalments of $2,362 and $1,575 respectively. The repayment was to be secured by a first registered mortgage over the property.

4 The plaintiff pleads that the funds were provided to CMR pursuant to the agreement, but, in breach of the agreement, CMR failed to make repayments in accordance with its terms.

5 The plaintiff pleads that the defendant executed an "all moneys" mortgage dated 24 August 1999 over the property ("the CBA mortgage"), securing all moneys then or in the future owing to the plaintiff by CMR, and the interest on such moneys. It is pleaded that demand was made in writing, dated 25 May 2001, but the defendant has failed to pay the sums demanded.

6 The plaintiff also pleads that the defendant, by mortgage registered in January 1998 ("the Westpac mortgage"), mortgaged the property to secure the indebtedness of CMR to Westpac, and that the plaintiff, on 15 September 1999, with the defendant's consent, paid Westpac $317,902.90 from the funds it advanced under the loan facilities to discharge a loan agreement between Westpac and CMR. [It should be noted that although the statement of claim refers to a loan agreement between Westpac as lender and CMR, the relevant loan agreement was in fact between Westpac as lender and the defendant and Mr Ewan McArthur, as joint principal debtors].

7 The plaintiff claims recovery of possession of the property, $342,499.31 with interest, $45,380.20 with interest, and a declaration that it is entitled to be subrogated to the rights and interest of Westpac under the Westpac mortgage.

8 By Defence and Counterclaim dated 5 October 2001 the defendant denies the alleged agreement between CMR and the plaintiff dated 13 September 1999 and the alleged terms, but admits that a mortgage was executed on 24 August 1999.

9 The defendant alleges that prior to her executing the CBA mortgage, the plaintiff represented to her that it would advance monies to CMR in accordance with the terms of a letter of the plaintiff to CMR dated 27 July 1999 and that the defendant executed the mortgage dated 24 August 1999 relying on the representation. The defendant alleges that by letter dated 13 September 1999, the plaintiff withdrew its offer to advance funds on the terms set out in the letter dated 27 July 1999 and instead stated that it would be prepared to advance the monies only on the terms outlined in the 13 September 1999 letter. The terms of the letter of 27 July 1999 provided for a loan of $363,000 and required monthly repayments of $2,717 over 20 years. The terms of the letter of 13 September 1999 split the amount of $363,000 into two loans of $315,000 and $48,000. It required monthly repayments (as to the $315,000 loan) of $2,362 over 20 years and (as to the $48,000 loan), monthly repayments of $1,575 over three years.

10 The defendant alleges that the terms of loans in the letter of13 September 1999 were more onerous and carried greater business risk to CMR, and to the defendant, than those in the letter of 27 July 1999, having regard to the then trading performance of, and budgets prepared for CMR, which budgets had been provided by CMR to the plaintiff.

11 The defendant alleges that by letter dated 4 October 1999, CMR protested that there was a binding loan agreement between it and the plaintiff on the basis of the letter of 27 July 1999 and stated that it did not accept the offer of 13 September 1999.

12 The defendant denies that she consented to the advance or payments made by the plaintiff in discharge of the Westpac mortgage. She alleges that there was no agreement between the plaintiff and the defendant that the plaintiff should be subrogated to Westpac's rights under the mortgage, that the plaintiff is a volunteer, and that it would be inequitable to permit the subrogation, or enforcement, of the CBA mortgage.

13 The defendant's counterclaim repeats the allegations in the defence and alleges that the plaintiff's conduct in advancing moneys to CMR contrary to the terms of 27 July 1999 letter, and without the consent of the defendant, constitutes unconscionable conduct in contravention of sections 51AB or 51AC or the Trade Practices Act 1974 (Cth), and sections 12CA and 12CB of the Australian Securities and Investments Commission Act 2001(Cth). The defendant, by way of counterclaim seeks declarations that the CBA mortgage is void ab initio and unenforceable, alternatively, that it be set aside or rescinded.

14 By Reply and Defence to Counterclaim dated 15 October 2001, the plaintiff contends that various of the defendant's allegations disclose no defence. Further, the plaintiff contends, broadly, that the offer in the letter of 27 July 1999 was conditional upon, inter alia, a valuation of the property satisfactory to the plaintiff, which was unsatisfied. It is alleged that the plaintiff notified CMR of that circumstance and offered two loans, the terms of which were orally accepted by Mr McArthur on behalf of CMR on 3 September 1999 and subsequently contained in the plaintiff's letter to CMR dated 13 September 1999. The plaintiff pleads that the defendant agreed to, and executed, an "all moneys" mortgage. It further contends that sections 51AB and 51AC of the Trade Practices Act 1974 (Cth) and sections 12CA and 12CB of the Australian Securities and Investment Commission Act are inapplicable to the plaintiff's conduct.

15 In or about late 1997, the defendant (Mrs McArthur) was informed by her son, Mr Ewan McArthur, that the record and music supply retailing business situated at a store at 927 Whitehorse Road, Box Hill, in which he worked as an employee, was to be sold. Mr McArthur suggested that the business might be a suitable investment for Mrs McArthur and that it should be purchased with her assistance and operated by himself.

16 Mrs McArthur sought the advice of her accountant, Mr Townsend, and Mr Marc Marcou, an accountant with legal qualifications, prior to agreeing to assist Mr McArthur to acquire the business. Mr Townsend, by letter dated 19 November 1997, advised Mrs McArthur in relation to the proposal generally, and sounded some warning notes. He stated that he was somewhat suspicious of the motives for the sale. He also noted that the price of $300,000 on first impression seemed "excessive" and that the rental of the premises seemed "somewhat high".

17 Mrs McArthur testified that she received and noted the letter of advice from Mr Townsend dated 19 November 1997 "as the person who is putting their house at risk".

18 Despite the cautionary aspects of Mr Townsend's letter, Mrs McArthur agreed to assist Mr McArthur by entering a loan agreement jointly with him to borrow the purchase price of the business from Westpac. She also agreed to mortgage the property to secure the Westpac borrowings.

19 Upon Mr Townsend's advice, a company, ultimately known as CMR, was acquired as the vehicle to purchase the business. Mrs McArthur was appointed company secretary of CMR. She was the holder of six of the twelve issued shares in CMR. Mr McArthur was the sole director of CMR and held the remaining six issued shares.

20 On 24 December 1997 CMR purchased the business from APC Computers Pty Limited for a total purchase price of $320,000. The purchase price was made up of $80,000 for plant and equipment, good will of $100,000 and stock of $140,000. The sum of $270, 000 was payable immediately. A second tranche of $50,000 was payable by instalments over 18 months.

21 By agreement dated 12 December 1997 Mr and Mrs McArthur borrowed the sum of $320,000 from the Bank of Melbourne (subsequently Westpac). The advance was made under two loan facilities. They comprised a business development loan of $300,000 and an "overdraft" of $20,000, repayable over 15 years at instalments of $2,732 per month. The applicable interest rate was variable. It is clear that Mr and Mrs McArthur, and not CMR, were the borrowers under the Westpac facilities.

22 By instrument of mortgage dated 12 December 1997 Mrs McArthur, as mortgagor, mortgaged her property to Westpac to secure the borrowings. The debtors were stated to be Loris McArthur and Ewan McArthur. The Memorandum of Common Provisions applicable to the Westpac mortgage provided that the moneys secured by the mortgage included, inter alia, "... all moneys advanced or paid or now or hereafter advanced or paid by the Bank to for or for the accommodation of or on behalf of the debtor and the mortgagor or either of them either alone or jointly with any other person or otherwise owing or payable now or hereafter by the debtor and the mortgagor or either of them either alone or jointly with any other person to the Bank on any account whatsoever and without limiting in any way whatsoever the generality of the foregoing ... "

23 CMR's business experienced significant problems in its initial phase of operations. During the first year, the overdraft had been exceeded and by December 1998, Westpac had decided to require the repayment of the facility.

24 Mrs McArthur was well aware that the business was in difficulty. She testified that although she was a shareholder of CMR, company secretary, guarantor of the company's loan from Westpac and had secured the loan over the property, she did not play any role in the business of CMR. She gave evidence that she was not experienced in business matters and was not "in partnership" with her son in relation to CMR. She stated that she never worked at CMR's shop but she did take cheques over to the bank on odd occasions when Mr McArthur could not leave the shop. However, she gave evidence that she had a close relationship with her son, and was in daily contact with him. He kept her well-informed, and she had never found him to withhold information from her.

25 She testified that by early to mid May 1999 Mr McArthur told her that certain CMR cheques had been dishonoured, that they (the McArthurs) would be "marked for exit" by Westpac and accordingly "we decided to apply for refinancing".

26 Although stating initially that she did not recollect it, Mrs McArthur conceded in cross-examination that she "read and understood" a letter from Westpac dated 23 December 1998 addressed to her and Mr McArthur, which stated that Westpac was concerned about their inability to reduce the temporary limit of $46,000 to $20,000 for the business equity line (the overdraft) of the approved credit facility.

27 The Westpac letter further stated that the loan facilities were outside Westpac's normal guidelines and that it required the borrowers to refinance. It offered the borrowers short-term finance to enable them to obtain refinance to repay the Westpac loans. The loan facilities were to expire on 15 March 1999. Mrs McArthur signed and returned the Westpac letter.

28 Mrs McArthur conceded that she knew that it was necessary to refinance and that another bank must be found. She conceded that she knew that the first six months of trading of CMR were "pretty disastrous".

29 Although Westpac originally required the McArthurs to obtain refinancing and to repay the Westpac facilities by 15 March 1999, the McArthurs were unable to comply with that requirement. By letter dated 12 April 1999 addressed to the McArthurs, Westpac suggested that CMR might be insolvent.

30 Westpac extended the term for repayment of the facilities on at least two occasions. First, Westpac provided the McArthurs with a further term until 31 May 1999 and subsequently until 15 July 1999. Westpac emphasised that by 15 July 1999, it required a copy of an unconditional letter of refinance for a amount sufficient to clear the banking facilities in full by 31 July 1999.

31 Further, by letter dated 1 July 1999 Westpac advised that the temporary overdraft excess was cancelled and must be reduced to its limit of $20,000.

32 In early to mid 1999, Mr McArthur, at his mother's suggestion, contacted Mr Townsend and sought assistance in obtaining refinance to repay the Westpac facilities. Mr Townsend referred Mr McArthur to Barry Burckhardt, a finance broker trading under the business name "Consulease".

33 By letter dated 10 May 1999, Mr Townsend informed Mr Burkhardt of the background details of the need to obtain refinance. The letter stated that "the business runs as trading company (sic) with the directors and equal shareholders being Ewan McArthur and his mother, Loris McArthur (formerly Synan)".

