Saints Management Pty Ltd v Jellicoe Pty Ltd and Christopher John Salmon

Background

1. In 2007 Mr O'Shea, the defendant and Mr Rufford, decided to purchase a business known as Ingram Products for approximately $4.7 million. That business manufactured and sold, amongst other things, children's play equipment, referred to in the proceedings as the "Teach and Play" business (TAP). As a result of his good fortune in winning the lottery in 2000, Mr O'Shea had funds available to purchase his share of TAP, but the defendant and Mr Rufford required finance to fund the purchase of their shares. After the defendant's efforts to obtain the required funding from banks failed, Mr O'Shea agreed to loan the defendant and Mr Rufford the funds ($1.566 million each) for them to purchase their shares in TAP.
2. By 2007 Mr O'Shea and Mr Rufford had been good friends for a number of years. The defendant was a work colleague of Mr Rufford and was introduced to Mr O'Shea by Mr Rufford. Mr O'Shea's lottery win had enabled him to retire from his previous occupation as a telecommunications technician. There is no issue in these proceedings that Mr O'Shea did not have a great deal of hands-on business experience and left the running of TAP to the defendant and Mr Rufford. Mr Rufford trained as an accountant and had been the Chief Financial Officer of a company with a turnover of approximately $20 million. The defendant holds a Bachelor of Applied Science in Management and Marketing. He accepted that he is an experienced businessmen having worked at the same company as Mr Rufford as the Chief Executive Officer.
3. The structure of the purchase of TAP was through a company, HM&O Investments Pty Ltd, of which each of Mr O'Shea, Mr Rufford and the defendant held 33.3% of the units in the HM&O Unit Trust through their companies as trustees of their respective family trusts; Mr O'Shea through the plaintiff; the defendant through Jellicoe; and Mr Rufford through Hendy Investments Pty Ltd.
4. The initial discussions in relation to the proposed purchase took place in December 2006. By March 2007 Mr O'Shea had instructed his accountant, Mr Bob Bell, and his solicitor, Mr Yee, to assist with the documentation and structure for the purchase.
5. At an early stage of the process Mr Yee advised Mr O'Shea that Mr Rufford and the defendant would need to instruct their own solicitor to act for them. Mr Yee was subsequently informed that Mr Andrew Miller, of Andrew Miller and Associates, had been retained to act as the solicitor for Mr Rufford, the defendant, and each of their respective companies, as well as for HM&O in its purchase of TAP.
6. On 22 March 2007 there was a meeting at Mr Yee's office at which Mr Bell, Mr O'Shea, Mr Rufford, the defendant and Mr Miller were present. Mr Yee's affidavit evidence was that he said that "given the money is going to be borrowed by companies that operate the family trusts, the borrowings can be supported by personal guarantees from Chris and Glenn. I will get the relevant loan and guarantee documents drafted so that they can be reviewed and agreed". Mr Yee gave affidavit evidence that there was no expression of any concern or reservation about Mr Rufford and the defendant giving a guarantee, nor was anything said to suggest that the subject was in any way controversial.
7. On 26 March 2007 Mr Miller wrote to Mr Yee referring to the meeting at Mr Yee's office on 22 March 2007 and requested a copy of the Unit Trust Deed so that he could finalise the Unit Holder's Agreement. Mr Yee drafted the Loan Agreement and Deed of Guarantee and provided them to Mr Miller. On 2 April 2007 Mr Miller wrote to Mr Yee in terms that included the following: We attach the marked up copy of the requested amendments to the draft loan and guarantee documents for Rufford. We note that the same amendments would be requested for the Salmon documents. We are finalising the requested amendments to the HM&O Guarantee and Indemnity and the Fixed and Floating Charge and will revert shortly. We note that you will still require the following documents: 1. Fixed and floating charge over both Jellicoe Nominees Pty Ltd; 2. Fixed and floating charge over Hendy Investments Pty Ltd; 3. ASIC forms for all charges; We hope to be able to forward the requested amendments to the Charge and Guarantee within the next twenty minutes. We look forward to hearing from you in relation to the requested amendments.
