Yusen Daly Smith International Pty Ltd v Smith [1999] NSWSC 450 | Case summary

JUDGMENT His Honour: 1 These proceedings arise from transactions which have already been the subject of extensive litigation. The course of that litigation will appear hereafter. The Factual Background and History of the Litigation 2 In the first half of 1989 the first defendant, Mr T E C Smith ("Smith"), and a Mr Daly ("Daly") were directors and equal shareholders in Daly Smith Corporation Pty Limited ("DSC") which conducted a warehousing and transport business. That company subsequently had its name changed to Thanyule Pty Limited ("Thanyule"). They were also associated in other companies. Those companies included Daly Smith (Management Services) Pty Limited ("Management Services") and Daly Smith Corporation (Australia) Pty Limited ("DSC Australia"). Negotiations took place between DSC and a Japanese shipping company, Nippon Yusen Kabushiki Kaisha ("NYK") for a joint venture. Yusen Daly Smith International Pty Limited ("YDSI"), now in liquidation, became the vehicle for that joint venture and purchased DSC's business from it for the sum of $3.8 million. The $3.8 million was borrowed by YDSI from the Australia and New Zealand Banking Group Limited ("the ANZ"). The $3.8 million was drawn down and the purchase price of the business paid on 5 July 1989. Later in the year YDSI sought overdraft facilities from the ANZ and, as a condition of being granted those facilities, on 23 October 1989 executed a mortgage debenture ("the mortgage debenture") in favour of the ANZ. 3 The mortgage debenture was registered on 28 November 1989 and numbered 43368. It charged all of YDSI's undertaking and assets with the payment of "the moneys hereby secured". "The moneys hereby secured" are defined on the first page of the mortgage debenture as the moneys in certain categories. The categories are not numbered in the mortgage debenture but when quoted below are given paragraph numbers in round brackets and sub paragraph numbers in Roman numerals for ease of reference. "The moneys hereby secured" include the following: "(2) ALL MONEYS which the Bank … has paid or become liable to pay or which the Bank shall pay or become liable to pay for or on account of the mortgagor … and either by direct advances or by reason of accepting or paying or discounting any order draft cheque promissory note Bill of Exchange or other engagement … or otherwise incurring liabilities for or on behalf of the mortgagor … (4) ALSO ALL moneys costs (as between Solicitor and own client) charges and expenses which the Bank shall pay or become liable to pay in or incidental to [i] preparing completing stamping or registering these presents or [ii] to investigating or perfecting or defending the title to the mortgaged premises or [iii] exercising or attempting to exercise any right or remedy of the Bank hereunder or of any such demand as aforesaid or [iv] on account of or arising out of any default by the Mortgagor in duly performing or observing any of the covenants or agreements on the part of the Mortgagor contained or implied herein or in any other security over the mortgaged premises or any part thereof. (5) ALSO ALL moneys payable or to become payable for discounts postages commissions charges exchanges re-exchanges and other lawful and accustomed charges and expenses according to the usage and course of business of the Bank." The mortgage debenture further provides as follows: "1 The Mortgagor will on demand duly pay to the Bank the moneys hereby secured. … 12 All moneys which the Bank may pay or expend under any power or authority herein contained or implied or in consequence of any default that may be made by the Mortgagor in the performance or observance of any covenant or condition of these presents and all costs (including costs as between Solicitor and own client) charges and expenses already or hereafter incurred by the Bank … for the purpose of giving effect to the security created by these presents … shall be moneys hereby secured as aforesaid … … 18 The moneys hereby secured shall at the option of the Bank (notwithstanding anything hereinbefore contained) immediately become due and payable and the security hereby created shall immediately become enforceable without the necessity for any demand or notice … upon the happening of any one or more of the following events: (a) if a petition is presented or an order is made or an effective resolution is passed for the winding up of the Mortgagor … … 41 And except to the extent that such interpretation shall be excluded by or be repugnant to the context whenever the same is used herein the word 'Mortgagor' shall be deemed to mean and include the Mortgagor and its assigns the word 'Bank' shall be deemed to mean and include the Bank and its assigns …" 4 Part of the security provided by YDSI for the borrowing of $3.8 million was a bank guarantee procured to be given by the ANZ in favour of the Bank of Tokyo Australia Limited ("BOT") in the sum of $2.65 million. In respect of this a guarantee was given to the ANZ by DSC. 5 In 1994 there was a parting of the ways between Smith and Daly. The form which this took was that Smith bought all of Daly's shareholdings in the Daly Smith group of companies (save that in some cases Daly retained one share to provide a second shareholder for a company). At that time, the DSC guarantee to support the bank guarantee to the BOT for $2.65 million was replaced by two individual guarantees of $1.325 million given to the ANZ by each of Daly and Smith. At the same time the $2.65 million bank guarantee by the ANZ to BOT was replaced by two individual bank guarantees, each of $1.325 million and supported by the guarantee of one of the two shareholders. The letter of offer to Smith to this effect dated 9 March 1994 and the bank guarantee guaranteed by him and executed on 22 April 1994 were part of the confused concatenation of documents which was central to the Court of Appeal's decision referred to below, and which was again relied on before me. On 6 October 1994 BOT made demand on the ANZ for $1.325 million under the bank guarantee supported by Smith's guarantee and was paid on the same day. On that day the ANZ debited the sum of $1.325 million to an account of Smith. 6 In October 1994 Smith commenced proceedings 4058/94 against YDSI, NYK and another, claiming the payment of the $1.325 million with which he had been debited by the ANZ and "the amount of the guarantees [sic] fees outlaid by Mr Smith for the provision of the ANZ … guarantees", or, alternatively, the winding up of YDSI under the Corporations Law s 260 (now s 246AA) or s 461. On 13 March 1995 Young J made an order in those proceedings for the winding up of the company by consent. 7 On 10 April 1995 Smith commenced proceedings 1913/95 in this Division. By his amended statement of claim he sued the ANZ as first defendant and YDSI as third defendant. After alleging the transactions referred to above he made the following charges of law and claims: "10 In the premises: a) the plaintiff is entitled to be subrogated to the rights which the first defendant had against the third defendant and its property including the first defendant's entitlement to recover the amount of $1,325,000.00 and interest, charges, expenses and costs as moneys owed under the aforesaid Registered Charge out of the third defendant's undertaking and property; b) the first defendant is obliged to assign the Charge to the plaintiff or alternatively, is obliged to lend its name to any proceedings for recovery of the aforesaid moneys by the plaintiff against the third defendant; c) the second defendant is obliged to pay the aforesaid moneys to the plaintiff on demand in satisfaction of the third defendant's liability aforesaid to the plaintiff. 