Argyle Lending Pty Ltd v Lantouris
[2021] VCC 259
•25 March 2021
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
EXPEDITED LIST
Case No. CI-17-05165
| ARGYLE LENDING PTY LTD (ACN 142 250 057) | First Plaintiff |
| and | |
| NICOLA MAZZEO and PATRICK LENNON trading as LENNON MAZZEO LAWYERS (A FIRM) | Second and Third Plaintiffs |
| V | |
| MARIA LANTOURIS and | Defendant |
| MORRY BLUMENTHAL | Third Party |
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JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13,14,15,16 and 20 July 2020 | |
DATE OF JUDGMENT: | 25 March 2021 | |
CASE MAY BE CITED AS: | Argyle Lending Pty Ltd & Ors v Lantouris | |
MEDIUM NEUTRAL CITATION: | [2021] VCC 259 | |
REASONS FOR JUDGMENT
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Subject:CONTRACT AND GUARANTEE
Catchwords: Construction of loan and charge agreement – whether a deed or not – if a simple contract whether consideration passed – whether deed of guarantee unenforceable
Legislation Cited: Corporations Act 2001 (Cth); Partnership Act 1958 (Vic); Bankruptcy Act 1966 (Cth)
Cases Cited:Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; Citicorp Australia Ltd v Hendry & Ors (1985) 4 NSWLR 1; Co-Operators Life Insurance Co v Gibbens (2009) SCC 159 (Supreme Court of Canada); Custom Credit Corp Ltd v Gray [1992] 1 VR 540; G Scammell and Nephew Ltd v Ouston [1941] AC 251; Gibbons v Pozzan (2007) 209 FLR 233; Hillam v Iacullo (2015) 90 NSWLR 422; ICTA Investments Pty Ltd T/A Jolly Roger & Anor v GE Commercial Corporation (Australia) Pty Ltd & Anor [2006] NSWCA 290; In re Perkins; Poyser v Beyfus [1898] 2 Ch D 182; Jowitt v Callaghan (1938) 38 SR (NSW) 512; McIntosh & Anor as T’ees of the Estate of Camm (A Bankrupt) v Linke Nominees P/L & Anor [2008] QCA 275; Melbourne Property Group Pty Ltd v SC Australia Pty Ltd and Ors [2013] VSC 701; Morris Finance v Brown (2017) FCAFC 97; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Newcomb v Newcomb (1934) NSW STRAP 44; (1934) 34 SR NSW 446; Realm Resources Limited v Aurora Place Investments Pty Ltd [2019] NSWSC 379; Toyota Finance Australia Limited v Gardiner (2016) NSWCA 162
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr T J Scotter | Spoke Legal |
| For the Defendant | Mr S D Hay QC with Mr J Nixon | Melbourne Legal Chambers |
| For the Third Party | Mr A Muller | Colin Biggers & Paisley |
TABLE OF CONTENTS
A. Introduction and summary
B. Background facts
Meeting at Lennon’s office on 25 July 2017
C. Evidentiary issues
D. The Loan Agreement claim
(1) What is the proper construction of the loan and charge agreement?
(2) Was the loan and charge agreement executed as a deed?
(3) If the loan and charge agreement was executed as a simple agreement and not a deed, is there valid consideration such that it can be enforced by Argyle against Lantouris?
(4) Properly construed did clause 3 of the October 2016 agreement create an equitable charge in favour of LM over the land at Station Street property to secure payment of legal fees owed by Sevdalis to LM?
(5) Was LM entitled to lodge its caveat registered on the title to the Station Street property on 2 June 2017?
(6)Was the LML agreement unenforceable against Sevdalis by reason of the operation of the Bankruptcy Act 1966 (Cth)?
E. The Guarantee claim
(7) As a result of the LM legal practice ceasing at 30 June 2017, is the deed of guarantee dated 25 July 2017 enforceable by the second and third plaintiffs constituting the LM firm against the defendant?
(8) If the LML agreement is not enforceable by the second and third plaintiffs against Dr Sevdalis, is the deed of guarantee enforceable by the firm against the defendant?
(9) Given it is accepted that the guarantee did not attach the LML agreement when it was executed by the defendant, is the guarantee void for uncertainty?
F. Conclusion
HER HONOUR:
A. Introduction and summary
1The defendant (“Lantouris”) is sued for moneys claimed to be owed by her to the first plaintiff (“Argyle”), or alternatively, to the second and third plaintiffs trading as the firm, Lennon Mazzeo Lawyers (“LM”). The plaintiffs seek recovery of the same principal amount, namely $500,000, together with interest at the rate of 20 percent per annum compounding monthly.
2The resolution of the issues in dispute turns primarily upon the construction of two documents being:
(a) a loan and charge agreement (“the loan agreement”) between Argyle and Lantouris dated 25 July 2017;[1] and
(b) a deed of guarantee (“the guarantee”) between LM and Lantouris dated 25 July 2017.[2]
[1]Court Book (“CB”) 559-564
[2]CB619-623
3Lantouris admits she signed both documents and that she has not made any payments to Argyle or LM, despite demand.
4The plaintiffs’ claims arose in circumstances where LM was owed legal fees by Lantouris’ brother, Dr Nicholas Sevdalis (“Sevdalis”). LM had acted for Sevdalis in various matters since 2012. LM had become increasingly concerned about the substantial level of outstanding fees. Following Sevdalis’ voluntary bankruptcy on 23 December 2016, LM held extensive negotiations with Sevdalis and his associates with a view to securing payment of the fees. Several proposals were put forward, with Lantouris ultimately agreeing to sign the documents, the subject of this proceeding, on 25 July 2017.
5Nine key issues for determination were agreed upon by the parties at trial. The cascading issues, some of which overlap, relate to the construction and enforceability of the loan agreement and the guarantee. Lantouris withdrew a counterclaim seeking to aside those documents on the grounds of unconscionability at the start of the trial.
6For the following reasons, I am not persuaded Argyle is entitled to enforce the loan agreement against Lantouris. Similarly, I find the guarantee relied upon by LM is unenforceable, with the result that the plaintiffs’ claims must fail.
B. Background facts
7On 13 October 2016, LM entered into a charge agreement (“2016 charge agreement”) with Sevdalis and a company associated with him, Native Bond Pty Ltd to secure payment of the firm’s legal services. The relevant terms of the document are as follows:
“RECITALS
B. Nick (Sevdalis) & Native Bond have agreed to charge in favour of LM their properties (together with any property that is held on trust for Nick & Native Bond) to secure the payment of the services rendered by LM on the terms and conditions set out in this Agreement.
OPERATIVE PART
2.Nick & Native Bond hereby charge as security for the services of LM all their interest in the following properties: (two properties are then identified, being properties in Doreen and Hawthorn)
3.Nick & Native Bond shall further secure the services by charging in favour of LM all their right title and interest in any other property whether real or personal and Nick & Native Bond shall sign all and any documents that may reasonably be required by LM to enable LM to better secure their interest in such property.”
8On 23 December 2016, the following events occurred. Sevdalis filed a debtor’s petition and became a bankrupt. Mr Nick Mellos and Mr Stephen Dixon of Grant Thornton were appointed his trustees in bankruptcy. Mr Mellos lodged a trustee’s caveat over 242 Station Street, Fairfield (“Station Street property”). This was a property owned by Sevdalis since 15 October 1984 and where he conducted his medical practice. The property was subject to a registered mortgage with the Bendigo and Adelaide Bank Ltd.
9A meeting was held with Sevdalis and the second and third plaintiffs on 10 May 2017. Dimitrios James Podaridis (“Podaridis”) who is a second cousin of both Sevdalis and Lantouris and a barrister at the Victorian Bar also attended the meeting, as did Nick Bochrinis (“Bochrinis”), a long-standing friend of the Sevdalis family. Discussions took place regarding the fees owed to LM and the sums owed over various properties.
10On 12 May 2017, the second plaintiff (“Mazzeo”) sent an email to Podaridis attaching a statement of account. The statement listed the fees incurred by LM on behalf of Sevdalis between 31 October 2013 and 22 December 2016. The total sum billed was $825,173.34 and $761,873.34 was the amount due.
11On 2 June 2017, the second and third plaintiffs lodged a caveat over the Station Street property claiming an interest as chargee.[3] The grounds of claim listed in the caveat was the charge contained in the 2016 charge agreement.
[3] CB268
12On 21 June 2017, LM wrote to Sevdalis confirming an agreement reached whereby the firm would accept a reduction of their fees to $400,000 on the terms set out. The deal struck was that $200,000 would be payable in consideration of LM withdrawing its caveat over the Station Street property. The first instalment was due no later than 30 June 2017. A second payment of $200,000 would be paid from the settlement of the property at Doreen or any other property owned by Sevdalis or 31 December 2017, whichever is the earlier. It was noted the 2016 charge agreement would remain in full force and effect until the entire settlement sum was paid.
13LM ceased providing legal services on 30 June 2017. The principals of LM, being the second and third plaintiffs, then set up their own practices which are conducted on separate levels at 256 Queen Street, Melbourne.
14Settlement on a contract of sale dated 28 July 2016 of the Station Street property was due to occur on 30 June 2017. Sevdalis was the vendor. The purchaser was NB Services Pty Ltd, a company associated with Bochrinis. The price was $1,950,000. A deposit was paid of $1,250,000 on 30 September 2016 with the balance of $700,000 payable at settlement.
15LM sent a letter to Sevdalis on 20 July 2017 recording an agreement regarding the payment of fees in a similar format to the letter of 21 June 2017. The difference was that the first payment was broken up into two instalments of $100,000, followed by the balance of $200,000 as before. The second and third payments were to be guaranteed by Bochrinis and NB Services Pty Ltd with a proposed guarantee of deed attached. Both this letter and the earlier letter were copied in to Podaridis. A signed version of this deed of guarantee dated 20 July 2017 is at CB328-331. It contained a handwritten amendment which recorded the parties agreed the caveat over Station Street would be withdrawn at settlement and a further caveat would be lodged before 14 days of the date hereof. Another version of the letter of 20 July 2017 is at CB332-333. It changed the arrangement to the first instalment of $200,000 being payable by 14 September 2017, with the rest of the offer being the same as before.
16Podaridis forwarded a valuation of the Station Street to the second and third plaintiffs on 22 July 2017. He said in his covering email: “As you suggested, we can offer you a caveat as per the agreement and/or second mortgage to secure you for the full $200k and to be repaid on the refinance with the new funder.”
17On 23 July 2017, the third plaintiff (“Lennon”) had further discussions with Podaridis regarding the arrangements for repayment. Lennon sent an email to Podaridis on 24 July at 10.37am setting out the amended agreement. LM was willing to take a second mortgage over the Station Street property in the sum of $500,000 providing the first mortgage was capped at $900,000. The sum of $500,000 would be payable if the two instalments of $200,000 were not paid on the dates specified. Lennon asked Podaridis to arrange for Bochrinis and NB Services to execute the relevant documents, which Lennon would prepare.
