Rankin & Anor v Morgan & Anor

Court of Appeal (NSW)|2009-05-06|Before: Giles JA, Hodgson JA, Ipp JA

CITATION: Rankin & Anor v Morgan & Anor [2009] NSWCA 116

JUDGMENT OF: Giles JA at 1; Hodgson JA at 44; Ipp JA at 45

CATCHWORDS: GUARANTEE - whether discharged because guaranteed loan replaced by different loan - or because of material change in borrower's obligations - on facts, not discharged - no question of principle.

Phillip Norman Rankin - First Appellant PARTIES: David Hastings Warne - Second Appellant Scott Anthony Morgan - First Respondent Annette Frances Morgan - Second Respondent

COUNSEL: M Cashion SC & R Tronson - Appellants S Harben SC & M Lawson - Respondents

SOLICITORS: NOT Lawyers - Appellants Thomas Mitchel, Belmont - Respondents

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 438/07 (Newcastle)

LOWER COURT DATE OF DECISION: 14 August 2008

LOWER COURT MEDIUM NEUTRAL CITATION: Morgan v Rankin [2008] NSWDC 166

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40294/08 DC 438/07

GILES JA HODGSON JA IPP JA

Thursday 21 May 2009 RANKIN & ANOR v MORGAN & ANOR Judgment 1 GILES JA: This was a guarantee case. Were the appellants discharged from their liability as guarantors, either because the guaranteed loan was replaced by a different loan, or because there was a material change in the borrower's obligations? The trial judge held that they were not. Her Honour was correct, and the appeal should be dismissed.

The loan and guarantee 2 The appellants were two of the four directors of Morgan Building & Property Maintenance Pty Ltd ("Morgan Building"). Morgan Building carried on the business of building construction and maintenance. 3 The respondents became socially acquainted with the first appellant, Mr Phillip Rankin. In late 2004 they agreed to "invest" $200,000 by way of loan to Morgan Building. A loan agreement dated 20 December 2004 was executed between the respondents as the Lender, Morgan Building as the Borrower and the four directors as the Guarantors. 4 The recitals to the loan agreement read - "A. The Lender has agreed at the request of the borrower [sic] to provide a loan facility to the Borrower of $200,000 ("the principal sum").

B. The Lender and the Borrower have agreed to enter into the Agreement to set out the terms and conditions of the loan." 5 By cll 1 and 2, Morgan Building promised to repay the principal sum of $200,000 within twelve months and to pay interest at 17 per cent quarterly in arrears. Clause 1 included that the Lender could extend the time for repayment to twenty-four months by written notice. By cl 3 the principal sum and interest would become immediately due and payable in certain events, and cl 4 permitted early repayment. Clause 5 was concerned with payment of stamp duty, and cl 6 with warranties by Morgan Building. 6 By cl 7 (the structure and spelling and other errors are as in the original) - "7. In consideration of the Lender having at the request of the Guarantors agreed to advance the principle sum to the Borrower the Guarantors hereby guarantee to the Lender the repayment by the said Borrower of such advance with interest as set out herein and the parties further agree: (a) This guarantee is a continuing guarantee and the Guarantors liability under it is joint and several, and that as between the said Guarantors and the said Lender the said Guarantors are to be and be deemed to be principle debtors and no neglect or forbearance of the Lender to require or enforce payment of the moneys hereby secured or any part thereof and no time or any other indulgence given by the Lender to the Borrower shall release prejudice or affect the joint and several covenants of the Borrower and Guarantors or their or either of their continuing liability thereunder notwithstanding." 7 The $200,000 was paid into Morgan Building's bank account on 21 December 2004. A letter from Morgan Building to the respondents dated 4 March 2005 began, "Welcome to Morgan Building & Property Maintenance Pty Ltd. Please find below a summary of your loan to the company", and set out the amount, term, and interest payments. 8 There was dispute in the evidence, but at least about three or four days prior to 21 December 2004 the respondents were aware that the money was to be used for the purchase of a development property at Lamington Drive, Mt Hutton ("the Lamington Drive property"). The Lamington Drive property was subsequently purchased by Lammington Drive Pty Ltd ("Lammington Drive"), a company incorporated on 15 December 2004 with Mr Rankin as sole director. (The double m in the company's name is according to the evidence.) According to the first respondent, Mr Scott Morgan, he was not told that the Lamington Drive property would not be owned by Morgan Building. The evidence of Mr Rankin did not clearly controvert this. 9 From the $200,000, $125,000 was used as the deposit in the purchase of the Lamington Drive property and the rest was used for development expenses. There was no documentation or other evidence of an arrangement or arrangements whereby the money was made available to Lammington Drive. A table of comparative balance sheets in a report of the administrator of Morgan Building in May 2006 recorded a loan of $200,000 from Morgan Building to Lammington Drive as at 30 June 2005 and no such loan as at 27 February 2006. However, the administrator had limited primary records and only a back-up computer disc of the company's financial information, and no records in evidence supported a loan by Morgan Building to Lammington Drive or repayment of a loan.