11 The plaintiff claims accordingly: (1) Declarations or a declaration as the case may require that in the events which have happened: a) the first defendant is a secured creditor of the third defendant under Registered Charge No 43368 over the undertaking and assets of the third defendant for the whole of the amount of $1,325,000 paid out by it on 6 October 1994 to Bank of Tokyo Australia Limited for and on behalf of the third defendant and interest thereon at the first defendant's applicable rate or rates from time to time charges, expenses and costs ; and b) the first defendant is entitled to call for payment in full of the said amount of $1,325,000 and interest, charges, expenses and costs from the assets of the third defendant in the control of the second defendant; or c) alternatively, on 6 October, 1994, the plaintiff became entitled to be subrogated to the first defendant's rights with respect to the first defendant's registered Charge No 43368 and thereby entitled to call for payment in full of the aforesaid amount of $1,325,000 and any interest, charges, expenses and costs charged thereon by the first defendant in priority to all and any other debts, charges, costs and expenses of the third defendant" [emphasis added]. 8 When the proceedings came on for trial before Young J on 1 May 1995 the ANZ in effect announced by counsel that it would submit to the orders of the Court. The next day it announced by its solicitor that it did not seek an order for costs, stating that it was entitled to its costs under the mortgage debenture. In his judgment delivered on 16 June 1995 his Honour formulated four questions as necessary to be answered in order for him to decide the issues before him. Of those questions, relevant to the matter now in hand are the first two, which were as follows: "1 Was the guarantee given by Mr Smith given on his own behalf or on behalf of YDSI? 2 What was the status of the charge given by the third defendant at the time of payment of the ANZ Bank's debt?" His Honour's answer to question 1 was that Smith paid the ANZ as a surety and was entitled to be subrogated to whatever securities the ANZ had, but, to the second question, his Honour answered that the securities held by the ANZ were not available to Smith under the doctrine of subrogation. 9 Smith appealed to the Court of Appeal. The appeal was numbered CA 40392/95. It was heard on 30 November 1995 before Kirby P and Priestley and Sheller JJA. Judgment was delivered on 5 February 1996. That judgment was subsequently withdrawn, and the appeal was further heard on 4 March 1996 before Priestley, Sheller and Powell JJA. The judgment finally disposing of it was delivered on 21 November 1996. Before the second hearing, draft orders, which the appellant asked the Court of Appeal to make if his appeal were successful, had been lodged with the Court of Appeal. The draft orders were lodged about 16 February 1996 and were in the following form: "AND THE COURT DECLARES THAT: 3 Australia and New Zealand Banking Group Limited (ACN 005 357 522) ('ANZ') is a secured creditor of Yusen Daley [sic] Smith International Pty Limited (In Liquidation) ('the company') under Registered Charge No. 43368 over the undertaking and assets of the company for the whole of the amount of $1,325,000.00 paid out by ANZ on 6 October 1994 to Bank of Tokyo Australia Limited for and on behalf of the company and all moneys, costs, charges, expenses and interest in or incidental thereto as are secured under the charge including costs incurred by ANZ in proceedings in the Equity Division 1913 of 1995 and these proceedings. 4 Thomas Edwin Curtis Smith has the benefit of ANZ's rights under the said Registered Charge in respect of the said amount of $1,325,000.00 and moneys, costs, charges, expenses and interest and ANZ's remedies for enforcing payment thereof. AND THE COURT FURTHER ORDERS THAT: … 7 The appellant has liberty to apply to a judge of the Court with respect to the quantification of the said moneys, costs, charges, expenses and interest" [emphasis added]. Written submissions were made by counsel on both sides concerning the form of these orders. It would seem those submissions were lodged after the hearing on 4 March 1996. The submissions on behalf of YDSI are undated; the submissions on behalf of the appellant are dated 11 March 1996. Uncertain from their form is the order in which the respective submissions were prepared; perhaps it is more likely that YDSI's were prepared as a response to the form of orders, and that Smith's were prepared in reply to YDSI's; but it probably does not matter. YDSI's submissions contained the following: "1 The second and third respondents submit that the last six lines should be deleted from proposed order 3 if the appellant's case on subrogation is otherwise accepted. 2 Proposed order 3 should also be amended: a) by deleting 'is' from the second line and substituting 'would have been' and, b) adding after 'for and on behalf of the company', the words 'if it had not been paid the said amount by Thomas Edwin Curtis Smith'. 3 It is also submitted that the words afer '$1,325,000.00' should be omitted from proposed order 4 if the appellant's case on subrogation is otherwise upheld. 4 As to proposed order 3 - a) The last six lines should be deleted because this is a matter on which the ANZ bank [sic], though a party, has made no such application; b) It is not conceded that any such claims by ANZ (if and when made) would be secured under the charge. The portion of the draft Order asserting security for ANZ's costs under the mortgage does not correctly reflect the effect of the relevant provisions of the Mortgage Debenture: AB 98 S-U. Such claims are relevantly secured only in so far as they are liabilities or payments of the bank in or incidental to investigating, perfecting or defending the title to the mortgaged premises. 5 As to proposed order 4: a) The effect of this declaration would be to furnish to Mr Smith rights and remedies beyond those which were or would have been available to ANZ. The contentious words enable the appellant to 'tack' his own claims for costs and expenses into ANZ's security. This goes beyond the appellant's rights of subrogation: Sydney Turf Club v. Crowley [1971] NSWLR 724 at 734, per Mason, J [sic]. b) It is submitted that on the true construction of the mortgage debenture, the clauses relating to the bank's costs, charges, expenses and interest do not extend to include costs, charges, expenses and interest claims of the appellant. c) For example, the effect of the declaration would be that the appellant would become entitled to costs as between solicitor and own client under the mortgage (AB 98S-T) and to appoint receivers to recover the same, whereas the mortgage provides for those claims to be limited to those which the bank shall pay or become liable to pay, for certain limited purposes, as noted above." Smith's submissions contained the following: "1 The orders sought by the appellant, it is submitted, are perfectly appropriate in a case such as the present. 2 The appellant would accept, however, that in proposed Order 3 the words in the last four lines 'including…these proceedings' could be omitted. Once those words were omitted, there could be no objection to the form of order. It simply reflected the terms of the charge. The appellant does not, of course, concede that it is not entitled to an order in the form originally sought. 3 If the appellant is successful, ANZ is a secured creditor. 4 Proposed Order 4 simply relects the effect of subrogation. The appellant seeks no more than ANZ's rights. 5 The orders sought are within the ambit of the claims made in the action (AB 3K-U)." 