18On 24 July 2017, Podaridis sent an email at 11.15am replying to Lennon’s email. He sought additional time for the payment of the first instalment and then went on to say:
“The property to be secured with the mortgage will be over 24(sic) Park Street, Abbotsford as this has settled and now available immediately.”
19The street number given in the email was incorrect as the property in question was 22 Park Street, Abbotsford (“Park Street property”). This property was owned by a company called 22 Park Street Pty Ltd, of which Lantouris was the sole director. A historical title search revealed the Park Street property was originally owned by the parents of Lantouris and Sevdalis. Upon their father’s death, their mother became the sole owner. It was later transferred to the mother and Sevdalis as tenants in common in 2011. The mother held 19 equal undivided shares and Sevdalis held one share of a total of 20 undivided shares. The property was transferred to 22 Park Street Pty Ltd as sole proprietor on 8 May 2017.
20Podaridis sent a further email on 24 July 2017 at 4.56pm asking LM to copy in himself and Morry Blumenthal, a solicitor, in respect to the agreements which they had just discussed and confirmed they would attend LM’s offices the next day at 9.30am.
21Lantouris was contacted by Sevdalis in the evening of 24 July 2017. He told her that Podaridis wanted to speak to her urgently. She then rang Podaridis. Podaridis told her he had obtained a bargain deal for Nick’s fees owing to Lennon of $800,000 down to $400,000. Podaridis told her to ring Lennon. He said “I'll send you his number and ring and tell him you agree and you just put a caveat on 22 Park Street, Abbotsford. It’s quite urgent.” He also mentioned that if she were to sign “the sharks will go away”. Lantouris told Podaridis that she did not want to sign as she was looking after her son who had a stroke a month beforehand. Podaridis then texted her Lennon’s number. In cross-examination, Podaridis could not recall whether he had a conversation with Lantouris that evening.
22In July 2017, Lantouris was living at 17 Green Street, Northcote with her elderly mother, her brother and a family friend, both of whom were bipolar. She had limited formal education. Lantouris had worked on occasion as a receptionist at Sevdalis’ medical practice. She was in receipt of a carer’s pension.
Telephone call between Lennon and Lantouris on 24 July 2017
23Lantouris rang Lennon and left a message for him. He telephoned her later in the evening of 24 July 2017. Mr Lennon accepted that he had not dealt with Lantouris before and that she was a “fresh face”.
24Lantouris gave evidence she said to Lennon in the phone call that “James has told me that you’re going to do a good price for Nick’s legal fees for $400,000 and I just have to put a caveat on 22 Park Street, Abbotsford.” Lennon replied “Yes” and then proceeded to ask her what properties she owned. She told him 17 Green Street, Northcote, 22 Park Street and two units in Coate Avenue, Alphington. Lennon then asked her how much was owed. She was unsure of the amounts and she suggested Podaridis may be able to tell him. Lennon did not tell her when the sum of $400,000 had to be paid, nor did he say anything to her about paying $500,000 or interest. When cross-examined, she said she was surprised Lennon asked questions about other properties which made her suspicious.
25In cross-examination, Lantouris’ evidence was to the effect that she had agreed to her brother’s legal fees of $400,000 and a caveat on Park Street. “That’s what I said.” When asked she knew what that meant if her brother did not pay the legal fees she would have to, she replied:
“That meant I had a caveat on Park Street so if it wasn’t paid, if I sold my unit. That’s what a caveat I thought meant, was like just once if it’s ever sold and Mr Lennon didn’t get his money, he’d get his $400,000 back whenever I sold the unit.”
26Lennon took a file note of this conversation held on the evening of 24 July 2017.[4] His note records the call lasted for 15 minutes. He gave evidence about the file note during the trial. His recollection of the substance of what was discussed was not very detailed. Lennon accepted that he had asked Lantouris what property she owned and she told him 17 Green Street, Northcote, 22 Park Street and two units in Coate Avenue, Alphington. He asked her how much equity she owned in the properties. Lennon agreed in cross-examination he did not get into specific securities and he had asked her about other property to satisfy himself “about executing the debt because obvious reasons”. Lennon also agreed he had not discussed specific figures with Lantouris, such as when the sum of $400,000 was to be paid, the sum of $500,000 being payable on default or interest.
[4]CB399
27On 25 July 2017, Lennon sent an email to Podaridis at 11.58am attaching a draft loan and charge agreement and confirmed he had spoken with Lantouris on the preceding evening.
28A further letter to Sevdalis dated 25 July 2017 was signed by LM setting out the agreement reached for LM to accept $400,000 for its fees on the conditions stated (“the LML agreement”).[5] In the event of non-compliance on the instalment payments, the amount payable was $500,000 with interest to accrue at the rate of 20 percent and compounding monthly. Clause 2 provided that payment of the settlement sum was to be guaranteed and secured by Lantouris and 22 Park Street Pty Ltd. The letter stated that a deed of guarantee together with a mortgage document was being prepared and will be executed by Lantouris and 22 Park Street Pty Ltd in the course of the day. Clause 3 provided that the 2016 charge agreement was to remain in full force and effect until the entire settlement sum was paid.
[5] CB539-540
Meeting at Lennon’s office on 25 July 2017
29On 25 July 2017, Lantouris went to Lennon’s office with Sevdalis. They arrived at around 1.30pm. Mr Morry Blumenthal (“Blumenthal”) a solicitor also attended. Blumenthal was joined as a third party to the proceeding. He had been asked to attend the meeting by Podaridis to advise Lantouris about the documents and to provide a solicitor’s certificate. Lantouris gave evidence that Blumenthal said to her they were there on short notice because of the fees owing to LM of $800,000 down to $400,000 and she was going to put a caveat on 22 Park Street. Podaridis arrived sometime later. Lantouris and Blumenthal were in Lennon’s board room. A bundle of documents was given to Blumenthal by Lennon. Lennon could not recall what precise form the documents were in when he took them into the room, but they were collated in a bundle.
30Podaridis did not read the documents that Lennon gave to Blumenthal to be signed. He said Lennon came in with a bundle of documents and put them on the table. He and Sevdalis were asked to leave the room so that Blumenthal could advise Lantouris on the bundle of documents that were there. He said he left the room with Sevdalis and they stayed in the reception area of LM’s offices. Lantouris gave evidence that Blumenthal did not read the documents and neither did she. She signed the documents which took about 10 minutes and they were returned to Lennon. Blumenthal signed a certificate of witness and schedule of documents. Lantouris denied the matters contained in the certificate had been put to her by Blumenthal.
31The claim between Blumenthal and the defendant was settled on the second day of the trial. The third-party claim was struck out with no orders as to costs. Blumenthal was called as a witness on behalf of the plaintiffs. It was readily apparent that he had a very limited recollection of the events that occurred on 25 July 2017. Blumenthal gave evidence as to what he could say about his usual practice in respect of explaining such documents, including a statement that if his advice was wrong, he was insured. When cross-examined, Blumenthal did not dispute the proposition put to him that neither he nor Lantouris read the documents before they were signed.
32At 2.50pm on 25 July 2017, Lennon sent an email to Podaridis attaching draft copies of the various security documents, including the guarantee, the LM letter to Sevdalis and the loan agreement. The email read: “Please find attached documents being reviewed now.” At that time, Podaridis said he was sitting in LM’s offices. The settlement with the Bank of Bendigo was due to go ahead at Maddocks’ offices at 3pm and they were running late. Podaridis could not recall whether he opened the email on his computer that night or the following day but said it was most likely the day after.
33There was some debate at trial as to the capacity in which Podaridis acted for members of the Sevdalis family, including Lantouris. LM argued he was acting as the latter’s agent at the time the key documents were signed in July 2017. Lantouris denied this and said Podaridis was representing Sevdalis at the time. Podaridis confirmed this in his evidence and said he was not acting for Lantouris in July 2017 but was representing her brother’s interests. Although later when he was cross-examined, he conceded he was representing the Sevdalis family. It is apparent from the various emails sent, particularly in June and July 2017 and from the discussions held then that LM was dealing directly with Podaridis, who was negotiating the arrangements for Sevdalis. He certainly assisted Lantouris subsequently when LM and Argyle were trying to enforce their securities against her. The relevance of this topic comes in later when examining the enforceability or otherwise of the guarantee.
34The documents signed by Lantouris on 25 July 2017 are as follows:
(i) disbursement order (CB541);
(ii) mortgage of land over Park Street and Northcote properties (CB543-544);
(iii) acknowledgement of obligations under memorandum of common provisions (CB553);
(iv) authority to settle (CB554);
(v) statutory declaration (CB555-557);
(vi) loan and charge agreement (CB559-568);
(vii) general security agreement (CB569-618);
(x) deed of guarantee (CB619-623).
35A company search of Argyle reveals the sole director and secretary is Jane Margaret Lennon, who is Lennon’s wife. The company was registered on 24 February 2010. Lennon gave evidence that Argyle was a “mezzanine lender”, being a lender who advanced moneys on short-term loans and not by way of first mortgages. Lennon accepted he had drawn up the loan agreement naming Argyle. He said he decided to include Argyle as the lender and set the arrangement up as a loan. Mazzeo was responsible for drafting the guarantee. Lantouris had no recollection of Argyle being discussed. Lennon agreed in cross-examination that he had not mentioned Argyle to Lantouris during their phone call on 24 July 2017.
36Lennon did not provide signed copies of the documents to Lantouris following execution. Lennon provided copies of the documents at a later stage pursuant to an order made on 27 November 2018 by Judge Saccardo that required him to do so. Lantouris’ solicitors had requested copies of the documents and served notices to produce prior to the court order being made but Lennon refused to provide them. The answer that Lennon gave in evidence when asked why he did not do so was unconvincing and unsatisfactory. Lennon should have provided the documents to Lantouris’ solicitors immediately upon being asked to do so.
37On 26 July 2017, LM signed a withdrawal of caveat over the Station Street property. This caveat and a withdrawal of the Trustee’s caveat were registered on 2 July 2017, as was a transfer of the property to 242 Station Street Pty Ltd, the new owner. This was a company controlled by Bochrinis. This transfer of the Station Street property was subsequently declared void by virtue of Sevdalis’ bankruptcy, pursuant to consent orders made by Middleton J in the Federal Court on 7 December 2018.
38The first sum of $200,000 payable on 22 October 2017 was not paid. LM sent letters of demand to Lantouris and 22 Park Street Pty Ltd on 30 October 2017.
39On 9 November 2017, Lennon appointed Mr S Nelson of BPS Reconstruction as receiver over 22 Park Street Pty Ltd pursuant to the general security agreement that was signed on 25 July 2017. Various attempts were pursued by LM seeking recovery of the sums claimed.