34 The letter further stated that CMR required a financier to lend facilities sufficient to discharge all commitments to Westpac (a $280,000 fully drawn advance and an overdraft approved to $20,000 but with an unapproved limit extended to $300,000 and additional working capital of $30,000 to $40,000). It noted that the Westpac facilities were secured by a registered mortgage over Mrs McArthur's residence, which had recently had an independent valuation of $520,000.

35 The letter also stated, "Possibly for tax planning purposes the inventory at the date of acquisition was determined at $140,000 which may be considered to be inflated. This high value contributed largely to the loss of $119,289 posted for the six months ended 30 June 1998... Results to date in 1999 show that the business is meeting its commitments and is indeed profitable."

36 The letter enclosed current budgets, 1998 financial statements and income tax returns, financial statements for the nine months ended 31 March 1999 and an abridged copy of the sworn valuation of the property.

37 On receiving the letter, Mr Burkhardt applied, on behalf of CMR, for a loan from Bankwest. Bankwest "promptly" rejected the application by letter to Mr Burkhardt dated 17 May 1999.

38 Westpac continued to press for repayment. It would appear that following the rejection by Bankwest on 17 May 1999 Mr Townsend represented to Westpac as late as 1 June 1999 that Bankwest was still considering the application to refinance. Mr Townsend's evidence in relation to this issue was evasive. I conclude that although aware of Bankwest's rejection, Mr Townsend continued to represent to Westpac that refinancing by Bankwest remained a possibility, as he was "playing for time".

39 Mrs McArthur was aware that Westpac was pressing for repayment and that Bankwest had rejected the application. On 20 May 1999 she travelled overseas for an eight week period of professional commitments and activity, returning on 19 July 1999.

40 Mr Burkhardt realised that there was urgency to the application for refinance, as Westpac was threatening to abandon the borrowers. Despite that urgency, he made only two applications for refinance. He testified that he took the view that Bankwest and CBA were the only two lending institutions available for such an application at the time, as there was a limited number of providers of such commercial loans.

41 Mr Burkhardt prepared a letter dated 3 June 1999 and a loan application on the basis of the information provided to him by Mr Townsend.

42 The loan application stated the borrower to be "Concerts Music Retailers Pty Ltd" and its directors were stated to be Ewan McArthur and Loris McArthur. The security was noted to be a first registered mortgage over Mrs McArthur's property (stated to be the subject of a sworn valuation of $520,000) and a first registered debenture charge over the assets and undertakings of the borrowing entity (CMR).

43 The total loan amount requested in the loan application prepared by Mr Burckhardt was $363,000. The purpose of the loan was stated to be "To assist in repayment of a $288,000 Fully Drawn Advance with the Bank of Melbourne [that is, Westpac] together with a take out of the current overdraft balance of $35,000. Additional to this is a further working capital requirement of $40,000."

44 The letter prepared by Mr Burkhardt had no specific addressee. It was intended to be read by any potential financier approached. It stated that the CMR business was acquired 18 months ago by Mr McArthur, "in partnership with his mother, Loris McArthur who is a private music teacher."

45 Attached (apparently) to the letter were financial statements for 1999 and the nine months interim figures to 31 March 1999, personal income tax statements for Mr and Mrs McArthur for the year to 30 June 1998, budgeted cash flows and a statement of accounts for the 12 months ending 30 August 1999, "showing that the loan can be serviced" and a statement of position for Mrs McArthur "showing a net worth of $362,104 after allowing for the contingency of $304,000 covering Mortgage and Hire purchase committments (sic) associated with the business."

46 Following the rejection of the loan application by Bankwest on or about 17 May 1999, Mr Burkhardt approached CBFC, a division of CBA, where he had a personal contact. He was ultimately referred to Mr Larry Heath of CBA. In June 1999 Mr Burkhardt submitted the loan application dated 3 June 1999 to CBA, together with the financial attachments and the letter of Mr Townsend dated 10 May 1999.

47 Mr Heath received the applications and associated documents. Following an initial assessment, he informed Mr Burkhardt by facsimile dated 25 June 1999 that CBA was interested in assisting Mr Burkhardt's clients with a "better business loan" of $363,000. Mr Heath also requested a copy of twelve months of banking statements and advised that the valuation must be acceptable to CBA's property consultants, in which case the valuer would be required to re-address the valuation to CBA.

48 On or about 12 July 1999, Mr Townsend faxed the requested draft financial statements to Mr Heath.

49 Mr Heath then had a conversation with Mr Townsend. Mr Heath's evidence was that Mr Townsend told him that the 1998 losses of CMR were largely due to inflating the value of inventory to "minimise tax liability". The internal Application for Credit prepared by Mr Heath and Ms Donnison (a CBA credit officer) and dated 16 July 1999 under "Additional Information" noted in Mr Heath's handwriting "Accountant attributes loss as at 30/6/98 to tax planning with respects to the value of end stock." Mr Heath conceded in cross-examination that this may have incorrectly recorded Mr Townsend's comments.

50 It would appear that Mr Townsend, in discussion with Mr Heath, sought to explain CMR's losses for the year ended 30 June 1998 by reference to the inflation of the value of stock at the date of purchase. This issue occupied some time at trial. The effect of such inflation would be to reduce profit and hence, perhaps, the tax payable at the end of the relevant period. Mr Townsend referred to such an inflation of value in his letter to Mr Burckhardt dated 10 May 1999. I conclude that he referred to the matter in the course of his discussion with Mr Heath. I consider that Mr Heath's note in the internal memorandum dated 16 July 1999 refers to that issue, but inaccurately records a reference to the inflation of the value of end stock. The artificial inflation of the value of end stock, in contrast to opening stock, would have the effect of increasing profit.

51 The CBA internal loan application noted a registered mortgage by "Director Loris McArthur" over her residential property valued at $520,000. Mr McArthur was noted as "managing director" and Mrs McArthur as "director". Both Mr and Mrs McArthur were noted as "decision makers". Mr Heath noted "results to 30/6/99 are favourable with a 44-50% increase in sales and 33.90% increase in gross profit..". He also noted that "the vulnerable fiscal structure is mitigated via pledging of residential security by director Loris McArthur".

52 Mr Heath also noted that several "dishonours" had been observed in the perusal of the financial statements for the twelve months end. Mr Heath recognised that the existing Westpac facility provided inadequate funding for the business and that CMR's current overdraft limit of $20,000 was insufficient. The approval of the facility was recommended, "subject to satisfactory CRAA report, Right of Entry and acceptance of valuation by PCS."

53 Mr Heath did not have the authority to approve the loan application. The application, when completed, was to be forwarded to his supervisor, Mr Maroney, who would determine whether or not to approve the funding. The internal loan application materials for submission to Mr Maroney were prepared by Mr Heath and Ms Donnison.

54 When the CMR financial statements for the year ended 30 June 1999 were received, Mr Heath, on 12 July 1999 (and Ms Donnison), performed a computerised analysis which produced the result that for the year ended 30 June 1999, the borrower had a cash surplus available of $120,056 to service debt repayments.

55 The financial statements provided to CBA did not reveal the fact that CMR had received an additional $39,754.80 from related parties (principally Ms Val Synan, Mrs McArthur's sister) between 30 June 1998 and 30 June 1999.

56 Mr Heath impressed me as a direct and truthful witness. He conceded under cross-examination that the available bank statements indicated that CMR had insufficient working capital and that the fiscal structure was vulnerable. However, he contended, and I accept, that he formed the view that the applicants had "turned it around" and the additional working capital to be provided by CBA would address the previous problems. Mr Heath rejected the suggestion that he was content merely to rely on the security afforded by the residential property and was indifferent to whether or not the business was likely to be capable of servicing the debt. His evidence, which I accept, was that although aware of a risk that the business would not generate sufficient cash to service the debt, "we made a call that they would generate sufficient cash to service the borrowing." Mr Heath, in making his assessment of the loan application, did not know of the contribution of funds to CMR by related parties.

57 Mr Heath, by internal memorandum dated 22 July 1999, sought approval of the relevant CBA authority to reduce the establishment fee to $1,200 from a standard fee of $2,722 to ensure client acceptance and to cement the relationship with Mr Burkhardt "who could prove an effective referral source."

58 By letter addressed to "the Directors, Concert Music Retailers Pty Ltd" dated 27 July 1999, Mr Heath wrote to advise that CBA had approved a facility totalling $363,000 "to assist you to repay a Bank of Melbourne [Westpac] loan facility and additional working capital".

59 The letter enclosed a Terms Schedule, Fees and Charges Schedule, a Security Schedule and a Booklet of Usual Terms and Conditions. The letter stated that the facility was made available on the terms and conditions in the Booklet of Usual Terms and Conditions and the enclosed Schedule. An information sheet was also enclosed. The letter recommended that the documents be read carefully. It stated that for acceptance of the facility, the documents marked should be signed and returned to the bank.

60 The security required was stated to be a guarantee by Mr McArthur and a first registered mortgage over the property by Mrs McArthur.

61 The Booklet of Usual Terms and Conditions, under the heading "Conditions Precedent to the Bank's Obligations under the Contract", stated in clause 3.1(1) that the bank was obligated under the contract only if "the valuation and title of the Security Property and any other legal requirements connected with the Facility are to the Bank's satisfaction."

62 By clause 3.3, the Booklet stated, "If any one or more of the conditions precedent... are not satisfied within one calendar month of the date the Bank receives... the letter of authority signed or executed by the borrower, the Bank is under no obligation to make the Facility available to the borrower..."

63 By clause 6.5(b), the Booklet provided that "the Bank funds a loan, inter alia, when the Borrower or anyone authorised by the Borrower requests credit in a manner approved by the Bank... and the Bank provides that credit."

64 Clause 14 set out the details of variation of interest rates.

65 A document entitled "Acknowledgment and Consent" was signed and dated on 28 July 1999 by Mr and Mrs McArthur as 'Applicant/s / Borrower/s Company Director/s." A Privacy Act authority authorising the provision of particulars to a credit rating agency was also signed by Mr and Mrs McArthur and dated 28 July 1999.

66 The Terms Schedule stated the amount of the loan as $363,000, with a term of 20 years, and monthly repayments of $2,717 with a better business loan variable rate base rate. It noted, "These figures can change as the index rate and the margin rate change."

67 Mr and Mrs McArthur signed and returned the Terms Schedule on 28 July 1999.

68 Mrs McArthur stated in evidence that she knew from the outset that CBA's obligation to fund the loan was conditional upon a satisfactory valuation of the security property. She had realised that a valuation would be required for refinancing. For that reason, she had already organised the valuation by JB Marmion and Associates dated 3 May 1999, which ascribed a value of $520,000 to the property ("the Marmion valuation").