8. The defendant's affidavit evidence was that he attended a meeting on 2 April 2007 at Mr Yee's office with Mr O'Shea, Mr Yee, Mr Rufford, Mr Miller and the plaintiff's accountant Mr Bell. The defendant claimed that he had "no financial or legal representation at this meeting". The defendant claimed that the following conversation occurred: Mr Rufford: I don't know about signing this guarantee? Defendant: I'm not sure about it either? Mr O'Shea: Don't worry guys. I'm not going to take your houses. I have the assets in Teach and Play. Defendant: What about this document about receiving financial and legal advice? Mr Bell: Just don't sign in that section.
9. Mr O'Shea denied that any such statements were made. Mr Rufford gave evidence that Mr O'Shea said something similar, along the lines of "don't worry buddy, I'm not going to take your houses". Mr Yee gave evidence that no such conversation occurred at any meeting at which he was present. Indeed, Mr Yee did not accept that such meeting took place on 2 April 2007.
10. The defendant subsequently informed the managing director of his then employer that he was resigning because of the new TAP business. Discussions then ensued in respect of whether the defendant was interested in acquiring part of a business known as York Precision Plastics (York). The defendant discussed the prospect of purchasing York with Mr Rufford and Mr O'Shea and they decided to purchase the business for approximately $9.2 million. This purchase was completed in about July 2007. HM&O funded the purchase through the ANZ Bank with each of Mr O'Shea, the defendant and Mr Rufford providing their residences as security for the loan.
11. In 2008 Mr Bell contacted Emjay Insurance Brokers (Emjay), acting on behalf of HM&O, Mr Rufford and the defendant, to obtain, inter-alia, life insurance. On 22 January 2008 Mr Bell wrote to Emjay in terms that included the following: Saints has provided Jellicoe and Hendy a fully drawn advance of $3.1m, being $1.55 million each, to effect the purchase of Teach and Play Pty Limited ("Teach & Play"). The advance will be repaid through the business as required by, and pursuant to agreements with, Saints. Jellicoe, along with its principal Chris Salmon and Hendy, along with its principal Glen Rufford, are liable for this debt. Saints does not participate in the business other than to provide finance, whereas Chris and Glenn are responsible for the day to day operations and management. Jellicoe, Hendy and their respective principals are also responsible for one-third each of the loan of $1.3 from Saints to HM&O, used to purchase 52% of York Precision Plastics Pty Limited ("York"). Accordingly, the total potential liability for each of Chris and Glenn to Saints in respect of these acquisitions is as follows: Teach & Play $1,550,000 York $ 433,333 Total $1,983,333
12. On 3 March 2008 Mr Bell wrote again to Emjay in response to their request for documentation relating to the loans guaranteed by Mr Rufford and the defendant. Mr Bell provided a copy of the Loan Agreements under cover of a letter, which included the following: These loans reflect the amount loaned by Saints Management Pty Limited to the respective trusts for Mr Rufford and Mr Salmon and, per Item 1 of the schedule to each agreement, they are named personally as guarantors for the loans. We are awaiting a further Guarantee Agreement that evidences the guarantee of further loans by Mr Rufford and Mr Salmon to the extent of $433,333 each. This relates to the acquisition of shares in York Precision Plastics Pty Limited. There (sic) agreements will be forwarded as soon as we receive them.
13. It appears that the York business traded profitably for the next 12 months and that the TAP business traded only "marginally," because it lost one of its key clients. In March 2008 after a complaint was received from a childcare centre in respect of equipment provided to it by TAP, Mr Rufford and the defendant approached lawyers in 2009 and proceedings were commenced by HM&O against the vendors of the TAP business, Mr and Mrs Ingram. Those proceedings were heard in June 2011 and August 2012. Judgment was delivered in August 2012: HM&O Investments v Ingram [2012] NSWSC 958 (the HM&O proceedings). Although there was an award of $10,000 in the plaintiff's favour, these proceedings had an adverse impact on the on-going viability of TAP and York, which had been funding the proceedings.
14. On 30 October 2012 HM&O and TAP were placed into voluntary liquidation. In November 2013 ANZ demanded repayment of the loan funds in relation to the purchase from York. At the end of October 2014, York went into voluntary liquidation.
