Asia Pacific International P/L v Peel Valley Mushrooms

[2000] QSC 145

SUPREME COURT OF QUEENSLAND

CITATION:

Asia Pacific International P/L v Peel Valley Mushrooms & Anor [2000] QSC 145

PARTIES:

ASIA PACIFIC INTERNATIONAL PTY LTD ACN 064 150 072 AS TRUSTEE FOR THE PACIFIC PROPERTY RESOURCES GROUP
(plaintiff)
v
PEEL VALLEY MUSHROOMS LIMITED ACN 073 691 068
(first defendant)
GREGORY BERNARD SYMONS
(second defendant)

FILE NO:

SC No 1711 of 1998

DIVISION:

Trial Division

DELIVERED ON:

26 May 2000

DELIVERED AT:

Brisbane

HEARING DATE:

15, 16, 18, 19, 22, 23, 24, 26 February 1999

JUDGES:

Fryberg J

ORDER:

Judgment for Asia Pacific on both the claim and counterclaim

CATCHWORDS:

Contracts - General principles - Construction and interpretation – Implied terms - Implication of mutual obligation.

Contracts - General principles - Discharge, breach and defences – Repudiation and nonperformance - Delay and provisions as to time – Implied condition to be fulfill within a reasonable time – Registration of mortgage - Whether time of the essence.

Conveyancing – Relationship of vendor and purchaser - Matters arising between contract and conveyance - Conditions subsequent – Implied condition to be fulfilled within a reasonable time – Registration of mortgage - Whether time of the essence.

Guarantee and indemnity - Discharge of surety - Negligence - Failure to register of mortgage - Acquiescence by surety - Absence of detriment.

Mortgages – Transactions amounting to mortgages - Relevant principles - Omission of contingency for redemption - Form, validity and effect – Part of prescribed form left blank - Authority of mortgagee to complete blanks - Real Property Act 1900 (NSW), s 56(1).

Corporations Law
Real Property Act 1900 (NSW), s 56(1)

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, cons
Louinder v Leis (1982) 149 CLR 509
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, cons

COUNSEL:

L D Bowden for the plaintiff
S J Stanton for the first defendant

SOLICITORS:

Brown & Fowler Solicitors for the plaintiff
Kinneally Mahoney Solicitors for the first defendant

1. FRYBERG J:  The plaintiff (“Asia Pacific”) sues the first defendant (“PVM”) on a guarantee.[1]  PVM guaranteed a loan which Asia Pacific made to Elitact Pty Ltd (“Elitact”) for the purchase of some land in Sydney.  The loan was supposed to be secured by a registered second mortgage over the land.  After the loan was made, Elitact borrowed more money from Lex Nominees Pty Ltd (“Lex”).  This loan was secured by a first mortgage registered over the land before Asia Pacific caveated and then registered the second mortgage.  PVM now claims its liability under the guarantee is discharged.

   [1]The second defendant was not served and took no part in the proceedings.

1. The circumstances are complicated.  For ease of reference, this is a list of the main people involved.

1.Involved through Asia Pacific

a.Brown & Fowler – solicitors for Asia Pacific

i.    David Brown – solicitor

b.James Broadbent – a director of Asia Pacific

2.Involved through PVM

a.Aitken McLachlan & Thorpe – solicitors retained by PVM

i.Andrew Thorpe – solicitor

b.Allen Allen and Hemsley – solicitors retained by PVM

i.John Allen – partner

ii.Judy Mutton – partner

iii.Neil Pragnell – assistant to Ms Mutton

c.Brian Cook – managing director of PVM

d.Bruce Crossing – a director of PVM

e.Garry White – chairman of directors of PVM

f.Minter Ellison – solicitors retained by PVM

g.Rosenblums/Blake Dawson Waldron – solicitors retained by PVM

3.Involved through Elitact

a.A & J Financial Services – a finance company

i.    Tony Gee – a finance broker representing A & J Financial Services

b.Bill Gibbs – a finance broker

c.David Cass – solicitor for Elitact

d.Denham Investments Pty Ltd – original owner and vendor of the Ingleburn property

e.Direct Mortgage Funding Securities Ltd – a finance company

f.Gregory Bernard Symons – sole owner of Elitact

g.Herron Todd White – valuers engaged on behalf of Elitact

h.John Le Serve – a solicitor acting for Elitact

i.McMahon Hodgkinson & Associates – finance brokers

j.Permanent Trustee Ltd – trustee of the Howard Trust, a money lender

k.Swaab Attorneys – solicitors retained by Torosan

l.Torosan Pty Ltd and Emerging Business Advisory – caveators and mortgagees of Elitact

4.Involved through Lex

a.Paul Triscott and Associates – solicitors for Lex

b.Schrader and Associates – Sydney agents for Paul Triscott and Associates

i.    Drew Moffat – solicitor with Schrader and Associates

The first application for a loan

1. In 1997, Asia Pacific carried on business as a moneylender under the name Planet Securities.  Its letterhead contained the subtitle “Fast Bridging Finance”.  It was a lender of last resort.  Its customers usually needed funds urgently and there was always a requirement that loans be documented and proceed to settlement very quickly.  It charged high interest rates commensurate with the high risk environment in which it operated. 

1. On 7 May 1997, Asia Pacific received a written finance application from Elitact.  According to that document, Elitact sought $300,000 for 30 days for  “deposit moneys & preliminary expenses associate [sic] with purchase and sub-division of industrial property at 81 Williamson Road, Ingleburn, NSW”.  The vendor was Denham Investments Pty Ltd (“Denham”), the purchase price was $5 million and settlement was to be on 5 June 1997.  The security offered consisted of a registered debenture over Elitact, a promissory note for $300,000 payable on 15 June and drawn by PVM, and a personal guarantee of Gregory Bernard Symons.  Mr Symons was said to be a 49 year old law graduate and consultant and the sole owner of Elitact.  It appears from the application that Elitact proposed to subdivide the land into three lots.  The application asserted, “Peel Valley Mushrooms Ltd has contracted to acquire the largest component of the industrial land being purchased by Elitact Pty Ltd at Ingleburn, being a 10,000 m² purpose built high quality factory building”.  Elsewhere the application asserted that, after exchange of contracts with Denham, Elitact would enter into agreements for the sale of the three lots:  lot 1 to PVM for $5 million; lot 2 to City and Dominion Property Ltd for $1.125 million and lot 3 to a purchaser to be negotiated for $1 million.  The promissory note to be provided by PVM was said to be part of the price it was paying.  The application claimed, “Project funding is being undertaken by Paul Triscott & Associates, solicitors ... who have been requested to provide finance facilities through a vehicle, Lex Nominees Pty Ltd, to $4,000,000.00 to settle the acquisition of the property”.  It further claimed that Elitact had made arrangements to pay interest to Lex and to provide the necessary additional funds for the purchase.  Details of this were said to be able to be confirmed through David Cass, solicitor for Elitact.

1. The application was dealt with by Mr Broadbent, a director of Asia Pacific.  He quickly formed the view that there was no security of any substance available from Mr Symons or his company.  He therefore made inquiries regarding the financial position of PVM.  He was satisfied by the answers to his inquiries, and Asia Pacific approved the loan.  It instructed its solicitors, Brown and Fowler of Southport, to act on its behalf.  They advised that a promissory note should not be accepted, but that instead, a guarantee secured by mortgage should be obtained.  Somehow, this was conveyed to the applicant.

PVM’s involvement

1. What was the background to the application and how did PVM come to be mentioned in it?  PVM was incorporated as a public company in April 1996.  Its business was to be marketing and growing mushrooms.  Its initial capital raising was through a prospectus seeking $4.8 million issued in June 1996.  The terms of the issue, as described by Mr Crossing, a director, included granting investors a right to occupy a section of the production premises, which is suggestive of a tax minimisation scheme, but nothing turns on this.[2]  PVM purchased a mushroom growing business and  entered into a contract with the Tamworth City Council to buy some land near the Tamworth airport for $150,000.[3]  There it proposed to build 32 growing sheds and supporting facilities.  However it ran into difficulties.  Around November 1996 there was a change in legislation relating to the disposal of compost which complicated the development application for the land and generated additional costs.  There were cost blowouts on the construction program and it was decided to increase the number of sheds to 48.  In early 1997 a new general manager was appointed and much of the design work had to be redone.  It was estimated that a further $8.5 million was required.  The initial prospectus had raised only $3 million of the $4.5 million sought and I infer that there was no prospect of raising the required funds by issuing share capital.  There was insufficient equity for bank finance.  By April 1997, the directors of PVM were on the lookout for alternative sources of funding.  At that time, $60,000 of the price of the Tamworth land remained outstanding , and title to the land remained in the Council.

   [2]Mr Crossing described the methods used for later fund raising as “utilising the tax effective structures in which we specialise”.

   [3]Mr Crossing erroneously said it was $250,000.

1. Mr Brian Cook was the managing director of PVM.  He was an accountant whose private company provided accounting and administrative services to PVM.  His offices were in Sydney.  He had known Mr Symons since about the beginning of 1996.  He mentioned PVM’s need for finance to Mr Symons in early April 1997.  Mr Symons put him in touch with Mr Bill Gibbs, a finance broker, whom he met at the Hilton hotel in Sydney on or about 11 April 1997.  Mr Cook put Mr Gibbs in touch with Mr Crossing and the three of them arranged a meeting in the following week.  On Monday 14 April, two days before the meeting, Mr Gibbs sent PVM a summary of the finance arrangements which he proposed for the company.  He confirmed the agreement that his fee would be $500,000.  $25,000 was to be paid immediately and he was to receive shares in PVM to the value of $250,000 which were to be held in escrow by Mr David Cass, solicitor pending settlement of the finance facility.  The balance was payable on drawdown of the facility. 