69 Mrs McArthur's evidence is that on receiving the letter of offer of CBA dated 27 July 1999 she read it prior to signing it. She stated that she was fully aware of the structure of the proposed loan and signed it only after discussing with Mr Townsend whether the loan was structured so that the business could sustain the repayments. Her evidence is that although aware of the possibility of interest rate rises, she did not raise the issue with Mr Townsend, trusting him to take it into account.

70 A "Gateway" electronic banking application to CBA was signed by Mr McArthur and dated 3 August 1999. A business card application for CMR ("Ewan McArthur") was also signed by Mr McArthur and dated 3 August 1999.

71 As at 6 August 1999, CMR was subject to a proceeding to recover $23,951.84. Mrs McArthur's evidence was that she was aware of that proceeding and other litigation against CMR. She also knew that Westpac had cancelled the company's temporary excess limit and had "thrown her out". However, in cross-examination she did not concede that she knew that refinancing would be difficult. She did not accept that the situation was so desperate that the terms of repayment were a matter of indifference.

72 Mrs McArthur, on or about 24 August 1999, received a letter of CBA addressed to her and dated 23 August 1999 enclosing a booklet "What it means to be a Guarantor" and "Instructions for signing a Guarantee or Third Party Mortgage", together with an instrument of mortgage for execution.

73 The CBA letter advised that "your present maximum liability to the Bank under the documents is $363,000 plus all interests and amounts payable for discounts, costs, charges and expenses which the Bank may debit and charge to the account of the Debtor, or for which you are liable under the document(s)". It advised the addressee to "satisfy yourself that you understand the full nature and effect of your liabilities to the Bank" before signing the documents.

74 The Booklet entitled "What it means to be a Guarantor" was also enclosed. It warned intending guarantors and "third party" mortgagors to read the documents carefully and to obtain legal or financial advice if unsure about signing.

75 In particular, the Booklet advised the guarantor to obtain independent legal advice if:

• "You are not involved in the day-to-day management of any business whose debts you are asked to guarantee and any one of the following circumstances applies

• You are the wife or the husband of the debtor, or of a director of the debtor company; or

• You live in some other relationship with the debtor or with a director of the debtor company; or

• The debtor has some influence over you and your decisions; or

• You get easily upset or confused, particularly when someone wants you to do something for them that you do not fully understand; or

• English is not your first language and you are not fluent in the English language; or

• You are inexperienced in financial or business matters ; or

76 The Booklet explained, inter alia, "If we hold a mortgage from you to support your guarantee, we can sell your mortgaged property to pay the debt. This could mean that you lose everything you own, including your home."

77 It also explained the difference between "the scope of the guarantee" and "the amount of your liability under it." It stated "If the guarantee you give us does not say it is a limited guarantee, you should understand that there is no limit to the amount it guarantees."

78 Mrs McArthur gave evidence that she read and understood the Booklet "What it means to be a Guarantor".

79 Although she read the advice to seek legal advice if she did not understand, Mrs McArthur did not consult a solicitor because "it was clearly explained in the Booklet". Further, she had seen a solicitor in relation to the Westpac mortgage and she "couldn't see any difference in the documentation".

80 Mrs McArthur, however, stated in evidence that she understood the CBA mortgage to relate only to "the amount mentioned in the letter" (that is, the letter of 27 July 1999), being the amount of $363,000 plus the indeterminate charges. She agreed that she also knew of the possibility of interest rate rises. Therefore, Mrs McArthur knew that the terms of any repayment of the principal would not necessarily remain at the monthly amount specified in the 27 July 1999 letter.

81 The CBA mortgage did not refer to the letter of 27 July 1999 or to any particular loan contract or arrangement. Rather, it contained what is generally known as an "all moneys" clause.

82 Clause 3 of the Memorandum of Common Provisions relevantly provides:

"3. SECURED MONEYS

Secured Moneys means and includes all moneys, liabilities and amounts falling within any one or more of the following descriptions:-

1. all moneys (including moneys advanced by way of loan for fixed term or provided by way of overdraft) now or in the future to become owing or payable to the Mortgagee by the Debtor and the Mortgagor or either of them, either alone or on joint or partnership account or on any other account whatsoever whether as principal or surety;
2. all moneys which the Mortgagee shall lend or pay or become liable to lend or pay to, for or on account of the Debtor and the Mortgagor or either of them alone or jointly with any other person and either:-
   1. by direct advances;
   2. by reason of the Mortgagee accepting or indorsing or paying or discounting any order, draft, cheque, promissory note, bill of exchange or other engagement whether such order, draft, cheque, promissory note, bill of exchange or other engagement shall have matured or not; or
   3. by entering into any bond, indemnity or guarantee or otherwise incurring liabilities for or on behalf of the Debtor and the Mortgagor or either of them;

1. all Moneys which the Mortgagee shall lend or pay or become liable to lend or pay or may have advanced or may advance the payment or repayment of which the Debtor and the Mortgagor or either of them has guaranteed or may in the future guarantee to the Mortgagee;

1. all Moneys whatsoever which the Mortgagee shall lend, pay or advance or become in any way liable to lend, pay or advance to, for or on the credit or for the accommodation or otherwise on the account of the Debtor or to, for or on account of the Mortgagor to, for or on account of any other person upon the order or request or under the authority of the Debtor and the Mortgagor or either of them;
2. all moneys with which the Mortgagee shall be at liberty to debit and charge the account of the Debtor and Mortgagor or either of them under the covenants, conditions or provisions contained in the Mortgage;
3. all moneys payable or to become payable to the Mortgagee for discounts, stamp duties, postages, commissions, charges, exchanges, re-exchanges and expenses according to the usage and course of the business of the Mortgagee;
4. all moneys which the Debtor and the Mortgagor or either of them have or has agreed or shall in the future agree to pay the Mortgagee, whether as principal or surety;

83 Mrs McArthur, on 24 August 1999, executed the CBA mortgage and returned it to CBA.

Cancellation of Terms of Letter Dated 27 July 1999 - Revised Proposal

84 Following the execution and return of the letter of 27 July 1999, matters had not proceeded smoothly.

85 The granting of the loan was conditional upon the acceptance of the valuation of the security property. On 17 August 1999, Ms Donnison, the CBA credit analyst working with Mr Heath, sought advice from CBA's Property Consultancy Services ("PCS") as to whether the Marmion valuation, ascribing a value of $520,000 to the property, was suitable for CBA's purposes.

86 PCS considered the Marmion valuation. It advised that the Marmion valuation might be acceptable once it complied with a number of requirements. In particular, PCS stated that the valuation must be readdressed to CBA, with an acknowledgment by the valuer that it would be relied on by the bank.

87 When the lease of CMR's premises was received by CBA. Ms Donnison then prepared and forwarded the security documentation to the McArthurs.

88 On 25 August 1999, Mr Heath sent a letter to CMR setting out CBA's requirements in relation to the Marmion valuation. Mr McArthur received the letter. On 26 August 2002, Mr McArthur informed Mr Heath that the valuer, Mr Marmion, was overseas, or possibly overseas. His evidence is that he unsuccessfully telephoned Mr Marmion over a period of about two to three hours, and on that basis concluded that Mr Marmion was overseas. Mr McArthur's evidence on this, and on many other issues, was evasive and unclear. It is not apparent how the failure to contact Mr Marmion over a three hour interval could justify the conclusion that he was overseas.

89 Mr McArthur testified that the CBA letter of 25 August 1999 was his first indication that the loan would not be available unless there was a satisfactory valuation and he had not previously understood that. I am unable to accept that evidence.

90 Mrs McArthur and Mr Townsend were aware of that condition, which was clearly stated in the literature accompanying the 27 July 1999 letter. I conclude that Mr McArthur was also aware that a satisfactory valuation was required and was conscious of likely impediments to amending the Marmion valuation in satisfaction of CBA's requirements.

91 On Mr McArthur informing him that Mr Marmion was "away" so that the existing valuation could not be amended as required, Mr Heath stated that he would arrange for another valuer, Preston Rowe Patterson Vic Pty Ltd, to complete a new valuation. Mr McArthur agreed, as he was "keen for the thing to be settled at that point in time."

92 At the same time, Mr McArthur requested a temporary excess from CBA, as Westpac had, by then, cancelled CMR's temporary excess. CBA approved a $15,000 excess on 27 August 1999, to be used by the borrower until loan funding occurred.

93 On 26 August 1999, CBA sought an external valuation of the property by Preston Rowe Patterson. The valuation of Preston Rowe Patterson was promptly conducted and received by CBA on 1 September 1999. It ascribed a value of $450,000 to the property. That figure was $70,000 less than the $520,000 Marmion valuation, on the basis of which the terms of the 27 July 1999 loan had been structured.

94 CBA's lending policy at that time required that long term commercial lending not exceed 70% of the value of security in the form of residential real estate. While a valuation of $520,000 allowed the approval of an amount up to $364,000 for long term borrowing, a value of $450,000 allowed approval of only $315,000 on long term borrowing. Under CBA's lending policy, the balance of any loan over $315,000 would be classified as "unsecured" and could be made available on a short term basis only.

95 On 3 September 1999, Mr Heath and his superior, Mr Maroney, discussed splitting the proposed single loan of $363,000 to CMR into two loans of $315,000 and $48,000 respectively, in order to comply with the CBA lending policy. The "split" was apparently Mr Maroney's idea. It would permit a total loan of $363,000, in such a way as to comply with CBA's lending policy. The first loan of $315,000 was to be repayable over 20 years at 6.55% interest per annum and the second loan of $48,000 was to be repayable over three years, at an interest rate of 9.55% per annum. In comparison with the loan proposed in the letter of 27 July 1999, the new proposal required an additional monthly payment of $1,220 over the first three years. The interest rate on the smaller loan was also higher than the interest rate of 6.9% per annum applicable to the loan proposed in the letter of 27 July 1999. On 3 September 1999, Mr Maroney approved the new proposal.

96 Mr Maroney asked Mr Heath to confirm that the applicants were happy with the revised arrangement and if so, fresh documents would be arranged.

97 Mr Heath's evidence is that, soon after, he had a conversation with Mr McArthur and relayed the new proposal to Mr McArthur. He then wrote, on the relevant internal memorandum to Mr Maroney "Situation relayed to client, please prepare fresh BFDs [business facility documents] and check docs received." He was unable to recall with certainty that the conversation with Mr McArthur occurred on 3 September 1999, but thought it probable.

