Bailey, R.D. v Manos, J

Re: ROBERT DEAN BAILEY and OTHERS
And: JOHN MANOS; CHRISTINE MANOS; ANTHOULA MANOS; MANOS HOLDINGS PTY LTD and
JOHN MANOS INVESTMENTS PTY LTD
No. S G6 of 1992
FED No. 251
Construction of Deeds - Stamp Duty

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
Von Doussa J.(1)

CATCHWORDS

Construction of Deeds - clause limiting liability of a guarantor to a specified sum - similar limitation clause in mortgage debentures granted to the creditor by the principal debtors - whether on the proper construction of the deeds payment of a sum equal to the specified sum by the debtors discharged the guarantor - whether a personal guarantee was in respect of the past indebtedness of the principal debtors or extended to future debts becoming due to the creditor - manner of apportionment of general payments between interest, a debt carrying interest, and other debts, considered

Stamp Duty - admission of debenture deed into evidence - whether sufficiently stamped - sufficiency of stamping depending on the construction of the deed - upon holding that on its proper construction the deed was insufficiently stamped, proceedings stood over until deed duly stamped

Stamp Duty Act 1923 (SA), ss.21, 22, 77

Judiciary Act 1903 (Cwth), s.79

HEARING

ADELAIDE

#DATE 6:5:1992

Counsel for the applicants : Dr R J Baxter

Solicitor for the applicants : Finlaysons

Counsel for the respondents : Mr P C Heinrich

Solicitor for the respondents : Baker O'Loughlin

ORDER

1. Pursuant to O29, r2 the following two issues be decided as

separate questions:

Question 1. Whether, upon the true construction of the debenture granted by Manos Holdings Pty Ltd to the applicants, that company is presently liable to pay any money to the applicants.

Question 2. Whether, upon the true construction of the guarantee given by John Manos to the applicants, he is presently liable to pay any money to the applicants.

2. The decision of question 1 be stood over for further consideration

on a date to be fixed.

3. Question 2 be answered : No.

4. The question of costs be reserved for further consideration.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The Court is asked by all parties to these proceedings to determine as separate issues two questions which concern the construction of certain deeds. For this purpose the parties have agreed relevant facts and documents. The two questions raise discrete issues which lend themselves to determination as separate issues. If the points of construction are decided against the applicants the decision will finally determine the litigation. If one or both of the questions formulated by the parties are decided in favour of the applicants the remaining questions in the proceedings concern only the amount of the indebtedness of the first or the fourth respondent to the applicants. The parties have indicated that the extent of the indebtedness is a matter for calculation upon which agreement is likely. In these circumstances it is appropriate that the Court formally order that the following two issues be decided as separate questions pursuant to Federal Court Rules O29, r2:

1. Whether, upon the true construction of the debenture granted by Manos Holdings Pty Ltd to the applicants, that company is presently liable to pay any money to the applicants.

2. Whether, upon the true construction of the guarantee given by John Manos to the applicants, he is presently liable to pay any money to the applicants.

I set out the first 21 paragraphs of the Statement of Agreed Facts tendered for the purpose of resolving these questions, supplemented by additional information that emerged as common ground during the argument (shown in italics).

1.0 At all material times on and after 1 January 1976 the following companies traded in partnership together as Manos Poultry Industries ("MPI"):-

(The six partner companies are then identified by name) 2.0 MPI entered into contracts ("broiler contracts") whereby other persons ("Growers") raised poultry for MPI. The mode of organisation of the Growers varied: some were partnerships; some were single individuals; and some were incorporated. In these Facts the party (or parties) other than MPI to a single broiler contract will be referred to as a "Grower". 3.0 From time to time each Grower received, pursuant to its broiler contract, day old chicks, raised them and redelivered the grown birds to MPI for processing. Upon such redelivery, the Grower was entitled to be paid under its broiler contract for its services in raising the poultry.

4.0 By mid-1988 MPI was substantially in arrears in its payments to the Growers of sums due under the broiler contracts. The debt then due to the Secured Growers (who are defined in paragraph 5.0 below) was of the order of $2,000,000.00. Reference in these facts to a debt due by MPI to Growers is to a debt due under the broiler contracts.

