Sutherland v Ghougassian & Ors

Judgment 1HIS HONOUR : These are proceedings for an account to determine how much money is owed by St Gregory's Armenian School Inc (in liquidation) ("the School") to Mr Michael Ghougassian and Dr Daniel Ghougassian that is secured by a mortgage. 2The School was wound up pursuant to orders made on 21 June 2010 ( Vartanians v St Gregory's Armenian School Inc [2010] NSWSC 701). Mr Roderick Mackay Sutherland was appointed liquidator. 3The School's principal asset was the land on which the School was located. It was subject to a first registered mortgage to Mr Michael and Dr Daniel Ghougassian, and a second registered mortgage to the Commonwealth Bank of Australia. On 12 October 2006 Mr Michael and Dr Daniel Ghougassian executed a deed of priority in favour of the Bank. 4The Bank obtained orders for possession and sold the land in the exercise of its powers as mortgagee. After discharging the debt owed to it, the Bank paid the surplus proceeds of sale of $7,687,728.53 into court. The liquidator sought a determination of the amount secured by the mortgage to Mr and Dr Ghougassian and for the payment out of the balance to the liquidator. 5Mr Michael Ghougassian and Dr Daniel Ghougassian were ordered to provide an account of the moneys claimed to be due under the mortgage. On 12 April 2011 they provided statements of account said to be a statement of loans and loan repayments between the School and Mr Michael Ghougassian for the period from 17 December 2003 to 1 December 2010 and between the School and Dr Daniel Ghougassian for the period between 26 June 2003 to 19 November 2010. The amount claimed to be owed to Mr Michael Ghougassian was $2,328,338.53. The amount claimed to be due to Dr Daniel Ghougassian was $624,289.30. 6On 10 May 2011 Barrett J ordered that $4,600,000 held in court be paid out to the School. 7The liquidator served a notice of falsification to the accounts. In final submissions the liquidator contended that the amounts owing to the Ghougassians secured by the mortgage were $142,016.13 owed to Mr Michael Ghougassian and $54,894.24 to Dr Daniel Ghougassian. 8The evidence of Mr Michael and Dr Daniel Ghougassian included evidence from their accountant that Dr Daniel Ghougassian was owed $1,278,728.52 and Mr Michael Ghougassian was owed $7,190,822.75. This was millions more than was claimed in the statement of account. 9It can be seen from these figures that the parties were widely apart. In the course of final submissions, counsel for Mr and Dr Ghougassian accepted that the debt secured by the mortgage was limited to $1,000,000 plus interest. Counsel contended that up to that limit, the mortgage secured advances made from 22 December 2004. 10The instrument of mortgage is undated. It was registered on 23 June 2005. The mortgage does not specify any particular debt or obligation that it secures. The form of mortgage provided for the inclusion of such provisions in an annexure or a memorandum. There was no annexure to the mortgage. The mortgage incorporated memorandum Q860000 filed at Land and Property Information New South Wales. That memorandum was filed on behalf of the Registrar General. It does not identify the principal debt secured by the mortgage or the interest secured. However, it was common ground that some debt was secured by the mortgage. Counsel for the liquidator accepted that a debt the subject of the Deed of Loan dated 6 May 2005 was secured. 11The Deed of Loan defined the School as the " Borrower " and Michael and Daniel Ghougassian as the " Lender ". It recited: " B. At the request of the Borrower the Lender agrees to provide the Borrower the sum of one million dollars ($1,000,000.00) by way of financial assistance for the purposes of working capital and to assist in the construction of new buildings for the school. C. By way of security for the provision of financial assistance referred to in recital B above, the Borrower agrees to grant in favour of the Lender a registered first mortgage secured over the Secured Property. D. The parties agree to enter into this Deed setting out the terms and conditions of the loan advance. " 12The Deed of Loan contained the following terms, amongst others: " 2. Loan Advance and Security 2.1 The Lender agrees to provide the Loan of one million dollars ($1,000,000.00) to the Borrower. 2.2 By way of security the Borrower agrees to grant the Lender a registered first mortgage over the Secured Property. 3. Payment of Interest 3.1 The Borrower must pay interest at the Interest Rate on the Amount Owing by monthly instalments on each Interest Payment Date. 3.2 Where any payment made under this Agreement is not paid on or before the due date for payment, the Borrower must pay interest on the Default Interest Rate calculated from the due date for payment. Default interest will be calculated on a daily basis and will be compounded on the last day of each month. 