STATE BANK OF NSW v. HIBBERT & ALSO GROOM v. HIBBERT [2000] NSWSC 628

These figures are difficult to follow. The reference to 42% is a deduction for tax on salaries and $49,590 is the net 58% of the total salaries. The $15,000 profit share was written in as an alteration by Mr Brooks; the document as first prepared by Mr Li did not have any corresponding income item. There was no reference to tax on the profit share. The assessed payment capacity was treated as $64,590 and against this were set annual commitments of $34,000 being 17% interest on $200,000, and a fee of $570. 23 The application also included assessments of the value of the house at $290,000 and the loanable sum at 85% or $246,500. The security contemplated was a registered first mortgage over the house and an unlimited joint and several guarantee by the directors. 24 Under the heading "remarks" appeared " "Crossell: housing loan. Business C/A". "Crossell" means "cross sell" and shows contemplation that there would be an additional opportunity to make a housing loan and to conduct a business current account. Other material under "remarks" shows that Mr Li must have had more information than appears in writing. This showed that it was expected that there would be a final hearing of Mr Hibbert's divorce proceedings on 26 January 1990 and that he would receive $45,000 from a property settlement in about 60 days. "This money will use toward to purchase the property at Summer Hill currently in joint names Sondra and Roderick James Groom. They also divorced. We will also advance H/L to settle the property and use as security (for Vertee P/L) this loan." The following also appears "The Rite Air P/L accounts are conducting at this branch and on quarterly monitoring basis. The 1989 figure show the company run as a lost and currently experience cash flow difficulties. However we have been constantly informed of the company activity and believe have contract work for $5m for 1989-1990." Other remarks refer to additional fees totalling $1958 which had not been referred to earlier. Mr Brooks approved the application subject to valuation on 22 January 1990. A bank valuer reported the value at $280,000 on 8 February 1990. 25 There are some remarkable aspects of this application and its approval. One is that there is no reference to any communications between Mrs Groom and the Bank relating to the application, under which she was to be committed to support payments to the Bank for far more than her annual income. On the whole of the evidence it is clear that in fact there had been no communication with her. 26 Another remarkable aspect is the lack of any real address to the relationship between the expected fortunes of Rite Air Pty Ltd in which Vertee was to invest and Vertee's capacity to repay the loan. In fact there were a number of companies which seem to have been customers or otherwise known at the Bank with the words "Rite Air" in their names but none of them was named Rite Air Pty Ltd, and the application did not establish which company Vertee Pty Ltd was to have shares in. There was no address to or appraisal of the value of the thing to be acquired, a 20% share in the equity of a Rite Air company, and no address to taking security from Vertee Pty Ltd over the shares, or over Vertee Pty Ltd's assets in general. This suggests that the Bank did not see the shares to be acquired as of significant value; if it did, the natural response of a bank would be to ask Vertee Pty Ltd which was to acquire the shares to pledge them in support of its loan, or to give a floating charge. As part of this response, the Bank would have required the advance actually to be applied towards acquiring shares, and exercised supervision over the process so as to ensure that that was what the advance was used for. The Bank did not do any of these things. 27 To my mind it is anomalous that, bearing in mind the value of money in 1990, it was contemplated by Mr Li that interest at 17% and fees, totalling $34,570 per year, would be payable out of after-tax incomes totalling $49,590 per year on a five year fixed term loan. This would leave a relatively small part of income for living expenses, and no real opportunity to accumulate money for repayment of $200,000 after five years. It is also anomalous that Mr Brooks adopted a $15,000 profit share as income, after tax, available towards repayment capacity, without showing any basis for projecting that there would be such a profit share, or for the implication that Rite Air would produce profit after tax of $75,000 for all holders of its shares. That would not be in accordance with recent experience as known and stated in Ex 13 under "remarks", in which the Rite Air Group had run at a loss and was currently experiencing cash flow difficulty. The availability of salary for Mr Hibbert of $62,500 was also contingent on success. 28 It was also contemplated that there would be other business, housing loan business, for the acquisition of an interest in the house, although all repayment capacity referred to and likely to be available had been used up on the $200,000 loan. There were no arrangements in hand for a housing loan to acquire the security property, although Mr Li saw the need for one. These were striking anomalies in the proposal which Mr Brooks approved. 29 On the face of the Application the proposed business was, in my finding, obviously unsatisfactory business from the Bank's point of view, very likely to lead to trouble in recovery. The facts stated on the face of the application should objectively have made it obvious to the Bank in the persons of Mr Li and Mr Brooks that the proposed business was very unsatisfactory from the points of view of Mr Hibbert and Mrs Groom, as the calculations about capacity to pay interest showed that their resources would be stretched if there was a good outcome, that they could not pay interest if Rite Air did not become prosperous, that they needed a housing loan to acquire the security property, yet had no arrangements for a housing loan and no further capacity to repay one, and that there was no plan to raise $200,000 for repayment after five years. Under any realistic appraisal, what they were proposing to do could only be achieved if they had astonishing good luck, and in all practicality it was unfeasible. 30 All these things give colour to the suggestion that the Bank had an unstated motivation to assist its position in dealings with the Rite Air companies by furnishing them with new capital injections. Further colour is given by the absence of any change of course or response on behalf of the Bank when at later times the Bank's records show knowledge that it was proposed to use the advance of $200,000 largely for the purchase by Mr Hibbert of Mr Groom's interest in the house, and that only a relatively small part of the advance was to be applied to paying for the investment in a Rite Air company. The projected capacity to pay depended on Vertee actually acquiring a 20% interest and on Mr Hibbert's income being increased by fees as a company director; any information which threw doubt on Vertee's acquiring the interest would also throw doubt on the wisdom of the Bank's making the advance. 