1. The meeting was held on 16 April.  No evidence was given of what transpired at it.  However, Mr Cook was aware that Mr Symons, through Elitact, wanted to buy the Ingleburn land.  The day after the meeting with Mr Gibbs was arranged, Mr Symons telephoned Mr Cook.  According to the latter, the conversation was to the following effect:

“Mr Symons:     “You know that factory at Ingleburn that Gibbs is financing for me?  We’ve been doing some work and we think Tiger Woods (celebrity golfer) is prepared to market the pesticide/fertiliser by-product.  The pesticide/fertiliser has application to golf courses.  The ad agency Mojo has indicated we could get Tiger Woods’ endorsement.  In view of this possibility, PVM could lease the whole of Ingleburn and sub-lease part of the manufacturing facility to Paragon who will manufacture that product.  The proposal is that PVM would pay $500,000 per year rent, Paragon would pay PVM $365,000 per year on the sub-lease, my company, Elitact, will fund to the extent of $500,000 PVM’s costs for its public listing and Paragon will assign to PVM certain property rights in the pesticide/fertiliser product from which it will generate further income.

Myself:“This sounds good, I’ll put it to the board of PVM and see if they want to investigate it further”.

The precise terms of this arrangement were never fully explained.  The benefit to Mr Symons and Elitact was to make any application for finance much more attractive to a lender.  I shall discuss the benefit to PVM below.

1. The board of PVM met on 17 April.  It resolved in succession “to  proceed with Mr Gibbs’ proposal” and “to pursue Ingleburn Transaction as outlined”.  Next day, Mr Cook wrote to Mr Gibbs as follows:

“Bill, following our conversation this morning, I would like to confirm the decision of the Directors:-

a)To appoint you as broker to implement a raising of $8.5m via a bank guaranteed performance bond system;

b)Arrange for a pre-approval to take out this facility albeit we may approve another financier other than the Trust proposed.

c)Organise as part of this arrangement to finalise the payout or provision of a guarantee to Tamworth Council for the balance of the land purchase prince ($60,000).

d)To arrange with the builder his facilities to allow construction to commence by end of April with first payment due under his contract by the 21 May.

e)Allow Westpac to provide an overdraft of $1.0m to facilitate payment of your fees and other overheads leading up to commencement of production.

f)To recognise that we will enter into leasing and financial arrangements for a marketing joint venture at Ingleburn.

g)To recognise that we are proceeding towards a float of PVM as soon as possible.

h)Your fees are agreed in practical terms:-

i.      $25,000 lodged with D. Cass solicitor by Tuesday and payable against 1 drawdown.

ii.     $225,000 paid on drawdown of the facility.

iii.     $250,000 in 12% preference shares to be issued and held by D. Cass, solicitor against final drawdown.”

1. On 29 April 1997, Mr Cook authorised Mr Symons to instruct solicitors on the drafting of documentation in connection with the Ingleburn proposal.  He did not specify any particular firm, but guessed that Mr Symons would probably instruct Mr Cass, who was the solicitor for Elitact.  A few days later, he went overseas, leaving the Ingleburn proposal in the hands of Mr Crossing.

1. Mr Gibbs met Mr Crossing a number of times in early May 1997.  At one of these meetings, he told Mr Crossing that the proposal for Ingleburn had changed.  It was now proposed that the land be subdivided, that PVM should buy the lot containing the factory and that PVM should lease that land to the company Paragon International.  At a subsequent meeting, he told Crossing that Elitact would be taking a short term loan from the Howard Mortgage Trust for $3 million and another from Asia Pacific for $300,000 for costs associated with the purchase.  He said that Mr Symons wanted PVM to guarantee the Asia Pacific loan and to secure the guarantee by a mortgage of the Tamworth land; and that Mr Symons was prepared to pay a fee of $120,500 out of the $300,000 loan. 

1. At that time PVM was looking for funds.  Despite (or perhaps because of) the fact that it still owed $60,000 for the Tamworth land and did not have title to that land, Mr Crossing decided to accept Mr Symons’ offer subject to conditions.  Mr Cook was informed of the deal, particularly of the fee, by telephone.  He said in evidence that it did not strike him as odd that of $300,000 being borrowed from Asia Pacific allegedly for the Ingleburn land, $120,500 should be paid as a fee to PVM - he thought this was “a very nice deal”.   On Monday 12 May, Mr Crossing sent Mr Cass a letter typed, I find, the previous Friday, instructing him to pay the Council $60,000 from his trust account using the $120,500 due to PVM.  On the same day, at a meeting of directors in Mr Cass’s office, PVM resolved to enter into the loan guarantee agreement secured by a mortgage over the Tamworth land.

1. The conditions envisaged by PVM are of some importance.  They were subsequently set out by Mr Crossing in a letter to Mr Symons:

“Further to my fax of clarification to you I am now confirming the arrangements for the Ingleburn purchase.

They are as follows:

1.Peel Valley Mushrooms Limited will enter into an unconditional Contract of Sale for a net $5 million for the purchase of freehold property at 81 Williamson Road, Ingleburn, NSW paying a 5% deposit ($250,000) which is to be held by David Cass, Solicitor of Level 1, 428 George St, Sydney, until settlement on the 22 of November 1997.  Elitact Pty Ltd are to pay stamp duty and legal costs associated with the transaction.

2.Paragon International Pty Ltd has agreed to purchase $2 million of redeemable preference shares in Peel Valley Mushrooms Ltd for $1.750 million.  Settlement of this preference share issue is to be within 180 days and is to be secured by a Promissory Note issued by Paragon International Pty Ltd and made in favour of Peel Valley Mushrooms Limited and held in Escrow by David Cass, Solicitor of Level 1, 428 George Street, Sydney, until settlement on the 22 of November 1997.

3.These arrangements limit the exposure of Peel Valley Mushrooms Limited to $3.5 million on the settlement of 81 Williamson Road, Ingleburn, NSW which can be fully financed through Triscott & Associates, Solicitors, Brisbane.

4.Paragon International Pty Limited will enter into a long term lease of the building commencing at $490,000 per annum plus outgoings (this income stream will service the outgoings on the loan and the building for Peel Valley Mushrooms Pty Ltd).

5.Ellitact Pty Limited arrange that Paragon International Pty Limited provide at manufacturing cost Peel Valley Mushrooms Limited with the tea tree oil based natural disinfectant, and joint venture the manufacturing rights of the Tiger Green Product range being developed through Naturally Wild Pharmaceuticals Pty Limited.

6.Elitact Pty Limited under these arrangements will allow under Licence, Paragon International Pty Limited, to have free access to the building for the 180 day term of the Peel Valley Mushrooms Limited contract in order to establish their manufacturing equipment within the factory.

It should be noted that these arrangements are subject to the following being in place.

They are:

·     a sworn valuation on the property showing a value of $5 million.

·     an agreement from Paragon International Pty Ltd to the leasing arrangements.

·     an agreement from a financier to finance an amount of $3.5 million.

·     that the loan of $3.5 million is to be secured only against the Ingleburn property.

Subject to the above being agreed to I will present this proposal to the Board of Directors of Peel Valley Mushrooms Pty Ltd for their approval.”

1. This was an unusual arrangement, to put it mildly.  Mr Crossing said that the payment for the preference shares was to be set off against the price of the land at the time of completion and agreed that one could draw the conclusion from the arrangement that in fact, PVM was paying only slightly in excess of $3 million for the property.  This feature of the transaction was not revealed in Elitact’s application to Asia Pacific.[4]

   [4]The transaction was described in Elitact’s application in the following terms:

   “Peel Valley Mushrooms Limited has agreed to enter into a long term leasing arrangement with Paragon Pharmaceuticals, a company established in 1961, which is to install approximately $15,000,000.00 worth of equipment into the Ingleburn facility, apart from paying Peel Valley Mushrooms Limited a rental of $495,000.00 per annum plus outgoings.

   Paragon Pharmaceuticals and Peel Valley Mushrooms have jointly developed a tea tree based disinfectant to be used to regularly sterilise the mushroom growing rooms being constructed at Tamworth.  This tea tree based disinfectant replaces the formaldehyde currently used for such purposes and the spent tea tree oil is to be recycled by Paragon Pharmaceuticals into a natural repellent to be used on golf courses and in other outdoor applications.  This tea tree based product is both natural and very effective and replaces toxic chemical products used to date.”

The first loan

1. Elitact wanted the money urgently.  Asia Pacific was in the business of providing urgent bridging finance.  Its solicitors were used to handling the documentation of such transactions.  The security proposed for the guarantee was a mortgage of land in New South Wales.  To save time, Mr Brown, the principal of Brown and Fowler, decided to ask Mr Cass to prepare the mortgage document.  There was a need, he said, for procedures to be “streamlined”.  He prepared the principal loan documents himself and couriered them to Mr Cass.  They were executed by Elitact and PVM and were returned to Brown and Fowler.  On 13 May, $251,164[5] was transferred to Mr Cass’s trust account.  Under the terms of the deed of loan, $300,000 was repayable on 13 June.

   [5]The balance after deduction of interest, legal costs and outlays.

1. Mr Brown envisaged that Mr Cass would attend to registration of the mortgage on his behalf.  On 21 May, after having the documents executed by Asia Pacific, Mr Brown sent the mortgage to Mr Cass for registration.  However Mr Cass did nothing to get the mortgage registered.  He did not (as Mr Brown had expected he would do) pay the outstanding $60,000 to the Tamworth Council.  On 29 May, Mr Brown wrote to Mr Cass inquiring the date of lodgement and dealing number of the mortgage.  On 4 June, Mr Cass left a message for Mr Brown that it would be lodged that day or the following day.  Mr Brown again wrote on 5 June asking for confirmation of registration and the relevant dealing number as soon as possible.  He did not receive them, and on 13 June, the loan fell due for repayment.