98 Mr Heath's evidence was that he relayed the situation "concisely" to Mr McArthur "and he was accepting of it". Mr McArthur's evidence was also that the conversation probably took place on about 3 September 1999. He said that Mr Heath told him only that "we need to change the loan slightly and cancel the original loan and issue the same amount in two new loans". According to Mr McArthur, he responded by simply asking that the paperwork be sent to him for his consideration and that he did not ask, and was not told, the revised amount of the monthly repayment, although he "was curious" and the situation was urgent. Indeed, the urgency was such that throughout that period, Mr McArthur was telephoning Mr Heath twice daily.

99 Mr Heath, in contrast, stated that he did tell Mr McArthur the details of a new property valuation of $450,000, the approval "altered into two new loans" and an annual increase of $12,220 in loan repayments was "verbally relayed to client". Mr Heath also said that unless Mr McArthur had accepted the new proposal over the telephone, he would not have asked Mr Maroney to proceed.

100 There is a conflict between the evidence of Mr Heath and Mr McArthur on what Mr McArthur was told in the conversation on about 3 September 1999. Mr Heath presented as a direct and truthful witness. His account is fortified by diary notes dated 3 September 1999. It is also entirely credible that he would give the precise details of any repayment to the client to ensure the proposal was acceptable, prior to asking his superior, Mr Maroney, to proceed.

101 Mr McArthur, in contrast, appeared selective and evasive. His memory of some details was extremely clear, but non-existent in relation to other significant matters. Further, I am unable to accept that in the urgent situation of CMR, and the McArthurs, faced with imminent action by Westpac, necessitating twice daily telephone calls, and the crucial importance of the CBA loan, that Mr McArthur would fail immediately to seek the details of altered repayment, if they were not volunteered. I note also that, as outlined below, CBA advanced the funds on 15 September 1999 without waiting for the return of the executed loan document. That conduct appears consistent only with CBA's apprehension that the McArthurs already knew, and consented to, the terms set out in the letter of 13 September 1999.

102 I therefore prefer the evidence of Mr Heath on this issue and find that Mr Heath did, in a telephone conversation on about 3 September 1999, inform Mr McArthur of the new terms and repayments and that Mr McArthur indicated to Mr Heath that they would be acceptable.

103 The evidence of Mr McArthur is that he did not tell his mother anything about the conversation of 3 September 1999 with Mr Heath. He claimed that until 15 September 1999, he left her in ignorance of Mr Heath's advice that the original loan was to be cancelled and instead, two loans would be offered.

104 Mrs McArthur also gave evidence that she could not recall Mr McArthur telling her of the conversation with Mr Heath in which he stated that the 27 July 1999 loan would be cancelled or that there would be, instead, two loans. She contended that the first she heard of the cancellation of the 27 July 1999 loan terms was on 15 September 1999, when Mr McArthur brought her the CBA letter dated 13 September 1999.

105 As stated above, Mr McArthur, during the course of August 1999, frequently telephoned Mr Heath to enquire about the progress of the loan application and when he expected the loan to come through. Mr McArthur informed Mr Heath that Westpac was exerting pressure.

106 Mr Burkhardt also telephoned Mr Heath to inquire about the progress of the loan and when it would be funded. According to Mr Burckhardt, he encountered difficulty in contacting Mr Heath, who was slow to return the calls.

107 Mrs McArthur's evidence was to the effect that Mr McArthur's custom was to keep her fully informed at all times. She stated that their relationship was very close, that he was always open and honest with her, that he did not hold anything back and would immediately draw bank documents to her attention. She agreed that he consulted her about all important financial decisions and was in daily touch with her. Mr McArthur also stated that the only matter he had ever held back from his mother was the conversation with Mr Heath of 3 September 1999, contending that he did not tell her until 15 September 1999.

108 Mrs McArthur conceded that she knew the further Preston Rowe Patterson valuation dated 31 August 1999 was being conducted. The Preston Rowe Patterson valuer visited her property and she admitted him. By then, she knew the Marmion valuation would not be relied on and that the loan on terms of the 27 July 1999 letter was conditional upon a valuation satisfactory to CBA.

109 According to Mrs McArthur, on 14 September 1999, she received an early morning call from Mr McArthur. He was in a distressed state because the funding had not come through. She then decided to step in and telephone Mr Heath herself "as a concerned mother".

110 Mrs McArthur stated in evidence that at the time of her telephone conversation with Mr Heath, she knew nothing whatever of the original loan proposal being revised. She knew that the Marmion valuation would not be used and that a new valuation by Preston Rowe Patterson was to be used instead. However, she denied that she made any inquiries of Mr McArthur about the progress of the new valuation and was not concerned about it. She denied that she telephoned Mr Heath knowing that there was a new loan proposal which could be settled, in order to urge that it be acted on.

111 Mr McArthur conceded that he knew from about 3 September 1999 that the proposed loan of 27 July 1999 would not be advanced and that a revised loan only, if any, would be available. Mr McArthur's evidence is that he was doing everything possible within his power to have settlement occur as soon as possible at this time. He agreed that, in this context, he "had [his] mother on the case". In such circumstances, it is not credible that he would not arm her with all relevant facts known to him, in order to enable her to deal knowledgeably with CBA to achieve their urgent common goal.

112 Mrs McArthur impressed me as a capable and intelligent person who had experience of running her own business and professional life. I consider that in giving evidence, she tended to minimise her involvement with, and understanding of, her own financial affairs and those of CMR, portraying a degree of passivity and ignorance which did not accord with her acknowledged history and obvious attributes. I conclude that Mrs McArthur was vitally concerned about the fate of the business and the progress of the loan application, which profoundly affected her own financial security and the welfare of her son.

113 Regrettably, I am unable to accept the evidence of Mr and Mrs McArthur that in the urgent situation in which they were placed, Mr McArthur did not inform his mother of the conversation with Mr Heath soon after it occurred. I conclude that Mrs McArthur was, by that time, aware of the new valuation and monitoring developments closely. As I also accept Mr Heath's evidence that he conveyed the details of the new monthly repayment to Mr McArthur, I consider that soon thereafter, Mr McArthur conveyed those details to Mrs McArthur. A failure to inform his mother of a matter so crucial to the financial fate of the company and Mr and Mrs McArthur themselves, is totally inconsistent with the pattern of conduct to which both parties attest, and the commercial and personal exigencies of the situation. There is no credible reason why, in the circumstances, Mr McArthur would deviate from the parties' usual pattern and fail promptly and fully to inform his mother of that important conversation with Mr Heath.

114 I therefore find that Mrs McArthur was informed of the proposed new loans and new repayment terms by Mr McArthur very shortly after he himself was informed. I find that Mrs McArthur had that information prior to her telephone call to Mr Heath on 14 September 1999.

115 When Mrs McArthur, on the morning of 14 September 1999, telephoned Mr Heath, she apprised him of the urgency of the situation and urged him to ensure that the loan was funded as soon as possible. She testified that Mr Heath did not advert to the withdrawal of the terms of the letter of 27 July 1999 or the new proposal.

116 Mr Heath gave evidence of his conversation with Mrs McArthur on the morning of 14 September 1999. He did not deny Mrs McArthur's assertion that he did not mention the restructured loans. He said that he had thought or assumed that Mrs McArthur was already aware of the revised arrangement and that Mr McArthur had informed her.

117 Mr Heath said that Mrs McArthur was, on 14 September 1999, extremely concerned about when the loan would be funded. He also remembered some concerns being raised about problems with the business. At that time, Mr Heath had already prepared and signed the 13 September 1999 letter.

118 Further, on 14 September 1999, Mr Burckhardt visited CBA's premises and met with Mr Heath and Mr Laurie Clarke, the executive manager of the CBA Credit Centre. Mr Burckhardt's memory of the conversations with Mr McArthur after 27 July 1999, leading up to his appearance at CBA's premises on 14 September 1999, was extremely vague. He stated in evidence that he had not preserved, or consistently preserved, written records or diary notes relating to the CMR loan application. He could only recall that he "may have" had a conversation with Mr McArthur between 27 July 1999 and his visit to CBA. However, he recalled that he had had difficulty getting Mr Heath to return calls and that he was upset. Mr Burckhardt "wanted some action" from CBA.

119 Mr Burckhardt, although vague, thought that Mr Heath brought in his superior, Mr Clarke "when I went down there to remonstrate. It got to the stage where I wanted answers and I wasn't going until I got them and so he brought in a senior". Mr Burckhardt clearly recalled that he told the bank officers that settlement had to occur as soon as possible and he "told them to get on with it".

120 Mr Burckhardt denied that Mr McArthur told him to go to the bank, but ultimately conceded that Mr McArthur told him that he wanted Mr Burckhardt to organise, in whatever way he could, for settlement to occur promptly "and that is why he went to the bank, "out of frustration".

121 Mr McArthur stated that he had complained to Mr Burckhardt, at a date he could not remember (after 3 September but prior to 14 September), that it had been "taking way too long for the whole thing to be settled". He asked Mr Burckhardt "to try and get everything settled" and "I just told him to go - he said he would go and see what was going on and to try and get everything through ... to get settlement to take place ... as soon as possible".

122 Mr McArthur's evidence, which shifted from a denial that he told Mr Burckhardt to go to CBA to a concession that "I just told him to go", is that he told Mr Burckhardt to try to get everything settled and knew that he was going to at least try to see the bank officers, but that he "did not recall" telling Mr Burckhardt that CBA had cancelled the first loan.

123 Mr McArthur explained that although he knew the first loan offer had been withdrawn "he had no letter saying that the original loan had been cancelled and the new one was put in place".

124 Mr Burckhardt's evidence is that he recalled little detail other than that he wanted the loan settled as soon as possible. However, he did think that he had previously had a conversation with Mrs McArthur about a valuation. He had a copy of the Preston Rowe Patterson valuation on his file. He said of his conversation with Mrs McArthur that "I couldn't say that she was upset, but probably concerned about the fact that another valuation came in". Mr Burckhardt believed that they discussed property values in the area. He could not remember when he received the copy of the Preston Rowe Patterson valuation. Although he stated that he could not recall, he supposed, as the valuation was dated 31 August 1999, that "I would have got it a few days later. I probably would have asked for it seeing we were getting delayed."

125 Mr Burckhardt was vague about any conversations with Mr McArthur after 27 July 1999 stating that he "may have" spoken to him but had no idea what they spoke about, although his recollection was quite clear that he saw the CBA officers on 14 September because he was aware of delay to such an extent that he was "in a bit of a rage" and was trying to appease Mr McArthur.

126 I consider that Mr McArthur would not have told Mr Burckhardt to visit CBA to exert pressure for the immediate funding of the loan without updating him on all relevant details of the new proposal. I conclude that Mr Burckhardt, on 14 September 1999, required CBA to settle the loan as soon as possible, having been informed that the terms of the letter of 27 July 1999 were no longer offered and that those set out in the letter of 13 September 1999 letter were now proposed.