4. Repayment 4.1 The Borrower may, in addition to payment of interest pursuant to clause 3, make lump sum payments, which payments shall be applied towards payment of the principal of the Loan. 4.2 The Borrower acknowledges that the Loan is repayable upon demand by the Lender. 4.3 The Lender shall be entitled to demand repayment of the Loan or any part of it at any time, however the Lender must provide the Borrower with not less than sixty (60) days ['] written notice of demand of repayment. 4.4 If the full amount of the Loan is repayable by the Borrower pursuant to clause 4.2, the Borrower must repay the Loan together with any unpaid accrued interest within sixty (60) days of receipt of written demand of payment from the Lender. " 13Mr and Dr Ghougassian submitted that advances made before 6 May 2005 were secured by the mortgage. They both deposed that at the 2003 annual general meeting of the School held on 22 June 2003 Dr Daniel Ghougassian asked a question to the School Board to the following effect: " Who will be responsible for the interest that I pay on the loan to the school ? " 14Mr Michael and Dr Daniel Ghougassian both deposed that they recalled Mr Hrair Badelian replying with words to the effect: " The school will be responsible. The school will also repay the moneys provided by you to the School as loans if and when you require them with interest if you require it, being the same as normal banking rate of interest and its variations so that there is no disadvantage to you. We will enter into a mortgage over the School property to secure the loans and interest payments. " 15Mr Badelian was the chairman of the meeting. He also gave evidence that those words were said. Each of Mr Michael and Dr Daniel Ghougassian and Mr Badelian swore affidavits in which each deposed to the same words being said. 16The minutes of the meeting of 22 June 2003 were prepared by Dr Daniel Ghougassian (T90). The minutes record that Mr Michael Ghougassian (not Daniel Ghougassian) would provide a $500,000 loan obtained on first mortgage security over his house and that " interest/costs on overrun on the above loan during the year to be met by the school at all times. " It was resolved that Mr Michael Ghougassian be a permanent board member for the duration of the period for which he provided a loan to the School. The minutes contain no record of any discussion that the School would grant a mortgage over its land to Mr Ghougassian as security for the loan. To the contrary, the minutes record " the School is always unencumbered property ". 17I am not satisfied that there was discussion at the 2003 annual general meeting to the effect deposed to by Mr Michael and Dr Daniel Ghougassian and by Mr Badelian. Had there been discussion that the School would mortgage its land to secure the loan to be made available to it by either Mr Michael or Dr Daniel Ghougassian, that would have been recorded in the minutes. Instead, the minutes contain a statement to the opposite effect. In any event, in final submissions, counsel for Mr and Dr Ghougassian did not contend that advances from 22 June 2003 would be secured by mortgage. 18On 22 December 2004 the board of the School resolved that the School borrow $1,000,000 from Michael and Daniel Ghougassian for the purposes of working capital and to assist in construction of new buildings. The board resolved that the interest on such borrowings be payable in accordance with the rate charged by Westpac Banking Corporation and Home Loan Services Pty Ltd in relation to similar borrowings. It was resolved that the School execute a deed of loan setting out the terms and conditions of such borrowings. It was resolved that by way of security for such borrowings, the School should grant to the lender a registered first mortgage in relation to the real property of the School. 19It was pursuant to that resolution that the Deed of Loan was signed on 6 May 2005 and the mortgage was executed. 20Counsel for Mr Michael and Dr Daniel Ghougassian submitted that advances made from 22 December 2004 were secured by the mortgage. Counsel for the liquidator submitted that it was only advances made from 6 May 2005 that are secured. 