40This proceeding was commenced by writ on 2 November 2018. The second sum of $200,000 due on 31 December 2017 was also not paid. Neither Argyle nor LM received any moneys as a result of the sale of the Park Street property or from any other source.
41On 21 December 2018, Argyle received a letter from solicitors acting for the first mortgagee over the Park Street property advising that the mortgage was in default. A similar letter was sent to Argyle on 1 March 2018 advising that the first mortgage was in default in respect of the property at 17 Green Street, Northcote. After the counterclaim was filed, Argyle discharged the mortgage it held over the property at Northcote. The mortgage had been provided by 22 Park Street Pty Ltd. This company was not the registered proprietor of the Northcote property which was Lantouris. Self-evidently, Argyle had no basis whatsoever to lodge a mortgage over the Northcote property in these circumstances. Lennon accepted in cross-examination that the mortgage lodged over the Northcote property was done in error because the mortgagor was incorrectly listed as 22 Park Street Pty Ltd.
42The Park Street property was subsequently sold at a first mortgagee’s auction. Lantouris signed a contract of sale to purchase the property but the sale did not go ahead because she did not have the funds available to honour the cheque she signed for the deposit of $172,000. The property was later resold for a lesser sum. In proceeding No.CI-19-02345 filed in this court, the receiver and manager appointed to 22 Park Street Pty Ltd has sued Lantouris for damages arising from the aborted sale.
C. Evidentiary issues
43An issue arose regarding Lennon’s credit because of text messages he sent to Podaridis on the Friday preceding the start of the trial on Monday, 13 July 2020. There were a series of text messages which were vulgar and abusive in tone.[6] The texts were sent after Lennon admitted he had received an outline of evidence to be given at trial on behalf of Podaridis.
[6] CB973-976
44It was suggested by counsel for Lantouris that by sending the texts, Lennon was attempting to influence or cause Podaridis to change his evidence regarding an issue about agency as to whether he was acting for Lantouris at the relevant time, and the texts also contained threats to Podaridis’ mother. Lennon denied he had attempted to get Podaridis to change his evidence or had made threats to his mother.
45I provided Lennon with a certificate under s128 of the Evidence Act regarding this evidence. The purpose of this evidence put forward by the defendant was not so much as to allege an act of contempt but rather to show the texts impacted adversely upon Lennon’s credit. Ultimately, it was unnecessary for me to make any determination as to whether or not there had been an improper attempt by Lennon to influence Podaridis or whether he had made threats to Podaridis’ mother. It is sufficient to say that the text messages sent by Lennon to a witness on the eve of the trial were entirely inappropriate and fell far short of the standard expected from an officer of the court.
46Lantouris was also cross-examined about various matters regarding her conduct after the relevant documents were signed on the basis that these matters went to her credit. This included the circumstances in which she failed to honour the cheque she had signed at the auction of the Park Street property and information provided in various loan application forms which were clearly incorrect. In particular, the high levels of income attributed to her in these forms. Lantouris’ conduct post the signing of the documents is largely irrelevant to the issues for determination in this proceeding. Lantouris was also cross-examined about inconsistencies in earlier affidavits she had made in this proceeding relating to the setting aside of a default judgment and a summary judgment application. In those affidavits, Lantouris deposed that Podaridis had been acting on her behalf, which she now said was a mistake. In her oral evidence, Lantouris said he was not representing her but, at all relevant times, was acting on behalf of Sevdalis.
47The resolution of the issues in dispute revolves around the interpretation of documents, the authenticity of which is not challenged. As such, it was unnecessary for me to make any findings regarding credit of either of the two principal witnesses. In any event, as the evidence emerged, there was really very little discrepancy between the key witnesses, particularly, Lennon and Lantouris about what had happened, including the telephone call on 24 July 2017.
D.The loan agreement claim
48Several issues were identified in the agreed statement of issues regarding the enforceability of the loan agreement. The first issue raised relates to a question of construction in the following terms:
(1) Is the proper construction of the loan and charge agreement:
(a)as contended by the first plaintiff at paragraph 3A of the further amended statement of claim (“FASC”); or
(b)as contended by the defendant at paragraph 3AA(b) of her defence.
49Paragraph 3A of the FASC dated 1 November 2019, describes the loan agreement as being an agreement whereby Lantouris agreed to pay the sum of $500,000 to Argyle on or before 31 December 2017, in consideration for Argyle procuring LM to withdraw a caveat over the Station Street property. Paragraph 3B pleads that Argyle procured the withdrawal by LM of the latter’s caveat over the Station Street property on 2 August 2017.
50In response, paragraph 3AA(b) of the defence dated 7 February 2020, pleads if the loan agreement is otherwise enforceable, then on a proper construction of the loan agreement, Lantouris was only to become liable to pay Argyle if Argyle paid LM the sum of $500,000. Argyle did not make any such payment and as a result, Lantouris is not liable to pay Argyle.
Plaintiffs’ contentions
51The plaintiffs accept Argyle did not make any advance to LM. Their case is that no such advance was required principally because of the acknowledgment in clause 1 that: “the Borrower (22 Park Street Pty Ltd) and the Guarantor (Lantouris) accept and acknowledge that the secured moneys, namely $500,000 is being advanced effectively to Lennon Mazzeo to pay the debt owed by Sevdalis to Lennon Mazzeo.”
52The plaintiffs contend that as a matter of construction, regard can be had to objective facts known to the parties to assist in identifying the purpose or object of the transaction which may include its history, background and context.[7] The context relied upon here is that LM was willing to exchange its rights in exchange for the defendant and her company taking on an obligation to pay the relevant sums. This is in circumstances where Argyle was a company closely related to LM; the commercial intention of the documents is relied upon and Recital C in the loan agreement itself sought to substitute Lantouris’ obligations for the Station Street caveat.
[7] per Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [46]-[52]
The defendant’s contentions
53The defendant argues the construction put forward by Argyle should not be accepted as it ignores the text of the document. Lantouris says the following matters should be noted:
(a) Recital C states that in consideration for LM withdrawing the caveat the defendant (and 22 Park Street Pty Ltd) have agreed to enter into the loan agreement such that the lender will pay to LM an amount of $500,000 and the defendant enters into the agreement to enable the lender to pay the amount of $500,000 to LM;
(b) Clause 1 states that the lender has agreed to provide to the defendant a loan in the sum of $500,000 which, together with interest and any other monies payable to Argyle by the defendant, shall be referred to as the “Secured monies”. The defendant accepts and acknowledges that the Secured monies, namely $500,000, is being advanced effectively to LM to pay the debt owed by Nicholas Sevdalis to LM;
(c) Clause 2 sets out when the $500,000 will be due and payable;
(d) Clause 3 contains an acceleration clause in the event of non-payment;
(e) Clause 4 contains an obligation to pay interest on the amount of $500,000 at a rate of 20 percent per annum until it is repaid in full;
(f) Clause 5 contains a charging clause;
(g) Clause 6 provides that, in the event of default, written notice may be given to demand repayment of the entire amount of the secured monies together with any costs associated with the demands; and
(h) Clause 7 states that, in consideration of Argyle having provided the secured monies, the defendant guarantees 22 Park Street’s obligations under the loan and charge agreement.
54The defendant says given the construction of the agreement it can only be intended to be a loan agreement, hence its name. Argyle admits it did not pay LM any money.[8] Self-evidently, had that occurred, then LM would have been paid and could not now sue for the same debt. There has been no assignment of the debt owed from LM to Argyle. The document that was prepared envisaged actual money being paid from one entity to another which did not occur. It was submitted Lennon is stuck with the deal he drafted. Argyle’s entitlement as a lender to repayment from Lantouris was clearly dependent upon it paying LM at Lantouris’ direction.
[8]See paragraph 3AA(b) of the plaintiffs’ reply to defence and defence to counterclaim
55The defendant relies upon Hillam v Iacullo (2015) 90 NSWLR 422 at [93] to [108] per Leeming JA (Basten and Ward JJA agreeing); and Newcomb v Newcomb (1934) NSW STRAP 44; (1934) 34 SR NSW 446 at [450] per Jordan CJ where his Honour refers to the different types of obligations that can arise between parties to “an indenture”. In this case, the obligation to repay was dependent upon receiving a loan. The defendant says the construction put forward by the plaintiffs is absurd. Asked rhetorically, why would Lantouris be obliged to pay Argyle interest unless she received money from it in the form of an advance being made to LM on her behalf? Additionally, why should she have to “repay” money on demand unless money had actually been advanced to LM at her direction, and further how could the plaintiffs’ construction stand in the face of Recital C where there are references to Argyle paying LM and Lantouris entering into the agreement to enable Argyle to pay LM.
Analysis
56The document is, as was noted by the plaintiffs’ counsel, an odd document. In my opinion, it is also a flawed document. It is expressed to be a loan agreement but there is no controversy that the named lender, Argyle did not advance any funds to anyone.
57The plaintiffs’ reliance upon the words “is being advanced effectively” in clause 1 of the loan agreement does not overcome the problem that Argyle did not advance any funds to LM to pay the debt owed by Sevdalis. Clause 7 does not work because Argyle did not provide any secured moneys which is said to be the consideration for Lantouris giving the guarantee. Whilst one can have regard to the background and context of the transaction in question as an aid to interpretation, this does not go so far as ignoring the express words of a contract.
58I accept the defendant’s submission that as a matter of construction, Lantouris has no obligation to repay Argyle when Argyle did not pay any moneys to LM contrary to clauses 1 and 7. Nor did Argyle transfer any funds “effectively” or otherwise to LM. In my view, as a matter of construction, the loan agreement creates no enforceable obligation on the part of Lantouris to repay funds to Argyle. It was Lennon’s decision and his alone to introduce Argyle as the entity to take the second mortgage over the Park Street property. This document, which was cobbled together in haste, cannot overcome the insuperable hurdle that Argyle did not lend any funds to Lantouris or pay any sums to LM at her direction. That being so, she has no obligation to repay Argyle.
(2) Was the loan and charge agreement executed as a deed?
Plaintiffs’ contentions
59The plaintiffs’ case is that the loan agreement is a deed, and, in those circumstances, no consideration is required. The point arises because of the mixed language used in the document. On the cover of the loan agreement it is referred to as an agreement and in Recital C (arguably) and D. But the plaintiffs note that the main part of the document is referred to as the operative part (the language of a deed) and in the operative part, the document is exclusively referred to as a deed, in clauses 1, 6 and 7 (twice).[9] Another indicia that it is a deed on the plaintiffs’ case is that Lantouris executed it by way of it being “signed, sealed and delivered” and in the presence of a witness. It is submitted there is no other reason for a document to be signed, sealed and delivered apart from being a deed. There is no dispute that the document was delivered as it was handed back to Lennon after it was signed.