5.0 Following negotiations between the Growers and MPI during the later part of 1988 certain of the Growers agreed on 14 December 1988 to forbear from demanding immediate payment of the debt then due by MPI to them in consideration of:-

5.1 MPI entering into an agreement for repayment of the outstanding debt (this agreement has been referred to by the parties in argument as the "Loan Agreement", and is similarly referred to later in the Agreed Facts. I shall adopt that description although in the deeds which fall for construction it is referred to simply as "the said Agreement").

5.2 Each of the partner companies of MPI granting a second ranking mortgage debenture (containing a guarantee) (each debenture and guarantee being dated 14 December 1988) over their assets and the assets of the partnership. (Those Growers who entered into this agreement will be called "Secured Growers".)

6.0 As further security for the indebtedness of MPI to the Secured Growers on 14 December 1988 Manos Holdings Pty Ltd ("Manos Holdings") granted a second ranking mortgage debenture (containing a guarantee) dated 14 December 1988 over its assets in favour of the Secured Growers. (I shall refer to this deed as the Manos Holdings debenture).

7.0 Also on 14 December 1988, John Manos himself guaranteed the payment of certain moneys then due and owing by MPI, and to become due and owing, under the broiler contracts to the Secured Growers. (This guarantee is contained in a Deed of Guarantee executed by John Manos and incorrectly dated 14 November 1988. I shall refer to this deed as the "John Manos guarantee"). 8.0 On 14 December 1988 MPI was indebted to the Secured Growers in the sum of $2,015,000.00.

9.0 During the period between 14 December 1988 and 10 December 1989, the Secured Growers continued to grow poultry pursuant to the broiler contracts and MPI from time to time paid to the Secured Growers some of the sums then due under broiler contracts. 10.0 As at 9 November 1989, the total debt due by MPI to the Secured Growers was $2,524,889.61.

11.0 The amount of $2,524,889.61 referred to in paragraph 10 was made up as follows:-

11.1 $2,028,009.00 being the balance of the Principal Sum (as defined in the Loan Agreement of 14 December 1988) and interest accrued thereon;

11.2 $496,880.61 being the unpaid balance of amounts which became due as a result of chickens grown by the Growers under broiler contracts during 1989. (In argument the parties said there is now some doubt about the accuracy of the calculation leading to this figure, but for present purposes nothing turns on any inaccuracy in this figure). 12.0 On 10 November 1989 pursuant to the debentures referred to above Mr RAF England and Mr BJ Carter were appointed Receivers and Managers on behalf of the Secured Growers of the assets of each of the partner companies of MPI and Manos Holdings. (The Receivers and Managers were appointed by the Secured Growers). 13.0 A separate appointment of Messrs England and Carter as Receivers and Managers of the assets of the partner companies of MPI was made by the State Bank of South Australia pursuant to powers contained in debentures given by the companies in favour of that Bank, such debentures ranking in priority to those in favour of the Secured Growers.

14.0 By order of a Master made on 16 November 1989 Messrs England and Carter were appointed Receivers and Managers of the assets of MPI. (This appointment was apparently made under debentures given by the partner companies of MPI to the State Bank of South Australia. On 14 March 1990 each of the partner companies was placed in liquidation).

15.0 On 23 October 1990 Justice Perry ordered the debentures referred to in paragraph 4.2 (sic - paragraph 5.2) to be rectified). 16.0 An appeal by MPI against the order of Perry J was instituted and an interlocutory injunction restraining the Receivers and Managers of MPI from paying any sums to the Secured Growers pursuant to the debentures described in paragraph 5.2 pending the termination of the appeal was granted by Millhouse J on 10 December 1990. 17.0 The appeal was dismissed by the Full Court on 5 April 1991 and, on that date, the total debt due by MPI to the Secured Growers exceeded $3,000,000.00.

18.0 Each of the mortgage debentures referred to in paragraphs 5 and 6 contained a clause in the following terms:- That notwithstanding anything hereinbefore contained the maximum amount of the liability of the Mortgagor to the Mortgagee at any time hereunder shall not exceed the sum of $3,000,000.00 and such sum shall constitute the "specified maximum amount" for the purposes of paragraph 3 of Schedule 5 to the Companies (South Australia) Code. 19.0 On the 19th day of April 1991 pursuant to the order of Master Bowen Pain made (in the Supreme Court of South Australia) on 16 April 1991 the sum of $3M was paid to the Growers out of the assets of MPI.

