BETWEEN : VISION TELECOMMUNICATIONS PTY LTD (ACN 079 498 561)

AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD (ACN 005 357 522)

Contract - Banker and customer - Loan agreement - No breach by borrower - Event of Default defined to include a material adverse change in the financial condition of the borrower - Whether there was an Event of Default - Whether bank properly exercised its power - Whether a security given over a term deposit was subject to a defeasance

Trade practices - Whether misleading or deceptive conduct - Whether unconscionable conduct - Whether a security had an indefinite liability clause - Whether unconscionable conduct by reason of such a clause

Begbie v State Bank of NSW Ltd [1993] FCA 579; [1994] ATPR 41-288

Currabubula Holdings Pty Ltd & Paola Holdings v State Bank of NSW Ltd [1999] NSWSC 276

Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571

1 PIDGEON AUJ: The first question that has arisen in this action is whether a bank, in respect of a loan where there had been no actual breach by the borrower, properly exercised its power when it refused to advance monies payable under the loan by claiming that in the opinion of the bank there was a material adverse change in the financial condition of the borrower such as was likely to prejudice its ability to pay the loan. The terms of the loan defined this as an "Event of Default". The second question that has arisen is whether a term deposit of $68,000 lodged with the bank was payable when requested by the depositor or whether it was properly being held by the bank as security for the loan. The loan was made by the defendant bank to the first plaintiff, Vision Telecommunications Pty Ltd. The term deposit was lodged with the defendant by the second plaintiffs, Mr and Mrs Sebregts, who were two of the directors of the first plaintiff.

2 The first plaintiff was incorporated on 28 July 1997 by three families who were members of a church group in Kwinana. They were Mr and Mrs Sebregts, Mr and Mrs Dean Smith, his parents, Mr and Mrs Ken Smith and Mr and Mrs Bryan. The Bryans retired from the venture at an early stage. Mr Sebregts and Mr Dean Smith had earlier been trading in partnership as distributors of portable refrigerators and solar panels. They decided to form the company to enter the telecommunications industry which they saw as a growing profitable area. Mr and Mrs Ken Smith agreed to be directors and to mortgage their home to help their son Mr Dean Smith. They were not active in the actual running of the business. They, nevertheless, attended every meeting of directors and took a keen interest in the company as did Mrs Sebregts and Mrs Dean Smith.

3 Mr Sebregts and Mr Dean Smith, at the time the first plaintiff was incorporated, were seeking an agency from Global One which was a service provider giving telephone subscribers access to an overseas telecommunications system for the purpose of making international telephone calls. The first plaintiff succeeded in obtaining this agency and on 22 December 1997 entered into an agency agreement.

4 Another area in which Mr Sebregts and Mr Dean Smith were interested was selling mobile telephones and in particular in arranging for the purchasers of the phones to become subscribers to a carrier such as Telstra, Optus or Vodaphone. The structure normally involved in this type of operation was outlined by Mr Paul Reeves, a director of a retailer called Telechoice Pty Ltd. The evidence was that carriers such as Telstra, Optus and Vodaphone own or have the use of a series of towers to provide a telecommunication system over which mobile phones can operate. The carriers "sell time", that is, they sell a period of time during which a mobile phone can operate over the telecommunication system. The carriers sell the time on a wholesale basis to service providers. The service providers then enter into contracts with persons who have purchased a mobile phone to use the time the service provider has purchased from the carrier. The purchaser pays his or her mobile telephone account to the service provider. The impression I had from the evidence is that the carriers will sell time direct to the public but this would be at a higher rate. They sell the time in bulk at a cheaper rate to the service providers who, in turn sell it to the public with some margin.

5 Some service providers arrange sales through retailers. The handsets themselves do not normally come from the service providers. The retailer obtains them on a wholesale basis from outside warehouses. When a handset is sold, the retailer then arranges for the purchaser to enter into a contract with the service provider to enable the purchaser to make telephone calls over the telecommunication system. The retailer then receives a commission from the service provider for introducing the purchaser to that service provider. The retailer would also receive any profit on the sale of the phone, the property in which would pass by delivery. Mr Reeves said in evidence that the prime interest of a retailer such as his company, Telechoice, was to sell "time on the line", as distinct from selling handsets. The handsets were incidental and in some cases may even be given away in order to sell time on the line.

6 Some retailers operate by entering into either licence or franchise agreements with persons who, on their own account, would operate under the name of the retailer under the terms and conditions of the agreement. If a licensee made a sale, the service provider would pay the commission direct to the licensor who in turn would pay a portion to the licensee.

7 Mr Sebregts and Mr Dean Smith, at the time they were incorporating the first plaintiff, were negotiating with Intercomm, a retailer in Melbourne, for the first plaintiff to act as a licensee of Intercomm in Western Australia by operating one or more Intercomm stores in this State. Each store was to be fitted out by Intercomm so that it had the appearance of an Intercomm store but it was otherwise to be conducted by the first plaintiff on its own account. The first plaintiff was to obtain the handsets in its own name on a wholesale basis from outside warehouses. It was required to use Intercomm methods and the Intercomm computer. It was permitted to conduct other businesses with the consent of Intercomm. The effect of the agreement was that it was intended that when a mobile phone was purchased by a customer of the first plaintiff, the first plaintiff would cause the purchaser to become a subscriber to a telecommunications system by arranging for the purchaser to enter into a contract with a service provider nominated by Intercomm. Intercomm would receive the resulting commission and would in turn pay a portion of the commission to the first plaintiff. The service provider, initially used, was called Link, which, on a wholesale basis, had purchased time from the carrier Optus. This meant that when the first plaintiff sold a mobile phone to one of its customers it arranged for that customer to enter into a contract with Link to give the customer access to the Optus carrier. The customer would then pay the monthly phone bill to Link. As it transpired, Intercomm did not have a service provider giving access to the Vodaphone carrier and that caused a difficulty to which I shall later refer. It was desirable to be able to give a purchaser of a phone an option as to which carrier to use. The plaintiffs also, initially, anticipated that they could give their customers the option of using the Telstra carrier and said that Intercomm had indicated that this could be done. This was not possible as Telstra would not enter into any arrangements with retailers dealing with the carriers Optus and Vodaphone.

8 The evidence showed that it was not seen as practical for a company in the first plaintiff's position to open a store whereby it dealt direct with service providers without the intervention of a retailer such as Intercomm. There were a number of reasons for this. It could be expected that a retailer, through its good will and advertising, would make it much easier for a store to attract customers. For example, it could be expected that all phone calls to the retailer in Melbourne originating in the area of the licensee would be directed straight to the licensee. In addition, the retailer provided the system, knowledge and experience to enable sales to be made.

9 The position, therefore, during July 1997 and the weeks following, was that Mr Sebregts and Mr Dean Smith were negotiating for the first plaintiff to acquire the Intercomm franchise. They were also negotiating with a number of possible sources of finance. At that early stage it was contemplated that there would be more than one store and the site for each store had not been finally determined. Mr Sebregts contacted a number of banks about possible finance and, in the course of his doing this, he rang the head office of the defendant at Allendale Square, Perth. He spoke on the telephone to Mr Corbitt at that office and explained to him that he had obtained the Global One agency and that he intended to use an Intercomm franchise to sell mobile phones. He mentioned other agencies and the fact that he planned to sell his own computer products and to continue to sell portable camping refrigerators, solar panels and accessories. Mr Corbitt asked him to draw up a business plan setting out what the plaintiff company proposed to do.

10 On 2 August 1997, Mr Corbitt visited Mr and Mrs Sebregts' house in Wellard and had a meeting with Mr and Mrs Sebregts, Mr and Mrs Dean Smith, Mr and Mrs Ken Smith's and the Bryans. They were all directors of the first plaintiff. At this meeting Mr Sebregts presented the document he had prepared as to the anticipated future earnings of the company and the question of the loan was discussed as well as the securities that could be offered. Mr Sebregts said that the security offered, at that stage, were second mortgages over Mr and Mrs Ken Smith's house at 39 Bickner Way and a vacant block of land they owned being lot 65 Wheelwright Gardens Wellard. The Bryans offered a second mortgage over land they owned. Subsequently the Bryans decided not to continue in the venture and resigned from the company. This resulted in further discussion as to the securities available. Mr Sebregts said that he then offered a second mortgage over a vacant block of land in his name being lot 43 Glazier Grove.