Events in Sydney

1. Following Mr Cass’s receipt of the Asia Pacific loan on 13 May, arrangements were made in Sydney in relation to the Ingleburn contract.  They produced a tangled web indeed.  On 14 May, Elitact executed a contract to purchase the land from Denham.  The deposit required was only $20,000, not the $500,000 originally envisaged and it was paid from Mr Cass’s trust account on that day.  The contract was expressed to be “subject to and conditional upon the Purchaser obtaining finance in the sum of $2,000,000.00 from Lex Nominees Pty Limited by 4.00pm on Friday 23 May 1997”.  The completion date was expressed to be “30 May 1997 and time shall be of the essence in this regard”.  That date came and went without settlement.  Despite this, the contract apparently remained on foot and Elitact pursued Mr Gibbs’ proposal that PVM buy the lot containing the factory.  PVM set about preparing itself to implement the deal.  First, through Mr Gibbs, it engaged Minter Ellison, solicitors, to act on its behalf in relation to its purchase of the proposed lot 1.  Mr Crossing at first denied that Minter Ellison had authority to act in relation to this matter, despite the terms of exhibit 76.  In late April PVM had authorised Mr Symons to retain solicitors in relation to the Ingleburn proposal.[6]  In cross-examination Mr Crossing conceded that Minter Ellison had apparently been engaged (pursuant to this authority) because Mr Cass had a conflict of interest, and he identified a payment to them from Mr Cass’s trust account.  Second, through Mr Gibbs, it applied to Lex for an advance of $3 million to purchase the property.  A favourable response dated 3 June 1997 was received from Triscott and Associates, the solicitors for Lex. 

[6]See paragraph [10] above.

The variation of loan

1. Elitact did not repay the loan on 13 June, when it was due.  On Monday 16 June, Mr Brown, no doubt concerned about Asia Pacific’s position, faxed Mr Cass advising him of the default and urgently seeking information about the position regarding PVM’s title and mortgage.  Later that day, Mr Cass telephoned Mr Broadbent of Asia Pacific.  He said he had just concluded a meeting with Brian Cook of PVM.  He said “they” were very angry with Elitact over the matter.  He said that PVM intended to pay Asia Pacific out at the end of the week at the latest.  He said there was a settlement coming up by then.  He said he would send a fax setting out the position.  No such fax appears to have been received.  The following day, Mr Broadbent faxed  PVM advising of the default and of Asia Pacific’s intention to issue enforcement proceedings the following day.  He received no reply.  The following day he phoned Mr Cass and threatened proceedings unless the promised fax was received within 1½  hours.  This elicited a fax from Mr Cass to Mr Brown, copied to Mr Broadbent, which represented that the loan would be repaid in full at the settlement of another transaction to take place that week, no later than Friday afternoon.  Mr Cass sought a precise payout figure on that basis.  There is no evidence before me that any such settlement was contemplated.  On the contrary, Mr Cass was moving in a different direction entirely.

1. On 18 June, the same day that he faxed Mr Brown and Mr Broadbent, Mr Cass engaged Herron Todd White, valuers, on behalf of Elitact, “to undertake a further valuation of the subject property”.  That implies the existence of an earlier valuation, and this was confirmed by Mr Crossing, who had seen one in late April or early May.  The earlier valuation has not been placed in evidence.  Mr Cass told the valuers that Elitact had entered into an unconditional contract with PVM to sell a portion of the land for $5 million and another unconditional contract to sell another portion of the land to City and Dominion Ltd for $1.125 million.  The first statement (at least) was false.  No such contract had been signed and the conditions on which PVM was willing to contract precluded a truly unconditional contract.  On these and a  number of other dubious assumptions, Herron Todd White valued the land for mortgage security purposes at $6,475,000.  I infer that this figure was substantially higher than that produced by the earlier valuation.  On  Mr Cass’s instructions, Herron Todd White included that figure in a report addressed to Asia Pacific and dated 18 June 1997. 

1. McMahon Hodgkinson and Associates was a firm of finance brokers acting on behalf of Elitact.  By 20 June, that firm had been provided with a copy of the new Herron Todd White valuation.  It used the valuation that day to apply to Asia Pacific for a fresh loan of nearly $1 million.  Negotiations took place between Mr McMahon and representatives of Asia Pacific over the next five days.  As security, Mr McMahon offered a second mortgage over the Ingleburn land.  The first mortgagee was to be Permanent Trustee Australia Ltd (“Permanent”) as trustee of the Howard Mortgage Trust and it was implicit in the proposal that the money was required for the settlement of the contract to purchase the Ingleburn land.  The loan was required for 30 days, after which it was envisaged that both mortgages would be paid out from a fresh loan, to be made by Lex.  Asia Pacific’s request for a continuation of the mortgage given by PVM was rejected on the basis that PVM claimed it needed unencumbered title to develop the Tamworth land.  However a guarantee of the whole amount of the loan by PVM was offered.  According to Mr McMahon, Elitact required settlement on 27 June.  On 26 June, Asia Pacific gave conditional approval to the advance and instructed Mr Brown to prepare the necessary documentation.

1. PVM first heard of the default under the first loan in mid to late June.  Mr Gibbs informed Mr Cook of the proposal for a further advance.  He showed him a copy of the Herron Todd White valuation and discussed the need for a guarantee of the new advance.  Both Mr Cook and Mr Crossing said in evidence that they felt that PVM was protected by the fact that there would be a registered second mortgage in favour of Asia Pacific and (on the basis of the new Herron Todd White valuation) sufficient equity in the land to support that mortgage.  I do not accept this evidence.  Both were aware of the falsity of the assumption made in the valuation regarding an unconditional contract for the sale of lot 1 to PVM and of PVM’s requirement for an injection of $1.75 million as a condition of such a transaction.[7]  Such a condition would inevitably have had a major depressing effect on the valuation and on the worth of the second mortgage, and they must have realised this.

   [7]See para [13].

1. Both Mr Crossing and Mr Cook also said in evidence that they were very anxious to have the mortgage over the Tamworth land released to enable the acquisition of finance for the development of that land.  I have considerable doubt about the frankness of this assertion.  At that time, they assumed that the mortgage over the Tamworth land had been registered.  If they were as anxious as they suggested, one would have expected that they would have insisted on receiving a release of the mortgage in exchange for the fresh guarantee.  They did not do so.  I need not make any finding in relation to this point.

1. I find that by late June, PVM was in a difficult situation.  Mr Cass had not paid the $60,000 due to the Tamworth Council, contrary to Mr Crossing’s letter of instruction sent to him on 12 May.  Apparently PVM lacked the capacity to pay  the $60,000 from its own resources.  Of the $120,500 which it had been promised for guaranteeing the first loan, it had received $27,300 and a further $18,500 had been paid to others on its behalf; but the source of the funds, the first loan from Asia Pacific, was now exhausted.  Unless Elitact received further funds, there was little chance that PVM would get any more of the promised fee.  It had received a statutory demand from Asia Pacific for $300,000.  The second loan would eliminate that indebtedness.  It is not surprising that on 27 June, PVM resolved to provide the guarantee needed to procure the second loan.  On that day, it executed, among other documents, the Deed of Variation of Loan and the new Guarantee and gave them to Mr Gibbs for delivery to Mr Cass.

1. Both Mr Cook and Mr Crossing gave evidence by affidavit and orally regarding the events of 27 June.  Neither of them mentioned in evidence in chief two other features of the arrangements made between them and Elitact that day.  These were, first, that PVM was to receive a further fee of $40,000; and second, that PVM required Mr Cass to agree not to make payments in respect of the Ingleburn land without written instructions, which instructions were to be countersigned by Mr Cook.  Mr Cass provided Mr Cook with a letter agreeing to this arrangement.  Mr Cook’s evidence about this letter was evasive.  He attempted to suggest that he intended the letter to relate only to an advance from Lex, though ultimately he said he could not recall whether the arrangement was to relate to the Asia Pacific advance of $1 million.  He sought to explain his lack of recall because 27 June was his busiest period.  I am satisfied that he distrusted Mr Cass and wanted control over the advance from Asia Pacific.

1. The second loan (or, more accurately, the loan as varied) was for $1 million, but this was not the amount which reached the borrower.  The arrangement required that the first loan be repaid out of the borrowed funds, so only $700,000 was initially available.  Outstanding interest on the first loan together with interest in advance on the new loan totalled $195,000 and these amounts also were deducted before the advance.  After deduction of a further sum for legal costs and outlays, the amount available to Elitact was in fact $498,520.  Mr Brown had sent the documentation (including the deed of variation of loan) by courier to Mr Cass on 26 June.  He had engaged Mr Cass as his agent to prepare the new bill of mortgage and sought an undertaking from Mr Cass promptly to attend to stamping and registration of it immediately following settlement.  This Mr Cass had given orally later that day.

1. On 27 June, Mr Cass sent Mr Brown a fax which began as follows:

“I refer to your letter of 26 June 1997 and now enclose for your attention the execution pages of the following documents:-

(a)Deed of Variation of Loan Agreement;

(b)Deed of Variation of Mortgage, together with Form 311 and Form 350;

(c)Certificates of Witness;

(d)The solicitor’s certificates;

(e)Guarantors’ acknowledgments;

(f)Authority to Complete.

The originals of these documents will be posted to you by express post this evening.  I also enclose copies of the following:-

(i)Minutes of Peel Valley Mushrooms Limited in relation to this transaction;

(ii)Minutes of Elitact Pty Limited in relation to this transaction;

(iii)Draft Mortgage executed by Elitact Pty Limited.”