20.0 Immediately after payment to the Secured Growers referred to in paragraph 19:-

20.1 there remained a debt due and owing by MPI to the Secured Growers;

20.2 MPI had assets (in the form of a credit in its bank account) exceeding $150,000.00 available for payment to secured creditors. (In argument counsel informed the Court that this sum has since been "paid out" but that it was not material to consider to whom it was paid by the Receivers and Managers).

21.0 By written Notices of Demand dated 5 September 1991, the Secured Growers demanded that:-

(a) Manos Holdings (Receivers and Managers Appointed) pay the Secured Growers the sum of $365,963.86 plus interest;

(b) John Manos pay the Secured Growers the sum of $365,963.86 plus interest.

(It was alleged that the sum demanded equalled the difference between the total debt due to MPI to the Secured Growers, and $3,000,000.00).

The balance of the Agreed Facts record that in January 1992 agreement was reached between the Secured Growers, John Manos and two other members of his family, the State Bank of South Australia, and the Receivers and Managers, covering numerous issues concerning the affairs of the six partner companies of MPI, Manos Holdings, John Manos Investments Pty Ltd (Receivers and Managers Appointed) ("John Manos Investments") and Manos Storage Pty Ltd (Receivers and Managers Appointed) ("Manos Storage"). John Manos and the two members of his family were the principal shareholders in the six partner companies in MPI, Manos Holdings, Manos Investments and Manos Storage. All nine companies are referred to as "the various Manos companies" in paragraph 23 of the Agreed Facts. Pursuant to one term of the agreement $400,000 was paid to a stakeholder from the assets of Manos Holdings to abide the outcome of these proceedings.
The applicants in these proceedings are the forty-four Secured Growers. The respondents include Manos Holdings and John Manos.
A central part of the restructuring of the debts of MPI due to the Growers was the Loan Agreement: see Agreed Facts para 5.1. By the Loan Agreement the Growers who became parties to it granted a moratorium in respect of the debts then due to them. For an initial period of six months, interest only would be paid by MPI, and thereafter the "Principal Sum" and interest thereon was to be paid in 36 equal calendar monthly instalments. The "Principal Sum" was defined in the Loan Agreement as the amount of the indebtedness of MPI to each Grower set out in a schedule (referred to in this judgment as "the schedule of indebtedness"), being the then present indebtedness of MPI, "or the balance thereof from time to time outstanding". By clause 6 of the Loan Agreement the parties acknowledge that the Principal Sum and interest thereon are secured by the debentures granted by each of the six partner companies in MPI. It will be necessary to make further reference to the terms of the Loan Agreement when considering the second question to be decided.
The first question to be decided concerns the construction of the Manos Holdings debenture, and in particular clause 40. By way of background it is necessary to refer to the debentures granted by the partner companies in MPI to the Secured Growers.
In the proceedings in the Supreme Court of South Australia before Perry J, and then on appeal before the Full Court of South Australia, it was held that by their terms the debentures granted by each of the partner companies in MPI purported to charge only the assets of each individual company, whereas the common agreement between the partner companies and the Secured Growers was that the partner companies would charge the assets of the partnership. The order for rectification amended the terms of the debenture deeds to achieve this result.
In their original form, and as rectified, each debenture deed was in similar terms. Recital A identified the six partner companies in MPI. By the order for rectification an additional recital E was added. It reads:

"E. Each of the said companies referred to in recital A -

(i) (other than the Mortgagor) have this day executed deeds in substantially the same terms as this deed and to the same intent and effect with respect to their separate property and undertakings.

(ii) have agreed with the mortgagor to charge the assets and undertaking of the said partnership as further security in respect of the Moneys Hereby Secured."

The terms of certain covenants contained in the debenture deeds were amended and an additional covenant was added, which reads:

"1A This Deed is to be read as one with the deeds referred to in recital E (supra) executed by the other partners to the extent necessary to ensure that the said deeds and this Deed together operate to create a valid and effectual charge over the assets and undertaking of the said partnership, and so that when applied in relation to the said assets and undertaking of the said partnership, the word 'mortgagor' where appearing in this and the other said deeds shall, as well as having the meaning therein defined, shall (sic) be read and construed as meaning all of the said companies in partnership, and 'business' shall when so applied mean the business of the partnership."