[9]CB561-562
Defendant’s contentions
60Lantouris submits the loan agreement is not a deed. It was not even titled as such and unlike the guarantee, which was prepared at the same time, the loan agreement does not contain the words “executed as a deed”.
61Argyle executed the loan agreement pursuant to s127(1) of the Corporations Act 2001 (Cth). Section 127(3) states that the company can execute a deed pursuant to s127(1) if “the document is expressed to be executed as a deed”. The loan agreement is not so expressed and, on that basis, the defendant argues the document is not a deed.
Analysis
62Section 127(3) and (4) of the Corporations Act provide as follows:
“(3)A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).
(4)This section does not limit the ways in which a company may execute a document (including a deed).”
63The purpose of s127 of the Corporations Act is to move away from certain common law formalities as to the execution of a deed and look at its substance and intention.[10] It is the use of the word “deed” in a document that is significant when determining whether it is executed as a deed.
[10] Gibbons v Pozzan (2007) 209 FLR 233
64This issue was considered in Realm Resources Limited v Aurora Place Investments Pty Ltd [2019] NSWSC 379, where the Court noted as follows:
“47.I will deal first with the question whether Realm became bound to the sublease as a result of a delivery of the sublease as a deed. This question involves several elements that are not entirely distinct. It is necessary to consider whether it was intended by the parties that the sublease would operate or take effect as a deed. It is necessary to consider whether the formal requirements for a deed are satisfied. It is also necessary to consider whether Realm evinced an intention to be immediately bound by the sublease such that it is taken to have been delivered as a deed.
48.As stated in B Edgeworth, Butt’s Land Law (Lawbook Co, 7th Edition, 2017) at [12.350]:
‘Although all deeds must comply with the relevant statutory and (to the extent that they survive) common law formalities, not all instruments that comply with those formalities are deeds. Whether an instrument is a deed depends on whether the parties intended it to be a deed. That intention is gleaned from considering the instrument’s form, substance and object as a whole. Important factors include whether the instrument reflects the phraseology and structure commonly found in deeds, and whether it is cast in the most solemn form of documentation appropriate for that particular transaction. Generally, an unregistered Torrens title dealing is not a deed (although nothing prevents the parties from amending its form to make it one), but it becomes one on registration.’
49.It has been said that this question of intention “is to be decided principally by reference to the contents of the instrument under consideration” (see 400 George Street (Qld) Pty Ltd v BG International Ltd [2010] 2 Qd R 302; [2010] QCA 245 (“400 George Street”) at [32]). The submissions of the parties accorded with that approach.”
65The Court also said at paragraph 62:
“62.Counsel for Aurora referred the Court to Gibbons v Pozzan (2007) 209 FLR 233; [2007] SASC 99, a decision of the Full Court of the Supreme Court of South Australia. In that case, an issue arose as to whether a loan agreement, that had been signed for a company by its sole director and secretary in accordance with s 127(1), was expressed to be executed as a deed for the purposes of s 127(3). Duggan J (with whom Gray and White JJ agreed) rejected an argument that s 127(3) required the words “executed as a deed” to be stated in the document. His Honour stated at [30]:
‘I cannot agree that the precise phrase used in the legislation must be incorporated into the document before s 127(3) can take effect. The section dispenses with certain common law formalities which were required for the execution of a deed. The purpose of s 127 is to move away from these formalities and look to substance and intention.’”
66The case law as set out above shows the task that still remains to be performed is whether the document can be construed as a deed.
67The problem here is that the loan agreement itself is unclear. In such circumstances, where there is doubt about the meaning of a contract, the words will be construed against the person who put them forward being the application of the well-known rule of construction of contra proferentum.[11]
[11]See The Interpretation of Contracts in Australia, Lewison and Hughes, Law Book Company 2012 at 7.08
68The drafting of the document was done solely by Lennon and no input was made by anyone else, including the defendant. It is clear from the surrounding circumstances in which the documents were prepared that they were done with some haste given the pending settlement with the Bank of Bendigo.
69It is accepted that the contra proferentum principle only applies where there is doubt or ambiguity.[12] In my view, there is clearly an ambiguity or doubt in the loan agreement given the interchangeable use of the words “agreement” and “deed” throughout the document. When one examines the loan agreement, there are several references to the term “agreement”. The cover page describes the document as “Loan & Charge Agreement”. “Agreement” is used in Recital C (twice), in Recital D and in paragraphs 3 and 4 of the operative part. Conversely, the word “deed” is used in paragraphs 1, 6 and 7 (3 times) in the operative part. The execution clause on behalf of Argyle is not stated to be executed as a deed, although the absence of these precise words is not fatal.
[12]Lewison supra at 7.08.3
70The mixed use of the language adopted creates an ambiguity. If the matter is not free from doubt then in those circumstances, the ambiguity or doubt should be resolved against the party who is putting the document forward – in this instance, Argyle. As was said by Binnie J in Co-Operators Life Insurance Co v Gibbens:[13]“Whoever holds the pen creates the ambiguity and must live with the consequences.” Given the inconsistency in the language used in the loan agreement and applying the contra proferentum rule, I find the loan agreement is not a deed.
(3) If the loan and charge agreement was executed as a simple agreement and not a deed, is there valid consideration such that it can be enforced by Argyle against Lantouris?
[13](2009) SCC 159 at [25] (Supreme Court of Canada)
Plaintiffs’ contentions
71The plaintiffs rely upon the wording in Recital C of the loan agreement which provides that the consideration is LM providing a withdrawal of the Station Street caveat. Argyle also noted that in order for there to be valid consideration, it did not need to move between the actual parties to a contract. There is valid consideration whereby in a contract, A agrees with B to provide a benefit for C. So long as consideration is moved from A, that is sufficient. The plaintiffs pointed to the fact that it is trite law that consideration need not be adequate consideration.
Defendant’s contentions
72The defendant refers to the matters pleaded at paragraph 3BB of her defence. Clause 3 of the 2016 charge agreement between Sevdalis and LM states that Sevdalis “shall further secure” LM’s services by charging all other property he may own. The defendant argues that on a proper construction of the charge agreement, Sevdalis did not presently charge his other property, which included the Station Street property. This is to be contrasted with the result provided for by clause 2 by which Sevdalis did in fact presently charge certain properties which were identified. It is submitted there is a difference between the language used in clause 2, “hereby charge” and clause 3, “shall charge”. LM did not have an entitlement to lodge the caveat over the Station Street property that Argyle allegedly agreed to cause to be removed pursuant to the loan agreement. Therefore, in circumstances where Lantouris did not have an interest in the Station Street property, she received no consideration for the agreement. In other words because the security underpinning the caveat was unenforceable, then the procurement of the withdrawal of the LM caveat (which did not support a caveatable interest) provided no benefit. Therefore, the loan agreement fails on this additional basis
Analysis
73The loan agreement provides in Recital C that the consideration for the loan is LM providing a withdrawal of caveat over the Station Street property, so as to enable Argyle to pay the amount of $500,000 to LM. Self-evidently, LM is not a party to the loan agreement and could not provide consideration directly. To get around this, the plaintiffs’ pleaded case is that Argyle would “procure” LM to withdraw its caveat. This wording does not appear in the loan agreement itself. Paragraph 3B of the FASC pleads Argyle procured the withdrawal by LM of its caveat on 2 August 2017.
74There was no evidence called on behalf of Argyle. Lennon gave evidence that the caveat was withdrawn before settlement of the Station Street property but he did not give any evidence that this was done at the direction of or by the procurement of Argyle. There is simply no evidence before the Court that Argyle had any involvement whatsoever in relation to the removal of the LM caveat. In the absence of such evidence, there is no proof that consideration passed in the way it is pleaded or indeed at all. As has already been conceded, Argyle did not pay the sum of $500,000 to LM, being the payment referred to in Recital C. Consequently, I find that the loan agreement is unenforceable because of the failure of consideration. The validity or otherwise of the LM caveat falls to be considered under issues 4 and 5 below.
(4) Properly construed did clause 3 of the October 2016 agreement create an equitable charge in favour of LM over the land at Station Street property to secure payment of legal fees owed by Sevdalis to LM?
75The plaintiffs argue the 2016 charge agreement did create a charge over the Station Street property. Recital B provides that Sevdalis and Native Bond Pty Ltd, a company controlled by Sevdalis, “have agreed to charge in favour of LM, their properties (together with any property that is held in trust for Nick and NB)” to secure the payment of legal fees. Clause 2 of the 2016 charge agreement charged two specific properties identified, namely in Doreen and Hawthorn.
76Clause 3 is a general charge over any real or personal property and provides an obligation to sign any documents that may be requested to better secure LM’s interests. The form of the “further documents” obligation is different to clause 2 as it had to cover potential personal property as well as land. The plaintiffs’ case is that clause 3 created an extra charge over inter alia, any real property then owned by Sevdalis. Sevdalis had owned the Station Street property since 1984.
77The defendant relies upon the submissions on this aspect as being the same raised in respect of issue 3.
Analysis
78The issue and nature of equitable charges was considered by Derham AsJ in Melbourne Property Group Pty Ltd v SC Australia Pty Ltd and Ors [2013] VSC 701:
“58.A charge is described in Fisher and Lightwood’s Law of Mortgage as follows:
‘A charge is a security whereby real or personal property is appropriated for the discharge of a debt or other obligation, but which does not pass either an absolute or a special property in the subject of the security to the creditor, nor any right of possession, but only a right of realisation by judicial process in case of non-payment of the debt.’
59.An ordinary charge may be created by a charge or a direction in an instrument, whereby real or personal property is expressly or constructively made liable or specifically appropriated to the discharge of a debt. No special form is required to create a charge.
60.The following further propositions relating to an equitable charge are noted:
(a)An equitable charge is created when property is expressly or constructively made liable to discharge a debt or some other obligation and the charge confers on the chargee a right of realisation by judicial process, such as an order for sale: Swiss Bank Corp v Lloyds Bank Ltd; Re. Cosslett (Contractors) Ltd;
(b)It has been held that an agreement that a person may place a caveat on another’s title may constitute a charge;
(c)It is of the essence of a charge that a particular asset or class of assets is appropriated to the satisfaction of a debt so that the chargee is entitled to look to the asset and its proceeds for the discharge of the liability;
(d)An equitable charge is to be distinguished from a purely contractual arrangement giving rise to no proprietary right;
(e)Whether a particular set of circumstances gives rise to an equitable charge will depend on the intention of the parties, ascertained objectively from the language used by the parties in the instrument in the light of surrounding circumstances: Swiss Bank Corp v Lloyds Bank Ltd;
(f)There is no required form an equitable charge should take. However, the instrument must indicate the parties’ intention that the relevant property should constitute a security: AVCO Financial Services Ltd v White.