31 In February 1990 correspondence between the Bank and Rite Air Services and Rite Air Installations expressed concern about the state of their accounts with the Bank. Mr Brooks in a letter of 12 February 1990 said to the effect that he had been directed to advise that the debt on overdraft was not to increase from current unsatisfactory levels. He put close restrictions on drawing cheques. He said "The alarming increase in your debtors to $1.68 m requires immediate attention by all directors to bring the group's exposure to State Bank down to an acceptable level i.e. maximum $900,000, until such time as new capital injection by additional shareholders is in place." On 26 February 1990 Mr Brooks said in a letter that accounts were being monitored daily, that it was imperative that the debt not increase and "… you should continue to take whatever steps necessary to collect your outstanding debtors and expedite injection of capital for new shareholders." There was a threat to return cheques at overdraft $1.18m. 32 On 1 March 1990 the Bank made an advance of $100,000 to Ganas Pty Ltd, the company associated with Mr Mourched, presumably this money was invested in the Rite Air Group. A loan precis on the Bank's file for 5 March 1990 shows that the contemplated loan to Vertee was $200,000 to purchase a 20% share in Rite Air Services Pty Ltd. A copy letter on file of that day from the State Bank to Vertee says that the Bank was prepared to advance $200,000 on a fixed rate interest term loan for 5 years and requested acknowledgment and acceptance. The original letter was not in fact dispatched to Vertee Pty Ltd. 33 On the same day, 5 March 1990, an office minute records a telephone call from Mr Hibbert to a Bank officer asking the position about the loan approval and raising the possibility of increasing the loan to $246,500, which was 85% of the valuation of the house. The writer of the minute noted that there was a relation between a decision to increase the borrowings and the Bank's overall exposure to customers associated with the Rite Air group. The minute said that Rite Air was known to be experiencing cash flow problems, and that up-to-date trading information was to be analysed and considered by Regional Office in connection with any increased borrowings. The minute also noted that $160,000 of the loan was to be used to purchase a 20% share in Rite Air Pty Ltd. The reference to $160,000 is a significant departure from the form which the proposal had earlier taken. It seems possible that there is some connection between this and the fact that on 13 March Mr Hibbert deposited $40,000 to an account at the State Bank in the name of Rite Air Services Pty Ltd; this $40,000 was proceeds of settlement of his property proceedings with his wife relating to the house at Box Hill Victoria. 34 From Early March 1990 there was a lapse of over two months when no significant attention to the proposed loan appears to have been recorded. During some of this period Mr Brooks was absent on holiday. During this interval Mr P.J. Phibbs, a bank officer who had not previously been employed at the Fairfield branch, was appointed a Commercial Relationship Manager at that branch. Mr Phibbs gave the date 17 April 1990 as the date on which he began to work at the Fairfield branch; he relied on the Bank's records which show that was the effective date of his promotion to that position. The time when he began to work at the Fairfield branch and had some part in affairs relating to Mr Hibbert, Vertee and Rite Air is significant because Mr Hibbert's evidence was that he paid $40,000 into the Rite Air account on 13 March 1990 on Mr Phibbs' advice that he should do so, whereas Mr Phibbs denies that he gave that advice, and it would inconsistent with Mr Phibbs' evidence that Mr Phibbs should have been working at the Fairfield branch or dealing with Mr Hibbert as early as 13 March. Mr Phibbs gave evidence of an event before 3 May 1990 when he first became involved in affairs connected with Rite Air Services; Mr Brooks invited Mr Phibbs into his office and introduced him to Mr Power and Mr Vaughan, and Mr Phibbs sat in at the meeting during which there was discussion relating to the loan application and approval relating to Mr Hibbert; Mr Power or Mr Vaughan said that he would arrange for Mr Hibbert to contact Mr Phibbs relating to the loan. Thereafter Mr Hibbert rang Mr Phibbs on 3 May 1990, a date established by handwritten minute Exhibit 17, and Mr Phibbs' dealings with Mr Hibbert began. 35 While it is possible that Mr Phibbs may have been working at the Fairfield branch under some informal arrangement before the effective date of his promotion I regard his evidence supported by the minute Exhibit 17 as establishing that his dealings with Mr Hibbert opened on 3 May 1990. I regard as highly improbable and I reject Mr Hibbert's evidence that he received advice from Mr Phibbs on or about 13 March relating to depositing his $40,000. I do not find that Mr Hibbert deposited that sum to the credit of the Rite Air account on the advice of Mr Phibbs or of any other bank officer. The reference in the minute of 3 March to $160,000 seems to raise the possibility that there was some discussion with someone about paying $40,000 towards a total of $200,000 to Rite Air, but this is no more than speculation and does not accord with Mr Hibbert's evidence. 36 Mr Phibbs' evidence, which I accept, shows that on 3 May 1990 Mr Hibbert telephoned him and asked where the loan application had reached, and that Mr Phibbs told him that he found an approval on the file and it appeared that the letter of approval had not been issued. Mr Hibbert raised with Mr Phibbs, as he had earlier with another unidentified bank officer on 5 March, the question of increasing the loan to $246,000 and Mr Phibbs said that there would have to be a new loan application "… and consideration will need to be given to the performance of Rite Air". Mr Hibbert said that he would get in touch after some days. When he next spoke to Mr Phibbs, Mr Hibbert said that he wished to proceed with the original approval for $200,000. Mr Phibbs said he needed further information relating to Mrs Groom's income. I infer that Mr Hibbert passed his request to Mrs Groom, because she obtained a letter from her employer Richard Crookes Interiors dated 24 May 1990 directed to the manager of the State Bank at Fairfield confirming her employment and salary, and this letter was passed to Mr Phibbs, probably by Mr Hibbert. This was the first communication which evidence shows passed between Mrs Groom and the Bank. 37 Mr Phibbs then caused Mr Li to prepare another series of loan approval documents dated 28 May 1990; a letter to Mr Hibbert and Mrs Groom, a letter to the Secretary of Vertee Pty Ltd (misspelt Vertree) and forms of standard loan details stating that the purpose of the loan was "assist purchase 20% share of Rite Air Services Pty Ltd." The documents were probably not sent out, because Mr Hibbert and Mrs Groom came to the Fairfield branch on 29 May; Mr Hibbert introduced Mrs Groom to Mr Phibbs, who showed them copies of the letters of offer, went through the document headed "Standard Loan Details" and gave them an explanation of what appears in them. Mr Phibbs did not recall any particular discussion. Mr Hibbert and Mrs Groom signed the Standard Loan Details twice, once as and on behalf of Vertee Pty Ltd and once each as providers of security. One copy which they signed bore a declaration that they were authorised to sign on behalf of Vertee Pty Ltd. The events and the explanation given on this occasion are significant when considering Mrs Groom's case and I will return to them. Mr Hibbert asked that the loan be dealt with quickly. 