1. There was no explanation of the term “Draft Mortgage”.  The fax included a copy of the front page of a mortgage purporting to be in respect of the Ingleburn land, to be given by Elitact to Asia Pacific and to have been executed under seal by Elitact.  No memorandum of terms of mortgage was attached and the section of the form referring to terms (section (D)) was left blank.  Nonetheless,  Mr Brown remitted $498,520 to Mr Cass’s trust account later that day. Under the deed of variation, $1 million was repayable on 25 July 1997.

1. The originals of the documents which Mr Cass promised to send by express post that evening never arrived.  On 2 July, in response to an inquiry from Mr Brown, Mr Cass left a message:

“He said that the monies we TT to his trust account are frozen for the moment as the First Mortgagee is yet to put his mortgage in place.  The executed loan documents are held in escrow awaiting finalisation or termination.

1. This may have been true.  It appears from a title search that settlement of the purchase may have taken place on 4 July, when the transfer from Denham to Elitact and the first mortgage in favour of Permanent were executed.  They were registered on 8 July.  The second mortgage was not lodged for registration.  On 4 July, almost all of the Asia Pacific advance was paid out of Mr Cass’s trust account.  Some $260,000 went to the Office of State Revenue; $60,000 went to PVM’s solicitors; $70,000 went to Mr Gibbs for “fees”; and $50,000 went to “Swaab, Attorneys”.  Swaab was a firm of solicitors acting for a company Torosan Pty Ltd, to which I shall refer below.  Mr Cook could not remember whether he authorised (by countersigning) these payments, but he seemed unperturbed by them.  By fax dated 7 July, Mr Brown again requested return of the documents, but he received no reply.  On 16 July Mr Cass alleged to Mr Brown’s secretary “that he posted them by ordinary mail & can’t really chase it hard as he has no record (as in receipt no.) of posting same.”  On 23 July, Mr Brown wrote demanding a fresh bill of mortgage, but he received no response.  Two days later, the loan fell due for repayment.

The second default

1. On 25 July,  Mr Brown again wrote to Mr Cass.  After complaining of the latter’s failure to respond to letters and telephone calls, he demanded repayment of the loan that day and threatened that in default a receiver would be appointed to Elitact and a statutory demand served upon PVM.  On Monday 28 July (the next business day), he wrote to PVM demanding $1 million pursuant to the guarantee.  Then, on 29 July 1997, he sent a statutory demand under the Corporations Law by registered mail to PVM.  There was no immediate response from PVM, but on  6 August, Mr Brown received a fax from Mr Gibbs (dated, curiously, 1 August).  It read:

“I am writing to you in respect of the notice issued against Peel Valley Mushrooms Limited on the 28 ult. and confirm the following,

Lex Nominees Pty Limited NSW solicitors Mr Drew Moffat of Schroders [sic] Parramatta, have produced first mortgage documentation which is currently with Mr David Cass for execution and will repay  the existing first mortgage to Permanent Trustee Company Limited although the first mortgage will be for a total of $4.5 million the initial advance will be for $4 million minus establishment and prepaid interest charges.  The advance will be fully drawn to $4.5 million within a further 14 day period.

DMF Securities Limited have approved a further $1 million second mortgage which will also settle with the ensuing 14 days.  Would you kindly advise Asian Pacific Pty Limited will accept the following payments in full settlement of Elitact Pty Limited financial obligations:

1.          $333 000 Repayment schedule:  Monday 4 August.

2.          $333 000 Repayment schedule:  Monday 11 August.

3.          $333 000 Repayment schedule:  Monday 18 August.

Upon receipt of your acceptance of the repayment schedule I will advise Mr David Cass and Mr Drew Moffat accordingly.”

Mr Brown replied, pointing out that payment in full on or before 20 August would comply with the statutory demand.

1. On 7 August Mr Symons contacted Mr Broadbent directly.  Apparently he indicated that settlement was to take place the following day and made some proposal for repayment of the loan.  Whatever it was, it was not accepted.  Subsequently, Mr Gibbs contacted Asia Pacific and indicated that some part payment of the debt would be forthcoming and proposed a meeting with Mr Broadbent on 12 August to arrange payment of the balance.  No payment was made and Mr Gibbs failed to attend the meeting.  Mr Brown again wrote to him reiterating Asia Pacific’s intention to apply for the winding up of PVM after the expiration of the statutory period.

The refinancing of Elitact

1. Elitact’s original application to Asia Pacific had been for bridging finance.  It specified that long-term finance would ultimately be provided by Lex.  Precisely when Elitact applied to Lex is unclear, but presumably it was sometime in May or June 1997.  Mr Triscott, on behalf of Lex, wrote a letter of offer but for how much and when is not in evidence.  It was I infer for an amount which was a good deal less than ultimately was advanced.  For whatever reason, finance from Lex was not available to Elitact when it settled the purchase of the Ingleburn land on 4 July 1997.  It is unclear how Elitact paid for the land.  It had approximately half a million dollars from Asia Pacific which was disbursed in the manner described above.  It had the proceeds of a loan of nominally $3 million from Permanent, but the net amount is unknown.  The contract price was supposed to be $5 million, but I doubt if this was paid in cash.  If it was, there is no indication of where the balance of the money came from.  What is clear is that Elitact was desperately anxious to refinance its borrowings and was using Mr Gibbs for this purpose.

Mr Triscott’s investigations

1. Sometime in July, a copy of the Herron Todd White valuation was sent to Mr Triscott.  On 28 July, by facsimile to Mr Gibbs, he advised that in terms of the original letter of offer, Lex was prepared to enter into unconditional commitment to provide Elitact with $4.5 million within 30 days.  Three days later, at Mr Gibbs’ request, Mr Garry White, chairman of directors of PVM, wrote[8] to Mr Triscott, affirming that it had entered into unconditional contract to acquire “industrial property” at Ingleburn from Elitact for $5 million.  This letter was designed to instil confidence in Mr Triscott.  Annexed to it was a balance sheet for PVM as at July 1997.  That balance sheet contained no reference to the guarantee given to Asia Pacific, despite the facts that Elitact was in default and demand for repayment had been made by letter sent three working days earlier.[9]

   [8]Mr White shared the conduct of the matter on behalf of PVM from late July 1997.

   [9]PVM’s directors claimed that the statutory demand sent on 29 July was mislaid in PVM’s office and did not come to their attention until 12 August (see para [47]), but they made no such claim in relation to the letter of 28 July.  The reference to that letter in Mr Gibbs’ fax to Mr Brown sent on 6 August suggests that it was received.

1. Mr Triscott instructed Mr Moffat of his Sydney agents Schrader and Associates to conduct a due diligence inquiry in relation to the proposed loan.  On 5 August Mr Moffat wrote to Mr Cass informing him that the company charge over Elitact in favour of Asia Pacific would have to be discharged on settlement.  Mr Moffat also attended to searches and documentation on behalf of Mr Triscott.  Presumably as a result, Mr Triscott became aware that the amount owing under the company charge was in the order of $1 million and he also became aware of a claim by Torosan Pty Ltd and Emerging Business Advisory Pty Ltd (“Torosan”), supported by a consent caveat over the Ingleburn land, for $341,000.  The caveat protected an unregistered mortgage granted by Elitact on 20 June 1997.  In addition, he (or his agent) was contacted by one Andrew Yiasemides who claimed that he or his company was owed a sum in the order of $500,000 by Elitact and that a caveat was being lodged to protect this claim.

1. It was an integral part of the application for finance made to Lex that the land would be subdivided and proposed lot 1, containing the factory building, sold to PVM for $5 million.  It was further proposed that PVM would then lease lot 1 to Paragon at an annual rental of $490,000.  The existence and validity of this lease was another of the assumptions on which the Herron Todd White valuation, upon which Mr Triscott was relying, was based.  Paragon’s agreement to enter into such a lease with PVM was said to have been procured by Elitact.  No direct evidence of any such agreement was put before me.  As Schrader and Associates began their inquiries, Elitact and PVM seemed to lose interest in it.  In his letter of 31 July to Mr Triscott, Mr White on behalf of PVM wrote, “It was originally proposed that Paragon Agencies [sic] Pty Ltd occupy the building, however we understand immediately Elitact Pty Ltd settled the purchase, Richard Ellis advised that Leigh Mardon Datacard were keen to occupy the factory as they had just been awarded the contract to print Australian passports”.  In early August, Mr Triscott heard through Mr Cass that it was now proposed to lease lot 1 to Leigh Mardon for only $400,000 per annum.  On 8 August, he faxed Mr White asking, “Could you please let me know as a matter of urgency your attitude to the proposed lease”.  He received no written reply, but by telephone Mr White told him that PVM was willing to guarantee Elitact’s performance subject to its own solicitors being satisfied on the issue of the lease.  Mr Triscott was sufficiently concerned to telephone Mr White again the following day, a Saturday.  He asked Mr White why PVM was paying $5 million for a property producing a return of only $400,000 per annum when the going capitalisation rate was 10 percent.  Mr White replied that he had raised that issue with his co-directors.  Apparently, he offered no further explanation.  On 11 August, Mr Triscott twice faxed Mr White about the Herron Todd White valuation.  He told Mr White he had had discussions with the valuer who had advised that “as is”, the total value of the proposed lots 1 and 2 was $4.25 million, though it might be as low as $2.5 million.  With a lease to Leigh Mardon in place, the valuer said $4.55 million.  This was, of course, far less than the figure of $6.475 million contained in the valuation.  The faxes also informed Mr White of the claim by Yiasemides, which apparently was not taken into account in these figures.  There was no overt reaction to this information from PVM. 