61.In AVCO Financial Services v White this Court was called to determine whether a written loan agreement to fund the purchase of a property created an equitable charge over the property of the borrower. The agreement included the following clause:
‘As further security for the payment of the loan and interest I agree … to charge (as beneficial owner) all freehold and leasehold interest in the land which I may now have or during the currency of the loan may acquire …’
Gillard J summarised the essence of an equitable charge in the following terms:
‘An equitable charge for a debt is a security whereby only a right to payment of the debt out of the property is conferred by the owner of the property to the holder of the security. The remedy of the holder of the security on default in payment of the debt was to apply to a court of equity to have the property sold and the proceeds paid into court.’
62.In relation to the document before him, Gillard J pointed to the phrase ‘as further security for a payment of the loan’ and held that the words ‘clearly indicate the nature or the purpose of the paragraph’ and the parties’ intention to create an equitable charge.”
79Under the 2016 charge agreement, the two specific properties were identified in clause 2, being the properties in Doreen and Hawthorn. The area of controversy relates to the wording of clause 3, which did not specify any particular property. On the defendant’s case, it is said that this relates to future properties, whereas the construction put forward by the plaintiffs is that it created a present entitlement in respect of any properties then held by Sevdalis and/or NB Services Pty Ltd. As Derham AsJ noted, there is no required form that an equitable charge should take. Whether a set of circumstances gives rise to an equitable charge will depend upon the intention of the parties ascertained objectively from the language used.
80In the AVCO case quoted above, the relevant clause provided further security for payment of the loan and interest, whereby the beneficial owner agreed to charge all freehold and leasehold interest in the land which they may have or during the currency of the loan may acquire. Self-evidently, that wording related to property currently held or that would be acquired during the currency of the loan. Gillard J referred to the phrase “further security for the payment of the loan”, and held that those words clearly indicated the nature or purpose of the paragraph and the parties’ intention to create an equitable charge.
81Clause 3 provides that “Nick & Native Bond shall further secure the services by charging in favour of LM all their right title and interest in any other property whether real or personal….” and to sign any documents that might be reasonably be required (emphasis added). Recital B also refers to the agreement to charge properties held by Sevdalis and his company. In my view, the 2016 charge agreement did create an equitable charge in favour of LM, not only in respect to the property specified in clause 2 but also in respect of properties then held by Sevdalis and his company under clause 3. I consider the use of the words “by charging” in clause 3 created a present entitlement relating to properties then held by Sevdalis or his company. This also conforms with the wording used in Recital B. At the time, Sevdalis was the owner of the Station Street property. Consequently, in my view, the 2016 charge agreement was effective to create an equitable charge in favour of LM over the Station Street property.
(5) Was LM entitled to lodge its caveat registered on the title to the Station Street property on 2 June 2017?
82The estate or interest claimed in the caveat lodged by the second and third plaintiffs on the Station Street property is expressed to be “interest as chargee”. The grounds for claim are said to be “charge contained in agreement with … the registered proprietor. Date: 13 October 2016.”
83The resolution of this issue depends upon whether LM had an equitable charge over the Station Street property which is the question posed in the preceding issue. The defendant notes that a caveat does not create an estate or interest in land. It was contended by the defendant that if Sevdalis did not on executing the October 2016 agreement charge the Station Street property in favour of LM to secure payment for LM’s legal services, then LM did not have an estate or interest in the Fairfield property and the caveat was invalid.
Analysis
84For the preceding reasons given in respect of issue 4, I have found that the 2016 charge agreement was effective. That being so, it follows that LM was entitled to lodge its caveat on 2 June 2017 relying upon the equitable charge created under the 2016 charge agreement.
(6) Was the LML agreement unenforceable against Sevdalis by reason of the operation of the Bankruptcy Act 1966 (Cth)?
85The plaintiffs contend there are two questions that need to be considered when determining this issue, namely:
(a) was LM a “secured creditor” for the purpose of s58(5) of the Bankruptcy Act? and
(b) by making the LML agreement, was LM realising or otherwise dealing with a security such that by s58(5) of the Bankruptcy Act, nothing in s58 of the Bankruptcy Act affected LM’s right to make the LML agreement?
86The plaintiffs accepted that LM could not enforce the LML agreement against Sevdalis personally as he was a bankrupt. Their case, however, is that this did not affect LM’s rights pursuant to the 2016 charge agreement and in particular, its equitable charge over the Station Street property which was protected by the caveat lodged by LM.
87Section 58 of the Bankruptcy Act 1966 relevantly provides:
“(1)Subject to this Act, where a debtor becomes a bankrupt:
(a)the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b)after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
Note 1: This subsection has a limited application if there are orders in force under the proceeds of crime law: see section 58A.
Note 2: Even if property has vested under this section, it may, under the Proceeds of Crime Act 2002:
(a) become subject to a restraining order; and
(b) be taken into account in making a pecuniary penalty order; and
(c) become subject to a charge to secure the payment of an amount under a pecuniary penalty order, if it is subject to a restraining order; and
(d) be dealt with by the Official Trustee, if it is subject to a restraining order and a court has directed the Official Trustee to pay the Commonwealth an amount under a pecuniary penalty order out of property subject to the restraining order.
(2)Where a law of the Commonwealth or of a State or Territory of the Commonwealth requires the transmission of property to be registered and enables the trustee of the estate of a bankrupt to be registered as the owner of any such property that is part of the property of the bankrupt, that property, notwithstanding that it vests in equity in the trustee by virtue of this section, does not so vest at law until the requirements of that law have been complied with.
(3)Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a)to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b)except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
…
(5)Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security.”
88“Secured creditor” is defined in s5 of the Bankruptcy Act as:
“(b) in the case of any other debt—a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him or her from the debtor.”
89The plaintiffs argue LM was a secured creditor as defined and therefore was entitled to “realise or otherwise deal with that security” irrespective of Sevdalis’ bankruptcy. Accordingly, LM was entitled under the LML agreement to accept less than the sum secured by the 2016 charge agreement and agree to release one of the properties bound by it on the basis that other security was provided by Lantouris, as well as releasing the 2016 charge agreement entirely if the relevant payments were made in the LML agreement.
Defendant’s contentions
90The defendant notes that by operation of s58(1) of the Bankruptcy Act, the Station Street property vested forthwith in Sevdalis’ trustee in bankruptcy. The fees owed by Sevdalis to LM at the date of his bankruptcy constituted a provable debt of LM in Sevdalis’ bankrupt estate. By operation of s58(3) of the Bankruptcy Act, it was not competent for a creditor of Sevdalis to enforce any remedy against Sevdalis or the property of Sevdalis in respect of a provable debt within the meaning of the Act. Further, by operation of s58(5) Bankruptcy Act, nothing in s58 affects the right of a secured creditor to realise or otherwise deal with his or her security.
91Upon Sevdalis becoming a bankrupt, the debt owed to LM for its fees became a provable debt in the bankrupt’s estate. The LML agreement was an agreement between Sevdalis as a bankrupt and LM whereby he agreed to compromise LM’s claim for legal fees. Sevdalis’ trustee was not a party to the LML agreement. The making of that agreement contravened s58(3) of the Bankruptcy Act.
92The defendant disputes the plaintiffs’ assertion that LM was a secured creditor for the purposes of s58(5) of the Bankruptcy Act. It was submitted for the reasons already given that LM was not a person holding the charge on the Station Street property and that consequently, it is not entitled to rely on s58(5). Further, if it had been a secured creditor, the making of the LML agreement did not constitute realising or otherwise dealing with its security under s58(5) of the Act.
Analysis
93For the reasons already given, I am of the view that LM was a secured creditor by reason of the charge created pursuant to clause 3 of the 2016 charge agreement. That being so, the question is whether the making of the LML agreement amounted to “realising or otherwise dealing with its security” for the purposes of s58(5).
94The Full Federal Court in Morris Finance v Brown (2017) FCAFC 97, considered the meaning of “realise or otherwise deal with” in s58(5) of the Act. Beach, Markovic and Moshinsky JJ held at 36-50:
“36.As is apparent, s 58(5) deals with ‘the right of a secured creditor to realize or otherwise deal with his or her security’. The Act does not define ‘security’, but does define ‘secured creditor’ in s 5(1) in the terms that we have set out earlier. Limb (b) of that definition is relevant to the present case given that the equitable charge is said to concern real property. It will be appreciated that limb (b) is expressed in broad terms, namely, ‘a person holding a mortgage, charge or lien on property of the debtor as a security…’. In terms of textual analysis, there is no good reason to confine any of these types of securities to legal interests as opposed to equitable interests. The breadth of the text of the definition of ‘secured creditor’ and the context in which it is used in s 58(5) do not provide any textual or contextual basis for excluding from the operation of s 58(5) the holder of an equitable charge and the right of that holder to ‘realize or otherwise deal with’ its equitable charge. Indeed, at the time ss 5 and 58 were enacted, charges and liens were well-recognised species of equitable interests. And many of the earlier authorities discussed equitable interests, for example, equitable mortgages.
37.The more difficult question concerns the phrase ‘realize or otherwise deal with’ and its scope when one is considering an equitable charge. But before addressing that question directly, it is convenient to discuss the nature of such an interest.
38.Apart from statutory charges, charges are creatures of equity and enforceable only in equity (see Young PW, Croft C and Smith M, On Equity (Lawbook Co, 2009) at [9.180]). An equitable charge usually arises by agreement between the parties under which the property charged is made liable for or is ‘appropriated’ to securing the performance or discharge of the relevant contractual obligation. In relation to the charged property, there is no transfer of title or any possessory interest conferred by an equitable charge, although an order for possession may be a necessary adjunct to an order for sale if the equitable charge is sought to be enforced. Moreover, unlike a mortgage, there is no right or power of foreclosure (Tennant v Trenchard (1869) LR 4 Ch App 537 at 542 per Lord Hatherley LC). The principal right or remedy of the chargee to enforce its equitable charge is by a judicial order for sale (with an ancillary order for possession) or the appointment of a receiver (Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 595 per Buckley LJ). The chargee has no self-help remedy (see The Melbourne Tramways Trust v The Melbourne Tramway and Omnibus Company Limited (1887) 13 VLR 487 at 490) but must obtain the assistance of a court of equity to realize or enforce the charge. Usually, upon default a chargee is entitled to an order for sale, although given that an equitable jurisdiction is being invoked there may be discretionary aspects to the exercise of that jurisdiction. We have described a court’s power to order a sale (including any ancillary orders) to enforce an equitable charge as being in the court’s equitable jurisdiction, although such a jurisdiction may be supplemented by the conferral of other statutory powers.