The later documents 10 In August 2005 Morgan Building wrote to the respondents saying that all "investor loans" were being reviewed and proposing alternative "changes to your loan agreement". One alternative was repayment "at a time suitable to both lender and borrower". Another was a "new loan agreement … to pay interest of 8% p.a paid quarterly in arrears, and a further 10% p.a. paid yearly in arrears". The third was "putting all the funds into a shareholding in equity of a specific development". 11 Mr Morgan said that he asked Mr Rankin what the letter was about and that Mr Rankin said, "Don't worry that got sent to everyone, it doesn't affect your loan". So far as the evidence went, the proposal was not taken further at the time. 12 Later in 2005, it seems in December, there were discussions between Mr Rankin and Mr Morgan concerning continuation of the loan for $200,000 for a further twelve months and the loan of an additional $100,000. There was dispute in the evidence, but the trial judge preferred the evidence of Mr Morgan to that of Mr Rankin "concerning the purpose with which the transactions with Lammington Drive took place", as I understand it meaning these discussions. 13 Mr Rankin said to Mr Morgan, "The investment is not finished we would like you to invest for another twelve months", and that another twelve months was needed "for it all to come off". He said that investment of another $100,000 was needed "so we can make sure that this all goes through for everyone". 14 Mr Morgan said that the respondents had only intended to invest for twelve months. The discussion continued (I have made formal changes from the affidavit's typescript) -