The reason for PVM’s involvement in the Ingleburn transaction

1. At first sight PVM’s participation in the Ingleburn transaction seems an odd activity for a company whose business was growing mushrooms at Tamworth.  In a note to another director, Mr Cook  wrote, “I have already agreed with Bruce [Crossing] that this is a low risk highly profitable deal that gives high upside to PVM.”  He did not explain what the high upside was.  All three directors who gave evidence justified PVM’s involvement in the transaction on the basis that a lease to Paragon would enable significant synergies to be developed between the business of PVM and that of Paragon.  They asserted that spent compost from  PVM’s mushroom growing operations could be reused by Paragon to manufacture a combined fertiliser and insect repellent for use on golf courses.  Mr Cook said he had confirmation from Mojo advertising agency that Tiger Woods had expressed interest in branding the product “Tigergreen”.  No detail of this unlikely sounding scheme was given.  I am not satisfied that the supposed synergies with Paragon Pharmaceuticals (or whatever it was called) were a substantial factor in the directors’ thinking.  There is no evidence that they ever seriously investigated these synergies; there is no evidence that they ever spoke directly to any person from Paragon; and they readily abandoned the proposal to lease the land to that company in late July, notwithstanding that the alternative lease was for a much lower rental, indeed a rental so low as to throw the whole viability of the transaction into question.

1. Mr White advanced a second reason for PVM’s involvement.  He said that the transaction would have added significant equity to PVM’s balance sheet.  I accept that the directors thought that the addition of $2 million issued capital in redeemable preference shares, as required by PVM,[10] would indeed have this effect.  This was important as PVM was trying to raise finance to build its Tamworth facility and lack of equity was a major inihibition.  It engaged Mr Gibbs to raise this finance.  He introduced the Ingleburn scheme to PVM and it resolved to become involved within a few days of that introduction.  I find that the reason for PVM’s involvement was to effect a cosmetic improvement to its balance sheet at little cost, with a view to facilitating its fund-raising efforts.

   [10]See para [13].

1. I have used the word “involvement” in a deliberately loose sense.  I have already referred to the conditions upon which PVM was willing to enter into the contract with Elitact.  These conditions were never fulfilled.  I am satisfied that PVM never entered into a binding contract to purchase lot 1.[11]  Mr White had refused to sign the contract.  He said he believed it was signed by Mr Crossing and Mr Cook but never exchanged.  That explains why he was unconcerned by Mr Triscott’s letters of 11 August.  His statement to the contrary in his letter to Mr Triscott of 31 July was false.  It reflects little credit on him.

[11]According to Mr ten Kate’s valuation (see paras [76]-[77]), Elitact was still the registered proprietor in May 1998.

PVM’s solicitors

1. John Allen was a partner in the firm Allen Allen and Hemsley, solicitors.  He became a partner on 1 July 1983.  In 1997, he was in desparate financial straits.  Around March 1997 or before, he was in contact with McMahon Hodgkinson and Associates, the finance brokers.  He wanted to borrow $150,000.  Mr McMahon introduced him to Mr Gibbs and Mr Symons.  Somehow, some months prior to August of that year, Mr Symons “promised” to lend him some money.  Probably, Mr Symons agreed to lend him $150,000 from what he described as the proceeds of the “Elitact Settlement” sometime shortly before 27 May.  That loan did not eventuate.  Subsequent events led Mr Allen to believe that Mr Symons would lend him $49,000 out of the money to be advanced by Lex in August.

1. Sometime after Mr Allen met Mr Gibbs, he was introduced to Mr Cook.  Together they became involved in a development project at Homebush in Sydney.  That project was unconnected with PVM.  Subsequently the other directors of PVM were introduced to Mr Allen.  From conversation he became aware that PVM was looking at being involved in the Ingleburn project.  However it seems he was not involved as a solicitor prior to 8 August 1997. 

1. PVM’s normal solicitors were a firm called Rosenblums.  They had been retained in respect of the acquisition of the Tamworth land.  On 1 July 1997 they merged into the firm Blake Dawson Waldron.  That firm was engaged by PVM in relation to the guarantee to be given by it in respect of the loan by Lex to Elitact.  It was not retained by PVM in respect of its purchase of lot 1 of the Ingleburn land,[12] nor in respect of the proposed lease to Paragon or Leigh Mardon. 

   [12]Minter Ellison had been appointed for that purpose – see para [17].

1. On 8 August, Mr Allen met Mr Gibbs at his office in Martin Place, Sydney.  Mr Gibbs asked him to send (as a solicitor) a letter to Paul Triscott and Associates which Mr Gibbs had drafted.  He falsely assured Mr Allen that he was authorised by PVM to give instructions for the letter, and signed a statement saying so.  The letter  related to PVM’s fund-raising, though it contained a passing reference to the Ingleburn project.  Practically everything in it was either untrue or distorted.  Mr Allen recklessly accepted the instructions and sent the letter on his firm’s letterhead.  He sent no copy of it to PVM.  It reassured Mr Triscott as to PVM’s capacity to support its guarantee.

1. I have already referred[13] to Mr White’s conversation with Mr Triscott on 8 August, when Mr White said that PVM’s willingness to guarantee Elitact was subject to its own solicitors being satisfied on the issue of the lease.  In fact, PVM never appointed solicitors to consider the lease.  In his evidence before me, Mr White attempted to suggest that he was made aware of advice in relation to the lease which was being given by Allen Allen & Hemsley to Elitact, and that this advice satisfied him for the purpose referred to in the conversation.  That evidence is completely uncorroborated – indeed, there is no evidence that Allen Allen & Hemsley were ever acting for Elitact.  I formed the impression that Mr White’s suggestion was formulated on the spur of the moment, as he was giving evidence. 

   [13]Para [35].

1. By 8 August, Mr White had taken over the handling of the matter on behalf of PVM.  He felt that Blake Dawson Waldron would not be capable of giving timely advice in relation to the guarantee.  I infer that he discussed whom to appoint with Mr Gibbs, who recommended Mr Allen.  On or about Monday 11 August, Mr White and Mr Gibbs went to the offices of Allen Allen and Hemsley and met Mr Allen.  When they explained to him the nature of the problem, he referred them to one of his partners, Ms Judy Mutton.  She delegated the matter to Mr Neil Pragnell, her assistant (as he was described in evidence).  She subsequently set out the terms of her retainer:

“1.        OUR ROLE

The work we are to do is:

(a)advise you on the extent of moneys guaranteed under a Deed of Charge and Deed of Guarantee provided by Lex Nominees Pty Limited;

(b)amend Deed of Guarantee and Deed of Charge to limit amount guaranteed;

(c)prepare a Put Option Agreement between Elitact Pty Limited Peel Valley Mushrooms Limited;

(d)prepare Power of Attorney by Elitact Pty Limited in favour of Peel Valley Mushrooms Limited; and

(e)consider and amend Tripartite Agreement between Peel Valley Mushrooms Limited, Elitact Pty Limited and Lex Nominees Pty Limited

The scope of the work may expand beyond this at your request but the estimate quoted below assumes it will not.”

Sydney: 11-14 August

1. Monday 11 August was a busy day for Mr Triscott.  Mr Gibbs was urging him to settle the advance that day and had supplied him with a list of Elitact’s creditors.  The list alarmed him.  I have already referred to two faxes sent by Mr Triscott to Mr White that day.  After Mr White failed to respond to the hints contained in those letters, Mr Triscott sent him a third fax.  He drew attention to the mounting claims being made against Elitact and to the inconsistency between the creditors’ list supplied by Mr Gibbs and the trading figures supplied by Elitact.  He attached a list of debts to the letter, totalling $5.755 million.   He said that two issues arose: first, whether Elitact would be able to deliver title and second, its general solvency position and capacity to function with this level of debt.  In bold type, Mr Triscott asked, “In the light of the above are you still willing to provide the guarantee of Elitact’s performance under the mortgage?”  The letter concluded with this paragraph:

“In the spirit of the understanding that we have (arising from PVM providing a guarantee of Elitact’s mortgage with Lex) we consider it encumbent upon us to provide PVM with as frank and full a picture of the borrower’s financial position as we can.  It also follows that the information exchanged between us be treated on a strictly private and confidential basis.  Please respect our wishes in that regard.  Our understanding is that the information only be the subject of formal discussions between board members and no other persons (Bill Gibbs would be therefore not be included in the discussions regarding Elitact’s financial affairs – there are other more obvious reasons why he should not be counselled on the matter anyway).”

That letter sounded a clear warning about Mr Gibbs.  Its tone reflected the jaundiced view of Mr Gibbs which Mr Triscott shared with Mr White - both felt him untrustworthy.

1. Despite pressure from Mr Gibbs for a settlement on 11 and then 12August, the transaction remained unresolved.  That, said Mr Triscott in evidence, was because things were not in place.

1. Although Mr White swore that he did not know Elitact was in default to Asia Pacific at the end of July 1997, I am satisfied that he and his co-directors must have discovered that fact very soon afterwards.  However, owing to an administrative bungle in Mr Cook’s office, Asia Pacific’s statutory demand did not come to the attention of the directors of PVM until about 12 August 1997.  When he became aware of that demand, Mr White did not take it straight to PVM’s usual solicitors (Rosenblums/Blake Dawson Waldron), nor to the solicitors acting on its behalf in relation to the proposed purchase of the land (Minter Ellison).  Rather, he discussed it with Mr Gibbs.  According to Mr White, Mr Gibbs said that he could ask John Allen whether he could do anything to help.  He said he told Mr Gibbs to talk to Mr Allen and “let me know”.  By then, Allen Allen and Hemsley had already been engaged by PVM for the purposes described above.