Each of the debenture deeds contained an identical clause 40 in the terms set out in paragraph 18 of the Agreed Facts providing that "the maximum amount of the liability of the Mortgagor...hereunder" shall not exceed $3,000,000.00. The construction of these clauses before or after the debenture deeds were rectified was not an issue before the Supreme Court. However the probable consequence of the order for rectification is that these clauses, when each debenture is read as one with the other debentures granted by the partner companies in MPI, mean that the security thereby granted by the partner companies was not to exceed in aggregate the sum of $3,000,000.00. This consequence is implicit in the order of Deputy Master Bowen-Pain made on 16 April 1991.

The common shareholding of the various Manos companies including Manos Holdings and the six partner companies in MPI has already been referred to. The Manos Holdings debenture, and the John Manos guarantee were given on the same day as the Loan Agreement was executed and the debentures were granted by the partner companies. Recital A in the Manos Holdings debenture identifies the partner companies which carried on business as MPI, referred to thereafter in the deed together and separately as "the Debtor". Recital B states that the Debtor is indebted to the Secured Growers ("the Mortgagee") in amounts set out in the schedule of indebtedness "which said sum or the balance thereof from time to time outstanding by the Debtor to the Mortgagee is hereinafter called the "Principal Sum". Manos Holdings is defined as the Mortgagor. Recitals C and D read:

"C. The Mortgagee has at the request of the Mortgagor (which request is testified by the execution of this security by the Mortgagor) entered into an Agreement of even date herewith and made between the Mortgagee and the Debtor (which Agreement is hereinafter referred to as 'the said Agreement') in which the Mortgagee has agreed to forbear from demanding immediate repayment of the Principal Sum on the terms and conditions more particularly set out in the said Agreement.

D. The Mortgagee requires the further security in respect of the Moneys Hereby Secured of a registerable floating charge upon the undertaking and assets of the Mortgagor including inter alia its uncalled capital and called but unpaid capital upon the terms and conditions hereinafter appearing."

The expression "Moneys Hereby Secured" is defined in the Manos Holdings debenture in clause 1 of the covenants which reads:

"1. That the Mortgagor hereby guarantees the due and punctual payment by the Debtor to the Mortgagee of: 1.1 the Principal Sum now owing or payable or hereafter to become owing or payable to the Mortgagee by the Debtor together with all interest thereon under or by virtue of the Deeds of Acknowledgement and the said Agreement; and also

1.2 all moneys which may hereafter become due and owing by the Debtor to the Mortgagee pursuant to certain Broiler Growing Contracts ("the said contracts") made between the Debtor and any of the parties referred to in Schedule 1 and whether existing now or to be made in the future for the growing of chickens; all of which moneys are intended to be secured by these presents and which are hereinafter referred to as "the Moneys Hereby Secured" unless there is something in the subject or context inconsistent therewith."

The first covenant of each of the debentures granted by the partner companies in MPI is in identical terms to clause 1 of the Manos Holdings debenture. In every case the debenture was to secure both the existing indebtedness of MPI and future indebtedness which might arise in respect of services rendered thereafter by the Secured Growers.
The other covenants of the Mortgagor under the Manos Holdings debenture are also in similar terms to the covenants in the debentures granted by the partner companies in MPI before rectification, including clause 40, the terms of which I repeat:

"40. That notwithstanding anything hereinbefore contained the maximum amount of the liability of the Mortgagor to the Mortgagee at any time hereunder shall not exceed the sum of $3,000,000.00 and such sum shall constitute the 'specified maximum amount' for the purposes of paragraph 3 of Schedule 5 to the Companies (South Australia) Code."