15. The plaintiff commenced these proceedings in May 2015. It is not necessary to refer to the events in the latter part of 2015 and early 2016 when the parties sought to settle their differences, because the defendant has now abandoned his Cross-Claim in respect of those events.

Enforceability of the Deed of Guarantee

1. The defendant seeks to avoid his liability under the Guarantee on the basis that Mr O'Shea represented that the plaintiff would not seek recourse against the defendant's house and that recourse would be limited to the defendant's interest in the assets of TAP. The defendant contends that the plaintiff should be estopped from acting in a manner other than that represented, and as such, it cannot enforce the Guarantee. He also contends that having regard to the representations made, the Guarantee is an unfair contract and he is entitled to relief under the Contracts Review Act 1980 (CRA). The defendant also contends that the plaintiff engaged in misleading or deceptive conduct by the making of the representations and that he suffered loss and damage as a result.

The representations

1. The main factual issue for determination in respect of this aspect of the defendant's contentions is whether Mr O'Shea made the alleged representations.
2. The affidavit evidence in which the defendant claimed the representations were made was sworn prior to the defendant receiving the affidavits of Mr O'Shea and Mr Yee, which also included the correspondence between Mr Miller and Mr Yee. The plaintiff submitted that the picture that the defendant attempted to portray through his affidavit evidence was that at the meeting on 2 April 2007, he was presented with the Loan Agreement and Deed of Guarantee for the first time, and that they were then immediately executed by him and Mr Rufford without any input or advice from the lawyers representing their interests. The defendant claimed that it was in these circumstances that the alleged representations were made.
3. I am very conscious that the events about which the parties were giving evidence occurred nine years prior to the time they swore their affidavits and longer by the time they gave their oral evidence. The only person who had any contemporaneous file note was Mr Yee. Apart from the transactional documents, the only other relevant contemporaneous documents are the letters between Mr Yee and Mr Miller between 22 March 2007 and 2 April 2007. In those circumstances it has obviously been difficult, nine years after the relevant events, for the witnesses to bring back to mind with any real clarity the chronology of events and conversations that were alleged to have occurred.
4. Neither the defendant nor Mr Rufford suggested that there were two meetings at which were present Mr O'Shea, Mr Yee, Mr Miller, the defendant, Mr Rufford and Mr Bell. Indeed, Mr Rufford was firm in his recollection that there was only one meeting that he attended at Mr Yee's office. He claimed that this was when he signed the Loan Agreement and his Deed of Guarantee.
5. It is clear from the correspondence between Mr Miller and Mr Yee and Mr Yee's file note that there was a meeting on 22 March 2007 at which were present, Mr O'Shea, Mr Yee, Mr Miller, the defendant, Mr Rufford and Mr Bell. It is also clear that prior to that meeting, Mr Yee had advised Mr O'Shea that he could not act for the defendant and Mr Rufford, and by the time the meeting took place on 22 March 2007, Mr Miller had been instructed. Although the defendant claimed that he was not represented personally by Mr Miller, that claim is unsustainable. It is clear from the correspondence and from Mr Yee's evidence that Mr Miller was present at the meeting on 22 March 2007 representing not only the joint-venture company that was to purchase TAP, but also the defendant and Mr Rufford in respect of their proposed Loan Agreements and Deeds of Guarantees. It is clear that after this meeting, Mr Yee drafted the Loan Agreements and Deeds of Guarantees and forwarded them to Mr Miller for his review and response. It is also clear that Mr Miller took instructions in respect of those documents, marked up the proposed amendments and sent them back to Mr Yee under cover of an email at 12.22 pm on 2 April 2007. Mr Miller was then awaiting Mr Yee's response to these proposed amendments. It was only after this process that these documents were signed by the parties.
6. I do not accept that a further meeting took place on 2 April 2007 at which were present Mr O'Shea, Mr Yee, Mr Miller, the defendant, Mr Rufford and Mr Bell. The chronology gleaned from the correspondence between Mr Miller and Mr Yee makes it all the more improbable that a meeting as claimed by the defendant took place on 2 April 2007. I am satisfied that the defendant was mistaken in his recollection in this regard. I am satisfied that there was only one meeting at which all those people were present and that it occurred on 22 March 2007 in Mr Yee's office. I am also satisfied that at this meeting there was no Guarantee or Loan Agreement presented for signature. This was a meeting at which the structure of the transaction and the loan arrangements were discussed between the respective parties and their legal representatives.