11 On 26 September 1997 the first plaintiff signed a licence agreement with Intercomm to conduct a single store at an address in Victoria Park. On 30 September Mr Corbitt asked Mr Sebregts to provide details as to how the proposed loan funds were to be used. Mr Sebregts told him that the first plaintiff would like to open two stores but, initially, intended to open only one and to work towards opening a second store later. Mr Sebregts, on 1 October, in response to Mr Corbitt's request to provide information as to how the proposed loan was to be used, forwarded him a document headed "Upfront and Working Capital Requirements".

12 On 6 October the proposed loan to the first plaintiff was approved by the defendant who sent a letter of that date to the first plaintiff's directors. They were asked to countersign the letter which they each did and dated the countersigned portion 7 October 1997. The letter came from the head office of the defendant as that was the place where the application was made. The parties were referred to the branch nearest to where they lived. This was the Rockingham Beach branch managed by Mr Sharp. A day or so later Mr Sebregts delivered the countersigned letter to the branch and opened an account in the name of the company. This was called the "Business Classic Cheque" account.

13 I find, for reasons which will become apparent, that the letter of 6 October 1997 formed the contract between the first plaintiff and the defendant subject to the subsequent variations to which I shall refer. The letter was written on the defendant's letterhead and was signed by Mr Gary Smith, a business underwriter at the Perth Office of the bank. It was he who approved the loan after it had been submitted to him by Mr Corbitt. The letter commenced by saying that the bank was pleased to advise that the business mortgage loan application $110,000 "to fund the establishment of business outlet" has been approved. The loan was for a term of 15 years. During the first year the company was required to pay, each month, interest only. The principal was to be paid in the following years by equal instalments. The following paragraph appeared in the letter under the heading of "Repayments" (Exhibit 2 Vol 1/284):

"ANZ will not demand repayment of your loan unless there is an Event of Default. Failure to make a payment on a due date is an Event of Default. Please refer to the attachment "About your ANZ Business Mortgage loan' for Events of Default."

"The following are Events of Default for purposes of these Terms and Conditions:

- if you fail to make any agreed payment in respect of your Loan on the due date;

- if you or any guarantor defaults in the performance of any term or condition of any Loan or other facility with the Bank whether contained in these Terms and Conditions or in any other document or otherwise or of any term, condition, covenant, warranty or undertaking contained in any security for your Loan or any other Loan facility with the Bank;

- if (being a corporation) there shall be a change, in the opinion of the Bank and without the prior written consent of the Bank, in the effective control of you or either of you or of any guarantor;

- if any event or circumstance occurs or arises which in the opinion of the Bank causes a material adverse change in the financial condition of you or of any guarantor such as is likely to prejudice (in the opinion of the bank) your ability or the ability of any or either of you or of any guarantor to meet your or their obligations under your Loan or any security therefor."

14 This last paragraph becomes one of the critical terms in this action. I find, that it was a term of the contract that the bank could demand payment if an event occurred which came within the terms of this particular paragraph. It was also a term of the loan, and I so find, that if there were an event of default the defendant had the right to decline to advance the undrawn portion of the loan.

15 The letter also referred to the security that was required. This was firstly a guarantee by each director. This remained constant and the guarantees were in fact given. The other securities referred to were mortgages over two pieces of land. One was to be over Mr and Mrs Sebregts' land at Glazier Grove, Wellard and the other was over Mr and Mrs Ken Smith's house at 39 Bickner Way, Parmelia. The letter did not require Mr and Mrs Ken Smith to give a mortgage over their vacant land at Wheelwright Gardens. The letter, in each case, said "mortgage over" the particular piece of land. It was this that caused the first difficulty. Mr Gary Smith, who drafted the letter intended that this refer to a first mortgage, and in normal circumstances I consider that this would be the ordinary meaning of the word. However, the first plaintiff's directors thought it referred to a second mortgage as, on their evidence, this was what was discussed with Mr Corbitt and I accept that this was the discussion. Each piece of land referred to was already under mortgage.

16 There was, however, some delay in the branch before instructions were given to prepare the necessary security documents. Mr Sharp delegated to his assistant Mr Justin Capolicchio the task of obtaining the necessary information to forward to the defendant's securities department in Perth. Mr Capolicchio was on holiday for the first part of October and he was not able to attend to the matter immediately on his return.

17 It is clear and I find that by 27 October 1997 the agreed amount of the loan had been increased to $129,000 in order to pay out the Commonwealth Bank, the first mortgagee of Mr Sebregts land. This resulted in the defendant taking a first mortgage over that land. It was also agreed that the security to be given by Mr and Mrs Ken Smith was a second mortgage over their house together with a second mortgage over their vacant land at Wheelwright Gardens. There is however a conflict of evidence between the plaintiffs' witnesses and the defendant's witnesses as to how this variation came about.

18 Mr Sebregts said that the directors' guarantees were signed on 14 October. He said that on that day he told Mr Sharp that he wished to apply for a home loan and Mr Sharp told him to make an appointment with Mr Capolicchio. Mr Sebregts said that a few days later he rang Mr Corbitt and discussed the possibility of defendant paying out the first mortgagee of the Glazier Grove land so that the defendant would become first mortgagee of that land. He said that Mr Corbitt indicated that the defendant would be happy with this suggestion.

19 Mr Sebregts said that pursuant to the suggestion of Mr Sharp he phoned Mr Capolicchio sometime between 20 and 23 October to make an appointment to see Mr Capolicchio about the home loan and he and his wife saw him at about that time. He said he told him that he had in the Town and Country Bank an amount of $68,000 which he wished to use for the purposes of borrowing approximately $70,000 to purchase a house in Chelsea Gardens, Wellard. He said that Mr Capolicchio immediately expressed interest in this and suggested that they should deposit it with the bank as a temporary surety to enable the plaintiff company to draw down funds on the business loan until the mortgages had been finalised. Mr Sebregts said that Mr Capolicchio told them he believed the mortgages would be registered within seven days but no more than 14 days and recommended that the funds be placed on a seven-day account earning interest 1.5 per cent per annum. They were told that as soon as the mortgages were registered, the money deposited would be released as a security so it could earn a commercial rate pending determination of the home application. On 24 October, the sum of $68,000 was lodged by Mr and Mrs Sebregts with the defendant as a term deposit and as security. It is the plaintiffs' case that it was a temporary security pending registration of the mortgages. This is denied and becomes a question for me to decide.

20 Mr Capolicchio's evidence is that the variation to the loan and to the security to be given was as a result of what, in effect, was a flurry of activity and phone calls made on 23 October 1997 after he ascertained that the land to be mortgaged was already mortgaged. I shall refer to his evidence in greater detail when considering the question as to what were the conditions under which the term deposit was lodged with the defendant.

21 By the 29 October 1997 sufficient of formalities in respect of the loan for $129,000 had been completed to enable the defendant to make an advance. The term deposit had been lodged although the document relating to this was not, in fact, signed until the following day. On 29 October, a separate account was opened to accommodate the new loan. This account was in the name of the first plaintiff and was called the "Business Mortgage Loan" account". No cheque-book issued and this account was to be debited by the directors making written draw-down applications. The first draw down was made on 29 October and was for an amount of $35,500 paid to Intercomm to enable them to fit out the store. The amount also included an amount of $1000 on account of the licence fee of $2500. Mr Sebregts requested that the balance be withheld because of the difficulties the plaintiff was having with Intercomm to which I shall later refer.

22 I find that the arrangement was that the Business Mortgage Loan could be progressively drawn down in the agreed manner until it reached a debit of $129,000. When an application was made for a draw down Mr Sharp examined it to see if it was being used in the business of the first plaintiff. He said in evidence that if it were not he would have queried it. I consider that this was consistent with the loan agreement as its purpose was expressed to be to fund the establishment of the business, which was both Intercomm and the other agencies.

23 There was also in existence the Business Classic Cheque account to which I have referred, which was in the name of the first plaintiff and which had been opened on 6 October. This was a normal cheque account where a cheque book issued. There was no arrangement to overdraw this account and it was not part of the arrangement that the plaintiff could overdraw the cheque account in the expectation that monies would be transferred from the business loan account. The cheque account was not operated on until after 29 October. There was on that day a transfer to it from the Business Loan Account to enable bank fees to be paid. During December the only source of credit to the cheque account was a total of $5000 transferred from the Business Loan account. Interest payable on the Business Loan account was debited to the cheque account.