"Phillip Rankin: "Well the deal is this. As you know Lammington Drive owns the property. I'll make sure that if you pay the extra hundred thousand dollars that you'll also be secured for the two hundred thousand dollars and [sic] paid to Morgan Building so the entire three hundred thousand dollars would be secured over Lamington Drive." … Scott Morgan: "The only reason that I signed the Agreement for two hundred thousand dollars was that we had the personal guarantees of all the directors." Phillip Rankin: "That agreement still stands. If you give us an extra one hundred thousand dollars I'll make sure that you not only have the director's guarantees for the first two hundred thousand dollars but you'll also have security over the property owned [by] Lammington Drive for the whole three hundred thousand." Scott Morgan: 'How would you do this?" Phillip Rankin: "Well, we'd just sign an agreement with Lammington Drive saying that Lammington Drive also owes you for the two hundred grand you paid to Morgan Building and the extra hundred thousand we'll do a new agreement for." Scott Morgan: "I don't know Phil, I'll have to talk to Annette and get back to you." 15 Before Mr Morgan got back to Mr Rankin, Mr Rankin provided to him two loan agreements dated 20 December 2005. They named Morgan Building as the Borrower, and were signed by the four directors of Morgan Building. 16 The two loan agreements followed the same format as the loan agreement of 20 December 2004, save that the Guarantors were not parties and there was no guarantee clause. Each had recitals in the same terms as those in the 20 December 2004 loan agreement, one with an amount of $200,000 and the other with an amount of $100,000. Clauses 1 and 2 provided for repayment of the principal sum within twelve months and payment of interest, the interest being at 8 per cent quarterly in arrears and 12 per cent twelve monthly in arrears, and a new cl 3 stated the interest amounts and payment dates. There followed an immediate repayment clause (cl 4), an early repayment clause (cl 5), a stamp duty clause (cl 6) and a warranty clause (cl 7). 17 According to Mr Morgan (I have again made formal changes) - "I then had a conversation with Mr Rankin as follows, or words to the same effect: Phillip Rankin: "Look Scott, we need this hundred thousand dollars so we can complete this development and we can all be paid. If you want to go with the personal guarantees for the extra hundred thousand dollars then that's fine. As you can see, I've already arranged for the directors to sign two more agreements for you." Scott Morgan: "What's this all about Phil? I'm feeling very pressured. How come we need another agreement for two hundred thousand dollars anyway." Phillip Rankin: "Well, it just means that we have another year to pay two hundred thousand dollars." Scott Morgan: "Look Phil, I'm not happy with this at all." 18 The respondents did not sign the loan agreements dated 20 December 2005. However, $100,000 was paid by the respondents into Morgan Building's bank account on 22 December 2005. How this came about, when Mr Morgan was "not happy with this at all", was not explained beyond Mr Morgan's evidence that on numerous occasions Mr Rankin told him that the money was needed urgently, and said that they needed more time for the development, interest would continue and "the guarantee still stood". There was no evidence of the use of $100,000, but presumably it was used to pay development expenses. 19 This obscurity in which the dealings between the parties were left went further. 20 First, a letter from Morgan Building to the respondents dated 15 December 2005 read - " Re: 2 Loans to Morgan Building & Property Maintenance Pty Ltd We wish to advise that the security offered for the 2 loans will be $300,000 worth of C class shares in the company Lammington Drive Pty Ltd. Lammington Drive Pty Ltd is a company set up to control one of our developments which is a 17 lot subdivision at Warners Bay/Mount Hutton, which is currently awaiting approval from LMCC for the DA application. Please contact me if you have any questions or require any additional information." 21 It appears, although only from the "flow" of Mr Morgan's affidavit, that this was received after the conversation in which Mr Morgan said that he was not happy, but the evidence did not explain it further. There was no evidence that shares were issued to the respondents. 22 Secondly, it appears that in early 2006 there were issued to the respondents 300,000 "'F' Class Units (Finance Units)" in the Lammington Unit Trust. The evidence included a balance sheet of Lammington Drive Unit Trust as at February 2006, Lammington Drive being the trustee. It recorded loans of $200,000 and $100,000 from the respondents. The issue of the units was not further explained, nor was the provenance of the balance sheet. It could not have been correct, since the loan agreements with Lammington Drive hereafter mentioned were signed after February 2006. 23 Thirdly, the evidence included a letter dated 28 February 2006 from a solicitor to Mr Rankin, relevently reading - "I confirm that I act on your instructions for Lammington Drive Pty Limited. I am instructed that Lammington Drive Pty Limited has agreed to grant a mortgage to Scott and Annette Morgan in consideration for them forbearing from recalling their loan, previously made. I enclose a Mortgage which, if approved, needs to be signed by Lamington [sic] Drive Pty Limited and then by Mr and Mrs Morgan. I advise that I am not acting for Mr and Mrs Morgan and they should obtain their own advice on this Mortgage." 24 A mortgage was given, see later in these reasons, and this is in accord with Mr Morgan's evidence of the late 2005 discussion with Mr Rankin. Remarkably, there was no cross-examination of Mr Rankin on the basis of the second paragraph of the letter. Nor did the evidence otherwise explain the basis of the letter in dealings between Mr Morgan and Mr Rankin. 25 To return to the narrative, on 27 February 2006 Morgan Building was placed in voluntary administration. In his report to creditors dated 17 May 2006 the administrator expressed the opinion that it had been trading whilst insolvent for at least six months prior to his appointment. 26 There were subsequently executed two loan agreements between the respondents and Lammington Drive, which while dated 16 and 20 December 2005, and bearing in manuscript signature dates of 16 December 2005 and in one case 20 December 2005, were found to have been signed "some time in March, April or May 2006". Yet again, the dealings between the parties in relation to the signing of the agreements were left unexplained. 27 The loan agreements were in the same terms as the loan agreements dated 20 December 2005 earlier provided, save that Lammington Drive was the Borrower and in one of the loan agreements the clause stating the interest amounts and payment dates was absent. One loan agreement was for $200,000, repayable within twelve months and bearing interest at 8 per cent payable in arrears and 12 per cent payable annually in arrears. The other was for $100,000 on like terms. Neither contained a guarantee. As had the original loan agreement of 20 December 2004 and the loan agreements dated 20 December 2005, they had recitals in the terms - "A. The Lender has agreed at the request of the borrower to provide a loan facility to the Borrower of $200,000 [or $100,000] ("the principal sum").