39.It is apparent that an equitable charge can only be enforced by judicial order for sale or receivership of the charged property. Is a proceeding seeking such orders a step to ‘realize’ or ‘otherwise deal with’ such a security within the meaning of s 58(5)? If so, no leave is required under s 58(3)(b).
40.In the present case, Morris Finance has sought the relief in its summons that we have set out earlier. Orders for possession and sale of the Coopernook property are sought, with other ancillary orders to deal with the proceeds of any sale. But in terms, no declarations are sought dealing with the existence of its equitable charge(s). Moreover, there is no claim in debt against any of the respondents.
41.Before we address s 58(5), which operates as an exception to, inter alia, s 58(3)(b), it must be first determined whether s 58(3)(b) otherwise applies to Morris Finance’s proceeding absent the carve out. Clearly the amounts due by Mr and Mrs Brown under the goods lease and the guarantee as at the date of bankruptcy were provable debts, even if secured. The question is whether Morris Finance’s proceeding is ‘in respect of a provable debt’. Given the breadth of the expression ‘in respect of’, which has a ‘chameleon-like’ quality reflecting the context in which it is used, and where only a “discernible and rational link” may be necessary between the proceeding and the provable debt (Technical Products Pty Ltd v State Government Insurance Office (Qld) (1989) 167 CLR 45 at 47 per Brennan, Deane and Gaudron JJ), we consider that there is the necessary link, as the primary judge correctly found (see at [23]). The proceeding seeks to enforce the equitable charge(s) which itself secures payment of the provable debt. As s 90 indicates, a secured debt is provable, although a secured creditor may not seek to prove or may only prove for any balance owing after the security has been realized (s 90(3)). Put another way, a necessary underpinning of the security interest that is sought to be enforced is the provable debt, without which there would be no security interest (see Mango Media Pty Ltd v Velingos [2008] NSWSC 202 at [14] and [15] per Barrett J and Scott v Bagshaw (2000) 99 FCR 573 at [25] per Drummond, RD Nicholson and Katz JJ).
42.Accordingly, if s 58(5) did not apply, then Morris Finance needed leave under s 58(3)(b). The question then is whether s 58(5) applies. In our view it does and we respectfully differ from the primary judge who took the contrary view. We will discuss aspects of his Honour’s reasons, but there is no need to address any specific grounds of appeal as Morris Finance’s draft notice of appeal identifies only the principal question of law that we have identified and on which it is said his Honour erred. It is appropriate to elaborate on why we have taken a different view to his Honour.
43.First, there is cogent authority to support the proposition that legal proceedings brought by a mortgagee seeking an order for possession of mortgaged property fall within s 58(5) (see Hanshaw v National Australia Bank [2012] NSWCA 100 at [35] to [43] per Young JA, Perpetual Trustee Company Ltd v Daniel Cuitanovic as Trustee of the Bankrupt Estate of Dimitrovski [2013] NSWSC 722 at [15] to [19] per Slattery J and, by parity of reasoning, Savieri v Brown [2008] NSWSC 1210 at [29] to [33] per White J). In such cases, the claimant is seeking to enforce a remedy being a right to possession. To enforce a right of possession for the purposes of sale is treated as an act of realization of the relevant security, whether by self-help or through judicial process.
44.By parity of reasoning, Morris Finance’s proceeding is in substance the exercise of a ‘right of realisation by judicial process’ to use Heenan J’s phrase in Evenwood Pty Ltd v Conway [1997] WASC 14. It seeks orders for sale, possession and the distribution of proceeds by way of judicial enforcement of its equitable charge. There is no reason to treat this security interest differently from a registered mortgage where a mortgagee approaches a court seeking an order for possession. Indeed, to do so would be inconsistent with construing s 58(5) ‘relatively liberally’ as Young JA described in Hanshaw at [42].
45.Now true it is that a mortgage might contain express terms conferring an entitlement to possession and a power of sale (in addition, perhaps, to any statutory rights), so that it may be said that the legal proceedings are merely ancillary to enforcing otherwise conferred rights. Contrastingly, in the present case, it may be said that the equitable charge(s) contains no terms conferring such rights and that all the chargee has is a right to approach a court of equity to seek orders for sale and ancillary orders to enforce the charge. But it seems to us that this is not a relevant difference. The breadth of ‘secured creditor’ and ‘security’ embrace an equitable charge. And if an equitable charge can only be enforced and realized through judicial process, in our view the words in s 58(5) ‘to realize’ are sufficiently broad to embrace the invocation of judicial process to seek an order for sale and consequential orders, that being the only way to enforce an equitable charge. Otherwise holders of equitable charges would for all practical purposes not be able to rely on the benefit of s 58(5), which would contradict the premise, namely, that s 58(5) is sufficiently broad to embrace equitable charges. We also consider that the steps of seeking an order for sale (and consequential orders) are within the expression ‘otherwise deal’ construed broadly.
46.The third respondent submitted that an equitable chargee is not entitled to an order for possession. We do not agree with that proposition in the generality with which it has been expressed. In order to achieve a sale, vacant possession may be required to facilitate any sale and the settlement thereof. Accordingly, there is no reason why an order for possession cannot be made as an ancillary order to enforce the charge by way of an order for sale.
47.Relatedly, the third respondent also sought to draw a distinction between, on the one hand, Hanshaw and Savieri which sought orders for possession and, on the other hand, the present case where the principal relief was an order for sale. More generally, a distinction was sought to be drawn between an equitable mortgagee and the exercise of its rights and the position of an equitable chargee. But we do not consider that to be a relevant distinction for the purposes of s 58(5). Proceedings seeking either possession or sale or both can come within the phrase ‘realize or otherwise deal with his or her security’.
48.Second, the legislative history that we have set out earlier is not incompatible with the proposition that s 58(5) can embrace judicial realization of an equitable charge. Indeed, it also supports the position that s 58(5) is to be construed ‘relatively liberally’.
49.Third, it is also to be recalled that s 58(3) operates in aid of s 58(1) with the purpose of ensuring that the property of a bankrupt ‘is not depleted to the advantage of individual creditors and the disadvantage of creditors generally’ and to prevent one creditor obtaining an unfair advantage over another (Talacko v Bennett [2017] HCA 15 at [37], albeit that Talacko was concerned more with the interaction between s 58(3) of the Act and s 15(2) of the Foreign Judgments Act 1991 (Cth)). We make this observation to emphasise the point that a liberal reading of s 58(5), which itself operates as a carve out to inter alia s 58(3)(b), such that s 58(5) embraces the realization by judicial process of an equitable charge, is quite consistent with that purpose. There is no unfair advantage in favour of an equitable chargee resorting to such a process asserting its entitlement to an order for sale and any ancillary orders or any inappropriate depletion in the bankrupt’s estate as a result of pursuing that course.
50.Fourth, in our view the present case is not of a type dealt with in Mango Media, contrary to the primary judge’s analysis at [22]. In that case, Barrett J held that the proceedings before him fell outside s 58(5) because all that was sought was a declaration as to the existence of the security interest and an order for the extension of a caveat predicated upon the existence of that interest. He considered that such relief and the seeking thereof did not involve exercising a right ‘to realize’. The declaration per se and the caveat extension did not realize or seek to realize anything. Nor did the proceeding seeking such orders fall within ‘otherwise deal’. Mango Media was followed in Lawrence & Hanson Group Pty Ltd, in the matter of Pugliese v Pugliese [2016] FCA 1278 at [24] and [25] per Gleeson J. But the relief sought by Morris Finance in the present case is distinguishable. Orders for sale and ancillary orders are sought.”
95As can be seen from the above extract, a step such as taking possession for the purpose of a sale is accepted as being an act of realisation of a security. It is also recognised that the holder of an equitable charge has an entitlement to apply to the court for an order for judicial sale. Neither of those measures were taken in this case.
96LM’s case is that by agreeing to withdraw the caveat and not insist upon its rights pursuant to the 2016 charge agreement under the LML agreement, the making of that agreement therefore amounted to realising or dealing with its security. The difficulty is that the LML agreement, as is admitted, was entered into with a bankrupt and had no force and effect. The firm withdrew its caveat over the secured property, Station Street and thus lost any rights it may have had under the 2016 charge agreement in respect of that property. LM then took alternative security from different entities, namely, Lantouris and 22 Park Street Pty Ltd in an attempt to secure payment of the bankrupt’s debt to the firm.
97In my view, the steps taken by LM did not amount to realising or dealing with its security and constituted a different arrangement altogether, particularly, the taking of alternative security from other entities namely, Lantouris and 22 Park Street Pty Ltd. That being so, I find that LM’s actions fell outside the steps permitted under s58(5).
E. The guarantee claim
98The defendant raises three grounds upon which she argues the guarantee is unenforceable against her. These grounds are set out at points 7-9 in the agreed statement of issues.
99The relevant parts of the deed of guarantee are set out below:
“RECITALS
At the request of the guarantors the covenantors have agreed to enter into the attached agreement with the covenantee named in the schedule [Nicholas Sevdalis].
OPERATIVE PART
1.The guarantors warrant that before execution hereof they have sought such advice as they deem necessary to understand the full import of their responsibilities under this guarantee and in particular the financial impositions on them consequential on default by the covenantee in performance of their obligation and payment of any money due under the attached agreement. They have acquainted themselves with this documentation and sought such advice as they deem necessary. They have satisfied themselves as to financial position of the covenantee and their capacity to comply with their obligations.
2.The guarantors herby guarantee to the covenantors the due and punctual performance of all the obligations of the covenantee under the attached agreement and hereby indemnifies the covenantors against all losses, expenditures, costs and expenses of whatever nature suffered or incurred directly or indirectly by the covenantors in recovering any money owing as a result of the default in such performance.
3.This guarantee and indemnity is continuing and irrevocable and the obligations of the guarantors are absolute and unconditional in all circumstances and must continue notwithstanding that there is any change in the name style constitution or otherwise of covenantee.
4.This guarantee continues despite the payment of any part of the amount owing and despite any time or other concession or compromise extended by the covenantee or any other person.
5.This guarantee will not be affected by the neglect or omission of the covenantors to enforce any of its rights in whole or in part or if a covenantee dies or becomes of unsound mind or bankrupt or being a company goes into liquidation or any other obligation of the covenantee for any reason becoming unenforceable in whole or in part.
6.This guarantee and indemnity is a principal obligation and is not to be treated as ancillary or collateral to any obligation to the intent that this guarantee and indemnity will be enforceable notwithstanding that any of the agreements and other obligations arising between the covenantors and the covenantee are in whole or part unenforceable for any reason.
7/The covenantors need not first exercise its rights against the covenantee or against the covenantees security before exercising its rights hereunder against the guarantors.”
(7) As a result of the LM legal practice ceasing at 30 June 2017, is the deed of guarantee dated 25 July 2017 enforceable by the second and third plaintiffs constituting the LM firm against the defendant?