127 Mr Heath's evidence is that the principal issue Mr Burckhardt raised on 14 September 1999 was "when this loan was going to be funded". Mr Heath said that he told Mr Burckhardt "specifically at any time what the situation was to the best of my ability". He stated that they discussed why the Marmion valuation was unacceptable. On the basis of Mr Burckhardt's request that settlement be arranged as soon as possible Mr Heath agreed to do so. Following the meeting, he telephoned Westpac to arrange settlement for the next day, 15 September 1999. After the meeting with Mr Burckhardt, Mr Heath wrote a note addressed to his team leader, Mr Maroney. It stated "settlement of this matter is of great urgency. I have seen a broker with Laurie. We have committed to settle as soon as possible. I seek your authorisation to do so." Mr Maroney authorised settlement.

128 Early on 15 September 1999, Mr Heath telephoned Mr McArthur and advised him that settlement of the loan would take place that day.

129 CBA made available the funds pursuant to the 13 September 1999 letter without awaiting its execution and return by CMR. Settlement occurred at 3.00 p.m. on 15 September 1999. The Westpac loan and Westpac mortgage were discharged.

130 Although Mr and Mrs McArthur did not execute the letter dated 13 September 1999, and were aware from early on 15 September 1999 that the funds would be advanced that day, neither they nor any other party on behalf of CMR took any steps to prevent the settlement of the CBA loans. The funds advanced by CBA were used to discharge the Westpac liability and the Westpac mortgage and to pay CMR's creditors.

131 Although Mr and Mrs McArthur did not execute or return the 13 September 1999 letter, it was conceded, and I find, that in the circumstances there was a valid contract of loan between CMR and CBA on the terms set out in the 13 September 1999 letter.

132 The 13 September 1999 letter included two separate Terms Schedules, one for each loan, for execution by Mr and Mrs McArthur on behalf of CMR. The 13 September 1999 letter was referred to in a subsequent letter of Mr McArthur to CBA dated 7 November 2000 as having arrived on 14 September 1999 - the day before the loans were funded. He claimed in evidence that he did not see the letter that day if it did arrive on 14 September 1999 because he was out teaching.

133 According to Mr McArthur, he first saw the 13 September 1999 letter on the morning of 15 September 1999. Mrs McArthur stated that she also first saw the letter on 15 September 1999.

134 The CBA letter of 13 September 1999 probably arrived at the premises of CMR on 14 September 1999 and Mr McArthur became aware of its contents, or at least the fact of the letter's arrival, that day. However, I consider that the letter merely confirmed the new proposal, of which he was already aware.

135 The letter of CBA to the directors of CMR dated 13 September 1999 relevantly stated "the Bank has approved the following facilities totalling $363,000 to assist you to repay a Bank of Melbourne loan facility and additional working capital." The facilities are stated to be two better business loans in the amounts of $315,000 and $48,000. The facility in the amount of $315,000 was repayable over the term of 20 years by monthly instalments of $2,362. The facility in the amount of $48,000 was repayable over the term of 3 years by monthly instalments of $1,575.

136 In the course of 15 September 1999, Mr McArthur discussed the letter of 13 September 1999 with Mr Townsend. Mr Townsend advised Mr McArthur not to sign the letter until the matter was clarified. Mr Townsend stated that this advice was not based on his detailed calculations that CMR could not sustain repayments under the terms of the 13 September 1999 letter. Rather, it was based on his conviction that there was "offer and acceptance" in relation to the letter of 27 July 1999 and that CBA should be held to its terms. It is unclear how that approach was consistent with Mr Townsend's acknowledgment of his awareness that the 27 July 1999 letter was conditional, and that there were problems with the valuation. Further, Mr Townsend was aware that the affairs of CMR had deteriorated since the making of the application to CBA, as its "trade cycle was broken", and there was a critical need for cash, both to discharge the Westpac loan and to carry on business.

137 Mr Townsend's evidence is that he had originally performed calculations which may have indicated that CMR had $60-70,000 surplus cash available with which to service a new loan. He had advised on that basis that the 27 July loan 1999 was sustainable.

138 When he was telephoned by Mr McArthur at about 9.00 a.m. on 15 September 1999, Mr Townsend stated that at that stage he had not been informed that the first loan had been cancelled due to a receipt of the lower Preston Rowe Patterson valuation for only $450,000. His evidence on that issue was evasive and vague.

139 However, Mr Townsend ultimately conceded that at the date of receipt of the 13 September 1999 letter, he did know that there was a problem with the valuation, although he was not aware of the details until after settlement had occurred.

140 Ultimately, Mr Townsend's advice appeared to be to permit settlement to proceed because the "company was bleeding to death" and he was fearful that further harm would result if settlement were delayed pending clarification.

141 Mr Townsend stated that he did a calculation as to serviceability of the new loan structure but did not suggest that the company did not have the capacity to find another $15,000 a year. His evidence, which was shifting, was that he thought that the revised loan terms would have been able to be met in June but not in September, because during the intervening period the trade cycle of the company was broken.

142 However, CBA was not advised that circumstances indicated that the loans were no longer affordable. The company's ledger shows unsecured loans to Val Synan in the sum of approximately $35,000 in the prepared financial statements for 1999. Mrs McArthur also lent approximately $7095 to the company between 29 September 1998 and 3 July 1999.

143 The company received an overdraft from CBA of $35,000 in August 1999 and Mrs Synan put in $35,000 and Mrs McArthur put in $40,000 between September 1998 and September 1999. Mr Townsend was unable to explain how, in those circumstances, cash flow problems accounted for CMR's subsequent inability to service the loans.

144 Mrs McArthur's evidence is that she understood the difference between the 27 July 1999 and 13 September 1999 terms schedules and was "horrified", as Mr McArthur told her Mr Townsend had said not to sign any documents, because the structuring of the loan was "a threat to my home and unsustainable by the present state of the business".

145 Mrs McArthur stated that she thought that the loan money was being transferred on 15 September 1999.

146 She was aware, or assumed, that on repayment of the Westpac loan, the mortgage to Westpac would be discharged on 15 September 1999. She was also aware that on 15 September 1999, CMR received approximately $45,000 cash. She withdrew $20,000 from her superannuation fund on 17 September 1999 to provide total additional cash of $65,000 for CMR. Although stating that she did not know that Mr McArthur then wrote many cheques in payment of CMR's liabilities, Mrs McArthur knew that "we'd (the business) been without cash flow for quite a considerable time and we had lost a lot of business".

147 She stated that she did not ask or know what Mr McArthur did with the money but assumed that he paid off creditors. Mrs McArthur, although "horrified", did not take any action to halt the funding or to quarantine the funds from use in payment of creditors, or to limit her liability.

148 Although CMR employed the funds made available by CBA, Mr and Mrs McArthur still did not, on behalf of CMR, execute and return the Terms Schedules for the two loans. By letter dated 22 September 1999 to CMR, CBA confirmed settlement and sought the return of the Terms Schedules.

149 Mr and Mrs McArthur did not comply with that request. By letter of CMR to CBA dated 3 December 1999 Mr McArthur complained about difficulties experienced by CMR between the original approval of 27 July 1999 and the date of settlement, leading to an inability to purchase goods on credit and the loss of major accounts. The letter questioned the accuracy of the Preston Rowe Patterson valuation. It stated that, "We cannot repay $48,000 over three years", and "We accepted the offer dated 27 July 1999, not the terms specified in your letters dated 13 September and 6 October [a credit card offer of $3,000] (both different)".

150 The letter referred to two previous letters of Mr McArthur to CBA dated 21 August 1999 and 4 October 1999. Those letters also asserted that CMR had accepted only the terms of the letter of 27 July 1999. Mr Heath's evidence, which I accept, is that he did not receive them.

151 Mr and Mrs McArthur did not at any stage execute the requested Terms Schedules.

152 The company did not comply with repayment schedules applicable to either the 27 July 1999 terms or the 13 September 1999 terms.

153 CMR made only one initial monthly payment after the drawing down of the loan facility on 15 September 1999. Thereafter, there was a hiatus in payments for several months. The repayments made by CMR totalled $6,299 for the first six months, as against $23,622 due under the 13 September 1999 loan structure and $16,302 which would have been due under the 27 July 1999 loan structure.

154 The evidence, therefore, is that CMR did not in fact repay the amounts which would have been due under the terms of the 27 July 1999 letter and that Mrs McArthur's apprehension that it could do so was not based on her independent assessment of the figures, but reliance on advice from her accountant that the 27 July 1999 loan terms were sustainable.

155 Following the advance on 15 September 1999 of the total sum of $363,000 (comprising the loans of $315,000 and $48,000 respectively) CMR repaid a total sum of $6,299 in the first six months to 15 March 2000. The total repayments required under the letter of offer of 27 July 1999 for the relevant period amounted to $16,302.

156 The amount repaid for the first twelve months to 15 September 2000 was $19,723 as opposed to $32,604 required under the letter of 27 July 1999 and $47,244 required under the letter of 13 September 1999.

157 The amount repaid in the 24 months following the CBA advance totalled $27,571, as opposed to $65,208 required under the letter of 27 July 1999 and $94,488 under the letter of 13 September 1999.

158 The evidence clearly demonstrates that CMR did not in fact repay the amounts required under either letter.

159 Mrs McArthur commissioned a further valuation by Marmion dated 1 December 1999 which criticised aspects of the Preston Rowe Patterson valuation and ascribed a value of $505,000 to the property, but still failed to comply with CBA's requirement that it be addressed to CBA.

160 Initially, Mr Heath, and subsequently, Mr Cassidy of CBA, assisted by other CBA officers, met with, negotiated and corresponded with Mr and Mrs McArthur and CMR, with a view to resolving the problems. The arrears were not cleared. Further time was allowed and there were, apparently, unsuccessful attempts to sell the business.

161 CMR's financial difficulties were not resolved. On 24 May 2001, the director resolved to appoint an administrator to CMR. On 20 June 2001, the company was wound up.

162 Mr Watts, counsel for the defendant, stressed that events subsequent to 15 September 1999 are irrelevant to the defendant's case, which is principally that "the mortgage ought to be discharged by reason of the material variation of the principal contract".

163 To that end, the defendant led the evidence of Mr Wilkinson to establish that the repayments required under the letter of 13 September 1999 were not sustainable and that there was a material increase in the risk factor, to which Mrs McArthur did not consent. Mr Watts submitted that Mrs McArthur was prepared to sign the CBA mortgage only on the basis that the 27 July 1999 loan structure was in place.