1. Settlement was arranged for 15 August 1997.  On 14 August, Mr Triscott (who had gone to Sydney for the settlement) notified Mr Cass that he wanted confirmation from Asia Pacific that the charge (given to it by Elitact) had not crystallised and that in the event of any happening giving rise to crystallisation, Lex would be given notice.  He maintained his insistence on a guarantee from PVM and evidence that it could support the guarantee.  By then, only five days remained for compliance with the statutory demand.  It was apparent to Mr Triscott that the amounts owed to creditors in a position to frustrate the settlement exceeded the money being advanced.  His concern about PVM’s position is unsurprising.  But PVM and Elitact were determined that the deal should go ahead.  Mr Gibbs arranged for Mr Crossing and Mr White to attend on Mr Pragnell of Allen Allen and Hemsley to sign the necessary documents, which they did.[14]

   [14]Mr White had attended the offices of Allen Allen and Hemsley every day that week, presumably to give instructions about the documents.

1. By 14 August, the major obstacle to settlement of the loan from Lex was the existence of the statutory demand.  On that day, Mr Broadbent received a telephone call from a Mr John Le Serve, a solicitor acting for Elitact.  It is unnecessary to set out the whole conversation.  Mr Le Serve sought an extension of time for repayment of the debt and offered payment of $150,000 the following day.  Mr Broadbent indicated his exasperation with Mr Symons and said that unless $150,000 was paid by midday the following day, there would be no further discussions with him.

15 August 1997

1. On 15 August a meeting took place at the office of Mr Pragnell at Allen Allen and Hemsley.  Mr White said that those present, in addition to Mr Pragnell, were Mr Gibbs, Mr Triscott, himself, and “Elitact” (presumably Mr Symons).  Mr John Allen was not present.  Mr Triscott thought that Mr Symons was at Mr Cass’s office but agreed that he himself spent most of the day at Allen Allen and Hemsley.  In addition to documentation, there was discussion about settlement figures.  Mr Triscott wanted to know how the amount of the loan was required to be disbursed.  He made notes of what he was told.  PVM was to receive $100,000 (that was its fee for the guarantee).  Mr Gibbs was to receive $145,000.  “Planet” was to receive $100,000.  He also made a note which, I find, reads “Allen J. 40 K.”  That referred to a requirement to draw a cheque in favour of Mr John Allen for $40,000.  There were other figures and names to which it is unnecessary to refer now.

1. What was behind the reference to “Planet”?  That morning Mr Gibbs called on Mr Allen.  According to Mr Allen, he said words to this effect:

“Peel Valley Mushrooms have a problem in connection with the Ingleburn property.  Elitact financed the purchase of that property through a loan from a company called Asia Pacific.  Elitact is in default under that loan and is in the process of refinancing the property.  Peel Valley Mushrooms has given a guarantee to Asia Pacific and has been served with a statutory demand.  It’s vital to the refinancing that the statutory demand be sorted out.  It expires shortly.  Peel Valley Mushrooms has asked me to work with you to resolve the problem.  They are very concerned about the notice.”

1. Mr Allen said that Mr Gibbs later came to his office and they worked together to finalise the terms of an offer from PVM to Asia Pacific.  The offer was embodied in a fax to be sent to Mr Brown.  According to Mr Allen, before it was sent, he had a conversation with Mr Gibbs to the following effect:

“I said:‘Do you have the authority to be able to run this?’

He said:‘Yes, I’ve been asked by Peel Valley to come and talk to you about the solution to this problem.  You have received instructions regarding the Ingleburn property matter.  This is connected with that.  You have instructions to send the fax.’”

1. The fax was in these terms:

“We act for Peel Valley Mushrooms Limited who had a commercial relationship with a company called Ellitact Pty Limited.  We understand that Ellitact Pty Limited has a loan outstanding with Planet Securities secured by a guarantee from Peel Valley Mushrooms Limited.  We understand further that your clients have issued a statutory demand against Peel Valley Mushrooms Limited.
Without prejudice to our client’s position we are instructed to propose on their behalf a commercial settlement of that demand.
It is proposed as follows:

1.Payment of $100,000 today which payment shall be paid into your trust account.

2.We have instructions to prepare a second mortgage to secure $1,100,000 in favour of Peel Valley Mushrooms Limited from Ellitact Pty Limited over the property known as 81 Williamson Road, Ingleburn.  We are further instructed that there will  be a first mortgage over that property in the amount of $4,500,000.  In addition our clients are holding a valuation of that property in the amount of $6,475,000 with exchanged contracts to that value underpinning the valuation.  We are instructed to propose that such mortgage is available for assignment to Planet Securities.

In addition Peel Valley Mushrooms Limited has an irrevocable Power of Attorney from Ellitact Pty Limited to control the process of letting the existing premises and to put into effect a proposed subdivision, both of which are further underpinning that value.

The completion of this leas and subdivision application is a condition precedent to a further loan secured by a second mortgage to be undertaken by Ellitact Pty Limited over that property.  That loan will come from a financier called DMF, the funds from which will be used to pay out Planet Securities.

3.Those funds from DMF are expected in the next two weeks.

4.The statutory demand be withdrawn today and not be reissued within 21 days of the date hereof.

5.The existing charge over the assets and undertaking of Ellitact Pty Limited be continued only as a floating charge.

We would appreciate confirmation from your client promptly so that this can be put into effect and the funds forwarded to you today.

Please advise your trust account details.”

1. The authority of Mr Gibbs to give such instructions and of Mr Allen to send that fax were hotly contested during the trial.  Mr Gibbs was not called.  There is no clear evidence that he was authorised by either Mr Cook or Mr Crossing to engage Mr Allen. The evidence is circumstantial; and though considerable, is ambiguous.  On the other hand, Mr White denied that he authorised Mr Gibbs to engage Mr Allen in relation to the statutory demand.  There are also unsatisfactory features about Mr Allen’s evidence:  he never asked to see the statutory demand itself; he did not forward a copy of the fax to PVM; he did not explain why he charged no fee for his work; there was no explanation for why Mr Pragnell was not asked to deal with the matter, he being in daily contact with Mr White; and the powerful element of self-interest affected Mr Allen.  There is uncontradicted evidence that Mr Gibbs was fabricating documents to deceive Mr Triscott.  For Asia Pacific, Mr Bowden argued that I should infer that Mr Gibbs had authority in relation to the statutory demand from his fax to Mr Brown sent on 6 August and dated 1 August and from a letter from Schrader and Associates dated 13 August marked “your ref: John Allen”.  He argued that Mr Gibbs may well have learned of the existence of the statutory demand for Mr White and (by implication) been given authority to deal with it.  I have found that Mr Gibbs’ fax referred not to the statutory demand but to the letter of demand sent by Mr Brown on 28 July; but even if I am wrong about this, I do not think the inference contended for should be drawn.  No one from Schrader and Associates was called to explain the reference to Mr Allen in their letter.  There are other ways in which Mr Gibbs might have learned of the demand, or he might have guessed its existence. In all the circumstances, I am not satisfied that the fax was sent with the authority of PVM.

1. After Mr Brown received that fax, he spoke to Mr Allen by phone.  Mr Allen told Mr Brown that arrangements were being entered into for the refinancing of the property and that as a result $100,000 would be available to be paid to Asia Pacific on account of the outstanding debt owed by PVM.  He inquired whether Asia Pacific would be prepared to withdraw the statutory demand in consideration of that payment.  Mr Brown told him that Asia Pacific would not be prepared to withdraw the statutory demand but would be prepared to withhold further action with respect to winding up PVM for 14 days if that payment were received that day.  He confirmed that advice by a letter faxed to Mr Allen in which he warned that if payment in full were not received within 14 days his client would be at liberty immediately to file a winding up application.  Mr Gibbs told Mr White that Asia Pacific was to receive $100,000 from the settlement and that it would agree to the transaction and withhold any further action on the statutory demand until 3 September.  Mr White thought that this happened on 13 or 14 August; but is more likely it occurred after Mr Allen received Mr Brown’s fax on 15 August.  Mr White was grateful that the extension had been arranged.

1. Settlement of the transaction was set for 3 pm at the offices of the solicitors for the first mortgagee, Permanent.  Mr Cass, Mr Symons and Mr Gibbs attended on behalf of Elitact; Mr Moffat and Mr Triscott were there on behalf of Lex; a finance broker named Tony Gee represented A & J Financial Services, which had a claim for $100,000; Swaab Attorneys attended on behalf of Torosan; but apparently nobody attended on behalf of Asia Pacific or PVM.  Mr Cass had made no arrangements to discharge the claim of Torosan, whose caveat remained on the title.  There were no arrangements in relation to Mr Gee’s claim.  By four o’clock it was apparent that unless these problems were resolved, settlement would not take place.  At Mr Gibbs’ suggestion, Mr Symons, Mr Triscott and Mr Gee returned to Mr Gibbs’ office where Mr Allen and Mr White joined them.

1. The principal document governing relations between Elitact, PVM and Lex was a tripartite agreement executed earlier that day by those three parties.  Clause 5 of that agreement provided, “Lex must not advance any part of the loan amount without the written approval of PVM which consent must not unreasonably be withheld”.  Mr White considered that this clause required PVM’s approval to all disbursements from the Lex advance.  He had earlier seen and approved a list of disbursements.  I infer that the list he saw was the one written out by Mr Triscott.  It contained no reference to Mr Gee’s claim.  Mr Allen now drafted an agreement to deal with that claim.  Mr White signed it, giving PVM’s approval to it.  Mr Allen also telephoned Mr Brown and secured his agreement that the terms of the offer made earlier in the day would be regarded as satisfied if he (Mr Allen) were to receive a cheque for $100,000 for deposit into Mr Brown’s trust account on the opening of business the following Monday.  He confirmed this agreement by a fax sent to Mr Brown from the office of Allen Allen & Hemsley at 4:55 pm.