To complete the background picture, at the same time as the debentures already referred to were granted, Manos Investments also granted a debenture in virtually identical terms to the Manos Holdings debenture, including clause 40, charging its undertaking and assets to the Secured Growers.
The point of construction raised by the first question is whether the limitation on the liability arising under clause 40 has the effect, in the events which have happened, that upon payment to the Secured Growers of $3,000,000.00 from the assets of the partner companies in MPI, no liability attaches to Manos Holdings under the Manos Holdings debenture in respect of the balance which remains due to the Secured Growers under their broiler contracts.
The argument advanced on behalf of the Secured Growers is simple and straightforward. It is submitted that the language used in clause 40 is clear and should be given effect according to the ordinary meaning of the words used. The maximum stipulated applies to the Mortgagor's liability "hereunder" - that is under the debenture. By clause 1 the Mortgagor guarantees payment by MPI of the "Moneys Hereby Secured" to the Secured Growers. To the extent that MPI fails to make due and punctual payment of the Moneys Hereby Secured the Mortgagor is liable under the debenture to the Secured Growers up to a maximum of $3,000,000.00. In the result the Secured Growers would be entitled to receive payment up to $3,000,000.00 under the debentures granted by the partner companies in MPI, and up to a further $3,000,000.00 from the assets of Manos Holdings. It is contended that there is nothing in the terms of the Loan Agreement or the other deeds dated 14 December 1988 which is inconsistent with this construction.
On behalf of Manos Holdings it is contended that to construe the Manos Holdings debenture in this way makes nonsense of the plain and natural meaning of the deed as a whole because "the only primary liability imposed on Manos Holdings by the debenture is the guarantee contained in clause 1. The charging clause does not impose any additional liability in the sense that it does not say that Manos Holdings will pay or guarantee any additional or different obligations to those referred to in clause 1." It is contended that clause 40 should be construed so that upon payment of an aggregate sum of $3,000,000.00 by the partner companies of MPI, Manos Holdings is discharged from any further liability under the Manos Holdings debenture.
The charging clause in the debenture charges the undertaking and assets of Manos Holdings "with payment to the Mortgagee of all moneys now or at any time...outstanding or payable to the Mortgagee under or pursuant to the guarantee contained in clause 1 of this Deed...". It is therefore correct that the charging clause does not impose any liability to make payment of any amount beyond that required by the obligations arising under clause 1, but this conclusion does not, in my opinion, advance the construction contended for by Manos Holdings. The obligations arising under clause 1 are, by the terms of clause 1, unlimited. Neither the terms of clause 1 nor any other provision in the Manos Holdings debenture stipulates any link between the maximum liability of MPI under the debentures granted by the partner companies of MPI and the liability of Manos Holdings under the Manos Holdings debenture. The Loan Agreement makes no reference to the Manos Holdings debenture. As a matter of construction of the Manos Holdings debenture, even if it is read with the debentures granted by the partner companies in MPI and the Loan Agreement, the only limitation which arises on the liability of Manos Holdings under the guarantee contained in clause 1 is that arising under clause 40. The terms of clause 40 are clear. The limitation is on the liability of Manos Holdings arising under the Manos Holdings debenture. In my opinion the construction contended for by the Secured Growers is plainly correct.
Counsel for Manos Holdings advanced as a further reason for rejecting the construction contended for by the Secured Growers the fact that if the Manos Holdings debenture is construed so as to impose a liability thereunder to a maximum of $3,000,000.00 over and above payments made under the debentures granted by the partner companies in MPI, a similar construction should be given to the debenture granted by John Manos Investments. It would follow that Secured Growers could have recourse to the debentures granted by the partner companies of MPI up to $3,000,000.00, to the debenture granted by Manos Holdings for an additional sum of $3,000,000.00, and to the debenture granted by John Manos Investments for yet a further sum of $3,000,000.00. It is argued that having regard to the extent of the indebtedness of MPI to the Secured Growers at 14 December 1988, and the period of the proposed moratorium, the intention of the parties would not have been that the Manos companies in aggregate provide security for up to $9,000.000.00.
Whilst it is a legitimate aid to the construction of the deeds to have regard to the surrounding circumstances which were known to the parties at the time when the deeds were executed, (see Prenn v Simmonds (1971) 3 All ER 237) if the language of the deeds is clear and unambiguous, the meaning of that language must be taken to express the intention of the parties. Manos Holdings' argument, which seeks to call in aid "commercial reality", might have been forceful had this application been for rectification of the terms of the Manos Holdings debenture, but rectification is not sought. On the contrary, the parties seek to have the Manos Holdings debenture as it stands construed, and for this reason extrinsic evidence bearing on the intention of the parties has not been led. Moreover it is not readily apparent that the construction contended for by the Secured Growers is contrary to commercial reality. The Secured Growers may have questioned the value of the undertaking and assets of each of the companies which granted debentures. The Court was informed that the Secured Growers are not seeking relief against John Manos Investments as that company is now in liquidation and the debenture security granted by it is valueless. The Court cannot speculate as to the knowledge or belief of the parties as at 14 December 1988. If, at that time the Secured Growers were seeking adequate security to fully protect them, it is quite consistent with commercial reality that they would require security from each of Manos Holdings and John Manos Investments in the terms which the Secured Growers now contend the debentures were granted.
In further support of the construction for which he contended, counsel for Manos Holdings relied strenuously on the manner in which the several debentures were lodged for stamping under the Stamp Duties Act 1923 (SA). The Manos Holdings debenture was stamped as the primary security up to $2,015,000.00, and, each of the debentures granted by the partner companies in MPI and by John Manos Investments were stamped as collateral securities. Counsel contends that the Secured Growers must be taken to have known that fact and to have assented to the proposition that each debenture secures the same moneys, this being the effect of s.77 of the Stamp Duties Act which provides:

"77. If several instruments are necessary to make a mortgage and duty would, but for this section, be chargeable on more than one of those instruments, the duty shall be chargeable upon the principal instrument only and the other instruments shall not be liable to any duty, and the parties, with the approval of the Commissioner, may decide which is the principal instrument."

It is clear from the agreed documents that the debentures were lodged for stamping by the solicitors who acted for the Manos companies. There is no evidence that the Secured Growers or their legal advisers were made aware of the terms of the declarations prepared by Manos Holdings' solicitors which assert to the stamping authority that the moneys secured by all the other debentures were the same as that secured by the Manos Holdings debenture. Insofar as it is contended that the manner in which the debentures were stamped is inconsistent with the construction now contended for by the Secured Growers, I do not consider that the actions taken by the solicitors for Manos Holdings subsequent to the granting of the debentures provides evidence of the intention of the Secured Growers, or can be called in aid on the construction of the language of the debentures.

Furthermore, I do not consider the construction contended for by the Secured Growers is inconsistent with the manner in which the several debentures were stamped. Each debenture was granted to secure the present and future indebtedness of MPI. Up to an indebtedness in the amount of $3,000,000.00 each debenture secured the same moneys. That the debenture granted by Manos Holdings secured the indebtedness of MPI beyond $3,000,000.00 does not mean that the debenture did not secure the same moneys as were secured by the debentures granted by the partner companies in MPI. The Manos Holdings debenture may have secured a greater amount of money, but the greater includes the lesser. As the debentures were stamped only to $2,015,000.00 it was correct to assert that to that extent all debentures secured the same moneys.
The Stamp Duties Act further provides in ss.21 and 22 that:

"21. Upon the production of any instrument chargeable with duty as evidence in any civil proceedings in any part of South Australia, the officer whose duty it is to read the instrument shall call the attention of the presiding judge, special magistrate or justices to any omission or insufficiency of the stamp thereon.

22. No instrument chargeable with duty executed in any part of South Australia, or relating, wherever it was executed, to any property situated, or to any matter or thing done or to be done, in any part of South Australia, shall, except in criminal proceedings, be pleaded or given in evidence, or admitted to be good, useful or available at law or in equity, unless duly stamped."

Provisions of this kind have a long history: In re Coolgardie Goldfields Limited (1900) 1 Ch 475. Their purpose is to protect the Revenue.

Sections 21 and 22 have application in the present proceedings by force of s.79 of the Judiciary Act 1903 (Cwth). Counsel for Manos Holdings said that in pursuance of the obligation imposed on him as an "officer" of the Court he must call the attention of the presiding judge to the fact that the Manos Holdings debenture is insufficiently stamped if the argument of the Secured Growers is correct. For this reason he contended that under s.22 the Manos Holdings debenture could not be pleaded or given in evidence, and could not be admitted in law or in equity to support the Secured Growers' application to the Court, at least until the Manos Holdings debenture had been duly stamped.
This submission is not helpful on the construction question, as the validity of the submission itself turns on the correct construction of the John Manos debenture. If the construction contended for by Manos Holdings is correct no question of admitting the Manos Holdings debenture to be good in law or in equity as the ground for relief would arise. On the other hand if the construction contended for by the Secured Growers is correct, as I consider it is, the Manos Holdings debenture is insufficiently stamped as the present stamping does not cover the indebtedness of MPI which has arisen since 14 December 1988 under the broiler contracts, and should not be admitted under s.22. Having reached this conclusion, I consider the Court should stand over its decision on the first question, and refrain from further considering the Secured Growers' claim for relief based on the Manos Holdings debenture until the Secured Growers bring into Court the Manos Holdings debenture bearing evidence that it is now duly stamped: see Owen v Thomas (1834) 3 My and K 353; 40 ER 134.
The second question to be decided concerns the construction of the John Manos guarantee. The Secured Growers contend that on the proper construction of the deed John Manos guaranteed not only the due payment of the existing debts due by MPI to the Secured Growers and interest thereon but also the due payment of all moneys thereafter becoming due and owing by MPI under the broiler contracts. The contrary contention of John Manos is that the guarantee was in respect only of the existing debts due by MPI and interest thereon, but did not extend to future indebtedness.
The John Manos Guarantee commences:

"To: The parties whose names and addresses appear in Schedule 1 hereto (hereinafter jointly and severally called 'the Growers')

IN CONSIDERATION of the Growers at the request of JOHN MANOS (hereinafter called 'the Guarantor') contemporaneously herewith entering into a certain Agreement (hereinafter called 'the Agreement') with (the six partner companies of MPI) (hereinafter called 'Manos Poultry Industries') in respect of certain moneys or the balance thereof from time to time outstanding by Manos Poultry Industries to the Growers together with all interest payable thereon as is more particularly described therein (hereinafter called 'the said Debt') the Guarantor hereby guarantees to the Growers the due and punctual payment by Manos Poultry Industries at the times and in manner stipulated in the Agreement or otherwise as and when due of the said Debt and payable to the Vendor (sic) pursuant to or in respect of the Agreement AND guarantees the due performance and observance by Manos Poultry Industries of all covenants obligations terms and conditions contained in or implied by the Agreement and on the part of Manos Poultry Industries to be performed or observed (all of which obligations comprising the payment of the said Debt and also the performance and observance of all covenants obligations terms and conditions aforesaid are hereinafter collectively called 'the said Covenants') AND FURTHER as a separate severable and additional covenant agrees to indemnify and keep indemnified the Growers from and against all losses costs charges expenses and damages whatsoever that the Growers may suffer or incur by reason of the failure or default of Manos Poultry Industries to pay perform or observe any of the said Covenants..."

Included among the covenants, terms and conditions which follow on is, relevantly, clause 2 which reads:

"2. Continuing Guarantee

The guarantee hereby given is a continuing guarantee the indemnity hereby given is a continuing indemnity and neither this Deed nor the said guarantee nor the said indemnity shall be discharged in any way or be considered or deemed to be discharged in any way by any payment to the Growers other than the payment to and acceptance by the Growers of One Hundred Cents in the Dollar of the whole of the said Debt and the payment performance and observance by the Purchaser

(sic) of all the said Covenants."

The terms of the John Manos guarantee therefore require close consideration of "all covenants obligations terms and conditions contained in or implied by the Agreement" (that is, the Loan Agreement). It will be remembered that the Loan Agreement defines "the Principal Sum" to be the existing indebtedness of MPI to the Secured Growers, and contains a forbearance by the Secured Growers from demanding immediate repayment during the moratorium period granted in consideration of MPI entering into the Loan Agreement. Clause 1 of the Loan Agreement contains several definitions of expressions used "in this Agreement". One of the definitions is of the expression "Moneys Hereby Secured". This expression is also used in the several debentures to which reference has been made earlier in this judgment. In each debenture the expression is defined in clause 1 thereof for the purpose of that debenture. In the Loan Agreement the definition of the expression is differently expressed and includes no reference to interest on the Principal Sum. In the Loan Agreement the definition reads:

"'Moneys Hereby Secured' means the Principal Sum and all moneys which may hereafter become due and owing by Manos Poultry Industries to the Growers pursuant to the Contracts."

"Contracts" is defined to mean the broiler contracts. Clause 2 provides for payment of interest, and then the Principal Sum and interest, during the moratorium period. Significantly, it makes no provision for the payment of future debts. Clause 3 provides a formula for computing interest. Clauses 4 and 5 make further provision for the payment of instalments. Clause 6 contains an acknowledgment by each of the partner companies in MPI that the Principal Sum and interest thereon are secured by the debentures granted by the partner companies in MPI. Clause 7 is one of the provisions in the Loan Agreement on which the argument advanced on behalf of the Secured Growers is based. It reads:

"7. Each of the companies included in the expression 'Manos Poultry Industries' hereby acknowledges that the definition of 'the Moneys Hereby Secured' in the Securities includes all moneys that may hereafter become due and owing by Manos Poultry Industries to the Growers pursuant to the Contracts."