164 In Mr Watts' submission, whatever occurred subsequent to 15 September 1999 is not relevant to whether the CBA mortgage ought to be discharged by reason of the material variation of the principal contract, "because we say that as at the date when these advances were made that the CBA had placed Mrs McArthur in a position where, regardless of what would have happened, she was exposed, ... "

165 The defendant also alleged in its pleadings that CBA's conduct constituted unconscionable conduct within terms of sections 51AB and 51AC of the Trade Practices Act and sections 12CA and s.12CB of the ASIC Act. No submissions on the application of the legislation (which was disputed) or authorities on unconscionability under it, were made at trial.

166 In order to establish unconscionability, the defendant relied on the same alleged facts pleaded in relation to the variation argument. Namely, the advance of funds contrary to the alleged representation constituted by the 27 July 1999 letter, on which the defendant allegedly relied in executing the CBA mortgage, without the defendant's consent, on the terms of the 13 September 1999 letter, which were more onerous and carried greater business risk.

167 Although there is no additional particularisation of unconscionable conduct in the pleadings, so that, as pleaded, the variation and unconscionability arguments coincide, the defendant, in the evidence on her behalf and in submissions, alleged or suggested a number of factors characteristically associated with established general law categories of unconscionability.

(a) Mrs McArthur was a passive investor of little or no business experience or competence, wholly removed from the management and financial affairs of CMR and trusting of, and dependent upon, her professional advisors and her son.

(b) CBA knew that CMR was a company in distress and should have known that it could not sustain the repayments under terms of the 13 September 1999 letter.

(c) Mr Heath did not initially disclose details of the repayments required under the 13 September 1999 letter to Mr or Mrs McArthur, so that they discovered those details only on or about 15 September 1999. In such circumstances, it was then too late to seek alternative finance, any application for which would be, according to Mr Sherman's evidence, probably prejudiced by the dealings with CBA.

169 The defendant, in this context, submits that Mrs McArthur was in complete ignorance of the cancellation of the 27 July 1999 terms until 15 September 1999. Further, it is submitted that Mr Burckhardt, in seeking immediate funding, was also in ignorance on 14 September 1999 of the new terms and was not acting on Mrs McArthur's behalf in requiring CBA to settle the loan.

170 The defendant further alleges that CBA is not entitled to be subrogated to the rights of Westpac under the Westpac mortgage as there was no agreement between the defendant and CBA to that effect, CBA was a volunteer and subrogation would be inequitable.

171 Ms Loughnan, on behalf of the plaintiff, submitted that Mrs McArthur, far from being removed from the management of CMR and occupying a merely formal position, was actively involved in its high level management and decision-making and was, throughout, fully aware of its affairs and financial dealings.

172 She submitted that there was no representation by CBA to Mrs McArthur that the funds would be advanced pursuant to the 27 July 1999 letter. She contended that I should accept that Mr Heath communicated the details of the new repayments to Mr McArthur and that Mr McArthur informed Mrs McArthur, Mr Townsend and Mr Burckhardt of these details.

173 Further, she submitted that I should accept that knowing of the new proposed terms, on 14 September 1999, Mrs McArthur and Mr Burckhardt (acting on behalf of Mrs McArthur and CMR), urged CBA to settle the loans immediately.

174 Mrs Loughnan emphasised that neither Mrs McArthur, nor any other party on her behalf took any steps to prevent the settlement of the loans upon becoming aware of the terms of the letter of 13 September 1999.

175 Ms Loughnan submitted that CMR did not, and was unable to, make the repayments due under the terms of the letter of 27 July 1999.

176 She also submitted that the financial statements made available to CBA did not disclose the fact that CMR's business had been supported by related party contributions.

177 I summarise my principal findings of fact as follows:

(1) CBA did not represent to Mrs McArthur that funds would necessarily be provided to CMR on the terms set out in the letter dated 27 July 1999. The accompanying Booklet clearly stated that the bank was obligated only if a satisfactory valuation and other legal requirements were completed. Mrs McArthur conceded that she was aware that the provision of funds under that letter was subject to a valuation of the property to the satisfaction of CBA. She was also aware that the interest rates referred to in the letter dated 27 July 1999 were subject to variation.

(2) Mrs McArthur was aware of the implications of the "all moneys" third party CBA mortgage she executed. She read the literature accompanying the CBA mortgage. She was aware that her liability under the CBA mortgage would extend to advances made on different terms from those set out in the 27 July 1999 letter and that, in the event that such advances were not repaid, the security property could be lost.

(3) Mrs McArthur was at all times well-informed as to the affairs of CMR and was an active and equal participant in all significant corporate decisions and management of its affairs.

(4) Mrs McArthur was aware, from late August 1999, that the Marmion valuation was not satisfactory to CBA and was aware that CBA had arranged a further valuation.

(5) Mr McArthur was, on or about 3 September 1999, informed by Mr Heath of the withdrawal of the proposed loan of 27 July 1999 and advised of the proposed "split" loans and of the new and higher monthly repayments.

(6) Mr McArthur, shortly after learning of the new proposal, in accordance with his usual practice informed Mrs McArthur of the new proposal and its details.

(7) The business of CMR was at that time, in urgent need of cash and Mr and Mrs McArthur (whose property was subject to the Westpac mortgage) urgently required the discharge of the Westpac mortgage.

(8) Prior to 14 September 1999, Mr McArthur informed Mr Burckhardt of the urgency of the situation and of the proposed "split" loans and revised terms and Mrs McArthur discussed the valuation problem with Mr Burckhardt.

(9) Mr McArthur, with the acquiescence of Mrs McArthur, and on behalf of the company, himself, and Mrs McArthur in her personal capacity, requested Mr Burckhardt to approach CBA to require an accelerated settlement of the loans.

178 Equity has traditionally adopted a "tender" approach towards the position of guarantors, as persons who assume liability for the repayment of the debts of others. In recognition of the altruism frequently involved in the assumption of such liability and the vulnerability which may characterise the surety's relationship with the principal debtor, equity has evolved a number of doctrines aimed at the protection of the vulnerable guarantor. In each case, the relevant doctrine aims to achieve a just balance between the interests of the surety and the creditor.

179 Relevant equitable doctrines which may result in the discharge of the surety's liability include the "special principle" applicable to variation of the principal contract without the surety's consent and certain recognised doctrines based on what might be broadly described as unconscionability, including misrepresentation, undue influence, duress and unconscionability based on special disadvantage or disability. Legislative prescription of unconscionable conduct (which may not coincide with general law equitable doctrines) may also result in discharge of liability.

180 Suretyship involves the assumption of liability for the debt of another. In the present case, the principal debtor of the CBA facility was CMR, the company of which Mrs McArthur was an equal shareholder with her son. Mrs McArthur was recorded as secretary of CMR and Mr McArthur as sole director. It was submitted on Mrs McArthur's behalf, and she gave evidence to the effect that, she played an entirely passive and formal role in relation to the management of CMR and its affairs. In short, it is submitted that she always regarded CMR as her son's company and played no role in the business other than in the formal capacity. The plaintiff submitted that Mrs McArthur, was on the contrary, a de facto director of CMR.

181 It is well-recognised that the corporate veil may be lifted in relation to quasi-partnerships in the context of winding up on the just and equitable ground. I am unaware of any decision in which the corporate veil has been lifted in the context of incorporators who have guaranteed or secured the company's liabilities and no such decision was cited to me. However, in European Asian of Australia v Kurland[1] Rogers J considered that a wife who was an equal shareholder with her husband in a company could not rely on the equitable doctrine of Yerkey v Jones[2] to avoid liability under a guarantee of the company's debts.

182 While the question whether Mrs McArthur was a de facto director of CMR does not dispose of any single issue in dispute, considerable time was devoted to it at trial and, in so far as it relates to Mrs McArthur's level of awareness of, and control over the affairs of CMR, it is potentially relevant to the issue of unconscionability and general equitable considerations.

183 The Corporations Act section 9 defines a director as

(a) a person who:

(i) is appointed to the position of a director; or

(ii) is appointed to the position of an alternate director and is acting in that capacity;

(iv) regardless of the name that is given to their position; and

(b) unless the contrary intention appears, a person who is not validly appointed as a director if:

(i) they act in the position of a director; or

(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.

Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.

184 While Mrs McArthur was recorded as the secretary of CMR, I am unable to accept that she played no role in the company's management. I accept that she performed only minor services in the day to day conduct of the company's business. However, Mr Townsend conceded that he initially advised her that she was to be a director of CMR and that he consistently held her out in correspondence on behalf of the company to its solicitors, to Mr Burckhardt and to CBA as a director and principal decision maker. Mr Townsend also sent company related or business correspondence to Mrs McArthur following the purchase of the business. He agreed that she was his client responsible for payment of fees in relation to incorporation. He expected her to be in possession of company cheque books.

185 Further, Mrs McArthur agreed that she discussed all matters concerning the company with Mr McArthur, save for the altered loan terms. She did not intend to make a gift of funds to Mr McArthur, but sought professional advice as to the soundness of the proposed investment. She subsequently invested a further $90,000 (approximately) in CMR. Her compliance was necessary for leasing and for every aspect of financing. Mrs McArthur had conducted her own business for many years. Ultimately, she telephoned Mr Heath to require him to accelerate the funding of the loan.

186 I conclude that Mrs McArthur considered the CMR business to be at once an investment, and a means of employment for her son. I consider that she was closely involved in the high level management of the company's affairs, was informed and aware of all significant developments and was an active participant with Mr McArthur in decision-making at management level. She permitted, and acquiesced in, her agents and associates holding her out as a director to third parties.

187 As such, I consider that Mrs McArthur did constitute a de facto director of CMR and that the company constituted a quasi-partnership, pursuant to which she and Mr McArthur carried on business together with a view to profit in corporate form.

188 Considerable argument was devoted at trial to the status of Mr Burckhardt. If he acted as the agent of Mrs McArthur in instructing CBA to settle the loans, knowing that the available terms were those set out in the letter of 13 September 1999 or indifferent to the terms, his knowledge would be imputed to Mrs McArthur, and his consent would constitute her consent to the transaction. That issue is less relevant given my conclusion that Mrs McArthur herself gave instructions for settlement with knowledge of the 13 September 1999 terms.

189 To the extent to which it is relevant, I find that Mr Burckhardt acted as Mrs McArthur's agent in giving CBA instructions to settle. Mr Burckhardt's brief was to identify and secure refinancing of a loan for which Mrs McArthur was jointly liable. Although Mrs McArthur did not formally or directly appoint him, she set in train his engagement by her instruction or suggestion to Mr McArthur. With knowledge of his purpose and activities, she consented to or acquiesced in his role and in the practice that communications were conducted principally by Mr McArthur or Mr Townsend. I consider that Mr Burckhardt had the implied, if not express, actual authority of Mrs McArthur to instruct CBA to settle and that he did so aware that the 27 July 1999 terms had been cancelled and that the new terms of 13 September 1999 were proposed in their place.