24 It was originally contemplated that the first plaintiff would open a store in Victoria Park, these being the premises referred to in the agreement with Intercomm dated 27 September 1997. The first plaintiff did not proceed with these premises but obtained premises at 383 Scarborough Beach Road opposite the Innaloo Shopping centre. Mr Stegall of Intercomm found these premises during October 1997 and a lease was signed on 22 December. Mr Sebregts had undertaken a training course with the service provider Link. Mr Sebregts and Mr Dean Smith were, however, encountering considerable difficulty with their licensor Intercomm and some of these difficulties arose soon after the agreement was signed with Intercomm on 27 September. I have mentioned that they had anticipated that Telstra would be one of the carriers that they could offer to their customers. However no store which offered connections to other carriers could offer connections through Telstra so in this respect the first plaintiff was not at a disadvantage in respect of other stores. The difficulty was, nevertheless, compounded by the fact that Mr Sebregts ascertained that Intercomm had no relationship with a service provider who could arrange a connection with the carrier Vodaphone. This meant that the first plaintiff could offer the purchasers of its phones a connection only through Optus by arranging for the purchaser to subscribe with Link. However when the store was about to open, late in January, Link severed its connection with Intercomm and was not available to provide connections to a carrier. This meant that the first plaintiff had no means available to arrange for the purchasers of its phones to be connected to a carrier.

25 Before dealing with the steps taken to overcome this particular difficulty, I shall refer to further difficulties that arose. Mr Sebregts and Mr Dean Smith hoped that the fit-out of the store would be completed by Christmas 1997. This was delayed but Intercomm arranged to find another fit-out contractor. The materials arrived early in January and the fitting out then proceeded with little trouble. A meeting of the director's of the plaintiff was held on 5 January 1998 which showed that the fitting out of the store was nearly complete and they anticipated an early opening with much publicity being arranged by Intercomm. However they were concerned by the fact that one of the directors of Intercomm was bankrupt. This came to the directors' notice through one of the suppliers requiring a C.O.D payment. The directors also ascertained, either then or later, that this person had been charged with obtaining credit without disclosing his bankruptcy and in this sense was guilty of fraud. The directors resolved on 5 January to "look at alternative service providers just in case". The plaintiff's directors had noted in their minutes that there was little they could do other than inquire as they were committed to Intercomm.

26 Mr Sebregts, during January, did make contact with other service providers as suggested in the minute. He spoke to a representative of Hutchison Telecommunications (Australia) Limited. This was a service provider who arranged connections through the carrier Optus. It was a service provider and not a retailer. The minute did not suggest that they seek another retailer and it said that the company was committed to Intercomm. An agreement was entered into with Hutchison on 20 February 1998 after the store was opened as an Intercomm store and after the position had become acute through the first plaintiff not being able to connect its customers to a carrier. This agreement enabled the first plaintiff to connect its customers to the carrier Optus. The first plaintiff had also by 18 February1998 succeeded in entering into an arrangement with the service provider Vodac to enable the first plaintiff to connect its customers to the carrier Vodaphone.

27 Mr Sebregts said that during January he told Mr Sharp that the directors of the first plaintiff were not happy with Intercomm as that company was not delivering the services agreed. He said that he told Mr Sharp that if a second store it would not be under the Intercomm name.

28 The store was unofficially opened for trade on 27 January 1998. There followed an official opening on 7 February with considerable publicity over the radio and with a barbecue. However, on the plaintiff's evidence, things with Intercomm went from bad to worse. Intercomm stopped answering calls. The first plaintiff's difficulties were compounded by the further fact I have mentioned, namely, that the service provider Link, which was the medium by which the plaintiff could cause its customers to be connected to the Optus carrier developed financial problems due to the Asian crisis and could no longer provide a service to the first plaintiff. This meant that until 18 February, when an arrangement was made with Vodac, the first plaintiff could not connect to a carrier a customer who purchased a mobile phone. Mr Dean Smith had, in the meantime, made some emergency arrangements for the first plaintiff to borrow the identification number of another company to enable the first plaintiff's customers to be connected to a carrier. By 20 February the first plaintiff could operate the mobile phone business by being able to connect purchasers of phones to a carrier through the new service providers. I mentioned that it is difficult to run such a business this way without the support of a retailer and Intercomm was not providing this support. Mr Sebregts and Mr Dean Smith decided to change to another retailer and in early February Intercomm were told of this. Mr Sebregts said he kept the defendant informed of this. I am also satisfied that Intercomm had so fundamentally breached its obligations that it was open to the first plaintiff to make the change. It appeared that Intercomm had abandoned its position.

29 Mr Sharp, who had become concerned with the first plaintiff's account, inspected the store on 10 February. I shall, later, refer in greater detail to this visit. Mr Sebregts told Mr Sharp that they would be looking for another provider. The expression "provider", in this context, was probably both meant to be and was understood to be referring to a retailer. Mr Sebregts made contact with One.Tel Ltd, which was both a service provider selling time on the Optus carrier and also a retailer. This contact would appear to be during the earlier part of February. This company was expanding in this State and was interested in having a retail outlet in the Innaloo area. A representative, Mrs Piper, attended the store which she said was an Intercomm Telecommunications store. She said the store was fully fitted out, although at the time it did not have a large number of products for sale. One.Tel was agreeable to repaint the store in order to make it a One.Tel store. Mrs Piper said she attended to the training of the operators which were Mr Sebregts and Mr Dean Smith. Mrs Piper said she provided the store with merchandising material and other equipment to enable the store to connect to the One.Tel service provider. Mrs Piper's evidence indicated that this all occurred in March but I consider the initial contact must have been in February. She said that shortly afterwards, this material was returned because of difficulties with the bank. On 26 March she forwarded to them a letter terminating their dealership.

30 While these negotiations were in progress, Mr Sebregts and Mr Dean Smith were introduced to the retailer Telechoice which used One.Tel as its service provider. The contact came about in the following way. In mid-February 1998 Mr Sebregts received a telephone call from Mr James Brandt who was the newly appointed manager of Intercomm. Intercomm was negotiating with Telechoice to see if Telechoice would take over Intercomm's business in Western Australia. Intercomm had one other store at Cannington operating under licence. As a result of these negotiations Mr Sebregts met Mr Paul Reeves, a director of Telechoice and being the witness to whom I have earlier referred. Mr Reeves actually came into the store incognito saying he wished to purchase a phone and was satisfied with the approach of Mr Sebregts and Mr Dean Smith. Negotiations between Telechoice and Intercomm did not proceed as Telechoice was not interested in taking over Intercomm. However, negotiations did continue between Mr Reeves and Mr Sebregts in respect of the first plaintiff operating a Telechoice store under franchise.

31 Telechoice Pty Ltd had a preference for operating kiosks in arcades but there were instances where the company saw an advantage in operating a store. Mr Reeves said that the company was most interested in operating the Innaloo store. Telechoice required the first plaintiff, in addition to the store, to operate at least one kiosk for which a franchise fee of $30,000 was required. Payment of this fee would have enabled the first plaintiff to operate both the store and the kiosk. A suggested place for the kiosk was an arcade in a Rockingham shopping centre. The publicity to launch Telechoice in Western Australia was proposed for May 1998. Mr Sebregts said, in his witness statement, that he considered that Telechoice was a better option than One.Tel. The decision was made for the first plaintiff not to proceed as a One.Tel store but to operate under a Telechoice franchise. This meant that the store would be a Telechoice store but One.Tel would still be the service provider by reason of its relationship with Telechoice. Mr Dean Smith went to Melbourne to make further inquiries about Telechoice and, if satisfied, to commence training in the Telechoice methods. It was during this transitional period that the critical phone conversation took place with Mr Sharp on 6 March. It arose because of the need to obtain $30,000 to pay to Telechoice.

32 Mr Sebregts rang Mr Sharp and said that he advised Mr Sharp of the difficulties they were having with Intercomm and told him of the decision to change over to a different retailer. What was said in this telephone conversation becomes a further matter for me to determine. It is common ground that Mr Sebregts wanted the return of the term deposit in order to pay the $30,000 to obtain the new franchise and Mr Sharp indicated that it was part of the bank's security and could not be returned. Mr Sebregts claims that Mr Sharp indicated that the first plaintiff could make no further draw downs on the business loan and told the plaintiff company to stop trading. He said the company did stop trading and attempted to assign the lease. The first plaintiff's bank accounts were transferred by Mr Sharp to Head Office in Perth in circumstances to which I shall later refer. It is common ground that Ms Haustead of that office, on 23 March 1998, indicated that the defendant would pay no further money on the loan. The plaintiffs claim that this refusal occurred at an earlier date, namely 6 March and this becomes a question to determine. There were subsequent negotiations as to the defendant giving credit on a different basis but these came to nothing. A factor preventing agreement was that the defendant wished the money in the term deposit to be part of the new arrangement but Mr Sebregts saw this as being an asset personal to him and which could not be mortgaged or used in the business. It was intended for a house.