7. The defendant's claim that Mr Miller did not represent him in respect of the Guarantee is in part based on the absence of any signature on the document entitled "Declaration by a Third Party Mortgagor, Guarantor, Surety Mortgagor or Indemnity for the Borrower". That document although, including the defendant's name and the reference to the Guarantee, was left blank in respect of the receipt of any independent legal advice and was also unsigned. The defendant claimed that it was at the meeting with the plaintiff, Mr Yee, Mr Miller, Mr Rufford and Mr Bell that he was advised by Mr Bell not to sign this document. I do not accept that this occurred. The defendant did not call Mr Miller to give evidence. The defendant did not cross-examine Mr Yee to suggest to him that such a conversation occurred at the meeting at which he was present.
8. On the state of the evidence it is not possible to determine with certainty where each of the parties was when the Loan Agreement and the Guarantees were executed. I am satisfied that it is probable that Mr O'Shea signed the Loan Agreement with his own solicitor, Mr Yee, and that Mr Rufford and the defendant signed the agreements with Mr Miller or as arranged by Mr Miller.
9. The defendant claimed that Mr Yee presented the Loan Agreement and the Guarantee to him and Mr Rufford for signature at the meeting that he has described in his affidavit. He claimed that at this time Mr Rufford said "I don't know about signing this guarantee" and that the defendant said "I'm not sure about it either". Such claim is inconsistent with Mr Yee's evidence that no such statements were made in his presence. They are also inconsistent with the correspondence between Mr Yee and Mr Miller. What occurred immediately after the meeting was a process of the preparation and then the amendment of the documents without any mention of any reservation about signing such documents. When Mr Rufford gave his evidence he did not claim that he said "I don't know about signing this guarantee".
10. The plaintiff also relied upon the correspondence between Mr Bell and Emjay in respect of the life insurance for the defendant and Mr Rufford in respect of the guaranteed debt. It was submitted that all of this would have been totally unnecessary if the defendant and Mr Rufford believed that the guarantee was not enforceable.
11. The defendant claimed that Mr O'Shea responded to his and Mr Rufford's expressions of reservations about signing the guarantees by saying that he and Mr Rufford should not worry and that he would not take their houses. The defendant also claimed that Mr O'Shea added that he had the assets of TAP (and by implication, would not have to worry about enforcing the guarantee against their houses).
12. The defendant's claim that the alleged representation was made depends in part upon the acceptance of his claim that his reservation about signing the guarantee was expressed. That is because it was alleged that Mr O'Shea's representation was made in response to these expressions of reservation about signing the Deed of Guarantee. I am satisfied that the evidence points overwhelmingly to the absence of any reservation having been expressed by the defendant or Mr Rufford about signing the guarantee. I am satisfied that such reservations were not expressed either at the meeting on 22 March 2007 or any other time.
13. That means that if the defendant's evidence about the balance of the conversation is to be accepted, Mr O'Shea would have proffered an unsolicited statement about the limitation on the Guarantee. On the one hand, Mr O'Shea claims that he did not make the representation and on the other, the defendant and Mr Rufford claim that he did so. Mr O'Shea's denial is supported by Mr Yee's evidence and the contemporaneous file note that he took at the time. Mr Yee was not cross-examined upon his evidence that no such statement was made in his presence.
14. It was clear that Mr Rufford felt very deeply about the loss of his friendship with Mr O'Shea which was caused by the collapse of these businesses and the failure to repay the loans. Indeed, Mr Rufford gave evidence of a recent encounter with Mr O'Shea in which he obviously felt that he had been rebuffed in a rather vulgar fashion (tr 89). Mr Rufford also claimed that he signed his Guarantee in Mr Yee's office (tr 81). However, he said that this was the "only time" that he attended Mr Yee's office. As I have found, the only meeting that took place between all the parties, including Mr Rufford, and their solicitors, was on 22 March 2007. The Guarantees were not signed at that time. Although I accept that Mr Rufford convinced himself that he did sign the Guarantee at that time in that place, I am satisfied that he did not do so.