1. In the meantime, Swaab Attorneys, the solicitors for Torosan, had been drafting a deed to deal with their clients’ claim.  By that deed, PVM purchased the debt of $346,977 which Torosan claimed against Elitact at its full face value.  $100,000 was payable forthwith and the balance, plus $20,000 for additional interest, after 28 days.  In return, Torosan agreed to lift its caveat to permit the registration of a mortgage in favour of Lex and to defer its priority in favour of that company. 

1. At about 7 pm the settlement meeting reconvened.  Mr White was desperate for the settlement to proceed.  He had earlier agreed with Mr Cook that he should do whatever was necessary to ensure this, as it was imperative for PVM that the refinancing go through.  He signed the Torosan agreement and applied PVM’s seal to it.  He said that he then and there authorised Mr Gibbs to co-sign the document with the intention that it have legal force, and this Mr Gibbs did.  At that time Mr White and his board believed Elitact was likely to obtain further finance from a company called DMF Securities Ltd (“DMF”) to pay out Asia Pacific within 14 days.[15]

   [15]Compare para [53].

1. The settlement then proceeded.  Mr Allen, who had joined the meeting, remained outside the settlement room, hoping to receive his promised loan from Mr Symons out of the proceeds of the settlement.  His hopes were dashed.  However PVM received its fee of $100,000 - the cheque was given to Mr Gibbs who promised to pass it on to Mr Cook.  Permanent’s registered first mortgage was paid out for $3,161,809 and a fresh mortgage was granted to Lex to secure the advance.  All parties intended that it should become a registered first mortgagee, and it did.  $4.2 million was appropriated that day and a subsequent drawdown of $300,000 brought the total secured to the intended $4.5 million.  Asia Pacific was paid $100,000, the amount agreed between Mr Brown and Mr Allen and shown on the disbursement list approved by Mr White.

Subsequent events

1. On 20 August Mr Brown wrote to Mr Allen acknowledging receipt of the $100,000, confirming Asia Pacific’s agreement to withhold filing any application for winding up PVM until 3 September to allow payment of the debt, and setting out a calculation of the amount which would be payable on the date.  Mr Allen forwarded a copy of that letter to Mr Gibbs and Mr Cook the following day.

1. Not surprisingly, the funding from DMF which the board of PVM hoped would be used by Elitact to pay out Asia Pacific was not forthcoming.  It is not clear when the directors of PVM realised that this would be the position.  By 26 August, PVM’s position was again becoming perilous.  The extension of time granted by Asia Pacific had only eight days to run.  Asia Pacific was threatening to commence winding up proceedings when the extension expired.  Then Mr Gibbs dropped a bombshell: through Mr Allen, he sent PVM a takeover offer.  It was addressed to the shareholders care of Mr Cook and offered to acquire 100 percent of the issued ordinary shareholding in PVM.  It was really an offer in principle and it did not conform with the provisions of the Corporations Law.  However it was enough to infuriate Mr Cook.  A meeting took place involving at least Mr Cook, Mr Allen and Mr Gibbs.  During that meeting, Mr Cook said to Mr Allen, “Please understand that Bill Gibbs no longer acts for PVM and in future all instructions must come in writing from PVM”.  Mr Cook rebuffed Mr Gibbs’ offer, but he continued to use Mr Allen’s services in relation to the Homebush project.

1. To deal with the problem of the statutory demand, PVM consulted new solicitors, Aitken McLachlan and Thorpe.  On 1 September Mr Thorpe began discussions with Mr Brown with a view to inducing Asia Pacific to withhold further action.  In the course of those conversations, probably on 2 September, Mr Brown told Mr Thorpe that the bill of mortgage executed by Elitact in favour of Asia Pacific had never been received from Mr Cass.  He said that he held a facsimile copy which could form the basis of a caveat over the property and that upon payment of the debt in full by PVM, the mortgage could be transferred to it.  In response, PVM adopted an open position and a without prejudice position.  In open letters, various technical criticisms of the statutory demand were made.  In without prejudice letters, proposals for extensions of time and payment of interest were made.  No complaint was made regarding the nonregistration of the mortgage, nor was the authority of Mr Allen to send the letter of 15 August disavowed.  Mr Cook and Mr White claimed that they did not know of the nonregistration of the mortgage. It was put to Mr Brown that his version of his conversation with Mr Thorpe was wrong, a proposition he denied. However Mr Thorpe was not called as a witness and Mr Brown’s letter of 8 September, where he asked Mr Thorpe to act as his agent for the purposes of lodging a caveat, would have made no sense to Mr Thorpe had he been unaware of the nonregistration of the mortgage.  I am satisfied that PVM knew of the nonregistration of the mortgage by early September 1997 at the latest.  It was not a matter of any importance to it.  Its directors would not have acted any differently even if they had known on 15 August.

1. The letter of 8 September suggests that Mr Thorpe had orally agreed to act as agent for Mr Brown for the purposes of lodgement of the caveat.  Whether he did so agree was not explicitly addressed in the evidence.  Whatever the position, Mr Thorpe did not in fact lodge a caveat, and Mr Brown engaged other agents to do so the following month.

1. Reasonably cordial relationships were maintained between Asia Pacific and PVM for the remainder of 1997.  In broad terms PVM paid interest on the outstanding debt and Asia Pacific extended time for payment by PVM.  PVM was involved in negotiations to refinance Elitact and kept Asia Pacific informed of progress.  Officers of PVM continued to reassure officers of Asia Pacific that funding was imminent and that this would enable the debt to be paid.  The last such contact was a telephone call from Mr Crossing to an officer of Asia Pacific on 17 February 1998.  A week later, there was a sudden change.  Mr Thorpe wrote to Mr Brown:

“We refer to our telephone conversation with you earlier today.

Your client has for some time been seeking the recovery from our client, as guarantor, of the repayment of amounts advanced by your client to Elitact Pty Limited (“Elitact”) pursuant to the Deed of Loan dated 13 May 1997 and the Deed of Variation of Loan Agreement dated 27 June 1997 (“the Varied Loan Agreement”).

It is clear from the Varied Loan Agreement that there is a condition that the monies advanced be secured by a second mortgage over Elitact’s property at Ingleburn as described in item 8(b) in the Schedule (“the Security”) and accordingly, that your client was obliged to obtain and register the Security.  Further, or in the alternative, your client was under an equitable duty to perfect by way of registration the Security in circumstances where it was obtained from the debtor to secure a guaranteed debt.

We are instructed that your client did not obtain and/or register the Security.  Your client’s failure to carry out these steps was a breach of the condition in the Varied Loan Agreement as referred to above and/or a breach of its equitable duty to our client as also referred to above.

In the event, our client is discharged completely from all liability to your client pursuant to the Varied Loan Agreement.  We refer you to Chapter 8 of the third edition of the Modern Contract of Guarantee by O’Donovan & Phillips.

It follows that our client does not intend to make any further payment to your client.  Indeed, we have received instructions to commence proceedings against your client for the recovery of amounts paid to your client to date.  In this respect, we ask that you inform us whether you have instructions to accept service of process.”

Thereafter, Asia Pacific executed a mortgage over the Ingleburn land in the name of Elitact in the exercise of the power of attorney contained in the loan agreement.  That mortgage was registered on 10 July 1998.

The first ground of defence

1. PVM has not challenged the basic elements of Asia Pacific’s case.  It defends itself first by asserting that it was a condition of the deed of variation of loan executed by it on 27 June 1997 that the security held by Asia Pacific in respect of the original loan (the mortgage over the Tamworth land given by PVM) be replaced by a registered second ranking mortgage over the Ingleburn land.  That condition is pleaded  as an express or alternatively an implied condition.  A further condition is pleaded, that Asia Pacific obtain the registered mortgage immediately upon or within a reasonable time after advancing the additional funds on 27 June 1997.  It is pleaded that a reasonable time expired before 25 July, or on 15 August at the latest.  Finally, it is pleaded that Asia Pacific was in “fundamental breach” of the condition “ so that any liability of PVM to [Asia Pacific] pursuant to the Deed of Variation of Loan Agreement and Deed of Loan is now absolutely discharged”.

1. It is plain that the deed of variation did not contain an express condition in the terms alleged by PVM.  A number of interesting arguments were addressed to me from both sides on the issue of whether such a term should be implied, either from the wording of the agreement or from the surrounding circumstances or both.  It is unnecessary to determine that question.  For the purposes of this case, I am prepared to assume that such a condition should be implied and that there should also be implied a condition that Asia Pacific obtain (or do everything necessary on its part to obtain) a registered mortgage within a reasonable time.  It was breach of the latter condition which PVM submitted entitled it to terminate the loan agreement by its solicitors’ letter of 24 February 1998.[16]

   [16]Although PVM's pleading seems to assert an automatic termination of the agreement, automatic termination was not relied on in argument.

1. The first question is whether breach of the implied clause entitled PVM to terminate the deed.  The clause prescribed a time for Asia Pacific to perform an action.  PVM’s complaint is not that Asia Pacific did not perform its obligation, but that it did not do so within the time prescribed.  In such cases, the test for determining whether the injured party is entitled to terminate has traditionally been expressed by asking whether time was of the essence of the clause. In the present case, that is essentially a question of construction.[17]  If the answer to that question is in the affirmative, it is necessary to consider whether Asia Pacific breached the clause and if so whether the right to terminate remained alive in February 1998.

   [17]There is no question of PVM having given notice to perform.