38 Thereafter the Bank appointed solicitors to conduct and complete the transaction, and the Bank's solicitors prepared documents and sent them to Messrs Muggletons, solicitors of Petersham, who acted for Mr Hibbert and Mrs Groom. Messrs Muggletons had not previously acted for Mr Hibbert or Mrs Groom, and Mr Hibbert selected them by asking the Law Society by telephone for names of solicitors who practised in the suburbs near Summer Hill. Mr Hibbert and Mrs Groom attended Messrs Muggletons' office on 17 July 1990 and saw Mr Thomas Rose, solicitor, and in an interview with him they signed a number of documents. 39 Mr Hibbert's complaints against the Bank are based partly on alleged advice, representations or encouragement given to him by Mr Brooks, and partly on the absence of any warning against investing significant money in the Rite Air Group, notwithstanding the Bank's continuing concerns about the prosperity of that Group, and about the Group meeting commitments to the Bank. An aspect of his complaint is the suggestion that the Bank, and particularly Mr Brooks, were seeking to protect the position of the Bank and it may also be of Mr Brooks by strengthening the Rite Air Group by arranging for Mr Hibbert and Mr Mourched to invest capital in it. 40 Mr Brooks' overall position and his management of the Bank's dealings with Mr Hibbert, Vertee Pty Ltd and Mrs Groom cannot be regarded as satisfactory. It is difficult to understand the application which he approved on 21 January 1990 or how he could have approved it. In relation to Mr Hibbert and Mrs Groom's past earning experience a fixed rate term loan for five years at 17%, with an obligation to repay all the capital after five years, was an impossible burden, because paying the interest would leave them very narrow means on which to live, and in reality with no means by which to prepare to repay the loan capital. It was even more clearly impossible if regard was had to the need to borrow and repay further money to finance the purchase of Mr Groom's half interest, which was essential if the scheme was to be carried out and Mr Hibbert was to be able to support Vertee Pty Ltd's borrowing with security. This need, and the need to make repayments on further borrowing, were not addressed. There was a reference to the amount of $45,000 expected from Mr Hibbert's family property settlement, but there was no reference to the amount of money which would be needed to purchase the half interest in the house, although the "Crossel" comment shows that it was contemplated that there would be a further borrowing. Capacity to pay interest depended on the fortunes of Rite Air Group and the success of the investment. The appraisal of the prospects of Rite Air Group in the application was very superficial, although the prospects of paying the interest largely depended on a good outcome. Mr Brooks' decision to approve the advance was very rash. 41 About April Mr Brooks was given counselling about what his superiors said was an excess of his delegated authority in other business, and in June he resigned from the Bank's service in unhappy circumstances. Whatever was the true reason for his leaving, the Bank in all reason ought to have disapproved strongly of the way he handled its money and its customers in this instance. 42 Overall the facts and circumstances give colour to the interpretation that Mr Brooks may have deliberately led Mr Hibbert, Mrs Groom and also Mr Mourched into unsatisfactory investments to bolster another customer who was more important to him, but do not prove that interpretation in any substantial way. It is more probable that Mr Brooks brought more enthusiasm than competence to bear upon these opportunities to write some new business. 43 The probabilities do not favour Mr Hibbert's claim that he was advised by Mr Brooks to operate through a shelf company, and do not favour his claim that he introduced Vertee into the transactions as a result of advice of Mr Brooks. I do not accept that in fact there was any conversation between them relating in any way to the proposed loan before the interview of 1 December 1989. The two men met before then in the course of one or more visits by Mr Brooks to the Rite Air premises, but they had little communication. Mr Hibbert although not qualified in accountancy had some experience and had some means of knowledge of the affairs of the Rite Air Group; in managing the debtors and creditors accounts he was in some position to gauge the state of the Group's financial affairs. He had access to other sources of advice, including a private accountant and his own brother, whom he regarded as canny in business. I do not regard the probabilities as overwhelming either way, and Mr Hibbert bears the onus of proof on the balance of probabilities. My finding is that Mr Brooks did not give Mr Hibbert advice about the use of a shelf company. I do not understand what advantages there were or were expected from interposing a shelf company. 44 I do not regard it as probable either that Mr Brooks gave Mr Hibbert any advice endorsing investment in the Rite Air Group on 1 December. If he did so, it is unlikely that advice from that source would have caused Mr Hibbert to embark on the investment. Mr Hibbert who worked in the Rite Air Group had means of informing himself and making his own judgment about investment in it, and it is very unlikely that a bank manager with whom he had earlier had very little to do would embark on advising him to make an investment in the Group, without support from accounts, figures or reasoning, or that Mr Hibbert would have taken any notice if he had. In my opinion Mr Brooks and the Bank were not under any legal duty and were not required by ordinary standards of fair dealing to tell Mr Hibbert what they knew or to give Mr Hibbert views about the wisdom of investing in the Rite Air Group. 45 If the Bank gave Mr Hibbert any advice supporting investment at any earlier stage it may well have come under an obligation to give Mr Hibbert further information or advice as adverse information became available before settlement of the loan. If contrary to my view the Bank was under a duty of care or disclosure towards Mr Hibbert or Vertee Pty Ltd during the period from January until 1 August 1990 there were a number of circumstances that the Bank would have been obliged to disclose. These include particularly the series of warnings which the Bank gave the Rite Air Group in February 1990 and led to indications of possible adverse consequences of a review by the Regional Office which was to take place in March. This phase appears to have passed when Mr Mourched made his investment, and possibly because of it. However the Rite Air Group did not become a satisfactory investment with that event. In June 1990 the Bank received a report by Ms MacGregor, a chartered accountant retained by the Rite Air Group, on the financial difficulties of the group; if there had been any duty to give Mr Hibbert advice or to correct earlier advice this report would have enlivened the obligation. In my opinion there are no circumstances which obliged the Bank to deal otherwise than on an arms length basis with Mr Hibbert and Vertee Pty Ltd, and there were no circumstances which obliged the Bank to use the information and insights available to it for their benefit. In my judgment the cross-claimants have not proved the allegations in the First Cross-claim relating to breach of a duty to make disclosures, and to misleading and deceptive conduct, or the allegations in Mr Hibbert's Third Cross-claim