100This issue turns upon the capacity of LM to enter into the guarantee given the firm was no longer trading when the guarantee was executed.
Plaintiffs’ contentions
101The plaintiffs’ position is that the LM partnership had not been dissolved as at 30 June 2017 and that it continues in existence.
102In any event, even if it had been dissolved, s42 of the Partnership Act 1958, provides that the rights and obligations of the partners continue so far as may be necessary to wind up the affairs of the partnership and complete transactions begun but unfinished at the time of dissolution.
103LM was seeking to obtain payment for legal fees, being a debt to the partnership, and secured by the 2016 charge agreement. The collection of debts due to a partnership is a necessary step in winding up its affairs. Dealing with the rights under the 2016 charge agreement is likewise a necessary step and in any event, a step to seek to complete a transaction.
Defendant’s contentions
104The defendant noted Lennon conceded that by 25 July 2017, LM was doing nothing but collecting its debtors. The defendant argues the firm had ceased to engage in legal practice, which was its only “adventure or undertaking” within the meaning of s36(b) of the Partnership Act. Therefore, by that date, the LM partnership had dissolved. The only power Mr Lennon had after that dissolution was provided by s42 of the Act. The short point the defendant makes is that LM’s entry into the LML agreement and the deed of guarantee were not “necessary” steps required to wind up the affairs of LM. They may have been “desirable” steps from LM’s perspective, but they were not necessary ones. Accordingly, Lennon lacked the power to cause LM to enter into the transactions and they are of no effect.
[25]The Modern Contract of Guarantee 4th Ed Sweet & Maxwell, O'Donovan & Phillips at 5-175
137Consideration should be given to the definition of the loss used in the indemnity. The other factor is context. If the indemnity is provided in a situation where the parties may reasonably expect the principal transaction to be ineffective, then this lends weight to a construction that the indemnity will operate in that eventuality.[26]
[26]The Modern Contract of Guarantee at page 345
138Applying those considerations to clause 2, the trigger event is the default in performance by Sevdalis in the performance of his obligations. The loss to be indemnified are the losses sustained by the covenantors (LM) in recovering any money owing as a result of the default in performance by Sevdalis.
139As a matter of construction, I am of the view that the wording in clause 2 only triggers the indemnity in respect of losses occurring as a result of the default by Sevdalis. As he was under no legal obligation to pay the plaintiffs because the LML agreement was unenforceable against him, it follows he could not be in default and the trigger in clause 2 is not engaged. LM is not entitled to recover its “losses” when there is no obligation upon Sevdalis to pay. Therefore, I find that the plaintiffs are not entitled to rely upon the indemnity set out in clause 2.
140The other clause relied upon by the plaintiffs is clause 6. This provides that “This guarantee and indemnity is a principal obligation”. It then goes on to state that the obligation is not ancillary or collateral to any obligation to the intent that this guarantee and indemnity will be enforceable notwithstanding that any of the agreements and other obligations arise in between the covenantors and the covenantee are in whole or part unenforceable for any reason.
141As was pointed out by counsel for the plaintiffs, everybody knew at the time that Sevdalis was a bankrupt and it was for that reason the guarantee and other security were being sought from other parties. It was said that consequently, the parties may reasonably expect that the principal transaction to be ineffective lends weight a construction that the indemnity will operate in that eventuality.
142It was known to the parties at the time of the negotiations that Sevdalis was a bankrupt and that LM was seeking to obtain alternative security in order to secure payment of its fees which had been agreed at a lesser sum of $400,000. Lantouris was aware and was willing to provide a guarantee for her brother’s legal fees and to provide a caveat over 22 Park Street to enable this to occur. Whilst obviously her subjective views as to the arrangements do not assist in terms of construction, the question of the context of the dealings between the parties is a relevant factor.
143Counsel for the defendant sought to rely on the Jowitt case. In that case, the principal debtor had become a bankrupt after the entry into the agreement and it was held that the guarantor remained liable. The distinction made by the defendant here is that the LML agreement was at all time unenforceable because Sevdalis was a bankrupt at the time the agreement was made on 25 July 2017. The plaintiff’s answer to this is that there is no temporal restriction in clause 6 as evidenced by the words “are or in whole or part unenforceable for any reason”.
144It should be noted that clause 6 refers to “this guarantee and indemnity” in both the first line and in the second and third lines of clause 6. The guarantee obligation and indemnity obligation are those specified in clause 2. The scope of the indemnity is defined in clause 2. Accordingly, where the words are used “this guarantee and indemnity”, I consider that clause 6 must be read subject to the scope of the indemnity which is defined in clause 2. That being so, the plaintiffs then face the same insurmountable problem that the liability under the indemnity only arises if there is default of the performance by the debtor, Sevdalis. As already stated, there can be no default if he had no obligation to pay. If the matter is not free from doubt, then it is trite law that any ambiguity must be resolved in favour of the surety.
145In addition, I am of the view that clause 6 cannot be relied upon in circumstances where the underlying obligation never came into existence. There being no obligation upon Sevdalis to pay then correspondingly, there can be no obligation to indemnify on the part of Lantouris. At the time of the entry into the LML agreement, Sevdalis was an undischarged bankrupt. The agreement for him to pay LM its legal fees at a reduced sum, such fees being a provable debt, was precluded by the operation of s58(3)(a) of the Bankruptcy Act. As stated in s58(3), such a course was not competent for a creditor. That being so, the obligation for Sevdalis to pay never came into effect. It was not that the agreement is unenforceable for any reason being the words of clause 6, the purported agreement never existed in the first place because it was incompetent. To that end, the position is not dissimilar to the position in ICTA Investments Pty Ltd T/A Jolly Roger & Anor v GE Commercial Corporation (Australia) Pty Ltd & Anor[27] where the underlying agreement sought to be relied upon to found the indemnity was not created because offer and acceptance was not proved. I find that no agreement came into being between LM and Sevdalis because of the application of the statutory bar contained in s58(3) of the Bankruptcy Act. Consequently, there is no loss which LM can seek to be indemnified against because it never had a contractual entitlement to claim such a loss. Putting it another way, Lantouris has no liability to indemnify where there is no liability in existence because LM were barred from entering into any arrangements with Sevdalis to recover their fees once he became a bankrupt.
[27][2006] NSWCA 290 at [54]; see also McIntosh & Anor as Trustee of the Estate of Camm (A bankrupt) v Linke Nominees Pty Ltd & Anor [2008] QCA 275.
146Accordingly, I find clauses 2 and 6 of the guarantee, being the indemnity provisions relied upon by the plaintiffs, do not give rise to any liability on the part of Lantouris to pay LM.
(9) Given it is accepted that the guarantee did not attach the LML Agreement when it was executed by the defendant, is the guarantee void for uncertainty?
Plaintiffs’ contentions
147The plaintiffs admitted in paragraph 3AA(a) of the amended reply filed with leave on 13 July 2020, that the LML agreement was not attached to the guarantee signed by Lantouris.
148The plaintiffs argue that as a matter of construction the guarantee is valid and enforceable against the defendant. The plaintiffs submitted:[28]
“As set out above “[T]he rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.”
[28] Plaintiffs’ outline of closing submissions, pages 14-17, [78]-[96]
149Thus, the principles of construction expressly permit the Court to look at documents referred to in the relevant document.
150Here, the LML agreement is expressly referred to in the guarantee, see:
(a) the schedule at CB622;
(b) the date of the LML agreement and the relevant parties are set out in the guarantee, the covenantors were defined in the heading and the covenantee in the schedule.
151The LML agreement was readily ascertainable and clear. That is the end of the defendant’s case in this regard.
152Although it is the case that guarantees are to be construed in favour of sureties that does not assist the defendant as the terms of the guarantee are clear. The evidence as to the content of the guarantee and the LML agreement could not have been clearer, it is a plain simple agreement in writing.
153There is no doubt from the guarantee that what the parties objectively intended was for the defendant to guarantee the LML agreement. As noted, the terms of that agreement were in existence and readily ascertainable. If the defendant chose to sign the guarantee, without ascertaining exactly what those obligations were, that does not relieve her of liability.
154Lantouris gave evidence the first time she saw the LML agreement was probably a year ago when her solicitor showed her the document. She was not aware at the time she signed the guarantee that payments were due on certain dates, and that if she did not comply $500,000 was payable or that interest would be chargeable at a rate of 20 percent per annum compounding monthly.
155If it is the case that the defendant did not know precisely what she was guaranteeing, that does not mean that she did not objectively intend to guarantee it. In any event she knew that there had been an agreement between Sevdalis and LM for payment and she knew and intended that she would guarantee it. The defendant’s subjective intention as to what the LML agreement was or meant or as to what she was guaranteeing is irrelevant.
156If it be established that Lantouris subjectively thought that she was guaranteeing $400,000 only, then that gives rise to a remedy against others, principally the third party. She has advanced that case and resolved it.
Plaintiffs’ alternative position
157If the Court does not accept the above argument, then the plaintiffs argue the defendant was on notice of the terms of the LML agreement as:
(a) These figures, or at the least the $500,000 maximum potential liability, was shown elsewhere in the suite of documents executed by Lantouris on 25 July 2017. It was:
(i)in terms, in the Loan and Charge Agreement, itself, inter alia, a personal obligation of Lantouris; and
(ii)in the disbursement order (3 times) CB541;
(b) At 11.58am Lennon emailed a draft of the Loan and Charge Agreement to Podaridis;
(c) The LML agreement, along with the other relevant documents were sent to Podaridis;
(d) Podaridis was acting on behalf of the Sevdalis family, including Lantouris, at that time;
(e) Podaridis was well aware of the sums that were to be secured;
(f) Lennon’s evidence of the discussion with Lantouris on 24 July 2017, that she was clear as to the obligations she was taking on;
(g) All the relevant documents were given to Blumenthal on the 25th.
Defendant’s contentions
158The defendant argues the guarantee is void for incompleteness and uncertainty because the LML agreement was not attached to the guarantee when it was executed by the defendant.
159The guarantee signed by Lantouris did not include “the attached agreement” referred to in the Recitals and clause 2 of the deed, and which was the only instrument that could give rise to any “principal obligations” in clause 6.
Incompleteness
160The defendant submits the guarantee is not legally binding as the parties have not agreed upon such terms as are, in the circumstances, legally necessary to constitute a contract.[29] With regard to incompleteness, the defendant submitted:
“Under clause 2 of the Deed of Guarantee, the guarantors guaranteed to the covenantors “the due and punctual performance of all the obligations of the covenantee under the attached agreement”. Clause 6 purports to make that obligation a principal obligation of the defendant. It is uncontroversial that clauses 2 and 6 are essential terms of the Deed. Without them, there are no substantive obligations on the defendant. Thus, as the Omitted Agreement was not attached, the content of essential terms of the Deed of Guarantee were omitted. Without the Omitted Agreement, the Deed of Guarantee is devoid of any ascertainable subject matter. Without the Omitted Agreement, the Deed of Guarantee is incomplete and unenforceable.”