10 By its judgment of 21 November 1996, the Court of Appeal allowed the appeal. It found that Young J's answer to question 1 was correct but that his Honour's answer to question 2 was not correct, and that the correct conclusion was that Smith was subrogated to the ANZ's right as a secured creditor of YDSI in regard to the ANZ's payment of $1.325 million to BOT. In view of certain of the submissions put before me, it is important to bear in mind what was said by Priestley JA in affirming Young J's decision on question 1: "In the end, counsel agreed that the critical issue was whether, on the one hand, it was right to say that Mr Smith did not do what he did on behalf of or at the request of YDSI, or, whether, on the other hand, it would be right for the court to infer that Mr Smith (in the shoes of DSC) committed himself to his 1994 document either on behalf of or at the request of YDSI. In making the submission that the former was the correct view to take, counsel for the respondents emphasised the form taken by the documentation which he said was inconsistent with and prevented any inference that either DSC's July 1989 document or Mr Smith's 1994 document was given for, or on behalf of, or at the request of YDSI. There are two reasons why I do not accept this submission. The first is that in my opinion, on the facts as stated, taking into account the documents, and in particular taking into account the form of bank guarantee set out at p4 of these reasons, the only reasonable inference is that first DSC and next Mr Daly and Mr Smith did what they did on behalf of YDSI and in respect of YDSI's indebtedness. The second reason is that acceptance of the respondents' submission would, it seems to me, mean that Mr Smith had no recourse against YDSI upon ANZ obtaining payment from him of the $1.325 million when it debited that amount against his account. There are two aspects of this consequence. One is that it does not seem to me to be open to the respondents at this stage of the appeal to rely on an argument having that effect. That is because both before Young J and in the argument before this court last year, the principal question in the case was presented as being whether the amount owed by YDSI to Mr Smith, the fact of indebtedness being common ground, was an unsecured or secured debt in the winding up of YDSI. The question was whether the debt was a secured debt by subrogation or whether, there being no entitlement to subrogation, it was unsecured. It was because that was treated as the principal issue that attention focused on the position of the mortgage debenture given by YDSI to ANZ, whether it was still on foot at the relevant time, and what its proper construction was. It seems likely to me that the fact that no question was raised about the indebtedness of YDSI to Mr Smith reflected the view then taken by the respondents' legal advisers that that was the position which coordinately involves the idea that Mr Smith's document of 1994 committing himself to ANZ was one by which he undertook a commitment for or on behalf of YDSI. As I have already indicated, I think that such a view was correct. In any event, however, it seems to me too late for that matter to be investigated at this stage of the appeal, having been common ground and the parties having conducted their cases on that basis for so long. In my view, therefore, what became the principal substantive submission (in the second argument in this court) fails." In making its orders the Court of Appeal omitted from the draft orders submitted on behalf of Smith the words that appear in bold in the draft orders set out in [9] above. All that was said in the reasons given by the Court of Appeal concerning the form of the orders was the following in the judgment of Priestley JA: "There was some discussion of the orders that would be made if the court came to the conclusions I have reached on questions 1 and 2. Each side put in a written submission as to the appropriate form. In the result I propose that the final orders of this court on the appeal should be: 1 Appeal upheld. 2 The orders made by Young J in the Equity Division of the Supreme Court on 16 June 1995 be set aside. 3 Declare that (i) Australia and New Zealand Banking Group Limited (ACN 005 357 522) ('ANZ') was at relevant times a secured creditor of Yusen Daley [sic] Smith International Pty Limited (In Liquidation) ('the company') under Registered Charge No 43368 over the undertaking and assets of the company for the whole of the amount of $1,325,000.00 paid out by ANZ on 6 October 1994 to Bank of Tokyo Australia Limited for and on behalf of the company and all moneys, costs, charges, expenses and interest in or incidental thereto as are secured under the charge. (ii) Thomas Edwin Curtis Smith has the benefit of ANZ's rights under the said Registered Charge in respect of the said amount of $1,325,000.00, and ANZ's remedies for enforcing payment thereof. … 6 Liberty to any party to apply to a judge of the Court with respect to the quantification of the said moneys, costs, charges, expenses and interest." 11 On 24 December 1996 the ANZ by deed assigned to Smith "all its right title and interest in and under" the mortgage debenture ("the 1996 assignment"). The consideration for the 1996 assignment was stated in the deed to be $1.325m. Smith required the payment to him by YDSI by 28 April 1997 of the $27,787.88 the subject of claim (2) in [16] below. On 8 May 1997, Smith, purporting to act under the 1996 assignment, appointed John D Green ("Green") receiver under the mortgage debenture. In May and June 1997 the litigation was reactivated in two ways. Various motions were filed in 1913/95, the proceedings which had been to the Court of Appeal. The motion most relevant to the present proceedings was a "cross motion" of Smith ("the cross motion") seeking, pursuant to the reservation of liberty in the Court of Appeal, a direction as to whether he was a secured creditor under the mortgage debenture in respect of any of four items lettered (a) to (d) as set out below: "(a) ANZ Bank Guarantee fees totalling $87,229.06 charged to Daly Smith (Management Services) Pty Limited by ANZ in respect of the guarantees provided by ANZ for the third defendant; (b) legal costs incurred by the plaintiff in the following matters: (i) ED 4058/94; (ii) ED 1913/95; (iii) CA 4058/94 (iv) CA 40392/95 (v) HC S12 or [sic] 1996 (c) legal costs incurred by the plaintiff for work done by the plaintiff's solicitor before 06.10.1994 to the extent that it relates to the provision of the guarantees for the third defendant. (d) capitalised periodical interest as part of the principal sum of $1.325m…" The cross motion was before me at the end of June 1997, as was also an amended summons in these proceedings. They had been commenced on 13 May 1997 by YDSI taking out a summons against Smith and Green seeking to restrain Green from acting as receiver. By amendment, the summons sought declaratory relief generally to the effect that Smith had no rights under the mortgage debenture. After some delay relating to the availability of counsel, the cross motion was fixed for hearing before me on 3 November 1997. The amended summons in these proceedings was also listed before me on that day, not for hearing, but simply to keep the matters together. 12 On 28 October 1997 in the duty list an application for an injunction was made to Young J relating to the disbursement of moneys by the liquidator of YDSI. His Honour refused to grant any relief. In delivering reasons for his judgment upon that application, his Honour said, relevantly to the course of proceedings now under consideration: "The Court of Appeal's declaration 3(ii) as to Mr Smith's rights, when read literally said that Mr Smith's rights are limited to an amount of money which has already been paid. Thus its rights on that construction would now be exhausted however, it is hard to see, if that is the proper construction, what order 6 made by the Court of Appeal could possibly mean. Possibly it was made to refer to the ANZ Bank alone. If there is any problem about the Court of Appeal's order, that should be raised on a motion before the Court of Appeal rather than as a matter raised on a side wind before a single judge." 