33 The first plaintiff claims that what was said in the telephone conversation of 6 March 1998 gives rise to its cause of action, being a breach of the business loan agreement and which is pleaded as follows:

7.1 the loan pursuant to the first agreement had been drawn down to an amount of only $88,455,91; and

7.2 there had been no Event of Default,

John Sharp, the manager of the defendant's Rockingham branch, refused to permit the first plaintiff from making any further drawdowns on the loan, and informed the first named second plaintiff during a telephone discussion that;

7.3 the first plaintiff must cease trading;

7.4 the first plaintiff must not write out further cheques;

7.5 the account was being transferred to the defendant's group credit management area."

34 There are also claims under the Trade Practices Act (Cth) and a claim for unconscionable conduct which, in each case, I shall set out later.

35 The defendant's defence is that by 6 March there was an event of default as defined in the terms of the loan by reason of there being a material adverse change in the first plaintiff's financial condition thus relieving the defendant of the obligation to make further advances. The defendant denies that Mr Sharp, in the telephone conversation of 6 March, refused to permit further draw-downs or that he said that the first plaintiff must stop trading. It is agreed that on 26 March 1998 a direction was given by the defendant that there would be no further draw-downs, the defendant relying on the defined event of default to which I have referred.

36 The second plaintiffs claim that the agreement relating to their placing $68,000 on a term deposit was that it would be so placed to provide a temporary security for the loan made to the first plaintiff and this security was provided to enable the first plaintiff to commence drawing down on the loan before the mortgages over the land were registered. It is claimed that there was an express agreement that once the mortgages were registered the term deposit would be repayable to the second plaintiffs. Registration of the mortgages was completed by 1 April 1998 but the defendant refused to release the term deposit. $8000 was repaid in subsequent negotiations and the claim is for $60,000. There is also a claim for damages.

37 The defendant denies that there was an agreement to release the deposit on the completion of the registration of the mortgages. It was to remain while money was owing to the defendant but there was an understanding that it would be available to the second plaintiffs for a housing loan if it were replaced by adequate security.

Conditions under which the term deposit was mortgaged

38 I propose to deal with the claim of the second plaintiffs first and the question to determine is the conditions under which security was given for the term deposit of $68,000. I have already referred to Mr Sebregts evidence as to how he said that on Mr Sharp's suggestion he and his wife saw Mr Capolicchio a day or two before 23 October in order to discuss a housing loan and that Mr Capolicchio suggested that the money he had available be placed on a temporary deposit to secure the company loan pending the registration of the mortgages.

39 Mrs Sebregts' evidence was that on or about 23 October 1997, she and her husband were discussing the home loan with Mr Capolicchio. He asked about their assets and what deposit there was. Mrs Sebregts said, "When we mentioned that we had $68,000 in the Town and Country Bank, his ears pricked up." He then said that if they put the money into a seven-day investment account as a temporary surety, they could then draw funds to start the business quicker. She confirmed her husband's evidence that he said that the money would be repayable when the mortgages were registered which would be seven to fourteen days hence. She said that on 24 October she and her husband went to the bank, lodged the term deposit and signed some further documents.

40 Mr Capolicchio's evidence was that shortly before 23 October 1997, he commenced to do the paperwork in respect of the loan referred to in the letter of 6 October. He assumed that the reference to "mortgage" was a first mortgage. He obtained searches to the title and ascertained on 23 October that each title was encumbered. He spoke to Mr Sharp, and was instructed to ring Mr Sebregts in order to ascertain if the mortgages had been paid out. He said he had a number of telephone conversations that day with Mr Sebregts and he then reported to Mr Gary Smith who was then the credit manager in the head office of the bank at Perth and who was the one who gave approval to the loan. Mr Gary Smith told Mr Capolicchio to make notes of the conversation which he did and this was the basis for refreshing his memory to give his evidence.

41 Mr Capolicchio's evidence, based on these notes, was that in the course of his telephone conversations that day with Mr Sebregts, he was told that the mortgage on Mr Sebregts' property at Glazier Grove was securing a business debt of $17,250 to the Commonwealth Bank. Mr Capolicchio said that at the end of the series of the phone conversations he asked Mr Sebregts if he wished to increase the loan to $129,000 to pay out the Commonwealth Bank and Mr Sebregts replied in the affirmative. Mr Capolicchio was also told, by Mr Sebregts, in these conversations that the mortgage by Mr and Mrs Ken Smith over their house in Bickner Way was then securing a loan of $76,000 which had been used to purchase a block in Wheelwright Gardens. It was suggested that the latter be additional security so that the defendant would take second mortgages over both Bickner Way and Wheelwright Gardens.

42 Mr Capolicchio said that from information he had and from what Mr Sebregts told him he calculated that with the additional security of Wheelwright Gardens there would still be a shortfall of $35,275. Mr Capolicchio said that when he had ascertained this he asked Mr Sebregts if he had any other property available and was told by Mr Sebregts that he had received $64,000 from a worker's compensation claim and he anticipated receiving a further $14,000 from Medicare. This latter figure was noted but plays no further part in the action.

43 Mr Capolicchio said that Mr Sharp suggested that he raise with Mr Sebregts the possibility of using the cash to fund the deposit as a security deposit. He said that he suggested to Mr Sebregts that he could either use the workers' compensation money to reduce the loan available to the business or, alternatively, if he made available the term deposit as a security, there may be sufficient security acceptable to the bank. He told him that with the term deposit as security, the bank may approve a partial draw down of a loan to avoid the need to wait for the other securities to be in place. He said that Mr Sebregts replied that he wanted to use the money as a deposit to build the house and asked whether the bank could provide a home loan. Mr Capolicchio replied that the bank could not approve a home loan as this had to be done in Melbourne. He also suggested that if the bank approved the home loan, he could use the term deposit as part of the price of the home and the security for the plaintiff's debt could be transferred to this new property. He said that Mr Sebregts then said that he would use the term deposit as security and would apply for the home loan. He said he was very anxious to have the plaintiff's loan drawn down as soon as possible.

44 Mr Capolicchio said, that on the suggestion of Mr Sharp, he again on that day rang Mr Sebregts and said that if Mr and Mrs Ken Smith called at the bank that day and signed letters of authority to the Adelaide Bank it would save time and allow the draw-down to proceed if the loan on the new basis were approved. Mr Sebregts then arranged for Mr and Mrs Ken Smith to call at the bank that day to sign the document required and Mr Ken Smith, in his evidence confirms that he was called to the bank to sign the document addressed to the Adelaide Bank to enable the second mortgage to proceed. The documents actually signed were letters of authority addressed to the Adelaide Bank authorising that bank to give details of the loan to the defendant.

45 Mr Capolicchio, made a summary of the conversations as he was requested to do and then sent the file back to the head office. Mr Gary Smith approved the new arrangement. He prepared a letter in similar form and containing in the main similar words to the letter of 6 October. In this letter he set out the new security which was a mortgage over Glazier Grove and a second mortgage over the other two properties. It also referred to the guarantees as did the first letter. It contained, however, an additional security, namely, charge over the $60,000 (sic) term deposit. It was intended that this letter be signed by the borrowers. It was not signed and there is no evidence of posting before me. I therefore find that this letter was not sent and cannot be used as evidence of the new arrangements. The Event of Default is contained in the first document.

46 It is common ground that on 24 October, Mr and Mrs Sebregts called into the bank and lodged $68,000 as a term deposit. Although the figures of $64,000 and $60,000 had earlier been mentioned, this was the amount actually lodged on deposit. Mr Capolicchio said that as it was intended that it may later be used in respect of the proposed housing loan, and in order to avoid penalty interest, he suggested it be lodged on a seven-day term. He said that when he received the deposit, he requested the securities department at the head office to prepare the standard authority to set off the deposit against moneys owing to the bank. In the meantime he lodged a restraint notice on it so that it could not be repaid. Mr Capolicchio said that on 30 October Mr Sebregts called to sign the authority in respect of the term deposit and a diary note was made to that effect. He said that Mrs Sebregts signed at a later stage. There was no diary note as to when she did sign. The Sebregts said that they signed on the same day when Mr Capolicchio reiterated that the deposit was temporary security pending the registration of the mortgages. The authority signed by Mr and Mrs Sebregts was a standard form of security which authorised the bank to apply the fixed deposit in payment of any moneys owing by the bank and to leave the money on deposit until all such moneys were paid.