15. Clearly Mr Rufford and the defendant have discussed the matters the subject of the defendant's claim over the years. Mr Yee's evidence, including his correspondence with Mr Miller and his contemporaneous file note of the meeting on 22 March 2007, has assisted in determining whether to prefer Mr O'Shea's denial that he made the representation or the defendant's evidence that he made the representation. I have taken into account the fact that Mr Rufford did not give evidence that he expressed any reservation about signing the guarantee but also that he did claim that Mr O'Shea made the alleged representation. On balance I prefer Mr O'Shea's evidence and that of Mr Yee over that of the defendant and Mr Rufford.
16. It is also commercially illogical in the circumstances of the plaintiff making loans to the defendant and Mr Rufford, that the parties would have intended that the plaintiff (and Mr O'Shea) would bear the entirety of the risk in the business venture. On the defendant's case, if the representations were made, there would have been no need for the personal guarantees. I am satisfied that it is highly improbable that the parties would have executed Deeds of Guarantee, in the presence of two solicitors, that would serve no legal purpose.
17. In all the circumstances I am satisfied that the representations alleged by the defendant were not made.
18. On this basis, the defendant's claim in estoppel, the claim under the CRA and the claim for damages for misleading or deceptive conduct fail.

Is the claim statute-barred?

1. The second aspect of the defendant's defence is that the plaintiff's claim is statute-barred. This contention is based upon the fact that Jellicoe breached its obligations to make interest payments as early as July 2007, in the period prior to 1 April 2010 (that being when the repayment of the loan was due), and more than six years before the commencement of the proceedings. Clause 8.1 of the Loan Agreement provided as follows: 8.1 Rights on Default Despite any other provision of this document, at any time after an Event of Default occurs how and when the Lender in its absolute discretion decides, the Lender may sign anything and do anything the Lender considers appropriate to recover the Debt and deal with the Security. The Lender may do this with or without taking possession of the Security, whether or not in conjunction with other property, despite any omission, neglect, delay. Without limitation the Lender may do any one or more of the following. (a) Cancel the Facility. (b) Demand and require immediate payment of the Debt and recover the Debt from the Borrower and/or the Guarantor. (c) Exercise any right, power, or privilege conferred by law, equity, this document, the Security, the Guarantee, and/or any other collateral document or security. (d) Perform any one or more of the Boral's obligations under this document, the Security, or any collateral security.
2. The defendant claims that the whole of the advance became immediately payable on demand when Jellicoe failed to make the first interest payment. He submitted that time then commenced to run in respect of any claim to be made against Jellicoe or the defendant. The defendant contends that on this basis, the limitation period expired prior to the commencement of the proceedings.
3. The plaintiff's first answer to this defence puts an end to the matter. The limitation period on a cause of action founded on a Deed is 12 years: s 16 Limitation Act 1969. The Deed of Guarantee was stated to be "executed as a deed" by the defendant. The formal requirements for the creation of a Deed binding on an individual are: (1) that it must be written on paper; (2) that it must be executed in the manner specified by some person or corporation named in the instrument; and (3) it must express that the person or corporation so named undertakes or enters into some obligation, duty or agreement enforceable at law or in equity. The Deed must also be delivered, such delivery being constituted by words or conduct acknowledging that the party intends to be bound immediately and unconditionally by the provisions of the Deed: 400 George Street (Qld) & Ors v BG International Limited [2010] QCA 245 at [11]. All of these requirements are met in this case.
4. The proceedings were commenced well within the 12 year period, even if the whole advance fell due in July 2007. On this basis, the plaintiff's claim against the defendant is not statute-barred.
5. Although this puts an end to this defence I will deal with the alternative arguments that the defendant raised.
6. A cause of action "accrues" on the date which is the earliest time an action could have been brought: Reeves v Butcher [1891] 2 QB 509; O'Neill v Foster [2004] NSWSC 906 at [46]. The defendant's contention is that an action could have been brought by the plaintiff to recover the whole of the principal sum in July 2007, following Jellicoe's failure to make a quarterly interest payment. The plaintiff submitted that the defendant's argument in this regard incorrectly conflates the notion of the plaintiff having a discretionary right to take action to accelerate the date for repayment of the principal sum, with the notion of a cause of action to recover the principal sum.