13 When the the cross motion came before me on 3 November 1997, the whole day was taken up by argument as to what course the proceedings should follow, and whether they should be adjourned from that day. It was said on Smith's behalf that he desired to make application to the Court of Appeal for it to determine the interpretation of its orders and, if appropriate, to modify or extend the terms of its referral to a single Judge. Sharing as I did Young J's view as to the appropriate forum for interpretation of the Court of Appeal's order, I acceded to that application, for reasons which I gave at the time. 14 A motion was then brought in the Court of Appeal, which listed in a schedule the four items (a) to (d) as follows: "(a) ANZ Bank Guarantee fees totalling $87,229.06 charged to Thanyule Pty Limited and Daly Smith (Management Services) Pty Limited by ANZ in respect of the guarantees provided by ANZ for the third defendant. (b) Legal costs assessed on the solicitor/client basis incurred by the plaintiff in the following matters- (i) ED 4058/94; (ii) ED 1913/95 (iii) CA 40392/95; HC S12 OR 1006; (c) Legal fees incurred by ANZ Bank in proceedings No 1913/95 and debited to YDSI Pty Ltd as a secured debt subject to Mortgage Debenture registered No 43368. (d) Capitalised periodical interest additional to the principal sum of $1,325,000.00." These are substantially identical with those in the cross motion, set out in [11] above, with one significant difference. That is, that the earlier item (c) was replaced by one totally different. The motion asked for a determination whether the four items could be said "to fall within the terms of the said declarations 3(i) and 3(ii) and Order 6" of the Court of Appeal's orders. This motion was heard and determined by Meagher JA on 24 November 1997. His Honour said: "It is as clear as can be that the amounts listed in the schedule do not come within the terms of Court of Appeal order 3(i) and Mr Neil QC, learned senior counsel for the claimant did not claim that they did. It is however claimed with some vigour that they come within the provisions of orders 3(ii) [sic]. Mr Street of senior counsel for the opponents claimed the contrary. I am afraid I am convinced by what Mr Street said that none of the four items in the schedule come within order 3(ii), and am also convinced that order 6 of the Court of Appeal's orders does not progress the claimants [sic] entitlement to the order he seeks in the present motion. Merely by way of example if one looks at the first item in the schedule it is in the following terms. 'ANZ bank guarantee fees, totalling $87,229.06 charged to Thanyule Pty [sic] and Daly Smith (Management Services) Pty Ltd by ANZ in respect of guarantees provided by ANZ for the third defendant.' It is not clear whether anyone has paid the amount of $87,229.06. In particular it is not clear, that Mr Smith has done so. What is more to point is that Thanyule Pty Ltd and Daly Smith who are the alleged debtors in relation to these accounts are not parties in this litigation and do not seem to have anything to do with it. The amount has not been paid by and there is no liability that it should be paid by Thanyule Daly Smith International Pty Ltd [sic] the company in liquidation and the company referred to in the Court of Appeal orders. Likewise if one dissects each of the other three heads in the schedule one comes, perhaps reluctantly to the conclusion, that none of them are within the terms of the court of appeal orders. For those reasons I would suggest that the notice of motion be dismissed with costs because the declarations sought in par 2 of that notice of motion manifestly have no validity." 15 Thereafter Smith did not persist in his prosecution of the cross motion. On 13 January 1998 Management Services executed a deed of assignment ("the 1998 assignment"). The 1998 assignment listed in a schedule 14 monthly payments made by Management Services to the ANZ, the first on 3 September 1993, the last on 30 September 1994. The total amount was $51,895.78. The amount paid prior to April 1994 was $35,333.28 and the amount paid after April 1994 was $16,562.50. The deed recited that the payments were made "for and on behalf of YDSI on account of" the bank guarantee fees and that the "liability to pay the fee was a secured liability under the terms of" the mortgage debenture. No consideration was stated in the deed. By the 1998 assignment Management Services assigned to Smith "all its right title and interest in and under" the mortgage debenture. On 3 February 1998 Smith filed in these proceedings a cross claim in pleading form claiming declaratory relief, relevantly as set out in [16] below. I drew attention, late in the trial, to the fact that the original cross claim did not appear to accord with the case as argued. Smith has now propounded an amended cross claim, which it is said accurately reflects his case as argued. Leave has not yet formally been granted for the amendment, although both parties have put their final submissions by reference to the document, and YDSI has indicated that there is no objection to the amendment being made. On 16 February 1998 the plaintiffs as cross defendants filed a defence to the original cross claim containing traverses, but also pleading substantive defences by way of res judicata and estoppel arising out of the decision in 1913/95 (including its determination on appeal). The cross defendants state that they do not need to amend their defence by reason of the proposed amendment of the cross claim. The Present Claims 16 It is the defendant and cross claimant who is the proponent of the substantive claims in these proceedings; by the amended cross claim he claims declarations that items in three categories are secured in his favour by the mortgage debenture, so that he is entitled to enforce that security in respect of them. Those three claims have a general correspondence with items (a) to (c) raised before Meagher JA. YDSI's claim, made by the amended summons, is that there should be a declaration that none of Smith's claims is so secured and, consequentially, a declaration that Green's appointment as receiver was invalid, since there was no debt at the time of the appointment to found it. The cross claimant's three claims, as finally propounded, were that the following moneys should be declared to be secured under the mortgage debenture and were recoverable by Smith from YDSI: (1) Under par 55(a)(v) and (vi) of the amended cross claim, costs incurred by or ordered in favour of Smith in proceedings 4058/94 and 40392/95. This corresponds with item (b) in the cross motion and in the Court of Appeal motion. (2) Under par 55(a)(iv) of the amended cross claim, $27,787.88, alleged to have been "owed to ANZ by YDSI that was paid to ANZ by the Cross-claimant on 24 December 1996". The facts relating to this claim are somewhat convoluted, and are set out in more detail in [21] below. This claim corresponds with item (c) in the cross motion and in the Court of Appeal motion. (3) Under par 55(a)(ii) and (iii) of the amended cross claim, $51,895.78 in respect of the bank guarantee fees specified in the 1998 assignment. They are claimed under the general law, as paid in respect of the bank guarantee which was counter guaranteed by Smith, and paid by him to the ANZ under the guarantee. This corresponds with item (a) in the cross motion and in the Court of Appeal motion, which was in the sum of $87,229.06, but the balance over $51,895.78 has been abandoned. As already noted, no claim corresponding with item (d) in the cross motion and in the Court of Appeal motion is made in these proceedings. As I understand it, each claim is said to be made under the general law of subrogation and under s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 ("the LRMP Act"). Claim 3 is also made under the 1998 assignment. In the very confused state of these proceedings, despite earnest rereadings of the material, I remain unclear as to whether the claim to the $27,787.88 was or was not made under the 1996 assignment. I elaborate in [28] below. The assignments, of course, did not exist at the time of the earlier proceedings, including the Court of Appeal motion before Meagher JA. The Law: Subrogation 17 When the principal debt has been paid off, a guarantor who has paid the whole or part of it is entitled to be subrogated to the rights of the creditor in respect of the debt and to stand in the shoes of the creditor for the purpose of enforcing any security which the creditor held prior to the payment of the debt: see Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liq) (1978) 141 CLR 335 at 348 - 349 per Gibbs ACJ; Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at 180 - 181 per Wilson and Dawson