B. The Lender and the Borrower have agreed to enter into the Agreement to set out the terms and conditions of the loan." 28 Mr Morgan said that the respondents were advised by their solicitor that they should have a mortgage over the Lamington Drive property and that Lammington Drive agreed to give a mortgage. When the advice was given was not stated. Other than the late 2005 discussion, there was no evidence of discussions about giving a mortgage. As well as the letter of 28 February 2006, the evidence included correspondence between solicitors leading to execution of a mortgage of the Lamington Drive property to the respondents. Its form was probably defective, but relevantly it bore the endorsement - "Mortgage is subject to the terms and conditions of the two Agreements for Loan between Scott Anthony Morgan and Annette Frances Morgan (hereinafter referred to as 'the mortgagee') and Lammington Drive Pty Limited CAN 112 218 354 (hereinafter referred to as 'the mortgagor') dated 16th December 2005, confirming a total advance by the Mortgagee to the Mortgagor of three hundred thousand dollars ($300,000.00), copies of the said Agreements for Loan are hereto annexed and marked with the letters 'A' and 'B' to this mortgage." 29 The mortgage was not registered. A caveat was lodged on behalf of the respondents claimed an estate or interest under the mortgage.

Subsequent events 30 Interest payments had been made for 2005, but were not made thereafter. The $200,000 was not repaid to the respondents. Morgan Building went into liquidation. 31 The development of the Lamington Drive property was not completed. The Lamington Drive property was sold by the first mortgagee at the end of 2007, and after payment of the first and second mortgagees there was nothing left over for the respondents. Lammington Drive also went into liquidation. 32 The respondents commenced proceedings against the guaranteeing directors on 20 December 2007. The other two directors were bankrupt, and only the appellants defended the proceedings.