47 I have found that the document identifying the loan is the letter of 6 October 1997 and its attachments. These identified a loan for $110,000. I find on the further evidence that I have set out that this was increased to $129,000. It must follow and I find that the mortgages of land that were agreed to be given were the mortgages actually executed and ultimately registered. Each director was to give and did give his or her personal guarantee.

48 I find that Mr and Mrs Sebregts, on 24 October 1997, lodged with the Bank $68,000 as a term deposit with the intent that it be used as a further security for the loan to the plaintiff. They signed the document to which I referred agreeing to leave the money on term deposit for the duration of the loan and for any other moneys owing to the Bank authorising the Bank to have access to the deposit. I am satisfied that this latter document was signed on 30 October. I reach that conclusion because I consider that when the deposit was received on 24 October, Mr Capolicchio forwarded instructions to the Securities Department, Perth to prepare the document which meant it was received back at a later time.

Whether term deposit security was a temporary one

49 The critical question that arises is whether there was an oral agreement that the interest given to the Bank by Mr and Mrs Sebregts in the term deposit was to be a temporary interest to be brought to an end when the mortgages of the land were registered so that the deposit reverted unconditionally to Mr and Mrs Sebregts. If this agreement were made, I would see it as being a defeasance acting in a similar way to a deed of defeasance which is entered into when there is an absolute assignment of property by way of mortgage, the deed making it clear that the absolute assignment is a mortgage only and that the property will be transferred back when the conditions of the mortgage are met. I would see the plaintiffs having the onus to prove this oral agreement, but it would be discharged if it were shown, on the balance of probabilities, that either Mr Sharp or Mr Capolicchio or any other bank officer told Mr and Mrs Sebregts that it was a temporary security and would cease to operate when the mortgages were registered or if words to that effect were used.

50 I consider that the six directors of the plaintiffs who gave evidence before me were very honest witnesses seeing to conduct their business in an honest way and doing their best in court to recount the truth as best they could. It would, however, be a difficult, if not a near impossible task, for any person with little or no records to be able to recount in detail the sequence of events, the documents signed and what occurred during the month or so following the making of the loan. Many of the documents did not bear the date on which they were signed. There were, I consider, many areas where Mr Sebregts and the other witnesses were genuinely mistaken.

51 The principal officer for the defendant as to what occurred over this period in relation to this particular issue was Mr Capolicchio. He left the Bank and is now working in London as a business development manager. He would have handled many transactions of various types. I consider he had some direct recollection of what had occurred and was doing his best to recount it. There were, however, many areas in which I consider he was mistaken and, as to be expected, he was relying on records.

52 I shall refer to two records made at the time. The first to which I shall refer are the minutes of a meeting of the directors of the first plaintiff, which one of the witnesses said was held in the evening of 23 October 1997. I shall set these out. Justin is the first name of Mr Capolicchio. The minutes read (Vol 2/301):

"1. MEETING CALLED AS ALEX ADVISED BY JUSTIN AT THE ANZ BANK ROCKINGHAM BEACH, THAT HE COULD PUT HIS MONEY UP AS TEMPORARY SURETY WHILST MORTAGES WERE BEING FINIALISED. THIS WOULD ENABLE VISION TO DRAW DOWN FUNDS TO PAY INTERCOMM FOR FITOUT AND LICENSE. DISCUSSION FOLLOWED AS TO WETHER IT WAS OK TO DO THAT. ALEX SAID HE WAS ADVISED BY JUSTIN IT WAS OK AND THAT MONEY WOULD BE HELD IN A TERM DEPOSIT 7 DAY ACCOUNT. ONCE MORTGAGES WERE SETTLED HE COULD HAVE HIS MONEY BACK. ALEX SAID IT WAS ONLY A TEMPORARY MEASURE AND THAT HE AND LISA WERE LOOKING AT BUILDING A HOME. IT WAS AGREED THAT IF IT WAS OK TO DO SO THEN IT WOULD HELP SPEED THINGS UP."

53 The next record made at the time was the notes made by Mr Capolicchio late on 23 October when he was requested by Mr Gary Smith to make a summary of what happened that day.

Findings as to what occurred on 23 October 1997

54 I am satisfied that the question of a change in security was first raised by Mr Capolicchio on 23 October when he ascertained that there were mortgages already registered on those pieces of land over which he intended to prepare securities. This caused him to speak to Mr Sharp who instructed him to ring Mr Sebregts to ascertain if there were moneys owing under the mortgages. This in turn led to a number of telephone conversations that day when Mr Capolicchio ascertained that there was money owing under the mortgages and that Mr Sebregts was contemplating there being second mortgages. I consider Mr Sebregts was mistaken when he said that the way the matter of the term deposit came up was that he had earlier discussed with Mr Sharp the fact that he required a housing loan and that Mr Sharp then asked him to make an appointment with Mr Capolicchio, which he did, and that when he mentioned to Mr Capolicchio that he had an amount in the vicinity of $64,000 available, Mr Capolicchio suggested that he make it available as security for the plaintiff's business loan. One factor I have weighed up is that I feel it would be unlikely that a bank officer would suggest such a course spontaneously and when he was not aware that there was the difficulty with the securities.

55 One thing that is certain is that 23 October was, in respect of the first plaintiff's loan, a day of considerable activity as far as Mr Capolicchio and Mr Sebregts were concerned. This supports Mr Capolicchio version. What is known and what is common ground is that at some stage that day Mr and Mrs K G Smith were called to the Bank at very short notice and signed the request to the Adelaide Bank to supply the defendant with details of the existing loan to the Adelaide Bank. They called at the request of Mr Sebregts and the evidence indicates that they called alone and not with Mr Sebregts.

56 Mr Capolicchio in his evidence recalls ascertaining from Mr Sebregts that there was the $64,000 available. He noted it in his summary although he did not specifically refer to it as being a security. He spoke to Mr Gary Smith who requested it as a security but it appears from his evidence, particularly his re-examination, that he cannot specifically recall obtaining Mr Sebregts' approval and agreement that it would be used as a security.

57 The next matter that I consider is apparent from the whole of the evidence is that, at this stage, the first plaintiff was anxious to pay Intercomm the initial payment to get started. The bank records suggest this. Mr Gary Smith refers to it. The first concern of Mr Capolicchio on 23 October was that the pieces of land he thought were to be available for mortgage were already encumbered. The way out discussed in the initial discussions that day created in his mind the further concern that the security was inadequate and he raised this question with Mr Sebregts with a view to see if there was other property available. The records support this. He was, I consider, in answer to this question, told of the worker's compensation money but was told that Mr Sebregts had in mind using this to obtain a home loan. I consider Mr Capolicchio immediately saw the possibility of this being used as security for the first plaintiff's loan as that was the very purpose of his enquiry. It would also enable the bank to safely advance the initial payment to Intercomm prior to the mortgages being registered. This amount was a lesser amount that could be set off against a greater amount. It is true, as Mr Davis pointed out in cross-examination and in his submissions, that Mr Capolicchio, in the summary he made that night (Vol 1/301), did not refer to the compensation money being a security. However Mr Gary Smith said that in the phone call he received when he told Mr Capolicchio to make the diary note, he was told it was to be a security and, as I mentioned, this was the purpose that prompted Mr Capolicchio questions in this area.

58 I consider further that Mr Capolicchio's note that Mr Sebregts "talked of" borrowing for the home more consistent with the activity of 23 October, as outlined by Mr Capolicchio than it is with its being the subject matter of a call by appointment a day or so earlier. I consider and find that Mr Capolicchio did say that the bank could take an immediate charge over the money and the matter would be reviewed if the home loan application went ahead and there was a first mortgage over that piece of land if here were sufficient equity. I consider that this was said in the context of its being a likely possibility. I have weighed up Mr Davis's submission, that if the first plaintiff's loan was fully drawn it would not be possible to obtain the same ratio of equity that the bank normally required. This is right but I do not think the parties, that day thought that far ahead. In any event, if there were a first mortgage over house property a bank may favourably consider a lesser ratio.

59 I consider that the suggestion that the money be placed on a 7 day deposit was made over the phone by Mr Capolicchio on 23 October. This was referred to in the first plaintiff's minute of 23 October. This was because of the possibility of its being used for the proposed housing loan. I consider that Mr and Mrs Sebregts misunderstood Mr Capolicchio when they thought that they were told that they could have the money back when the mortgages to secure the first plaintiff's loan were registered. I do not consider Mr Capolicchio or any other person said words that would give that impression.