1. The most obvious argument against time being of the essence of the implied clause derives from the absence of a precise date for performance in the clause.  PVM did not argue that a clause should be implied requiring registration by a particular date.  It is difficult to see how it could have done so. The clause contended for was one which allowed a reasonable time.  No authority was cited in which such a clause has been held to entitle a party to terminate a contract without first giving notice making time of the essence.  The question was discussed in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd.[18] Gaudron J. questioned the parties’ assumption in that case that the reasonable time implied for the delivery of a registerable lease was not essential. However there seems to be considerable inconsistency between Her Honour’s view and those expressed in the same case by Brennan J. and Deane and Dawson JJ,[19] and even Gaudron J. recognised the force of what was said by Mason J. in Perri v Coolangatta Investments Pty Ltd:[20]

“There is a natural reluctance on the part of courts to classify a provision which looks to the happening of an event within a reasonable time as one which makes time of the essence, more particularly when that time is implied and is not expressed.  The reason is of course that it is undesirable that the rights of the parties should rest definitively and conclusively on the expiration of a reasonable time, a time notoriously difficult to predict.”

[18](1989) 166 CLR 623.

[19]See pages 665-6 per Gaudron J. and compare pages 641-5 per Brennan J. and pages 651-2 per Deane and Dawson JJ.  See also Louinder v Leis (1982) 149 CLR 509 at p 533 per Brennan J.

[20](1982) 149 CLR 537 at pp 554-5.

1. The strongest factor in support of PVM’s argument is the risk to which it as guarantor was exposed while the mortgage remained unregistered.  However it must be remembered that the mortgage was intended to be a second mortgage.  The main risk was therefore a risk of an intervening mortgagee becoming registered rather than a risk of the mortgagor selling the land without the second mortgagee’s knowledge. At all material times there was a registered first mortgage and the first mortgagee presumably held the title deeds.  Moreover, the mortgagor (Elitact) and PVM were not exactly strangers to each other.  On the other hand, there was relatively little contact between Asia Pacific and PVM during the time leading up to the execution of the deed of variation, and what contact there was does nothing to support the implication of the essentiality of time for registration.  In my judgment, even if it is theoretically possible for a clause stipulating a reasonable time for performance to be of the essence, the clause which PVM seeks to have implied in the present case is not such a one.

1. It follows that PVM’s purported termination of the loan agreement was ineffective.  It is unnecessary to consider what was a reasonable time in the circumstances; whether Asia Pacific’s conduct would have amounted to breach of such an implied term; and whether, if so, PVM subsequently elected to affirm the deed.

The second ground of defence

1. In the alternative, PVM submitted that as guarantor, it was entitled to be subrogated to the creditor’s mortgage; that Asia Pacific owed it an equitable duty to take reasonable care that the benefit of the mortgage should not be lost; that Asia Pacific breached that duty by failing to arrange registration of the mortgage within a reasonable time after 27 June 1997 and failing to lodge a caveat when it became aware of nonregistration; that by reason of that breach Elitact was armed with the ability to borrow further funds on the security of the property which it did (from Lex);  that in consequence the value of the mortgage was so diminished as to render PVM’s rights of subrogation worthless; and consequently PVM’s liability was absolutely discharged.

1. The doctrine relied upon by PVM was described by Dixon J. in the following terms: 

“If the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained, completed, protected, maintained or preserved, any failure in the performance of the condition operates to discharge the surety and the discharge is complete.  But otherwise the surety can complain only if the creditor sacrifices or impairs a security, or by his neglect or default allows it to be lost or diminished, and in that case the surety is entitled in equity to be credited with the deficiency in reduction of his liability.”[21]

[21]Williams v Frayne (1937) 58 CLR 710 at p 738; see also Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at p 675.

1. Having regard to the facts found above, there are at least two major obstacles in the path of this submission.  First, PVM, through Mr White, was not only aware that Elitact was obtaining refinancing from Lex, it was doing everything in its power to ensure that the refinancing transaction went through.  It may be that on 15 August 1997, none of the directors of PVM was aware that no second mortgage had been registered.  But that can make no difference.  PVM knowingly co­­-operated with Elitact to provide Lex with a registered first mortgage securing $4.5 million and to pay out the existing registered first mortgage of $3.1 million.  It would have acted no differently even if by then Asia Pacific had registered a second mortgage or lodged a caveat.  Nor would it have acted differently had it known that there was no registered second mortgage.  It cannot now complain of the increase in the amount secured by the first mortgage or argue that the value of its right of subrogation has been diminished by this amount.

1. Second, it has not been demonstrated that the right of subrogation to a registered second mortgage would have been worth anything, even if the refinancing had not taken place.  The value of the right depended upon the value of a registered second mortgage which in turn depended upon the value of the land.  No direct evidence of that value was given on oath before me, despite the fact that PVM did in fact call a valuer.

1. That valuer was Mr ten Kate.  For the purposes of a prospectus, he had estimated a market valuation of the proposed lot 1 in the sum of $3.3 million as at 4May 1998.  He thought the proposed lot 1 would have been worth about the same in August 1997.  However his report is hedged with many conditions and assumptions which he called “major limiting assumptions”.  Many of these were not proved in evidence.  In particular, Mr ten Kate assumed that the proposed subdivision was in place and that a lease for ten years was assured.  These were critical assumptions, since the valuation method was capitalisation of net income.  In fact, at the date of valuation no plan of subdivision had been registered.  It was not even proved before me that local authority approval for the subdivision had been obtained.  There was no evidence of likely conditions of approval or of the cost or difficulty involved in implementing such conditions.  As to the lease, Mr ten Kate assumed that it commenced in December 1997; that the lessee would be ABN Australasia Ltd, a public company, not American Banknote Australasia Pty Ltd, the company which was actually the party to the agreement for lease; and that either the lessee would be guaranteed by the parent American Banknote Corporation or a bank guarantee for 12 months gross rent would be in place.  None of these assumptions was justified in evidence.[22]

   [22]It should be noted that the agreement for lease was signed on behalf of Elitact by Mr White!

1. There were several other reasons why Mr ten Kate’s evidence cannot be used to establish the value of the right of subrogation to a registered second mortgage of the whole of the Ingleburn land.  First, a value estimated for the purposes of a prospectus is unlikely to reflect the amount which would be realised on a sale by a second mortgagee.  Second, Mr ten Kate expressly did not take into account any difficulties which might arise as a result of encumbrances on the title.  As of August 1997 there were at least two other groups claiming interests in the land:  Torosan and A and J Financial Services.  Third, the rights and obligations under the agreement for lease were expressly made personal and unassignable, and, therefore, of value only to Elitact; but no account was taken of this fact in the valuation.  Finally, the agreement for lease expressly recorded that the consent of the mortgagee (Lex) had not been given to the proposed lease.  No account was taken of this fact.

1. For reasons which are already apparent, I do not regard the Herron Todd White valuation as in any way reliable.

1. The evidence is insufficient in my judgment to support a conclusion that the right of subrogation would have been worth any thing, even if there had been a caveat and a registered second mortgage and the refinancing from Lex had not proceeded.

The third ground of defence

1. Last and (I hope I may say without disrespect to Mr Stanton who made the submission) least, PVM submitted that upon its proper construction, the amended loan agreement revealed an intention that PVM was not to be liable unless a second mortgage was obtained from Elitact; and that in fact no mortgage was obtained from Elitact.  This argument was based upon the decision of Powell J. in Marston v Charles H. Griffith & Co Pty Ltd.[23]  It may have been encouraged by some queries from the bench.  If so, it suffers the usual disabilities of arguments so inspired.

   [23](1985) 3 NSWLR 294.

1. The first leg of the argument raises a question of construction.  Even assuming that one can imply a term in favour of PVM that the second mortgage be obtained, it is not in my judgment possible to construe PVM’s obligation as dependent upon performance of that term.  The submission fails at this point.

1. The second leg depends upon the view that the executed mortgage a copy of which was faxed by Mr Cass to Mr Brown was ineffective as a mortgage because it did not comply with s 56(1) of the Real Property Act 1900 (NSW). That section requires a mortgage to be “in the approved form”. It was argued that the mortgage executed by Elitact was not in the approved form because section (D) had been left blank. By that section, Elitact covenanted “that the provisions set out in {Annexure ........... hereto/Memorandum No. .................... filed in the Land Titles Office are incorporated in this mortgage”. In the alternative, it was argued that because of this omission, the mortgage failed to identify any event upon which it was redeemable. It was argued that leaving such an essential element of the mortgage blank meant that it was no mortgage at all, relying on In re Vince; Curator of Intestate Estates v Kile.[24]

   [24](1911) 7 Tas L R 31.

1. On 27 June 1997, the day the form of mortgage was executed by Elitact, both that company and PVM executed what was described as an “authority to complete”.[25]  By that authority, they authorised Asia Pacific and its solicitors “to date and/or complete all mortgages and other documents relating to this transaction by filling in all blanks, and by making any necessary alterations to enable any documentation to be duly registered”.  In my judgment, that authority is wide enough to have enabled Asia Pacific to complete an annexure identifying the performance by Elitact of its obligations under the amended loan agreement as the contingency secured by the mortgage.  In addition, the power of attorney granted by Elitact to Asia Pacific in clause 37 of the original loan agreement is also wide enough to authorise that action.  There is no doubt that this was the contingency for redemption intended by the parties.  Even in the absence of the authority and the power, Asia Pacific would probably have been entitled to have the mortgage document rectified.  The document was a valid mortgage.  For these reasons, the second leg of the submission also fails.[26]

Conclusion

[25]See paras [23]-[24].

[26]It is unnecessary to consider whether the second leg also fails because Asia Pacific eventually did register a second mortgage.

1. PVM has no defence to Asia Pacific’s claim.  It is unnecessary to deal with the various arguments relating to ratification, to estoppel and to waiver and acquiescence raised by Asia Pacific in its reply.  The counterclaim must also fail, as it depends on the arguments discussed above.

1. There must be judgment for Asia Pacific on both the claim and the counterclaim.  I shall hear the parties on the calculation of the precise amount of the judgment and on the question of costs.