relating to misleading and deceptive conduct and breach of a duty of care. 46 Mr Hibbert did not carry out the arrangements for him to invest in the Rite Air companies, on any available view of what those arrangements were. In evidence he dissociated himself from the view that he was to get a 20% share. The only written record of his arrangement is the undated letter signed by Mr Vaughan which Mr Hibbert enclosed with his letter to the Bank of 10 January 1990. Mr Vaughan referred in the letter to a 20% interest for Mr Hibbert and a 10% interest for Mr Mourched, but did not say how much money was to be paid or how many shares were to be acquired or in which company. Whatever the arrangements were, at the least Mr Hibbert was to pay $100,000. On 1 August 1990, $46,938.68 of the money advanced to Vertee was, at the direction of Vertee in which Mr Hibbert joined, paid to Rite Air. The total of his payments thus came to $86,938.68, and he did not pay enough money to be entitled to a 20% interest or (if that was the true arrangement) a 10% interest, or to be entitled to the directorship, directors fees or other advantages. Whatever those advantages would have been worth, it cannot be said that any conduct or failure of the Bank caused Mr Hibbert not to have them; because he joined in directing most of the available money to someone else, Mr Groom, notwithstanding the purpose of the loan as recorded in writing. Most of the advance was used by Mr Hibbert to obtain a half share in the house, which he did obtain and still has. The advance obtained nothing for Vertee Pty Ltd and very little for Mrs Groom. 47 In my opinion Mr Hibbert is not entitled to succeed against the Bank, or to resist the Bank's claim to enforcement of its security against his half share in the house. 48 Mrs Groom's claims to relief are based in part on advice, misrepresentations and communications allegedly made by the Bank to Mr Hibbert and passed on by Mr Hibbert to her so that she acted on them; these claims fail with Mr Hibbert's case. She also claims relief on general equitable principles and under the Contracts Review Act on the footing that, on the whole dealings between the State Bank and herself it is unconscionable for the Bank to rely on her guarantee and mortgage. The presentation of her case was generally formed on Garcia v. National Australia Bank Ltd (1998) 194 CLR 395 and the circumstances in which it was held that it would be unconscionable for the National Australia Bank to enforce the guarantee against the plaintiff in that case. At the broadest level, as at the narrowest level, the facts of this case differ from Garcia's case in significant ways. The circumstances in which Gaudron, McHugh, Gummow and Hayne JJ granted equitable relief in Garcia included that the plaintiff was her husband's surety (taking the expression from Dixon J in Yerkey v Jones (1939) 63 CLR 649 at 684). Notwithstanding that in form the plaintiff and her husband both gave the mortgage over their home as guarantors and the principal debtor was a company, the concurring Justices found, at para [43], pp 411-12 after reviewing the facts, that the companies supported by the guarantees were in the complete control of the husband and that the plaintiff in fact obtained no real benefit from her entering into the transaction and was a volunteer. Another circumstance was that the plaintiff in Garcia was the wife of the principal of the companies, and the law which the Court applied had evolved and was stated in terms of protection to wives who become sureties for their husbands. Mrs Groom obtained a benefit from the advance as her Commonwealth Bank mortgage was repaid, but this benefit is qualified greatly because it was worth only a small part of the advance, and also because it merely substituted for another charge and did not advance her net asset position, which was greatly worsened overall. Mrs Groom was not married to Mr Hibbert, although Mr Hibbert had informed Mr Brooks that they were in a de facto relationship, and it was obvious to the Bank that they had some close relationship because, apart from what Mr Hibbert had said, they lived at the same address and they were both interested in and directors of a shelf company which was to make an investment which Mr Hibbert first proposed. 49 Vertee Pty Ltd was a shelf company, very recently acquired and established, with no other business than making the investment proposed. It had no financial history or earlier dealings. Mr Hibbert and Mrs Groom were the directors and the only directors and were prepared to guarantee its borrowings. The Bank knew these things. Mr Hibbert told the Bank in his letter of 12 January 1990 that she was "actively involved in the operation and future dealings of that company." At that stage there was really nothing to be active about, and Ex 13 shows that the Bank knew that Vertee was a shelf company with no history. There is no evidence that the Bank was told or otherwise knew the pattern of shareholdings in which Mr Hibbert owned 99 shares and Mrs Groom owned 1 share; if the Bank had known that it would have known that the substance of the matter was that Mrs Groom was acting as a surety for Mr Hibbert in providing a guarantee for Vertee. 50 There is no history of dealings and acts of control of the affairs of Vertee by Mr Hibbert which corresponds with the facts reviewed in para [43] of the judgment of the concurring Justices in Garcia, which were the basis of their Honours' conclusion that "Taken as a whole, those findings demonstrate that the appellant in fact obtained no real benefit from her entering the transaction; she was a volunteer." By this I understand that the facts demonstrated to the Bank that she obtained no benefit and was a volunteer. In this case there is no showing of facts or circumstances in which the Bank knew, or should have known or should have inquired about whether the pattern of shareholdings meant that Mr Hibbert was in complete control. 51 It is material that the law has evolved and has been stated in terms which protect wives who are sureties for their husbands, and not persons in other domestic relationships. The legal history of equitable relief of the kind referred to by Dixon J in Yerkey v. Jones (1939) 63 CLR 649 at 675ff, and granted in Garcia is very long, and it relates to wives and not to other persons. It is historically true that, as stated by Latham CJ in Yerkey v. Jones at 663, "The rule relied upon is a rather vague and indefinite survival from the days when a married woman was almost incapable in law and when the Courts of Equity gave her special protection in relation to transactions affecting her separate property." 52 What in my understanding was established by opinions expressed by Dixon J in Yerkey v Jones was the continued force and the implications of three equitable presumptions of an invalidating tendency which are applied to transactions in which a wife makes a large gift or imposes a large secured guarantee obligation on her property for the benefit of her husband. These presumptions apply although their relationship of husband and wife is not one which gives rise to a presumption of influence. To adopt Dixon J's language, the equitable presumptions apply when it is claimed that the transaction in which the wife has conferred a benefit on her husband ought to be set aside on the ground that the husband has in fact exercised undue influence over her or on some other equitable ground. The equitable presumptions apply at the intersection of principles the basis of which is shown by Dixon J at 670-4 and summarised in the passage from Storey (Equity Jurisprudence) (1835), sec 1395 set out by Dixon J at 635 in these words: the doctrine is now firmly established in equity that she may bestow her separate property by appointment or otherwise, upon her husband as upon a stranger. But at the same time, courts of equity examine every such transaction between husband and wife with an anxious watchfulness and caution, and dread of undue influence. 