[29]Ibid, page 8, [30]; Toyota Motor Corp Australia Ltd [1994] 2 VR 106 at 130. See also Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604
Uncertainty
161The defendant argues that further to being incomplete, the guarantee is void for want of certainty. The defendant submitted:[30]
“A contract will be void for uncertainty if the language employed by the parties is “so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention.” The Court will not attempt to remedy the uncertainty if to do so would make a new agreement for the parties or vary the existing agreement.”
[30] Defendant’s outline of opening submissions, pages 9-11, [35]-[39]
162In G Scammell and Nephew Ltd v Ouston,[31] the House of Lords held that a purported agreement to purchase a new motor van, containing the sentence “[t]his order is given on the understanding that the balance of purchase price can be had on hire-purchase terms over a period of two years”, was so vaguely expressed that it could not, standing by itself, be given a definite meaning. Consequently, there was no contract.[32] Lord Russell considered whether the Court could impute meaning to the phrase “hire-purchase terms”. The evidence established that the only acquisition contemplated by the parties was an acquisition by some form of hire-purchase, which would enable the respondents to spread their payment over a period of time. His Lordship held that:
“This could be brought about in various ways, and by documents containing a multiplicity of different terms … in view of the numerous forms of hire-purchase transactions, and the multiplicity of terms and details which they involve, the respondents are faced with what appears to me to be a fatal alternative, namely, either (1) this term of the alleged contract is quite uncertain as to its meaning, and prevents the existence of an enforceable contract, or (2) the term leaves essential contractual provisions for further negotiation between the parties, with the same result.”
[31] [1941] AC 251
[32] Ibid at 254
163In a similar way, the phrase “under the attached agreement” in clause 2 of the guarantee refers to an agreement which could contain numerous different terms. The Court cannot remedy this uncertainty, for example by implication or construction, without inserting terms into the guarantee on which agreement was not reached.
164The same issue arose in Custom Credit Corp Ltd v Gray.[33] That case involved a credit agreement. The offer document signed by the debtor left blank the dates on which the instalments were to be paid. Only after it was signed by the debtor and sent to the credit provider for acceptance were the instalment dates inserted. The credit provider counter-signed the filled-in version and sent a copy of it to the debtor.[34] The Full Court of the Victorian Supreme Court held that, because of the absence of the instalment dates in the version agreed to by the debtor, the agreement was too uncertain to amount to a contract. The statement of dates for payment of instalments was an essential provision in a contract of that type and was a provision that went “to the heart of the bargain between the parties”. The absence of specified dates left the agreement as to the payment of instalments uncertain. Because that essential provision was uncertain, the agreement was too uncertain to amount to a contract.
[33] [1992] 1 VR 540
[34] Ibid at 543
165The present case is substantively indistinguishable from Gray. When Lantouris signed the guarantee, it was missing the omitted agreement. That omitted agreement was eventually sent to her at a much later date. However, without the omitted agreement, the phrase “under the attached agreement” in the version to which Lantouris agreed was uncertain. Clauses 2 and 6, were essential terms that set out the subject matter of the guarantee and went to the heart of the bargain between the parties. Consequently, the guarantee as a whole is too uncertain to amount to a contract. Without the omitted agreement giving content to clauses 2 and 6, the guarantee is incapable of being enforced.
Analysis
166The “Modern Contract of Guarantee”[35] sets out the principles relating to uncertainty and guarantees as follows:
“A guarantee, like any other contract, may be void because the terms of the guarantee are uncertain. The tendency, however, has been for the courts to interpret the guarantee with regard to the fact that it is a commercial document, and there are few cases where a guarantee has been held void on that basis. Thus, if a guarantee is given in consideration of further advances being made to the principal, there is no necessity to specify the details of the amount of the advances of the time at which they will be made. As we have seen, the guarantee will be enforceable as soon as a bona fide advance is made …
Apart from the statement of consideration, the terms of the guarantee must be sufficiently certain. The relevant parties must be properly identified as well as the principal transaction to which the guarantee relates and the amount of the guarantor’s liability.
The courts will revert to the factual matrix of the transaction to give the guarantee a commercially sensible meaning. The process of construction implication (and exceptionally, rectification) may be used to correct errors or fill in omissions that might otherwise render the guarantee uncertain or incomplete. Where the relevant transactions have been executed and acted upon, the court will be less likely to find that the guarantee is uncertain. The fact that sections of a standard formal agreement have not been completed will not necessarily render the guarantee uncertain.”[36]
[35]O’Donovan and Phillips, The Law Book Company, 4th ed, 2020 at pages 87-88 [2-093] and [2-094]
[36]Footnotes omitted
167In Toyota Finance Australia Limited v Gardiner,[37] Toyota Finance Australia Limited entered into a number of hire purchase agreements with a company of which Gardiner was a director. None of the suite of documents that constituted the agreements contained an express clause making Gardiner a guarantee. Instead, it sought to rely at trial on the pro forma additional booklet which set out a guarantee. The booklet was unable to be connected to the suite of documents forming the agreement, nor was there sufficient evidence to prove the blank pro forma booklet was the document received by Gardiner. At [10]-[11] McColl JA stated:
“10.As the Lord Chancellor said in Blest v Brown, ‘a surety is bound … to the letter of his engagement. Beyond the proper interpretation of that engagement you have no hold upon him. He receives no benefit and no consideration. He is bound, therefore, merely according to the proper meaning and effect of the written engagement that he has entered into. Thus, as Deane J said in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd, ‘the obligations of a surety are strictly confined to what he has undertaken in the contract which constitutes him a surety’.
11.Evidence of a guarantee can ‘be made out from several documents if they can be connected together.’ They may be connected by express reference. In addition, ‘if you can spell out of the document a reference in it to some other transaction, you are at liberty to give evidence as to what that other transaction is, and, if that other transaction contains all the terms in writing, then you get a sufficient memorandum within the statute by reading the two together.’ The documents ‘must be connected with each other so naturally and reasonably’ that it can be concluded ‘that they all form part of the same transaction.’”[38]
[37](2016) NSWCA 162
[38]Footnotes omitted
168There is no dispute that the attached agreement, being the LML agreement was not attached to the guarantee. The issue then arises on the defendant’s case whether because of that omission, the guarantee is void for uncertainty or incompleteness.
169The plaintiffs point to the fact that the LML agreement was expressly referred to in the schedule to the guarantee. The date of the attached agreement is listed in the schedule as 25 July 2017. The relevant parties were identified. This included the covenantors (Lennon and Mazzeo) who were defined in the heading and the covenantee, Sevdalis in the schedule.
170The plaintiffs’ case is that the LML agreement was referred to by way of an express reference in the guarantee. The LML agreement itself does refer to a guarantee being given by Lantouris and 22 Park Street Pty Ltd.
171There is no dispute that written evidence of a guarantee can be satisfied by several documents if they are connected together.[39] Providing a document is incorporated by reference to another, if the requisite nexus exists, it does not matter that the guarantor has never seen the other document which is to be read together with the one he or she signed.[40]
[39]The Modern Contract of Guarantee O'Donovan & Phillips 4th Ed, Sweet & Maxwell at paragraph 3‑057.
[40]See O'Donovan & Phillips (supra) at 3-057
172Clause 1 of the operative part of the guarantee refers to the attached agreement and then it is stated: “They (the guarantors) have acquainted themselves with this documentation and sought such advice as they deem necessary.” This is an acknowledgment by the guarantors regarding the attached agreement. Self-evidently, the fact that Lantouris did not read the guarantee at the time of signing does not mean that she can escape liability.
173In my view, I do not consider the guarantee is void for uncertainty or incompleteness simply because the LML agreement was not attached. I accept the plaintiffs’ submissions that the document was incorporated by reference. It is expressly referred to in the schedule to the guarantee. The terms of the LML agreement confirm the arrangement entered into with LM and Sevdalis, the terms for payment and the security to be provided by Lantouris and 22 Park Street Pty Ltd, including the guarantee, all of which formed part of the same transaction entered into in late July 2017. I consider the requisite nexus between the documents is established.
174Having found for the plaintiffs on their primary argument, it is unnecessary to consider the plaintiffs’ alternative position that the defendant was put on notice of the terms of the LML agreement by reason of the various matters which the plaintiffs identified. Consequently, it is also unnecessary to make any determination as to whether Podaridis was acting as Lantouris’ agent during this transaction.
F. Conclusion
175Having regard to the foregoing, I find the loan agreement:
(a) did not as a matter of construction impose any obligation upon Lantouris to repay moneys to Argyle in circumstances where no moneys were advanced by Argyle either to her or to LM on her behalf;
(b) is not a deed;
(c)is unenforceable as a simple contract because there was a failure of consideration as there was no evidence adduced at trial which proved Argyle paid any money to LM or procured the withdrawal by LM of the LM caveat over the Station Street property, being the consideration relied upon in paragraphs 3A and 3B of the further amended statement of claim.
176The 2016 charge agreement created an equitable charge over the Station Street property in favour of LM. LM therefore was entitled to lodge its caveat as chargee. But the once the transfer of Station Street property occurred and LM removed its caveat, LM gave up its rights to that property under the 2016 charge agreement. The taking of alternative security from different entities in an attempt to secure the legal fees owed by Sevdalis, did not amount to realising or otherwise dealing with LM’s interest as a secured creditor within the meaning of s58(5) of the Bankruptcy Act.
177As for the guarantee, I find:
(a) LM was entitled to enter into the guarantee as the partnership had not been dissolved as at 25 July 2017;
(b) the fact that the LML agreement was not attached to the guarantee did not render it uncertain or incomplete in circumstances where the LML agreement was incorporated by reference;
(c) the guarantee was ineffective to guarantee the obligations of Sevdalis as the LML agreement was not competent pursuant to s58(3) of the Bankruptcy Act. Insofar as the indemnity provisions are relied upon, clause 2 is ineffective as it is expressed to be dependent upon an act of default of the covenantee, Sevdalis. He could not be in default when he was under no obligation to pay because the LML agreement was unenforceable against him as a bankrupt. The indemnity provision under clause 6 also fails as the indemnity so construed is the indemnity created under clause 2, which can only come into effect if there is a “default”. Further, s58(3) of the Bankruptcy Act operates as a statutory bar to recovery, with the result that there was no “loss” suffered by LM for which it could seek to be indemnified under the indemnity clauses in the guarantee.
178I will order that the plaintiffs’ claims be dismissed. I will hear from the parties on the question of costs.
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Certificate
I certify that these 58 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 25 March 2021.
Dated: 25 March 2021
Associate to Her Honour Judge A Ryan
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