JJ; McColl's Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365; and see generally The Laws of Australia tit Contract [176-177]; Rowlatt on Principal and Surety (4th Ed, 1982) 134; O'Donovan, The Modern Contract of Guarantee (3rd Ed, 1996) 653. In addition there is in force in New South Wales s 3 of the LRMP Act (originally the Mercantile Law Amendment Act 1856 (Imp) s 5), as follows: "3 (1) A person who, being surety for the debt or duty of another, or being liable with another for a debt or duty, pays that debt, or performs that duty, is entitled: (a) to have assigned to that person, or to a trustee for that person, every judgment, specialty or other security held by the creditor in respect of that debt or duty, whether or not that judgment, specialty or other security is taken at law to have been satisfied by the payment of the debt or the performance of the duty; and (b) to stand in the place of the creditor and to use all the remedies, and, if necessary, and on a proper indemnity, to use the name of the creditor in any proceedings to obtain from the principal debtor or any co-surety, co-contractor or co-debtor (as the case requires) indemnity for the advances made and loss sustained by the person who paid the debt or performed the duty. (2) The payment of the debt or the performance of the duty by a surety is not a defence to any such proceedings referred to in subsection (1). (3) A co-surety, co-contractor or co-debtor is not entitled under this section to recover from another co-surety, co-contractor or co-debtor more than the proportion to which, as between those parties themselves, that person is justly liable." This provision ensures that the security also continues to be available to the guarantor even if discharged as between the original parties to it. However, the doctrine of subrogation does not give the guarantor any greater rights than the creditor had, nor can the guarantor recover more than he has paid as guarantor: The Laws of Australia tit Contract [178]; O'Donovan op cit 666. This is illustrated by what was said by Mason JA (as his Honour then was) in Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 734: "Where an insurer is subrogated to the rights of the insured against a third party, the insured does not acquire an independent cause of action in his own right. He succeeds to the insured's cause of action against the third party, in this case a right of action on the policy issued by the Jockey Club. That right of action remains in all respects unaltered; it is brought in the name of the insured and it is subject to all the defences which would be available if the action had been brought by the insured for his own benefit. Thus payment in full by the Government Insurance Office on account of the risk is a defence to the action by the appellant against the Jockey Club and it is no answer to that defence that the action is brought for the benefit of the insurer." And by Gibbs ACJ in the Australasian Conference Association case supra at 348 - 349: "In my opinion the doctrine of subrogation does not assist the Bank in the circumstances of the present case. It was said by Lord Eldon that a right of subrogation arises by force of 'that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court, placing the surety exactly in the situation of the creditor': Aldrich v Cooper 11 (1803) 8 Ves Jun 382, at p 389 [32 ER 402, at p 405] … As the statement of Lord Eldon indicates, and as is well settled, a surety who has paid the debt due to the creditor is entitled to stand in the creditor's shoes; he has the creditor's rights, but only those rights … [T]he appellant concedes that it has no right to the surplus of the money … and all parties accept this concession as correct. If, therefore, the Bank were placed in the shoes of the appellant, it would have no claim by virtue of subrogation to the surplus of the money, because the appellant itself has no right to that surplus. For these reasons the doctrine of subrogation has no application to a case such as the present." This means that to succeed in a claim such as the present the surety must establish in respect of any item claimed: (1) that he expended a sum in discharge of his liability as surety; and (2) that there was a liability for the sum payable to the principal creditor by the debtor and falling within the security sought to be enforced. The Law: Res Judicata and Estoppel 18 The cross defendant relied on res judicata in the strict sense; issue estoppel, as to which, in this context, see Sandtara Pty Ltd v Abigroup Ltd (1997) 42 NSWLR 5; and estoppel within the extended principle discussed in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. In that case, the majority (Gibbs CJ, Mason and Aickin JJ) at 598 quoted the following passage from the judgment of Wigram VC in Henderson v Henderson (1843) 3 Hare 100 at 115; 67 ER 313 at 319: "where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time." Their Honours continued at 602: "In this situation we would prefer to say that there will be no estoppel unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it. Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff's claim, and its subject matter it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding. In this respect, we need to recall that there are a variety of circumstances, some referred to in the earlier cases, why a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings eg expense, importance of the particular issue, motives extraneous to the actual litigation, to mention but a few." In short, where the earlier judgment has determined the right or cause of action, the matter is res judicata; where that is not so, but an issue has necessarily been decided between the parties in arriving at the earlier judgment, there will be an issue estoppel; and where a subject matter was so closely related to the subject matter of the earlier proceedings that it ought reasonably have been raised and determined in those proceedings, there will be an Anshun estoppel: see Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 at 556 - 558 per Clarke JA, with whom Priestley JA agreed. The Law: Mortgagees' Costs 19 I have been referred to various authorities relating to the awarding of mortgagees' costs in mortgage actions. In reality, the issues that arise on costs in these proceedings are questions of construction of the mortgage debenture; the questions are whether various amounts fall within the paragraph numbered (4) set out in [3] above. Essentially, the construction of mortgages by courts proceeds on the same principles as the construction of other documents: Fisher & Lightwood's Law of Mortgage (Aust Ed by Tyler, Young & Croft, 1995) [3.7]. Where a mortgage provided for the payment of the mortgagee's costs on an indemnity basis, the mortgagee was held entitled to recover all costs except those unreasonably incurred: Gomba Holdings (UK) Ltd v Minories Finance Ltd [1993] Ch 171 CA. Although this mortgage debenture speaks in terms of solicitor and client costs, in my view the result for present purposes would be the same. In general terms, a mortgagee's costs to be recoverable must be reasonably incurred: see generally Tyler, Croft & Young op cit [40.23]. The Facts Relating to the Claims: Costs 20 This is, in monetary terms, the largest of the claims made. The costs were all costs incurred and paid by Smith in relation to earlier proceedings. There is no doubt that Smith paid them. As I understand it, it is agreed that the costs paid by Smith on a solicitor/client basis were $618,000. Costs ordered on a party/party basis, as assessed, total $247,000. The claim that is made is in respect of the difference, namely, $371,000, subject to one matter. That matter is that the quantum of the assessed costs is, on the evidence before me, under challenge by Smith, so that it is possible that the amount of $247,000 paid may at some stage be increased and the balance of the solicitor/client costs claimed correspondingly reduced. So far as relief in these proceedings is concerned, if there is to be any relevant relief, that situation may be met by the relief being declaratory