60 I have also weighed up Mr Davis's argument that the suggestion coming from Mr Capolicchio that the deposit be only for seven days with the resulting very low rate of interest is consistent with Mr and Mrs Sebregts evidence that the use of the money for security was to be for a very short time consistent with the registration of the mortgages. This I felt was a strong argument but I consider it is outweighed by the other factors. The housing loan was also to be in the reasonably immediate future. The Sebregts did submit to the defendant for approval of finance an offer to purchase a residence for $175,000 dated 18 January 1998 where they were to borrow $115,000. Mr Sharp by letter dated 21 January 1998 said that the defendant was unable to assist.

61 I do not consider the claimed oral agreement was made.

First Plaintiff's claim and the defence to it

62 The defendant had agreed to advance to the first plaintiff on the business loan the sum of $129,000. It is known that by 23 March 1998 when the amount advanced was a little short of $90,000 the defendant refused to make any further advances. The questions which must now be determined are firstly whether that refusal occurred on 6 March and secondly whether the defendant was relieved of its obligation to make advances by reason of there being a material adverse change in the financial condition of the plaintiff within the terms of the default clause I have set out.

63 I am satisfied that the reason why Mr Sharp made an inspection of the store on 10 February 1998 was because he was genuinely concerned as to the state of the first plaintiff's accounts. On that day the defendant had advanced under the business mortgage loan a total of $66,755 which was approaching the amount being held by the defendant on the term deposit. In addition, the Business Classic Cheque account had been overdrawn to an amount of almost $13,000 when there had been no arrangements made to allow it to be overdrawn. Mr Sharp said that when he inspected the store he found it bare of stock. He said that there were displays all around the side of the shop but a big gap in the middle. He said the small amount of stock in the shop looked completely out of proportion with the large size of the store. This caused him to be worried whether moneys advanced under the loan were being used in the business. The evidence of Mrs Piper of One.Tel Ltd, who also inspected the store at about this time supports what Mr Sharp said in respect of the lack of stock. Mrs Piper said that her recollection was that the store, although fully fitted out, did not have a large number of products for sale.

64 On the next day, 11 February, Mr Sharp caused a draw down of $13,000 to be made from the Business Loan account to the Classic Cheque account to put it back into credit. I consider what I have set out to date as to what occurred at and following the inspection on 10 February is relevant to determine Mr Sharp's state of mind and what was said in the telephone conversation of 6 March. I would mention that by this later date the Classic Cheque account was again overdrawn by $4,000.

Versions as to what it is claimed was said in the phone conversation 6 March

65 The question now to determine is what was said in the telephone conversation of 6 March. In order to determine this I have the evidence of Mr Sebregts and Mr Sharp together with notes each made at the time. Mr Sebregts made a summary for Mr Dean Smith (Vol 2/557) and Mr Sharp made a summary in the report he sent to his Head office on 10 March. (Vol 2/528).

66 Mr Sebregts said, in evidence, that the conversation commenced by his explaining the difficulties with Intercomm. He referred to a director being bankrupt and being fraudulent. He said that he told Mr Sharp that the first plaintiff had ceased trading with Intercomm and he said in his witness statement that he informed Mr Sharp of the arrangements that had taken place with One.Tel and the arrangements proposed with Telechoice. This might suggest that One.Tel was still in the picture as a possible licensor of the store with Telechoice being the franchisor of the kiosk. The cross-examination made it clear that One.Tel, as a retailer, was no more than part of the history of the negotiations. This was made clear in cross-examination when Mr Sebregts said (at T/S 199) that he had already negotiated with One.Tel and that was in the past tense and later there was the following question and answer (at T/S 199):

"And that you were trying to gain an additional licence to enable you to trade because nothing had been forthcoming from Intercomm?---No. We would've told them that we're looking at another licence in the store because we were debating at that time - we'd already negotiated One.Tel. One.Tel said whenever we're ready we can go ahead, but we also had Telechoice who we thought at that time would be best to have a Telechoice store and a Telechoice kiosk. Dean was in Melbourne just finalising that negotiation."

67 It was clear from Mr Reeves' evidence that the Telechoice plan involved operating both the store and the kiosk under the one retail franchise although the draft franchise agreement referred specifically to a kiosk. One.Tel would, however, still be Telechoice's the service provider. The request made by Mr Sebregts for the return of the term deposit was to finance the Telechoice plan.

68 Mr Sebregts said the next part of the conversation with Mr Sharp on 6 March related to his request to be repaid the term deposit. He requested this and he gave the seven days notice. He said that Mr Sharp told him that the money was still being used as security for the loan. Mr Sebregts said that he replied that nearly six months had elapsed and he said that he was then told that the title to one of Mr Ken Smith's properties had been lost and there was not enough collateral in place to service the loan. Mr Sebregts said that he replied "What's going on here. I need that money. Dean is in Melbourne doing the training now and I have put a deposit down to go ahead. This is unbelievable". He said that Mr Sharp replied "That's it. You are going to have to stop trading. This has got out of hand. You cannot write out any more cheques. It is going into the hands of the credit receivers". Mr Sebregts said that he told Mr Sharp again about the arrangements he had in hand with One.Tel and Telechoice and Mr Sharp repeated that he would have to shut down. He said that, following this conversation and after consulting with Mr Dean he did shut the store down. He contacted the estate agent to see if the agent could arrange the assigning of the lease of the store. His notes refer to telephone conversations with Mr Sharp on the days following and indicate that Mr Sharp, in effect, refused to discuss the matter.

69 Mr Sharp's version of the conversation was that he was told that Intercomm had not returned the plaintiff's telephone calls for some time. Mr Dean Smith had flown to Melbourne to investigate the matter and had discovered that one of the directors of Intercomm had been charged by the fraud squad in Melbourne. He was told that the other licensee of Intercomm in Perth, being a store in Cannington, had closed its doors and had walked away. He was told further that Mr Dean Smith was using his time in Melbourne to negotiate with an alternative licensor and had visited a kiosk in a large shopping centre. He said that the first plaintiff was looking at doing the same thing in Kwinana or Rockingham and he wanted the $60,000 term deposit to be released to him to fund the franchise. He said that Mr Sebregts told him that there were two options, namely, for his company to close its doors and walk away as the operators of the Cannington store had done, or, alternatively, to find a new licensee and operate out of a kiosk in a large shopping centre selling telephones only and not computers. He said that Mr Sebregts told him he preferred the latter option.

70 Mr Sharp said that he told Mr Sebregts that if the plaintiff closed, it would have to repay its debts which may mean realising securities and would have to assign its lease. If the company wished to start a new franchise, the bank would need to see financial plans indicating cash-flow forecasts to assess the ability of the franchise before funds could be released. He said that the term deposit was part of the security and could not be released. His evidence was that there were further telephone conversations and in those conversations he said that because of the problems with Intercomm, the plaintiff company should keep its spending to an absolute minimum and that he would need to refer the matter to his credit manager. He denied that he said that Vision should stop trading, or that he was stopping Vision's accounts or that they should not write out any further cheques. He said he did not say that the account was being transferred to the bank's group credit management department. He said that there were a number of telephone conversations.

71 Mr Sharp said that because of the problems with Intercomm, he was concerned whether the plaintiff company had a business and whether it was able to repay the loan. He discussed the matter with a credit manager in the Perth head office. On 10 March he prepared a report which he sent to head office. It set out in substance the conversation contained in his statement of evidence and noted in particular that the store at Cannington had closed and that the licensor had been charged by the fraud squad. He made the report to which I have referred and which concluded with the following recommendations which he sent with the account file to head office:

(1) Transfer sufficient funds to place overdraft facility in credit.

(2) No further drawings on account. Confirmed with customer that they have no further cheques to issue (rent and other VO will be ongoing).

(3) Transfer of file to hire risk in view of position."