7. The plaintiff distinguished the contract in Reeves v Butcher from the Loan Agreement in the present case. In Reeves v Butcher Fry LJ described the contract in that case as follows (at 511): The agreement contains a stipulation that the lender shall not call in the principal sum for a period of five years, if the borrower should so long live, and should duly and regularly pay the interest. This implies a contract by the borrower that the principal should be paid at once on the death of the borrower, or on default in payment of interest.
8. The plaintiff submitted that clause 8.1 of the Loan Agreement does not provide that on the event of default (the non-payment of interest) the principal sum becomes payable. It provides that the plaintiff has an "absolute discretion" whether to make a demand and require immediate payment of the Debt and then to recover the debt from the Borrower and/or the Guarantor.
9. The plaintiff also relied upon Edelman J's decision in Netglory Pty Ltd v Caratti [2013] WASC 364 in which his Honour said at [275] (footnotes omitted): The following principles apply in relation to limitation periods for contractual debts. (1) If a contract provides for a time for repayment or a condition which will trigger an obligation to repay, then the cause of action will accrue upon the expiration of the time period or the happening of the condition. (2) If no time for repayment is provided and no condition specified which will trigger the obligations to repay, then the loan will generally be repayable on demand. In such a case, unless the parties have expressly or impliedly agreed that no enforceable debt will arise without an actual demand, the agreement will generally be construed to create an immediate debt and time will run from the date of the loan. (3) If a contract provides that the principal sum becomes repayable upon default in the payment of any instalment then the time period for the whole debt will run from the first default in relation to any instalment, including instalments of interest.
10. The plaintiff contended that the first of these principles applies in the present case. The loan agreement provided for repayment of the principal sum on 1 April 2010. It did not contain a condition which triggered an obligation to repay at some other time. Clause 8.1 gave the plaintiff discretion to make a decision and act upon it to require repayment at some earlier time, and provided that if that occurred, the whole of the advance could then be recovered. The plaintiff did not take that decision, and in the circumstances, the plaintiff contended that the principal sum remained due for repayment on 1 April 2010.
11. The second principle referred to by Edelman J did not apply in its terms because the Loan Agreement fixed a time for payment. The plaintiff contended that what the defendant seeks to do is to apply an aspect of the second principle out of the context in which it is stated. The plaintiff submitted that the defendant argued that although time was fixed, the event of default converted the loan into one repayable on demand, and by virtue of that, the whole advance was immediately payable and the cause of action accrued on that event of default. The plaintiff submitted that the flaw in such argument is that it ignores the actual words of clause 8.1, which make it clear that the plaintiff must make a demand in the event of default in order to recover the whole advance.
12. The third principle does not apply because the Loan Agreement did not provide that the principal sum became repayable on default.
13. The plaintiff submitted that from the language used by the parties in the Loan Agreement, it can be seen that they intended that the principal sum was to be repaid on 1 April 2010 and that the position would not change in the event of a default by Jellicoe unless the plaintiff made a decision to act, namely, to make a demand and require immediate repayment of the Debt.
14. The language used by the parties does not demonstrate an intention that in the event of default the loan was immediately repayable. Something else had to happen. The plaintiff had to exercise its discretion and did not do so. I agree with the plaintiff's submission that nothing occurred merely by virtue of the default. Decision and action on the part of the plaintiff was required. Nothing was done and no right arose for it to recover the whole of the Debt simply by reason of the default.
15. If the defendant's contention were correct, it would mean that if the plaintiff did not exercise its discretion in July 2007 and then sought to recover the principal sum three years after the due date in August 2013, it would be statute-barred. I am not satisfied that the parties intended that if the plaintiff chose not to exercise its discretion in this manner on an event of default (the non-payment of interest) that it would be statute-barred from seeking repayment of the outstanding principal sum three years after it was due.
16. The plaintiff's claim is not statute-barred.

Orders

1. Judgment will be entered for the plaintiff against the defendant in the amount claimed of $2,573,311.25. The defendant is to pay the plaintiff's costs of the proceedings against him.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 October 2016