190 The defendant seeks principally to rely on the special principle endorsed in Ankar Pty Ltd v National Westminster Finance Aust Ltd,[3] in which the High Court (Mason ACJ, Wilson, Brennan and Dawson JJ) considered various statements of "the special principle said to apply to a surety contract, that the surety is discharged from its obligations by the creditor's breach of that contract, so long at any rate as the breach materially prejudices the interests of the surety".

191 Their Honours, having considered various statements of the special principle, appeared to accept the view of English cases that -

"The principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety's risk, eg, a reduction in the debtor's debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety. The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the surety's rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do."

192 In Ankar, the surety had secured the obligations of a lessee under a lease agreement. The surety agreement required the lessor to notify the surety of default under the lease or of the assignment of the lessee's interest. The lessor failed to fulfil those requirements. The High Court held that the breaches discharged the surety from liability.

193 In recognising the "special principle", the High Court majority construed the relevant requirements in the surety agreement as conditions, holding that the doctrine of strictissimi juris indicated that where there is doubt as to the status of a provision in a guarantee, it should be resolved in favour of the surety.

194 The special principle has application in cases where a particular liability is guaranteed, but it is altered or varied without consent, or the surety has certain contractual rights which are disregarded.

195 Limitations upon, or reservations concerning, the special principle endorsed in Ankar Pty Ltd v National Westminster Finance Australia Ltd have been applied. For example, in The Wardens and Commonality of the Mystery of the Mercers of the City of London v New Hampshire Insurance,[4] Phillips J considered that the principle applies only in relation to obligations arising under a specific contract which are guaranteed and not to obligations arising from a future course of dealings. Accordingly, if there is a guarantee in respect of all loans without reference to any particular contract, the creditor and principal could conclude a new loan and proceed to vary its terms without that variation operating to discharge the guarantor.

196 A further exception to the variation principle is where the contract of guarantee or third party mortgage expressly permits variation. In the present case, the CBA mortgage by clause 9.12 expressly provided for the mortgagee's right to vary advances and accommodation.

197 Similarly, the principle has no application to a subsequent independent agreement, as distinct from the variation of the terms of a particular original agreement. Whilst discharge will result from variation of the terms of a particular agreement unless it is unsubstantial and unprejudicial or the guarantor consents, the guarantor will remain liable in relation to entirely independent contracts, provided that they are within the scope of the guarantee.

198 Therefore, where there is a widely drafted "all moneys" guarantee or mortgage clause, as in the present case, and as widely employed in modern commercial practice, a fresh advance or a subsequent loan would be within the scope of the guarantee. Moreover, a variation of a single agreement would also appear to be within the scope of such a guarantee.

199 Where an "all moneys" guarantee or mortgage is executed, the guarantor has undertaken to guarantee an indefinite number of liabilities without limit. In such a context, it is artificial to distinguish between original and subsequent independent agreements, on the one hand, and variations of a single agreement, on the other hand. In the absence of misrepresentation as to the effect of the "all moneys" guarantee or mortgage, or other vitiating factors, there appears to be no reason why equity should require the discharge of the guarantor's obligation in either case.

200 In the present case, the letter of 27 July 1999 did not constitute an unconditional offer of finance. Although its terms were accepted by CMR, those terms included, inter alia, the condition precedent requiring a valuation satisfactory to CBA. That condition precedent was not fulfilled. There was no enforceable agreement, and no advance was made, pursuant to the terms of 27 July 1999.

201 Rather, CBA made the advance pursuant to the terms set out in the letter dated 13 September 1999. The advance was accepted by CMR and Mr and Mrs McArthur, who applied, or acquiesced in the application of, the funds for their own, and CMR's, purposes. In those circumstances, counsel for Mrs McArthur conceded, and I find, that there was a binding agreement between CBA and CMR pursuant to the terms set out in the letter of 13 September 1999.

202 In my opinion, the agreement of 13 September 1999 does not constitute a variation of an original agreement on terms set out in the 27 July 1999 letter. Rather, it is an independent agreement on different terms, albeit for the same principal sum, which is within the scope of the "all moneys" clause of the CBA mortgage.

203 As there is no variation of a principal contract, there can be no discharge of the defendant mortgagor's obligations pursuant to the CBA mortgage on the basis of the special principle recognised in Ankar, whether or not the terms of the 13 September 1999 advance were more onerous or involved a greater risk to the mortgagor than the terms set out in the letter of 27 July 1999. If, contrary to my finding, there were a variation of a principal contract, the CBA mortgage expressly provided for variations.

204 I have not been referred to any authority which deals expressly with the scope of the legitimate role of the "special principle" of variation in the context of "all moneys" guarantees. The special principle appears to have no legitimate application to "all moneys" guarantees. It is, however, unnecessary to determine such issues, given that I consider that the letter of 13 September 1999 set out the terms of an independent agreement which was itself within the ambit of the "all moneys" mortgage. Further, I have concluded that there was no representation by CBA that funds would be advanced on the terms set out in the letter of 27 July 1999 and no misrepresentation by CBA as to the effect of the CBA mortgage.

205 In the context of the special principle applicable to variation, it is not necessary to establish that the guarantor has suffered prejudice or even that prejudice is probable in order to secure discharge. Rather, the creditor can enforce the guarantee only if it can establish that the variation is "beneficial to the surety only or cannot in any circumstances increase the surety's risk".[5]

206 If a variation in the relevant sense were established, the plaintiff would bear the onus of establishing that there was no increased risk to the surety. In the present case the defendant led evidence to establish the increased risk. Given my conclusion that there was no variation, I consider that evidence only in so far as it is potentially relevant to unconscionability.

207 The defendant did not contend that the imposition of a higher repayment schedule caused the eventual collapse of CMR, in circumstances where the requirements of neither repayment schedule were observed. However, it was contended that the higher repayment schedule increased the risk to Mrs McArthur.

208 The terms of the letter of 13 September 1999 required a total monthly repayment of $3,937, as opposed to a total monthly repayment of $2,717 and a total annual repayment of $32,604 under the terms set out in the letter of 27 July 1999. The smaller loan contained in the letter of 13 September 1999 had a higher interest rate of 9.55% per annum.

209 As Mr Heath was aware, CMR had a shortage of working capital, which the CBA loan was intended to rectify. In fact, CMR's position was worse than the financial statements available to Mr Heath indicated, as it had required the input of $33,474.80 in funds from Ms Val Synan, Mrs McArthur's sister, between 30 June 1998 and 30 June 1999. There was conflicting evidence of the status of those advances. However, they were not apparent from the financial information available to CBA when Mr Heath performed his assessment of the loan application.

210 The evidence of Mr Wilkinson, on behalf of the defendant, was to the effect that as at the date of funding, a proper analysis would have indicated that CMR could have sustained a loan on the basis of the terms of the letter dated 27 July 1999, but not on the terms of the letter dated 13 September 1999.

211 Mr Wilkinson's evidence was that CMR was significantly undercapitalised, relying on bank finance and loans from related parties to fund the business. A total of $46,350 in loans from related parties were made between the year ended 30 June 1999 and 31 December 2000.

212 Mr Wilkinson also deposed to the fact there was a withdrawal of trade creditor finance, with many suppliers requiring COD terms. This occurred prior to the funding of the CBA loan on 15 September 1999, as Westpac had restricted the finance available. Mr Townsend agreed that the "trade cycle" of CMR was broken during the period.

213 Mr Wilkinson determined, on his analysis of available cash flows, that CMR probably would have been able to meet the monthly repayments of $2,717 per month, ($32,604 per annum), on the terms originally proposed by CBA, provided that CMR had been able to operate on the same basis (sales, debtors, stock levels and other liabilities remaining the same), with the same level of financial support both from the bank trade creditors and related parties that it had received during the year ended 30 June 1999. However, in Mr Wilkinson's opinion, "the 44.9% increase in loan repayments as imposed by the bank with the restructure of the loan facility would have been beyond the company's available cash flow". As such, in Mr Wilkinson's opinion, it would have substantially increased the risk associated with providing any guarantee or security for such a finance facility.

214 Mr Wilkinson, in making his assessment, agreed that CMR had not in fact met the commitment under either loan structure, and in evidence appeared to agree that it was unable to meet the commitment to "repay any sort of loan repayments under such a large loan as $363,000".

215 He also relied on figures for the years 2000 and 2001 in forming a view of what should have been apparent in 1999. His conclusion that CMR could probably meet the 27 July 1999 repayments assumed that related party support would continue at the same level.

216 It appears clear that CMR not only failed, but was unable, to sustain the repayment schedule under either loan. However, on the basis of the financial statements provided to CBA (which did not disclose the related party funding) I accept that it appeared to Mr Heath at the time of the loan application that CMR could do so.

217 I do not consider that it was or should have been apparent to CBA, from the material available to it, that CMR could sustain repayments under the terms of 27 July 1999 but not those under the terms of 13 September 1999.

218 Ultimately, it is unnecessary for me to determine, in the context of the special principle relating to variation, whether on a proper analysis CMR could in fact have sustained the repayments due under the 27 July 1999 letter, but not those due under the letter of 13 September 1999. In the context of that special principle, the creditor bears the onus of establishing that there is no increased risk to the guarantor. I consider that the plaintiff did not establish that there was no increased risk to the surety from the higher monthly repayments and increased interest rate in the letter of 13 September 1999, compared with a loan on the terms contained in the letter of 27 July 1999.

219 However, as I take the view that the special principle relating to variation does not apply in the present case, nothing turns upon a comparison of the risk entailed under the terms expressed in each of the two letters.

220 Although misrepresentation is not relied upon as an independent basis for discharge in the present case, it is alleged as an element of unconscionability. I now consider misrepresentation and other matters relevant to unconscionability in relation to the applicable provisions of the Trade Practices Act.

Misrepresentation - Trade Practices Act

221 A guarantee may be set aside or discharged due to misrepresentation or deceptive and misleading conduct by the creditor. In particular, where the creditor misrepresents a matter of fact, the contract of guarantee may be rescinded.

222 The defendant pleads that CBA represented to Mrs McArthur that the loan would be advanced on terms set out in the 27 July 1999 letter and in reliance on it she executed the CBA mortgage, whereas in fact CBA advanced the funds on the different and more onerous terms of the letter dated 13 September 1999.

223 For the reasons expressed above, in my opinion the letter dated 27 July 1999 did not constitute a representation that the funds would necessarily be advanced on the terms there set out. The offer was conditional upon, inter alia, a satisfactory valuation, as Mrs McArthur understood.