at this stage. The Facts Relating to the Claims: The $27,787.88 21 On 19 May 1995 Gadens Ridgeway, solicitors, sent to the ANZ an account for professional fees in the sum of $15,419.47 together with a memorandum of fees from Mr Arthur Emmett of Queen's Counsel for $8,100 and a memorandum of fees from Mr RW White of junior counsel for $3,250. The ANZ paid the total of these accounts, being $26,769.47. Gadens Ridgeway's account was stated to be "Re: Subpoena by" YDSI. It is impossible to tell from the accounts what precisely the work was in respect of. Despite the description in the accounts, the work appears to have been preparation for and appearance at a Court hearing on 1 May 1995, in respect of which day both counsel charged a brief on hearing fee. This was the day on which, as noted in [8] above the ANZ announced a submitting appearance. Mr M D Hirst, the partner of Gadens Ridgeway who is shown by the accounts to have done the bulk of the work, deposes that the appearances were before Young J and that the "ANZ appeared in the Equity Division proceedings because it was joined as a party." No order for costs was made in its favour. As again noted in [8], it did not ask for one, saying it would rely on the mortgage debenture. On 24 May 1995 the ANZ wrote to Smith requesting payment of those legal fees totalling $26,769.47 "in relation to the recent legal action undertaken between yourself and" YDSI. The request was made in "accordance with our Letter of Offer to yourself dated 9 March 1994" (presumably that referred to in [5] above). The moneys were not paid in answer to the request. As late as 13 December 1996 Smith denied in a letter by his solicitor that these costs fell within the security or were payable by him. The 1996 assignment was executed on 24 December 1996. Terese McCowen, Smith's wife and a director of Management Services and DSC Australia, on 23 December 1996 drew a cheque to the ANZ for $27,787.88 on DSC Australia which was debited to that company's account on the same day. Despite the difference of this sum from $26,769.47, the proceedings before me have been conducted on the basis that the larger sum represented the ANZ's costs in proceedings 1913/95. It was stated on the cheque requisition in Ms McCowen's hand that it was for (so far as is legible) "Legal - T Smith". The amount of the cheque was in DSC Australia's accounts debited to Smith's loan account. On 15 April 1997 the ANZ wrote to Mr McLaughlin, Smith's solicitor, confirming that Smith paid $27,787.88 to the ANZ on 24 December 1996 "by way of consideration for the assignment by us to him of" the mortgage debenture. Mr McLaughlin characterised the payment in the same way in a letter of 17 April 1997, under cover of which he sent a copy of the ANZ's letter to Blake Dawson Waldron, the solicitors for YDSI, requesting reimbursement of the sum to Smith. On the other hand, in a letter to Blake Dawson Waldron on 24 April 1997 Mr McLaughlin said that the payment was made because it "was a condition precedent to the assignment that the debt owing by YDSI to the bank would be discharged prior to the assignment". In his affidavit sworn on 29 May 1997, he deposed that the moneys were "paid out to the Bank by Mr Smith as a condition of the assignment to him by the Bank of the charge". There does not appear to be any evidence of the negotiation as a result of which the 1996 assignment was given. The Facts Relating to the Claims: The Guarantee Fees 22 This claim was reduced from $87,000-odd previously claimed to $51,895.78. There is no dispute that the $51,895.78 was paid as guarantee fees in respect of bank guarantees given on behalf of YDSI. YDSI itself met the bank guarantee fees (then in respect of the original bank guarantee of $2.65 million) until 1992. In that year its bank account was frozen by the ANZ. Initially, there was some suggestion in correspondence that the unpaid fees might be met by directors, but on 23 July 1992 Smith wrote to the ANZ that "DSC shall have to shoulder the burden and recover the money from YDSI in due course." Thereafter the payments were initially made by DSC (Thanyule). On 23 July 1993 a direction was made that the guarantee fees be debited to the account of Management Services rather than that of DSC. This direction was repeated on 18 August 1993. There is no dispute that from 3 September 1993 that occurred. When the original bank guarantee of $2.65 million was in April 1994 divided into two separate bank guarantees of $1.325 million each, and the bank guarantee subsequently drawn down on was issued at the instance of Smith, Management Services became a co surety with Smith in respect of that bank guarantee. It does not appear to me clear, on the material before me, whether Management Services was a surety in respect of the earlier bank guarantee of $2.65 million, or of the other bank guarantee issued in April 1994 (which was guaranteed by Daly), or whether any obligation in respect of the $2.65 million bank guarantee was secured under a registered mortgage debenture dated 19 March 1990 which it appears the ANZ held over the fixed and floating assets of Management Services. It is conceded by Mr Neil, of Queen's Counsel for Smith, that the payments totalling $51,895.78 were made by Management Services, and that no debit was made to any loan account of Smith with that company in respect of those payments. It is not conceded by YDSI that the payments were made in respect of an obligation of YDSI; it is asserted by Mr Street, of Senior Counsel for YDSI, that there was a separate agreement between the ANZ and Management Services under which Management Services was a primary obligee to pay those bank guarantee fees, albeit they were in respect of a bank guarantee of YDSI's obligations. Conclusion: The Costs 23 By the terms of the amended cross claim the claim in relation to costs appears to be put on the basis of the general law of subrogation only. That amended cross claim was specifically formulated as the final pleading basis on which the cross claimant seeks relief in the circumstances set out in [15] above. It is alleged in the amended cross claim that the costs "are moneys secured under the Charge aforesaid and recoverable by Smith as equitable mortgagee by subrogation for and an [sic] account that Smith paid the aforesaid $1.325 million and such moneys are covered by the terms of the charge as being" and then portions are set out of the paragraph of the mortgage debenture numbered (4) where it appears in [3] above. This claim does not appear on the face of the pleading to be made under s 3 of the LRMP Act or under either of the assignments. So far as the general law of subrogation is concerned, it was conceded by Mr Neil QC that this claim contravened the principle set out in [17] above, that to be recoverable by subrogation the debt must have been a debt owed, in the instant case, by YDSI to the ANZ. These costs never were in that category: they were incurred by Smith in respect of his conduct of litigation and were paid by Smith. It is contended that, nonetheless, they fall within the security provided by the mortgage debenture, so far as I can understand, by reference to its terms, and are recoverable under it. In my opinion this simply is not so. If s 3 of the LRMP Act were relied on, the situation would be no different. Nor could either of the assignments be relevant. In my opinion, these costs are not within the security. 24 It is not necessary, therefore, for me to determine the defence of estoppel in relation to this item. If I did have to determine it, I should determine that the defence of estoppel would succeed. The reasons for which I should do this are similar to my reasons given below in [27] in relation to the claim under the general law of subrogation to the $27,787.88. Conclusion: The $27,787.88 25 This claim is made in the amended cross claim in the following quite simplistic terms: "47 On 24 December, 1996, by Deed of Assignment made on that day, ANZ assigned absolutely all its right title and interest in and under the aforesaid Mortgage Debenture to Smith. 