21I agree with the submission of counsel for the liquidator that advances made prior to 6 May 2005 were not secured. The resolution of 22 December 2004 contemplated that future borrowings would be secured by the grant of a registered first mortgage and the execution of a deed of loan. Advances made after the resolution, but before the execution of those documents, would not be secured in the absence of an express provision to that effect in the documents to be executed. The mortgage itself did not specify what advances were secured. The Deed of Loan did not provide that prior borrowings would be secured, but only future borrowings. 22Nonetheless, it is necessary to consider whether and to what extent prior advances had been made to the School. This is because subsequent payments should prima facie be applied against the earlier debts, except where there is evidence that payments by the School to Mr or Dr Ghougassian in reduction of their loans were appropriated by either the School or the lenders against subsequent advances. 23The evidence of the payments made by Dr and Mr Ghougassian both before and after 6 May 2005 is scanty. Dr and Mr Ghougassian said that records of the advances were kept on a computer at the School that was seized by the liquidator. The liquidator took possession of about 30 computers. He retained a computer expert to image the server. The cost of imaging the server was about $7,000 and the cost of taking an image of each of the computers would have been substantial. It would have cost about that much for each computer. Mr Samarasinghe, who was employed by the liquidator, asked Mr Michael or Dr Daniel Ghougassian to identify the particular computer on which the records of advances and repayments could be found. They said that the records were kept on a black Dell computer, but there was no such black Dell computer in storage. 24Mostly, a determination of the debts secured by the mortgage can be made based on contemporaneous records. In some cases, it is necessary to weigh the evidence of Mr Michael and Dr Daniel Ghougassian. In some respects their evidence was not satisfactory. For example, I have rejected their evidence that the School agreed on 22 June 2003 that advances from Dr Daniel Ghougassian would be secured by mortgage. Nonetheless, I think both gave their evidence honestly. They were both benefactors to the School. I would not reject their evidence about an advance (which is itself proved) merely because their evidence is not corroborated, particularly given that corroboration may well be available on computers held by the liquidator that have not been examined by him. It does not appear that anyone from the liquidator's office has sat down with Mr Michael Ghougassian or former employees of the School and attempted to open the computers. 25The statement of account provided by Mr and Dr Ghougassian was based on Excel spreadsheets purportedly recording the state of loan accounts in their names. The Excel spreadsheets were the output of a Quicken software program. It was kept on a computer at the School. From 2004 the entries were made by a Mr Albert Verdian who acted as bookkeeper for the School. The entries were made contemporaneously on a weekly or monthly basis from invoices, bank statements and cheque butts. The spreadsheets were a business record of the School and provide some evidence of the state of the account, irrespective of whether entries on the spreadsheets can be corroborated by other evidence. 26However, a problem with the spreadsheets is that although a number of parents made loans or donations to the School, separate accounts were not kept in respect of each such individual. The accountant for the School, Mr Lott, was asked about the two loan accounts in the names of D Ghougassian and M Ghougassian. He said (T114) " Michael had asked us in earlier years how to record it, because the money was not income, and we told him to open a loan account in the accounts and put the money in through there ." Mr Lott said that from his examination of the books it could be seen that loans were being obtained by Mr Michael Ghougassian either personally or from third parties. 27Although the loan accounts were not audited, Mr Lott viewed the movements in the accounts and agreed with the calculations. Unaudited accounts for the School for the 12 months ended 31 December 2009 included comparable figures for 31 December 2008. They recorded that as at 31 December 2008, the School owed Mr Michael Ghougassian $1,563,986 and owed Dr Daniel Ghougassian $509,483. At 31 December 2009 the debts shown in the balance sheet were $1,647,612 owed to Mr Michael Ghougassian and $538,423 owed to Dr Daniel Ghougassian. These figures were in accordance with the loan account balances shown on the Excel spreadsheets. 28The loan account balances shown on the spreadsheets commence on 26 June 2003 in the case of Dr Daniel Ghougassian, and 1 February 2004 in the case of Mr Michael Ghougassian.