Replacement by a different loan? 33 The appellants' principal submission was that the $200,000 loan agreement with Lammington Drive replaced the loan agreement of 20 December 2004 with Morgan Building, so that they no longer had any liability as guarantors of a loan to Morgan Building. They said that the loan agreement with Lammington Drive recited an agreement to provide a loan facility, that the mortgage was expressed to secure an advance by the respondents to Lammington Drive, that nobody suggested that the respondents had lent a second amount of $200,000 to Lammington Drive, and that it should be found that the parties had agreed to discharge Morgan Building's obligations as borrower and substitute obligations of Lammington Drive as borrower. The submission recognised that the guarantee was not renewed, but it was said that the mortgage security took its place. 34 The appellants sought to put this as a matter of construction of the loan agreement with Lammington Drive, although they particularly relied also on a letter from the respondents' solicitor to which I will refer. Construction of the loan agreement could not affect the rights and obligations of Morgan Building and the Guarantors, under the loan agreement of 20 December 2004, or the position as between them and the respondents, since Morgan Building and the Guarantors were not parties to the loan agreement with Lammington Drive. At the time, as well, Morgan Building was in administration and not under the control of the guaranteeing directors. The submission came to be put that the loan agreement with Lammington Drive had effect as a unilateral discharge of Morgan Building from liability to repay the loan, on the reasoning that the loan to Lammington Drive expressed in the loan agreement and mortgage was of the same $200,000 and so negated continuance of a loan to Morgan Building. 35 Any such effect of the loan agreement with Lammington Drive was not a matter of construction, and had to be found from the circumstances in which it was executed together with its terms. So far as the submission relied on the expression of a loan to Lammington Drive, the recitals (and the reference in the mortgage to an advance to Lammington Drive) were contrary to the facts. The respondents did not lend $200,000 to Lammington Drive; nor did they lend $100,000 to it under the other loan agreement with Lammington Drive, since that amount had been paid to Morgan Building on 22 December 2005. 36 Assuming that Lammington Drive nonetheless accepted liability for the two amounts, it does not follow that Morgan Building was discharged from its liability for the $200,000. No discharge of Morgan Building was expressed, even as a third party beneficiary. Even if Morgan Building was in administration at the time, and there was no evidence that the respondents knew it was in administration, it would not lightly be inferred that rights against it were given up, and that it was in administration suggests that Mr Rankin as Lammington Drive's director (who in any event was only one of Morgan Building's directors) was not intending to affect its position. Still less would it lightly be inferred that rights against the Guarantors dependant on Morgan Building's liability were given up. There is nothing in the circumstances in which the loan agreement with Lammington Drive was executed to support the asserted unilateral discharge; rather, the loan agreements were an inept basis for the provision of mortgage security by Lammington Drive additionally to the guarantee of the $200,000 loan. To the extent to which regard can be had to the late 2005 discussions between Mr Morgan and Mr Rankin, which it is not necessary to consider because I would come to the same conclusion in any event, it is quite plain that Morgan Building's guaranteed liability was to continue with the addition of the mortgage security. 37 The appellants relied on a letter from the respondents' solicitor dated 3 March 2006. It was part of the correspondence leading to execution of a mortgage, and asked for "documentation confirming that your individual directors will be signing personal guarantees for the full advance of $300,000". They said that signing the loan agreements with Lammington Drive without the documentation showed that the loans were no longer guaranteed. If regard may be had to this, regard may be had also to Mr Morgan's evidence of Mr Rankin affirming the continuance of the directors' guarantees for the $200,000 and offering security over the Lamington Drive property as well; the likely explanation for signing the loan agreements with Lammington Drive without the documentation is that this was accepted as sufficient. 38 The appellants did not rely on the Lammington Drive Unit Trust balance sheet, or the balance sheets in the administrator's report. In my opinion, the loan agreements with Lammington Drive did not operate beyond its acceptance of liability for the $300,000. Replacement of Morgan Building's liability can not be found as a matter of construction, and should not be found as a unilateral discharge. 39 The appellants put a subsidiary submission that, although the loan agreements dated 20 December 2005 were not signed by the respondents, their conduct amounted to an adoption of the loan agreements whereby they replaced the loan agreement of 20 December 2004. The conduct was paying the $100,000 to Morgan Building on 22 December 2004 and failing to require repayment of the $200,000. Counsel recognised the difficulty in the submission, namely, that Mr Morgan had been unreceptive to the loan agreements in the absence of guarantees and the respondents had not signed them. The conduct could not constitute adoption of loan agreements without guarantees.

Change in borrower's obligation? 40 The appellants submitted that, by the conduct abovementioned, there was at the least variation of Morgan Building's obligations because the further $100,000 had been advanced and the respondents had not required repayment of the $200,000. Lending the $100,000 was not a change in the guaranteed obligations, but an independent transaction. Clause 7 of the loan agreement of 20 December 2004 permitted the giving of time. The submission is without substance. 41 The appellants further submitted that there was variation of Morgan Buildings' obligations because the de facto effect of the discussions resulting in the loan agreements with Lammington Drive and the loan agreements themselves was to add $100,000 to the obligations and extend the time for repayment of the original loan of $200,000. For the same reasons, the submission is without substance.

Reasons 42 The appellants submitted that the trial judge had not given reasons for her preference for the evidence of Mr Morgan over that of Mr Rankin. That is not correct. According to Mr Morgan, he had been told that Morgan Building could not repay the $200,000 and had been promised security for that amount and for the further $100,000. Mr Rankin said that the respondents approached him to extend the original loan and lend a further $100,000. The trial judge considered that the insolvency of Morgan Building, according to the administrator's opinion, was "consistent with" Mr Morgan's evidence. This was giving reasons for the preference, and it was not submitted that the consistency was not a sound basis for the preference.

Orders 43 I propose that the appeal be dismissed with costs. 44 HODGSON JA: I agree with Giles JA. 45 IPP JA: I agree with Giles JA.

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