53 The equitable presumptions of an invalidating tendency which are applied in examination of such transactions were set out by Dixon J at 795-6: In the first place, there is the doctrine, which may now perhaps be regarded as a rule of evidence, that, if a voluntary disposition in favour of the husband is impeached, the burden of establishing that it was not improperly or unfairly procured may be placed upon him by proof of circumstances raising any doubt or suspicion. In the second place, the position of strangers who deal through the husband with the wife in a transaction operating to the husband's advantage may, by that fact alone, be affected by any equity which as between the wife and the husband might arise from his conduct. In the third place, it still is or may be a condition of the validity of a voluntary dealing by the wife for the advantage of her husband that she really obtain an adequate understanding of the actual nature and consequences of the transaction. 54 Dixon J went on to examine the operation of these presumptions and the case law relating to them.. The ways in which they operate are far from direct and obvious, particularly in relation to the position of third parties who deal through the husband with the wife. The presumptions are not precisely expressed, as later observations by Dixon J illustrate. Dixon J regarded it as important always to keep in view the need to examine thoroughly the facts of each particular case before coming to a conclusion on equitable remedies to which they give rise; a judgment on unconscionability is not based on a highly prescriptive body of rules. 55 The relationship of husband and wife is essential both for the historical derivation of the state of the law and of the equitable presumptions shown by Dixon J, and also for the application of the presumptions. The application of the presumptions to some other relationship is not possible without a large departure from a chain of historical circumstances which brought this body of law into being, and it is also impossible without a large departure from the terms in which it has been and can be expressed. The principal judgment in Garcia contains no authority for either of these large departures. At paras [23]-[33] the law was examined in terms which in my understanding showed approval and endorsement of later passages in the judgment of Dixon J which deal with the position of the creditor or other third party benefited by a transaction in which a wife confers benefits on her husband; what Dixon J said illustrates the second of the equitable presumptions of an invalidating tendency and shows how the position of strangers who deal through the husband with the wife may be affected by any equity which as between the wife and the husband may arise from his conduct. The passage from the judgment of Dixon J at 684-6 cited in para [24] distinguishes between one case which is an actual exercise of undue influence in which the wife does understand what she is doing, is not assisted by an explanation of the effect of the documents, which she knows, and has the benefit of the second presumption unless it is shown that she had independent advice (which I take to refer to independent advice about whether or not she should enter into the transaction at all and not only as to its effect) or was in some other way relieved from the ascendency of her husband over her judgment and will, and a second case in which the wife does not understand the effect of the document or the nature of the transaction. In the second case the creditor is protected if he takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction. 56 Garcia was a case of the second kind in which the wife did not understand the purpose or effect of the transaction or that her obligations under the guarantee were secured by the mortgage which she had given over her home, and enforcement by the Bank was unconscionable because the circumstances were a combination of the kind set out in [31] of the judgment in Garcia. The present case is not one of that kind because I have found that notwithstanding her evidence that Mrs Groom did understand the purpose and effect of the transaction into which she entered and the Bank did take steps to explain the transaction to the wife, through the agency of Mr Phibbs, who gave a very inadequate explanation, and the Bank also took steps to find out that a stranger had explained it to her, by referring Mrs Groom and Mr Hibbert to solicitors of their own choice and requiring a certificate about the explanations given to be furnished by the solicitor. The facts of the present case fall into the first case which Dixon J at 684 distinguished from such cases; the first case is one in which the wife was alive to the nature and effect obligations she was undertaking and was procured to become her husband's surety by the exertion of him upon her of undue influence affirmatively established. Mr Hibbert used stronger means than undue influence; he procured Mrs Groom's agreement by positively misrepresenting to her parts of the transaction about the terms on which Vertee could obtain an interest in the Rite Air business and the amount to be paid for it and the manner in which the amount to be paid was to be raised out of the loan; what he told her was completely wrong, in respects of which he must have been aware. The second equitable presumption with an invalidating tendency given by Dixon J would, if they had been husband and wife, have produced the result stated by Dixon J in which the creditor is not protected if he deals directly with the wife and explains the effect of the document to her; there must be or also be independent advice or relief from the ascendency of the husband over the wife's judgment and will. 57 As Mrs Groom and Mr Hibbert were not married to each other, there is no authority and in my understanding and there is good reason why the Court is required to apply to the Bank any other standard for its being affected by the unconscionable conduct of others than the standard which is generally applied in the absence of the second equitable presumption and its invalidating tendency; that is, the standard of knowledge applied where it is sought to fix with liability in equity a person who has acquired property from or through persons who have been in breach of fiduciary duty; the category of "knowing receipt" established as the first limb of Barnes v Addy (1874) 9 Ch App 244. In my opinion there are no facts in evidence which establish either that that Bank knew that the advantages it gained through Mrs Groom's guarantee and security had been derived by Mr Hibbert in unconscionable circumstances by misrepresenting the transaction, or knew that those advantages were, in effect, large advantages which Mr Hibbert had obtained unconscionably and was passing on to the Bank for his own benefit. Nor are there facts which put the Bank on inquiry into circumstances, or otherwise made reliance by the Bank on the guarantee and security unconscionable. The large and difficult subject of degrees of knowledge, reviewed by Foster AJ in Gertsch v Atsas [1999] NSWSC 898 at [26]-[42], is not opened up by the facts of this case. 58 The question whether a proposed guarantor is the wife of a proposed borrower is readily ascertainable; people usually behave responsibly in handling information like that. Their Honours in Garcia contemplated at 404 para [22] the possibility that the principles applied in Yerkey v. Jones would find application to other relationships, observed that that was not a question which fell for decision and said "The resolution of questions arising in the context of other relationships may well require consideration of other issues. Thus to take one example, if cohabitation is taken as a criterion, what should a lender know or seek to find out about the nature of the relationship between the parties? But those issues did not arise and were not debated on the hearing of this appeal." 