48 Immediately before the assignment YDSI owed ANZ an amount of $27,787.88 secured under the Charge. 49 Smith paid that amount to ANZ on 24 December, 1996. 50 By reason of such payment Smith became a secured creditor of YDSI by subrogation entitled to the benefit of the Mortgage Debenture and to ANZ's rights and remedies thereunder for recovery of the said amount and interest loss or damage." In my opinion, the central question in relation to this claim, so far as it is based on the general law of subrogation, or on s 3 of the LRMP Act, is whether Smith in fact paid the $27,787.88 to the ANZ as a payment made by a surety in satisfaction of a debt of YDSI to the ANZ. This question itself comprehends three questions: 1 Whether the $27,787.88 was in fact a debt of YDSI to the ANZ. 2 Whether the payment was made by Smith. 3 Whether it was made in his capacity or guise as a surety. In seeking relief in respect of this claim Smith bears the onus of establishing each of these matters. 26 So far as question 1 is concerned, it seems to me that, although the ANZ was present at those proceedings in a sense only because it was the original owner of the security to which subrogation was sought, it would not have been in the position of having to make that appearance, were it not for YDSI's breach of its obligations. The proceedings arose because YDSI had breached its obligations under the mortgage debenture in that it did not pay to the ANZ the $1.325m paid on its behalf by the ANZ to the BOT; Smith paid the sum and brought the proceedings to recover it under the mortgage debenture. The ANZ was necessarily joined as a party as the mortgagee under the mortgage debenture. The ANZ's actions, in taking advice concerning this complex matter and then announcing submission to the Court's orders can hardly be characterised as unreasonable, nor can the incurring of legal costs in taking those actions. In my opinion, the correct conclusion is that the costs were incurred by the ANZ "on account of or arising out of any default by the Mortgagor" under the mortgage debenture as provided in paragraph (4) [iv] set out in [3] above. They were therefore owing and secured to the ANZ under the mortgage debenture. So far as question 2 is concerned, the contending versions were, on the one hand, that the payment was made by Smith and, on the other hand, that it was made by DSC Australia. On the evidence, I find that the payment was made by Smith. The cheque was drawn by DSC Australia on its acount. However, the narration in the cheque requisition appears to indicate that the liability was Smith's, and I accept on the evidence that the amount was debited to his loan account with DSC Australia in the relevant year (the company accounts showing the movement in the loan account are in evidence, as is an explanation of the movement). It was Smith who was taking the assignment of the mortgage debenture; the correct characterisation of what occurred is that the company lent the money to Smith, on whose account it was paid to the ANZ at the time of the assignment. Question 3 remains, whether the $27,787.88 was paid by Smith in discharge of an obligation as surety of YDSI's obligations, or whether it was paid by him as the price of the assignment he desired, in order to bolster his chances in making the claim for $27,787.88 the subject of the present litigation. As in so many instances in this case, despite the length and complexity of the litigation, the evidence is sparse and confused. That there is not in evidence, either by way of documents or otherwise, the negotiations or circumstances immediately surrounding the making of the payment or the execution and delivery of the assignment constitutes a difficulty in the way of Smith's case on this matter. Certainly, shortly before the payment was made, Smith was vigorously denying that these costs fell, as between the ANZ and YDSI, within the terms of the mortgage debenture so as to be payable to the ANZ by YDSI. The evidence does not disclose any withdrawal of this denial up to the point of payment. The only contemporaneous evidence going to what was in Smith's mind at the actual time of payment is Ms McCowen's note on the cheque requisition "Legal - T Smith", which is quite equivocal in this regard. On the evidence the first references after the payment, on behalf of both the ANZ and Smith, to the payment (in Smith's case written by lawyers, who are presumably aware of the significance of the word) characterise the payment as consideration for the assignment. There is some suggestion in the correspondence, eg, Mr McLaughlin's letter of 24 April 1997 referred to above, that the money was paid as costs rather than consideration for the assignment. However, that rather self serving statement was made only upon challenge by Blake Dawson Waldron of Smith's claim that he was entitled to have that sum treated as secured under the mortgage debenture. I do not ignore the fact that the 1996 assignment itself states a consideration of $1.325 million. That does not preclude the $27,787.88 being consideration for an agreement to grant the assignment; the $1.325 million would have been a past consideration in respect of that agreement. Upon all the evidence, I should find, if necessary, that the sum was paid by Smith as consideration for the 1996 assignment, and not in discharge of any liability as surety. I do find that Smith has not established that the payment was made by him in his capacity as surety, rather than on some other account. Since it is not established that the payment was made by Smith as surety, his claim under the general law of subrogation (or by reference to s 3 of the LRMP Act) in relation to the $27,787.88 must fail. 27 In the case of this claim, equally as with the costs claim, I do not need to determine the defence of estoppel. However, if I had to determine it, I should uphold the defence. The $27,787.88 is claimed under the rubric of costs. Subrogation in relation to costs under the mortgage debenture was claimed from the outset of proceedings 1913/95 (see, for instance, the claim made in the amended statement of claim as set out in [7]). It does seem to be true, so far as I can perceive, that at the trial before Young J minds were concentrated upon the issue relating to the $1.325 million. But, whilst it was done shortly, the question of whether the security extended to costs was dealt with in the judgment of the Court of Appeal: see [9] and [10] above. Upon doubts arising as to whether this item (inter alia) could be raised in the inquiry ordered by the Court of Appeal, the Court of Appeal motion was taken out and determined before Meagher JA, as set out in [14] above. It was submitted to me that Meagher JA's decision that this matter was not within the inquiry ordered by the Court of Appeal was made on the ground that it was totally outside the subject litigation and therefore ought be agitated in separate proceedings. It may be possible, if one looks only at the order that the motion be dismissed, to take this view. However, I respectfully take the view, by reference to his short reasons for judgment, that his Honour dealt with the "validity" of the claim that the item fell within the security so as to be a proper subject of the inquiry ordered. No review of Meagher JA's order was sought. The matter thus commenced with a pleading that refers to costs and concluded with only one order that contains a possibly relevant reference to costs, followed by a ruling of a Judge of Appeal that there is no validity in the argument that this claim is within that order. On that basis it seems to me that it would be appropriate to say that the claim is res judicata. If I am not correct in that characterisation, in my mind either there would be an issue estoppel in relation to this particular matter or, if the matter is taken not to have been so decided by the Court of Appeal as to attract doctrines of either res judicata or issue estoppel, it is certainly a matter which Smith ought reasonably to have raised and had determined by the courts in those proceedings, so that the extended Anshun principle would apply. For these reasons, as I have said, I