224 Further, the literature accompanying the instrument of mortgage, which Mrs McArthur read, explained the consequences of execution. Although Mrs McArthur stated in evidence that she did not understand that the CBA mortgage would extend to a loan or advance on terms other than those set out in the letter of 27 July 1999, I am unable to accept that testimony. In any event, if, contrary to my finding, Mrs McArthur misunderstood the import of execution of the CBA mortgage, such misunderstanding is not, in my opinion, attributable to any misrepresentation or misleading conduct on the part of CBA.

225 It is not alleged that Mrs McArthur was in a position of special disadvantage, but the defendant submits, in the context of the allegation of unconscionability, that she was passive, trusting and dependent on others in relation to financial and business matters.

226 In my opinion, the evidence does not support that contention. Mrs McArthur presented as an intelligent, well educated and competent professional person, with the capacity to act independently in relation to her affairs. She had maintained a longstanding business on her own account. Although not qualified in accounting, law or related disciplines, Mrs McArthur had access to and employed, professional advisers, whom she consulted when reaching her decisions.

227 She had some familiarity with the conduct of business affairs, had access to all information concerning the principal debtor, CMR, and was, as I have found, a de facto director of that company.

Trade Practices Act (1974) (Cth)

228 The defendant also pleads unconscionability pursuant to sections 51AB and 51AC of the Trade Practices Act and sections 12CA and 12CB of the ASIC Act.

229 The plaintiff pleaded that sections 51AB and 51AC of the Trade Practices Act do not apply to the conduct of CBA. Further, it pleads that sections 12CA and 12CB of the ASIC Act did not come into force until 15 July 2001 and therefore are inapplicable to the alleged conduct of the plaintiff.

230 No submissions on the meaning of unconscionability under the Trade Practices Act or ASIC provisions, or the legitimate application of those provisions, were made at trial. For the sake of completeness, I deal with those questions briefly.

231 The ASIC Act did not come into force until 2001 and accordingly sections 12CA and 12CB are inapplicable. Section 12CB would appear inapplicable to the plaintiff's alleged conduct in any event, as it applies only to unconscionable conduct in relation to financial services of a kind ordinarily acquired for personal, domestic or household use.

232 Subsection 51AAB(2) of the Trade Practices Act, effective from 1 July 1998, provides that section 51AB does not apply to the supply or possible supply of services that are financial services. "Financial services" is defined in section 4 of the Trade Practices Act to have the same meaning as Division 2 of Part 2 of the ASIC Act which provides:

"For the purposes of this Division, subject to paragraph (2)(b), a person provides a financial service if they:

(a) provide financial product advice (see subsection (5)); or

(b) deal in a financial product (see subsection (7)); or

(g) provide a service that is otherwise supplied in relation to a financial product; or

(h) engage in conduct of a kind prescribed in regulations made for the purposes of this paragraph.

233 Paragraph 12 BAA(7)(k) provides that a credit facility, within the meaning of the regulations, is a financial product.

234 Regulation 2B(1) of the ASIC regulations relevantly provides that a credit facility includes:

1. for any period; and
2. with or without prior agreement between the credit provider and the debtor; and
3. whether or not both credit and debit facilities are available.."

"credit means a contract, arrangement or understanding:

1. under which:
   1. payment of a debt owed by one person (a debtor) to another person (a credit provider) is deferred; or
   2. one person (a debtor) incurs a deferred debt to another person (a credit provider); and
2. including any of the following:
   1. any form of financial accommodation;
   2. an article known as a credit card or charge card;
   3. a financial benefit arising from or as the result of a loan."

236 The provision of the better business loans by CBA would appear to fall within the definition of "financial services" in the ASIC Act and Regulations. Accordingly, in my opinion, section 51AB does not apply to the plaintiff's conduct in the present case.

237 Section 51AC of the Trade Practices Act extends the unconscionable conduct provisions to business transactions involving the supply or acquisition of goods or services to a value of under $3 million by a person or corporation other than a public listed company.

"(1) A corporation must not, in trade or commerce, in connection with:

(a) the supply or possible supply of goods or services to a person (other than a listed public company); or

(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable."

239 The definition of "services" in section 4 of the Trade Practices Act relevantly provides:

"services includes any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce, and without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under:

(c) a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or

(d) any contract for or in relation to the lending of moneys.."

240 In Begbie v State Bank of New South Wales[6] it was held that the provision of bank loans was within the definition of "services" in section 4 of the Trade Practices Act. The plaintiff's conduct in supplying bank loans is, therefore, within the ambit of section 51AC.

241 In determining whether relevant conduct is unconscionable, and thus contravenes subsections 51AC(1) or (2), by subsection 51AC(3) the court may, without limiting it, have regard to a number of specified matters.

"Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the supplier) has contravened subsection (1) or (2) in connection with the supply or possible supply of goods or services to a person or a corporation (the business consumer), the Court may have regard to:

(a) the relative strengths of the bargaining positions of the supplier and the business consumer; and

(b) whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c) whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(f) the extent to which the supplier's conduct towards the business consumer was consistent with the supplier's conduct in similar transactions between the supplier and other like business consumers; and

(g) the requirements of any applicable industry code; and

(h) the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and

(i) the extent to which the supplier unreasonably failed to disclose to the business consumer:

(i) any intended conduct of the supplier that might affect the interests of the business consumer; and

(ii) any risks to the business consumer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and

(j) the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer; and

(k) the extent to which the supplier and the business consumer acted in good faith."

243 Section 51AC came into force on 1 July 1988. In Hurley v McDonald's Australia Ltd[7] the Full Federal Court considered that unconscionability within terms of that section carried its dictionary meaning and encompassed actions "showing no regard for conscience" or which "are irreconcilable with what is right or reasonable".

244 In ACCC v Simply No Knead (Franchising Pty Ltd)[8] Sundberg J considered the scope of unconscionability under, inter alia, section 51AC. Having reference to the wide range of non-exhaustive factors in subsection 51AC(3), his Honour took the view that unconscionability under section 51AC is intended to have wider coverage than the concept of unconscionabilty recognised by the "equitable unwritten law". He considered that the question whether conduct is unconscionable under section 51AC is "at large" and requires a determination by a court according to the ordinary meaning of the term, taking into account the matters specified in subsections 51AC(3) and (4) and any other relevant factors. Sundberg J considered that unconscionability in this context requires a moral perspective and "serious misconduct or something clearly unfair or unreasonable".

245 In my opinion, Sundberg J's view of the broad scope of section 51AC is convincing. However, on the basis of the facts I have found in the present case, I do not consider that CBA's conduct was unconscionable within terms of section 51AC. In my opinion, there was no conduct by CBA which could be described as "irreconcilable with what is right or reasonable", "serious misconduct" or "showing no regard for conscience". I consider that there was no misrepresentation by CBA, that Mrs McArthur understood relevant documents, and that CBA did not fund the loans on 15 September 1999 knowing or believing that CMR could not sustain repayments.

246 CBA did not inform Mrs McArthur of the cancellation of the terms of the 27 July 1999 letter and the new offer contained in the 13 September 1999 letter prior to settling the loan. Mr Heath relied upon Mr McArthur to inform her and assumed that he had done so. Although it is not a desirable practice to rely on such assumptions, in the present case, in my opinion, Mr Heath's assumption was correct. Doubtless, in the ordinary course, the loan would not have been settled prior to the execution and return of the Terms Schedules by the McArthurs, on behalf of CMR, ensuring their knowledge of the terms. That did not happen, ironically due to CBA's response to the urging of Mr Burckhardt and Mrs McArthur on 14 September 1999, to provide the funds immediately.

247 It is regrettable that Mrs McArthur's engagement in a series of transactions motivated significantly, but not exclusively, by family commitment and concern, resulted in serious detriment to her financial position. However, in my opinion, the detrimental outcome is not attributable to any legal wrong or morally reprehensible conduct on the part of CBA. I conclude that the CBA mortgage is valid and enforceable and CBA, as mortgagee, is entitled to its remedies.

248 In the light of the finding that the CBA mortgage is enforceable, it is unnecessary to determine the plaintiff's claim that it is entitled to be subrogated to Westpac's rights under the Westpac mortgage. The defendant contends that subrogation should not apply because there was no agreement between Mrs McArthur and CBA for subrogation, CBA was a volunteer, and subrogation would be inequitable in the circumstances.

249 In Ghana CommercialBank v Chandiram[9] the Privy Council stated the relevant principle thus:

"It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit."[10]

250 In Ghana Commercial Bank v Chandiram, a bank took a legal mortgage over a debtor's property, and on the same day paid out with its own funds a sum owed to an existing creditor of the same debtor, secured by an equitable deposit of title deeds. The bank's legal mortgage was subsequently held null and void pursuant to certain legislation. The bank "by paying the amount due to [the pre-existing creditor] the Ghana Bank became entitled to the benefit of the equitable charge with the same priority for the amount thereby secured as had theretofore been enjoyed by [the pre-existing creditor]".[11]

251 In both Butler v Rice[12] and Rogers v RESI Statewide Corp (No. 2)[13] a co-owner spouse borrowed money to pay off a mortgage without the knowledge or consent of the other spouse, on the undertaking to secure the money borrowed, or part thereof, by a new mortgage. When the innocent spouse in Butler v Rice refused to execute a new mortgage, it was held "that it must be presumed that the plaintiff intended to keep the first charge alive in his own favour over the property ... the fact that the wife had not requested to make the payment and did not know of the transaction was immaterial".[14]

252 Von Doussa J in Rogers v RESI Statewide Corp applied the reasoning of Butler v Rice. He also noted and approved authority to the effect that the concurrence or consent of the owner of the property was not material.[15]

253 In the present case, it is clear that CBA paid out the amount due on the Westpac mortgage, thus securing its discharge, on the understanding that Mrs McArthur as mortgagor would grant a mortgage to CBA as security for the advance employed to discharge the Westpac mortgage.

254 In those circumstances, if the CBA mortgage were unenforceable, CBA would be entitled to be subrogated to the benefit of the Westpac mortgage.

255 For the reasons set out in detail above it follows that I consider that the plaintiff, CBA, must succeed in its claim for relief and the defendant's counterclaim must fail.

[1] [1985] 8 NSWLR 192

[2] [1939] HCA 3; (1939) 63 CLR 649

[3] [1987] HCA 15; (1987) 162 CLR 549 at 560

[4] [1992] 2 Lloyds LR 365

[7] [1999] FCA 1728; (2000) ATPR 41-741

[8] [2000] FCA 1365; (2000) 104 FCR 253

[12] [1910] 2 Ch 277

[13] [1991] FCA 535; [1991] 32 FCR 344

[14] Rogers v RESI at 352 per Von Doussa.