59 At 442, para 109 Callinan J was unwilling to extend exceptional rules formerly applicable to guarantees by wives to co-habitees. On the other hand Kirby J was prepared to adopt a modified O'Brien principle which would apply to cases where there is a relationship of emotional dependence between the debtor and the person conferring the advantage; see p 433, para 78. 60 Extension of the principles acted on in Garcia from wives to all married persons, or to all women, or all persons who are living in de facto relationships, or all persons who share domestic relationships without consideration in detail of the circumstances of those relationships does not appear to me to be a development which the law can realistically be expected to take. The only extension which seriously falls for consideration if persons other than wives are to be protected appears to me to be an extension of the kind addressed by Kirby J and acted on by the House of Lords in O'Brien, that is, to all cases where one co-habitee stands surety for the co-habitee's debts and the creditor is aware that there is an emotional relationship between the co-habitees, and to other relationships where the creditor is aware that the surety reposes trust and confidence in the principal debtor. As a matter of judicial authority there has been no such extension. 61 Although the Bank had no information relating to the shareholding in Vertee Pty Ltd, the Bank knew that Mrs Groom was Mr Hibbert's de facto wife because Mr Hibbert told Mr Brooks that she was. Otherwise the Bank had no information which would directly indicate to it that Mrs Groom was in a position of emotional dependence on Mr Hibbert in relation to her decision to support Vertee's borrowing with a guarantee and a mortgage. 62 The evidence shows that she and Mr Hibbert were living together as husband and wife, forming a household and a family in an emotional relationship typical although not universal in adult emotional life. A marriage or a continuing de facto relationship in which economic burdens are shared and each party makes contributions generally to the other's welfare is not a state of dependence or disadvantage; it is a normal human adult condition to which most people aspire and which most of them achieve at least for some or part of their lives. Contributions, sacrifices and dis-economic behaviour take place in contexts of perceived emotional and personal advantages, and even of material advantages which can accrue more or less directly from such relationships. Only in a committed relationship could it happen, in ordinary human terms, that Mrs Groom would make such an economic sacrifice for Mr Hibbert's advantage as to move from being part owner of the house with a small mortgage and the prospect of some advantage in a property claim against Mr Groom to a situation where she gave a guarantee, in the first instance for a debt of $200,000 but unlimited, and mortgaged her half interest to an extent far greater than it had earlier been mortgaged in an arrangement which did not enhance her property rights, and brought her only the advantage of paying the Commonwealth Bank mortgage which is far outweighed by the much larger obligation which she incurred. 63 Mrs Groom was a person of ordinary adult competence, with some experience in more simple forms of business, including a number of years' experience working in offices and several transactions of purchasing houses and selling a house with Mr Groom; she was clearly able to understand the concepts of borrowing money, giving a mortgage and directing the money to be paid in the interest of someone else, and the concepts of risk in investment and dependence of capacity of repay on a good outcome of an investment. The only material on which it could be concluded that she was emotionally dependent or vulnerable is the fact that she entered into the transaction, and I do not regard that as establishing the conclusion, because that is a thing which a person might reasonably decide to do in the exercise of her economic liberty for the benefit of someone else to whom she was emotionally committed. On the evidence I would not conclude that in fact she was in any disadvantageous condition of emotional dependence on Mr Hibbert. 64 In Mrs Groom's perception there were advantages in the proposed transaction. One was that it resolved the question of Mr Groom's interest in the house, and brought about transfer of his interest to Mr Hibbert, with whom Mrs Groom saw herself as having a continuing long term relationship. Another was that she accepted that Mr Hibbert's proposals for investment were a good disposition of resources. In this she acted on his telling her that he was arranging the loan for $100,000 to buy a shareholding in Rite Air and for $100,000 to allow Mr Hibbert to buy out Mr Groom's half interest. Borrowing $100,000 to pay to Mr Groom together with $40,000 expected from Mr Hibbert's divorce settlement seemed to her to be a workable arrangement; she could only think so if she has high confidence that the expected advantages would come from the investment. She felt that Mr Groom deserved to have a half interest in the Moonbie Street property. 65 Mrs Groom was aware of the basic obligations under a mortgage, and knew that it gave the Bank significant rights; she could have had no doubt that the Bank's rights were enforceable on default. She had had earlier dealings with banks and had been involved in the repayment of mortgages. She also understood that risks were involved in a guarantee. She attended Mr Rose's office to sign the mortgage documents, understood the explanation he gave that the mortgage documents were a mortgage of the house to obtain the funds which had been asked for, she signed the documents voluntarily and if she had had any questions of Mr Rose she could have asked him. She said a number of times in her evidence to the effect that it was not explained to her that she could lose the house in which she resided from the transaction; in my finding this was obvious in the circumstances and was known to her, as she understood the nature of the mortgage and the guarantee, and understood that the transaction was a borrowing of $200,000. She would have gained nothing from any further explanation, or from any more explicit explanation. 