Findings as to allegations in par 7 of the Statement of Claim arising from phone conversation of 6 March

72 I consider the phone conversation of 6 March was a heated one. Mr Sharp was very concerned about the state of the account. The business had not started to earn very much money and had little stock. The cheque account was again overdrawn in an amount in excess of $4000 despite the transfer made on 11 February. He was being pressed to advance more money. It particular it was contemplated that another $30,000 was to be spent to get the business going. I consider that Mr Sharp, because of his concerns both with the business loan account being repaid and with the amount of overdrawing on the cheque account, gave instructions the effect of which was that cheques could not be written out except for essential matters such as rent. I do not consider he gave a command for the plaintiff to stop trading in the peremptory way suggested in the statement of claim. I consider in the somewhat heated discussion that took place, one of the alternatives he suggested was that the first plaintiff might have to stop trading, but it was no higher than that. Unfortunately, Mr Sharp did not say to Mr Sebregts that it was a condition of the loan that if there were the material adverse change as defined, the Bank was not required to advance further moneys and that one of his options would be to renegotiate the loan in the light of the new situation. Ms Haustead did not explain this either. Had it been explained, then much of the misunderstanding and difficulty may never have arisen.

73 I shall now, in the light of these general observations refer to the specific claims made in par 7 of the Statement of Claim. Paragraph 7.3 claims that Mr Sharp said that the first plaintiff must cease trading. If it were proved that these words were used, the act of using them would not of itself be a breach. The breach which must be proved is a refusal to allow any more moneys to be advanced under the loan in circumstances where the bank was obliged to make the advances. These words, if used, would not therefore amount to a breach unless it could be inferred from their use that no more money would be advanced from the Business Loan Account. I have indicated that I do not consider the words were used in the sense suggested by the statement of claim, that is, a direct command to stop trading. At the highest it was one of the options discussed.

74 Paragraph 7.3 claims that Mr Sharp said that the first plaintiff must not write out further cheques. I find that this was said. This prohibition applied to the Classic Cheque account as that was the only account with a cheque book. As this account had no overdraft facility and was well overdrawn it was open to Mr Sharp to give such a direction. I consider it is implicit that when words of that type are used, the prohibition of writing cheques is restricted to when there is no money in the account to pay them. It would be obvious that such a prohibition would not be intended to apply if the account were in credit.

75 As to the claim in par 7.5, I am satisfied that on that day or shortly afterwards Mr Sebregts was told that the account was to be transferred from Rockingham to the Group Credit Department in Head Office.

Whether there was a refusal on 6 March to permit draw-downs

76 However the main thrust of par 7 to establish a breach of the loan agreement are the two claims that, firstly, that there was no Event of Default and, secondly, that Mr Sharp refused to permit the first plaintiff to make further draw-downs on the Business Loan account. It is not claimed in the plea that he said this to Mr Sebregts. It could be argued that there was no refusal inasmuch as there was no request for a draw down. I consider, however, it can be inferred that if there were a request made after 6 March for a draw down for the purposes of furthering the business within the terms of the original loan, it would have been refused and Mr Sebregts was conscious of this. Mr Sharp's recommendation, which I have set out above, stated that there were to be no further drawings on account other than for things such as rent. His evidence was similar. He said that he made the request to Mr Sebregts that expenditure be kept to the very minimum. This, of itself would be a restriction of the right originally given by the terms of the loan and would be a breach if such a restriction were not otherwise authorised. I find that the second allegation in par 7.2 claiming that on or about 6 March Mr Sharp refused to permit the first plaintiff to make further draw-downs has been proved. There is no argument that Ms Haustead gave such a direction on 23 March 1998. She wrote to the first plaintiff's directors informing them that the loan had been temporarily stopped and no further drawings would be permitted. The letter indicated that the position could change and the defendant indicated, subsequently, that it would consider granting credit on different terms if a new application were made. This must be regarded as a refusal to make a payment within the terms of the original loan.

77 The first allegation in par 7.2 is that there was no Event of Default. The defendant pleads in par 16.7 of the defence that there were Events of Default particulars of which are set out. As the first plaintiff has established a refusal to make a payment within the terms of the loan the onus would be on the defendant to prove that there was an Event of Default which would justify it in this refusal. It is the defendant who is making this assertion

78 The Event of Default pleaded by the defendant against the first plaintiff is that the failure of the Intercomm franchise constituted a material adverse change in the financial condition of the first plaintiff such as was likely, in the opinion of the defendant, to prejudice the first plaintiff's ability to meet its obligations under the loan.

79 The first fact on which I am satisfied is that by 6 March there was in fact a material change in the financial condition of the first plaintiff. I shall deal later with the question whether or not it was an adverse one. My reason for reaching the view that there was a material change is that at the time the defendant agreed to make the loan, the first plaintiff was to trade under licence, as an Intercomm store. There were advantages seen as acting as a licensee of such a retailer. These included advertising on a country wide basis and in using proven methods of successful marketing. Significant goodwill was seen in the use of the name of such a retailer. The evidence showed that it was not seen as practical for a person to conduct such a store on his or her own account even if it had agreements with service providers giving access to the major networks. It would be against intense competition and advertising campaigns of rival retailers. The first plaintiff was fitted out as an Intercomm store but by 6 March, it was clear that Intercomm had failed as a retailer and the other store operating in this State under its name had stopped business. The first plaintiff could not continue to operate as an Intercomm store. The first plaintiff had other agencies such as Global One, some computer and other agencies of that type and a room was being used for the earlier business Mr Sebregts and Mr Dean Smith had been carrying on. It was, nevertheless an Intercomm store and that was intended to be a significant part of the business.

80 The next question is whether the material change was an adverse one. If the change can be seen as being one from Intercomm to Telechoice then it can be argued that the change was not an adverse one and was indeed a change for the better. The plaintiffs saw it that way. Telechoice had been successful in Melbourne and were considering starting up in Western Australia. It wished the first plaintiff to be its flagship. Mr Dean Smith discussed with Mr Reeves the problem of the first plaintiff's lack of stock and Mr Reeves said he would arrange for the first plaintiff to have stock on consignment. The first plaintiff would have the advantages earlier offered by Intercomm of state-wide advertising and of a proven system of marketing and the first plaintiff would accordingly, in that sense, have the benefit of Telechoice's goodwill. It is now known that Telechoice did start up a number of successful kiosks and stalls in this State. It could therefore be said that it was a better prospect than Intercomm. Telechoice had arrangements with service providers but, in addition, the first plaintiff had made alternate arrangements with other service providers which could be seen as a backup. To put it another way, in early February the position of the first plaintiff could be seen as being close to hopeless with no goodwill and no service providers. The work done by Mr Sebregts and Mr Dean Smith in the next few weeks changed that. It could be said that by the middle of March when Mr Dean Smith finished negotiating in Melbourne, the first plaintiff's position was far stronger than when it applied for the loan. Weighed against this was the requirement to provide a $30,000 payment to Telechoice over and above what had been earlier budgeted on.

81 However, the terms of the default clause do not provide for an objective judgment as to whether there is the adverse change but state that the condition of default is met if "in the opinion of the bank" the circumstances cause a material adverse change and "in the opinion of the bank" the adverse change is a change in the financial condition as is likely to prejudice the ability to meet the loan. On 6 March, the date of the critical telephone conversation, the new arrangements were not complete and were not certain. Mr Dean Smith arrived in Melbourne on 2 March. His statement of evidence indicated and his cross-examination confirmed that the purpose of the visit initially was to "check out" Telechoice. He said he had not made a full commitment and wanted to have a look at them. He made extensive inquiries including speaking to the Melbourne office of One.Tel who told them that Telechoice had a good reputation. He said that during the first five days of his stay he concluded that Telechoice was very successful. It was during this time that he and Mr Sebregts reached the view that Telechoice was the best way to go. I consider the position is that a firm decision had not been made by 6 March although Mr Sebregts and Mr Dean Smith thought it likely that they would make a commitment with Telechoice and that was why the money from the term deposit might be needed.

82 The opinion of the bank must be based on what Mr Sharp was told and what was properly in his mind on 6 March. He had the impression that Mr Dean Smith was in Melbourne firstly to investigate Intercomm, but he also noted "customers are discussing with company in Melbourne options of joining enterprise. Operate out of kiosk in large shopping centres selling mobile phone packages etc. Return based on commission." This note was an accurate summary of what Mr Dean Smith was doing and I find that Mr Sharp was told this. Mr Sharp noted, and his evidence was, that if the plaintiffs wished to pursue the proposed option they must give information to the bank so that the bank could be satisfied as to the viability of the new option. It must be remembered that at that stage Telechoice were not operating in Western Australia.