should uphold the estoppel defence if it were necessary for me to do so. 28 The claim for the $27,787.88 might be made out if it were made by Smith as assignee under the 1996 assignment. The pleadings and written and oral submissions in this case have been so confused that I find it difficult to determine whether the claim has been made on this basis. The proposed amended cross claim as set out in [25] above is unclear as to whether the claim is made in that way. This is not very satisfactory, in view of what I have said in [15] above as to the circumstances in which the amended pleading is now propounded. The submissions were also most unclear. It would be possible to say that no such claim should now be acceded to, since it has not been clearly pleaded and put. This I hesitate to do in the light of history. This litigation has been bedevilled by excessive pugnacity on both sides, as Young J has previously been moved to remark. It has also been bedevilled by the complexity of the subject matter and by multiple proceedings. It seems to me that there is a case that Smith is entitled to relief on this basis. I have found the payment of costs of $27,787.88 such as to fall within the mortgage debenture as between the ANZ and YDSI, so that that sum was secured to the ANZ as against YDSI. It has been found by the Court of Appeal that the mortgage debenture is still in force. The ANZ's rights under the mortgage debenture have been expressly assigned to Smith. This occurred on 24 December 1996. The substantive judgment of the Court of Appeal was delivered on 21 November 1996. The 1996 assignment was not and could not have been adverted to in the course of proceedings 1913/95 and CA 40392/95 up to the time of the last mentioned judgment. In my view there can therefore be no operative defence of estoppel in respect of an independent claim by Smith under the 1996 assignment. In view of the matters of history set out above, I am of the view that I should hear further submissions concerning this potential or actual head of claim. I take this course in the interest of the finality of litigation, to obviate the possibility of further proceedings and further defences of estoppel. Conclusion: The Guarantee Fees 29 The question of whether or not under the general law of subrogation Smith is entitled to have these payments regarded as secured to him under the mortgage debenture turns upon the same three questions as were posed in relation to the $27,787.88. Those questions may be stated as follows in relation to this subject matter: 1 Whether the guarantee fees claimed were in fact owed by YDSI to the ANZ. 2 Whether the payments were made by Smith. 3 Whether they were made in his capacity or guise as a surety. As to question 1, it has been argued that either Smith or Management Services (or perhaps both) undertook primary liability for the fees either before or under the arrangements made in respect of the two bank guarantees of $1.325 million each given in April 1994. I do not accept the argument that Management Services contractually accepted liability for guarantee fees through the directions in 1993 that its account be debited with them. Looking at the 1994 documentation relating to the bank guarantee given in respect of Smith's half share, there are certainly arguments open upon the face of what I have described as the confused concatenation of documentation that Smith (or Management Services) assumed primary liability for the fees. However, it is submitted on behalf of Smith that it flows from the decision of the Court of Appeal of the central question in the appeal, as set out in [10] above, that YDSI itself ought be regarded as primarily liable for the fees, since Smith requested and/or entered into the 1994 arrangement on its behalf. Whilst provision is not made in that documentation for payment of the guarantee fees by YDSI, neither is provision specifically made for its responsibility for the $1.325 million, if that sum were called up under the guarantee, as indeed it was. The matter is not entirely easy, but in my opinion the view that is better and is in accordance with the Court of Appeal's earlier judgment is that, as the guarantee was taken out on behalf of YDSI, whoever else might be liable to the ANZ for the fees, YDSI was itself liable. In my opinion this conclusion is not precluded by the fact that YDSI was no longer a customer of the ANZ, in the sense that it did not have an operating account (although it is referred to as "the customer" in the bank guarantee itself, one of the many confusions in the set of documents is that within its boundaries there are two persons defined as "the customer"). Once this conclusion is reached, there is potential for the fees to fall within the security in favour of some other person if that other person pays the fees in the guise of surety. This means that it is necessary to answer question 2, Did Smith pay the fees? My conclusion is that he did not do so. The fees were paid by Management Services. In the documentation, the arrangement was that the fees should be debited to Management Services' account. Upon their being debited to that account there is no suggestion of there being a corresponding debit to a loan account, unlike the situation with the $27,787.88. At least from April 1994, Management Services was undoubtedly a surety for YDSI's liability for the guarantee fees; it may have been so previously, although this, yet again, is not clear (as to which see [30] below). The correct conclusion appears to me to be that these payments were made by Management Services. I find that at least those made after April 1994 in respect of the bank guarantee relating to Smith's half share were made in its guise as a surety of YDSI's liability. In any event, I decline to find that any of the payments of bank guarantee fees claimed was made by Smith. That is fatal to the argument that these payments are secured under the mortgage debenture in favour of Smith. Question 3 does not arise in relation to these payments. Nor is it necessary to consider the defence of estoppel in relation to this claim. 30 However, the considerations are different in relation to the claim made to the same moneys under the 1998 assignment. I have found in [29] that at least those payments made after April 1994 in respect of the bank guarantee relating to Smith's half share were made by Management Services in its guise as a surety of YDSI's liability to the ANZ. In those circumstances Management Services was subrogated to the ANZ's rights under the mortgage debenture. That entitlement was assigned to Smith under the 1998 assignment. He is to that extent entitled to the security of the mortgage debenture, and it should be declared accordingly. I find it difficult to perceive, in the evidentiary maze of this case, whether Management Services was also a surety in respect of the fees paid on account of the bank guarantee relating to Daly's half share, or on account of the $2.65 million bank guarantee current up to April 1994. Further submissions on the extent of the declaration appropriate on the state of the evidence may be put when short minutes are brought in. The Result 31 It flows from my conclusions above that Smith as cross claimant is entitled to at least some declaratory relief upon the amended cross claim, as indicated above. So far as concerns YDSI's claim upon the amended summons for injunctive relief in relation to the appointment of the receiver, this cannot be determined until I deal finally with the claim for the $27,787.88. I shall give directions to permit the final determination of that matter. There may be argument at the same time as to the proper extent of the declaratory relief in respect of the guarantee fees Short minutes may thereafter be brought in of the orders which the parties contend are appropriate once the final determination has been made. Questions of costs may be raised when the short minutes are brought in.

Yusen Daly Smith International Pty Ltd v Smith

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Judgment (7 paragraphs)

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