66 If her position is treated as exactly analogous with a married woman the facts of her case closely resemble those in Garcia's case and she would be entitled to succeed, as she had no opportunity to be freed from the operation of Mr Hibbert's request and support for the proposal; and Mr Hibbert gave her accounts of the transaction which were not accurate and were unduly favourable to agreeing to it. However I do not regard the Bank as having been bound in conscience not to act on or enforce the transaction unless it pursued inquiries and brought to its knowledge what was the nature of her relationship with Mr Hibbert and what were the terms of his communications to her about it, and acted in some way to ensure that she had advice independent of him or otherwise had an opportunity to act uninfluenced by him. 67 There are two important respects in which Mrs Groom was disadvantaged in deciding to enter into the transaction. One was that Mr Hibbert gave her an incorrect account of what the transaction was. In what he told her borrowing was to be $200,000 of which $100,000 was to be used for him to buy an interest in Rite Air and $100,000 was to be used, together with money which he was to obtain from his divorce settlement, for Mr Hibbert to buy Mr Groom's half interest in the house. This was quite a different proposal to the proposal considered in Ex 13 and approved by the Bank, which was for finance of $200,000 to buy an interest in Rite Air, with contemplation of a further housing loan which, with the proceeds of Mr Hibbert's divorce settlement, would finance the acquisition of Mr Groom's share in the house. It is also quite different from the way in which the advance when made was actually applied, in which much more than $100,000 was applied towards buying Mr Groom's share, none of the divorce settlement was so applied, much less than $100,000 of the advance was applied towards an investment in the Rite Air Group, and the money paid to the Rite Air Group was not enough to obtain the interest expected, on either version of what that was and how much was to be paid for it. All three versions of the transaction were unbusinesslike and unfeasible. What Mr Hibbert told her was unfeasible because the the Bank had not approved it and it did not accord with the opportunity to invest in the Rite Air Group, recorded in Mr Vaughan's letter as an opportunity to obtain 20% interest, and relating to an investment of $200,000. The proposed considered by the Bank in Ex 13 was unfeasible because it was not in the realm of practicality for another borrowing additional to $200,000 to be obtained for the purchase of Mr Groom's half share of the house, or for any such borrowing to be repaid if it were obtained. The third version, what actually happened, was unfeasible because not enough money was paid to actually obtain an interest in the Rite Air Group and the borrowing could not be repaid without income from that source. All three versions were unfeasible for the further reason that investment in the Rite Air Group would be an unproductive investment, and as the Bank had reason to know, and as Mr Hibbert probably from his position in the company knew, this was shown by the company's continuing banking difficulties by February 1990, and became even more abundantly available to the knowledge of both by 1 August 1990 when the loan was actually drawn. 68 These circumstances make a compelling case for an adjustment under s 20 of the Property (Relationships) Act 1984 of property interests as between Mrs Groom and Mr Hibbert on the basis that only $7962.81 of the advance should be treated as an advance for the interest of Mrs Groom, that the rest of the advance should be treated as an advance for the interest of Mr Hibbert and that in an adjustment of property rights he should protect her against any liability in respect of the advance under the mortgage in corresponding proportion. However it is futile to make such an adjustment: pronouncing orders would have no effect as enforcement of the Bank's rights against Mr Hibbert and his half share will leave him with no property rights to be adjusted. Mrs Groom is also entitled to an award of damages against Mr Hibbert for his misrepresentations, which he knew to be false and on which she acted by entering into the mortgage and guarantee. She is also entitled under the Common law to be indemnified by Mr Groom, as she entered into those transactions at his request and for his benefit, except to the extent of $7962.81; see Israel v. Foreshore Properties Pty ltd (in Liq) (1980) 54 ALJR 421 at 423-4 (Aickin J). Again there seems no real prospect of enforcement. The orders should provide for inquiries to assess the amounts for which Mr Hibbert is liable to her and for entry of judgment. 69 In my finding Mrs Groom had an understanding of the transaction in the sense that she understood, in the general way which could be expected of anyone in the community of ordinary adult competence without any special training, the concepts of giving a guarantee for the liability of another company which borrowed money, and of giving a mortgage to secure repayment of money which may become due under a guarantee. She made repeated claims to the effect that no one explained to her and (inferentially) she did not know that her interest in the house could be sold, but I do not accept that she she did not know that this could happen; anyone who has ever entered into a mortgage transaction (and she had previously entered into two) could not fail to see that this is a possible outcome. In my finding she entered into the transaction with an understanding that there could possibly be adverse outcomes, including the loss of the property, and the influences on her mind in deciding to do that included the exercise of her own economic liberty and power of choice to accept risks so as to assist Mr Hibbert to make a business investment and also to become the co-owner of the house in the place of Mr Groom, so as to facilitate and consolidate her relationship with Mr Hibbert, for whom she had a deep emotional attachment, in contemplation of the relationship continuing for the indefinite future. 70 What Mrs Groom did not understand was the business risks of the arrangement and the extent to which it was hazardous and likely to fail. She did not understand this because Mr Hibbert gave her an inaccurate account of what the transaction was and what was to be done with the $200,000 advance, and did not point out to her the business hazards relating to the difficulty of making the required repayments and the need to raise more money as a housing loan to achieve all the objectives in view; the simple unfeasibility of the whole project if it was stated accurately and in detail. If she had been given, by Mr Hibbert or by anyone else, a fair accurate and complete account of what was actually proposed in terms of a business transaction she would probably have been able to see that it was unfeasible notwithstanding that her experience of business had been relatively uncomplicated; any person of ordinary adult competence would be able to see that. In retrospect it seems astonishing that any one would ever enter into the version of the transaction given in the application Exhibit 13, and sheer folly to enter into the transaction as it actually took place on 1 August, although it must always be remembered that that as described to her by Mr Hibbert the transaction took a different form. 71 Quite apart from any remedies under the Property (Relationships) Act, Mrs Groom is entitled to equitable remedies against Mr Hibbert on the footing that he is a fiduciary for her of all advantages which flow to him as a result of her participation in the transaction. Her claim to any equitable remedy against the Bank cannot be readily placed in any well known classification; it cannot be upheld on the basis of principles dealt with in Garcia. The Bank would be subject to equitable remedies in respect of its security over her property if the Bank obtained its security with knowledge that the security was made available to it through a breach of fiduciary duty by Mr Hibbert. The evidence does not support a finding that the Bank had knowledge of what Mr Hibbert told Mrs Groom or of how he induced or persuaded her to take part in the transaction. 