83 It was Mr Sharp's summary which was forwarded to Ms Haustead and on which she based her assessment. I consider, for reasons to which I shall later refer, that on the material submitted by Mr Sharp in his report, that Ms Haustead and her superior Mr Gotto formed the view that there was an adverse change in the financial condition of the first plaintiff as was likely to prejudice its ability to meet its obligations under the loan. I consider it an opinion honestly formed. The reply claims that the Event of Default, properly construed means, by necessary implication, that an event of default would only arise if the defendant formed the requisite opinions on reasonable grounds. I am satisfied that the opinion as based on the material the defendant then had was formed on reasonable grounds so there is no need to determine whether such a requirement is to be implied. The reason why I consider that the opinions were formed on reasonable grounds is that the picture that the officers had was that the bank were financing an Intercomm store and the first plaintiff could no longer operate as an Intercomm store. Predictions on which the loan was granted were based on the store being an Intercomm store with the goodwill attached to such a name. The officers did not have a picture of a substituted business. In any event the new business required a further payment of $30,000 which was not the subject of the earlier assessment.

84 The submissions on behalf of the plaintiffs go further. It was submitted in argument that the requirement for the view to be reasonable imported a requirement for the defendant to make reasonable inquiries and that before making a decision within the terms of the default clause there was a requirement for the defendant to make an inquiry as to what the future of the first plaintiff would be in the light of the negotiations that the defendant was told were taking place. I am satisfied that if there is a requirement for the bank to form a view that is reasonable, it does not extend as far as that. This submission would mean that not only must the view be reasonable, but reasonable steps must be taken to obtain information on which to base the view. I do not consider that the default clause could be read so as to require a bank to make inquiries of that type prior to making a decision within the terms of the default clause. This requirement is not contained within the terms of the default clause and I consider there is no basis on which it could be implied. In my view, when a customer is making a decision to change from one licensor to another in the circumstances that arose in this case, it is open to the bank to act under the default clause and not advance further monies under the existing loan and to say that the customer must bring in information as to the viability of the new arrangement before further moneys are advanced.

85 I accept the evidence of both Ms Haustead and Mr Gotti that they each formed the opinion required to be formed under the default clause. They are each of sufficient seniority whereby their opinion on such a question would be the opinion of the defendant within the meaning of the default clause. Included in the reasons for my accepting Ms Haustead's evidence on that question is that there were compelling circumstances present whereby a person would form such an opinion. The plaintiffs adduced evidence of subsequent negotiations in which it was claimed that Ms Haustead indicated that her concern was lack of security. There were extensive negotiations in which there was some give and take and where statements would be made in the hope that agreement would be reached. I am satisfied that no matter what was said at these later negotiations Ms Haustead was of the view I have found.

86 It is claimed that Mr Sharp, on 6 March, when he imposed the first restriction on drawing down the loan had not formed this view. I consider that Mr Sharp acted as he did as he considered that the first plaintiff would not be able to repay the loan by reason of the position of Intercomm, and by what he saw when he inspected the store. He did not himself direct his mind to the question whether there was an Event of Default within the meaning of the clause I have set out. He discussed with his Head Office his concerns and set them out in a report to the Head Office that accompanied the recommendations I have set out. This report was considered by Ms Haustead when she reached the view that there was an Event of Default.

87 As Mr Sharp had not directed his mind to the specific question as to whether there was an Event of Default on 6 March, the question arises as to whether there was an Event of Default existing to justify Mr Sharp imposing the restrictions he did on that day. In my view the Event of Default is the existence of the actual circumstances. Those circumstances, namely the failure of Intercomm, existed on 6 March. Those circumstances must have the quality that they, in the opinion of the defendant are a material adverse change, and are likely to prejudice the ability of the first plaintiff to pay the loan. The circumstances had this quality, because when an officer of the bank directed her mind to that question she formed that opinion. It does not matter that the opinion was formed later because the forming of that opinion meant that the circumstances existing as at 6 March had that quality. The opinion was based on the circumstances as they existed at 6 March. I do not consider that the Event of Default is the bank forming the opinion. It is the existence of circumstances with the quality mentioned and they existed on 6 March.

88 This approach is consistent with what was said by Kenny JA in ANZ Banking v Pan Foods [1999] 1 VR 29 at 45. His Honour was considering the situation where a notice of demand was issued when there was a similar default clause. His Honour said (par 46) that in the circumstance of that case it did not seem to him to matter whether or not the bank in fact relied upon that clause at the time it issued the notice. He said that the bank was entitled to justify the delivery of the notice of demand by reference to the agreement upon the basis that the facts which justified that step existed at the time the step was taken, though the bank did not know of the justification at the time.

89 I find therefore, in the terms of par 7.2 of the statement of claim and par 16.7 of the defence, that there was, in respect of the first plaintiff, an Event of Default existing on 6 March and, accordingly the defendant was not in breach of the loan agreement in refusing to advance further moneys on and after 6 March.

90 It is claimed in par 16 of the defence that there was also an Event of Default on the part of Mr and Mrs Sebregts, as guarantors. Particulars of this claim are that their request for the return of the term deposit constituted a similar material adverse change in the financial condition of the second plaintiffs as guarantors. I do not consider this amounts to an Event of Default. Mr Sebregts asked for payment of the term deposit in the mistaken belief that he had a right to do so. This could not give rise to a consideration as to whether there was a material adverse change in his financial condition. In any event, at the time the loan was approved on his guarantee, the defendant was not aware that he had the compensation money coming to him.

91 The first plaintiff has claimed, in the alternative, that the defendant, in granting the loan, in permitting subsequent draw-downs and then conducting itself in the manner referred to in par 7, which I have set out, engaged in conduct that was misleading or deceptive. It is claimed in particulars of this allegation that the defendant by granting the loan and permitting the draw-downs induced the first plaintiff into believing that it had a credit facility to an amount of $110,000 and that the facility would not be terminated provided that the first plaintiff abided by the terms of the agreement. It is claimed that this is contrary to s 52(1) of the Trade Practices Act 1974 (Cth).

92 I was not addressed on the question whether the service provided was a financial service so as to exclude the operation of the section pursuant to s 51AF. Each counsel agreed that the question must be resolved in contract. With this I agree. There could be no question that the first plaintiff in fact had the credit facility pursuant to the agreement made. In that respect there was no question of its being induced into a false position. The plea was not argued on the basis that the first plaintiff was induced to believe that it would not be withdrawn unless the first plaintiff itself did a positive act or omission of default. This proposition would be untenable. I have found that the Event of Default was part of the contract. It was contained in the material handed to the parties. It was not specifically discussed with any of them. It was posted to them to read prior to a signed copy being delivered to the bank.

93 There is an alternative claim under s 51AA of the Act. It is claimed that the defendant acted unconscionably in withdrawing the credit facility. This section would not apply to the circumstances of this case by reason of s 51AB(5) which limits the section to goods and services of a kind ordinarily acquired for personal domestic or household use or consumption. In any event, as the defendant was acting, within its power, under a default clause of a contract the conduct could not be unconscionable.

94 It is claimed in the reply that there were clauses in the set off agreement relating to the term deposit which it is claimed imposed an indefinite liability. It is claimed that this indefinite liability was not pointed out or explained to Mr and Mrs Sebregts. It is claimed further that the indefinite liability clauses are inconsistent with the oral agreement that the security was to be a temporary one pending the registration of the mortgages and they were induced to part with the $68,000 on the strength of this agreement. As I have found that the alleged oral agreement was not made, it must follow that the plea to the extent it relies on the oral agreement must fail. The matter goes further. The particular clause complained of authorised the defendant to apply all or any part of the term deposit in reduction of "any liability (whether due now or later and whether actual or contingent) which I may have to ANZ at that time". The amount covered by this clause would at all times be known by and in the control of the second plaintiffs and by reason of this it could not be classified as an indefinite liability clause. It is limited to the debt incurred by the company together with any debts they themselves personally incur. They are liable for the company debt as guarantors but it is a debt of a company of which they are each directors and they would be aware from the bank statements of the amount drawn from the defendant and as directors would be a party to initiating the debit. At the time the document was signed it was clearly in the minds of the second plaintiffs that it was to cover the amount due to the bank by the first plaintiff on the two accounts with the bank that the first plaintiff had opened. This is all the defendant is claiming in its counterclaim. This plea must fail.

95 The claims of each of the plaintiffs must stand dismissed.

96 The defendant made demands on each of the plaintiffs on 16 October 1998. It is counterclaiming for the amount owing on the accounts. It follows that it is entitled to judgment for this subject to the set off it has. It is seeking a declaration that it is entitled to set off the term deposit against this amount. As the defendant's right to claim the set to claim the set off has been brought into question I consider that it is entitled to the declaration and judgment for the balance of the claim following the set off.