72 In the early stages up to Mr Brook's approval of the loan and for several months thereafter the Bank had no communications with Mrs Groom; the Bank acted on the basis that its customer was to be Vertee Pty Ltd, and that Mr Hibbert was dealing with the Bank as one of the company's two directors. The Bank also knew that Vertee Pty Ltd was a shelf company which Mr Hibbert had decided to introduce into the transaction, and that Mrs Groom was also director of the company, that she was Mr Hibbert's de facto wife and that she was to provide the Bank security for the loan to Vertee over her half interest in the house; and Mr Hibbert was to do the same. The basis on which the loan was to be made was, in practical terms, an extremely poor business proposition bound to lead to trouble for the borrowers and very likely to do the same for the Bank. In my opinion that did not mean that it was unconscionable of the Bank to make the loan, and did not place the Bank under a duty to point out the adverse characteristics of the business to Mrs Groom, or mean that the Bank should have known that Mrs Groom entered into the transaction as a result of some misrepresentation, or that the Bank was under a duty to make any inquiries, or was behaving dishonestly or otherwise unconscionably. 73 In May 1990 the Bank gave Mrs Groom correspondence and documents which explained the form of the transaction in a reasonably clear way, but did not in any way enter upon the wisdom of the transaction as a business proposition. Mrs Groom herself attended at the Bank, in the company of Mr Hibbert, and the Bank dealt directly with her in obtaining her signature on documents then. In accordance with the requirements of the Bank Mrs Groom and Mr Hibbert consulted Messrs Muggletons and saw Mr Rose, solicitor at Muggletons, when the mortgage documents were signed and various certificates were given for the Bank's comfort about the circumstances in which they were signed. (The certificates seem to be incomplete, suggesting that they were not taken very seriously at the time). Messrs Muggletons and Mr Rose were not associated with the Bank, and were chosen altogether independently of the Bank, and Mrs Groom was in a position to ask them for any advice she thought appropriate. Mr Rose did not review or give advice about whether the transaction was sound business. (I do not suggest that it was his duty to do so). Mrs Groom joined in giving directions for the dispersal of the loan moneys when they were obtained. I see no basis for finding that the Bank behaved dishonestly or in any other way unconscionably towards Mrs Groom. 74 One of the bases for Mrs Groom's second cross-claim is a claim for relief under the Contracts Review Act 1980. In my finding the contract of loan was an unjust contract in the circumstances relating to it at the time it was made. This finding is based principally on the difficulties which I have referred to which appear from the terms of the application for loan itself in its factual context; in all practicality, the transactions dealt with and contemplated by the Bank in the application for a loan could not work, the obligations to pay interest could only be met with great difficulty and if very favourable circumstances occurred for the Rite Air investment; and by the time the documents were prepared and signed in May and June 1990 and even more clearly by the time the loan was actually advanced it was not reasonable to expect that the circumstances would be favourable. The contemplated arrangements could not be completed in all practicality without further housing finance, there were no arrangements for housing finance and if an attempt had been made to put together any arrangements for housing finance it must have failed because there was no further capacity to make repayments. 75 The question whether a contract was unjust under subs 7(1) requires an address to matters specified in s 9. In terms of subs 9(1) the only public interest questions which are involved are the public interest in the enforcement of contracts and the public interest reflected by the terms of the Contracts Review Act relating to limiting the enforcement of unjust contracts. 76 The matters referred to in subs 9(2) which appear to be relevant are para (d), in that it was unreasonably difficult to comply with the conditions of the loan, para (f) in that Mrs Groom was not equipped by her educational background or otherwise to make an analysis of the business feasibility of the contract, para (h) in the absence of availability to Mrs Groom of any expert advice analysing the business feasibility of the contract, para (i) in that the practical effect of the provision of the contract was not accurately explained but was misrepresented to Mrs Groom by Mr Hibbert, para (j) in that Mr Hibbert's conduct constituted unfair tactics, and para (l) the commercial setting, purpose and effect of the contract, in which, in practical terms, a successful outcome was not to be expected. I also have regard to circumstances of the case to which I have referred in this judgment relating to the formation of the loan agreement and the matters considered by the Bank in giving its approval, and to the further history up to the time of making the advance on 1 August 1990 of the Bank's dealings with and knowledge of the affairs of the Rite Air companies. 77 Most of the matters which bear on whether the contract was unjust do not involve considerations adverse to the Bank, but the Bank has significant involvement in my conclusion because on any complete, businesslike and fair appraisal of the application for a loan it ought to have been refused, as a piece of business which could mean nothing but trouble for the Bank and even more clearly had no prospects of a good outcome for the guarantors. In particular, the practical workings of the arrangements for Mrs Groom were extremely adverse because she would replace a small liability with a very large liability, but would not gain any of the advantages. 78 In my judgment the court should grant Mrs Groom relief under the Contracts Review Act against the mortgage over her interest in the house and against her personal liability as a guarantor, and should refuse to enforce any of the provisions of the mortgage against Mrs Groom and against her interest in the house, and should make an order under para 7(1)(d) requiring the execution of an instrument which varies the mortgage so as to release her interest from the Bank's security and terminates her personal obligations. This order should be made on terms that she pays to the Bank the sum of $7962.81. 79 The parties should bring in Draft Short Minutes of orders which will give effect to this decision.

At a glance

Court

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Before

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Judgment (10 paragraphs)

Cases Cited (4)

Cited By (1)