Clause 8 requires MPI on request to provide certain information about its performance to the Secured Growers. Clause 9 is also relied on by the Secured Growers. It reads:

"9. Notwithstanding anything hereinbefore contained the Moneys Hereby Secured or so much thereof as shall then remain outstanding and all interest thereon shall become immediately due and payable:-

9.1 if default is made by Manos Poultry Industries in the due payment of the Principal Sum and interest thereon or any instalment or part thereof respectively and any such default continues unremedied for a period of not less than seven days following notice of such default by such party of any of the parties referred to in Schedule 1 relying on such default, or 9.2 if any of the parties of the second part hereto makes default in the due performance or observance of any of the covenants and conditions on its part contained in or implied by this Agreement or by the Securities (i.e. the debentures granted by the partner companies in MPI) or..."

9.3) (Four other events are specified on the 9.4) happening of which the Moneys Hereby Secured 9.5) will become immediately due and payable, 9.6) but they are not material for present purposes.)

Of the remaining clauses of the Loan Agreement I refer only to clause 11 which includes certain covenants to be performed by MPI not confined to the payment of the Principal Sum and interest thereon, and sub-clause 11.2.1.4 which is another provision on which the Secured Growers argument is based. In relevant respects clause 11 reads:

"11. 11.1 Notwithstanding anything in this Agreement contained to the contrary, Manos Poultry Industries agrees to pay at the Commencement Date to the Growers an amount to the Growers sufficient that Manos Poultry Industries shall after such payment be indebted to each of the Growers severally for a sum no more than the growing fee payable to each of the Growers severally by Manos Poultry Industries for four and one half (4 1/2) batches pursuant to any Contract between Manos Poultry Industries and each Grower severally and existing at the Commencement Date. 11.2 Upon execution of this Agreement by the Growers the parties hereto agree that each existing Contract between each Grower severally and Manos Poultry Industries shall be deemed to be varied to the extent that the following terms shall take effect by way of addition to and augmentation of the terms and conditions presently contained in each such existing Contract all of which are hereby confirmed but subject to the proviso that if any conflict or inconsistency should occur between the terms and conditions presently in each such existing Contract and those terms following then the latter shall prevail. 11.2.1 Subject to Clause 11.2 hereof each existing Contract between each Grower severally and Manos Poultry Industries shall be varied in the following respects:-

11.2.1.1 Manos Poultry Industries agrees to extend any such existing Contract upon the same terms and conditions as any such existing Contract for a term of three (3) years and, subject to any rights of termination of either party provided for therein, for a further period of three (3) years upon each such Grower advising Manos Poultry Industries in writing twelve (12) months prior to the expiration of the original term of an intention to so require a further period.

11.2.1.2 Manos Poultry Industries agrees that each Grower will receive a minimum of six (6) batches per year at a minimum stocking density of 21.52 birds per square metre. 11.2.1.3 ...

11.2.1.4 Payment to each Grower severally shall be made thirty (30) days from shed clearance subject to the Securities still being in existence and of effect as between the Grower and the parties of the second part and as between the Grower of the one part and Manos Holdings Pty. Ltd. and John Manos Investments Pty. Ltd. of the other part respectively. When such Securities shall cease to be of effect the said payments shall from such date be made according to the terms of each such existing Contract prior to this variation taking effect."

On behalf of the Secured Growers it is submitted that by operation of clauses 7 and 9 and sub-clause 11.2.1.4 MPI incurs an obligation under the Loan Agreement, which in turn is guaranteed by the John Manos guarantee, to pay moneys becoming due after 14 December 1988 to the Secured Growers under their broiler contracts.
I am unable to accept this submission. In my opinion the Loan Agreement imposes an obligation on MPI to make payments of the Principal Sum, that is of the debts then due by MPI to the Secured Growers, and interest thereon, in accordance with the terms set out in the Loan Agreement. The Loan Agreement does not impose an obligation on MPI to pay moneys becoming due thereafter to the Secured Growers under their broiler contracts. The obligation to make those payments is imposed separately by the broiler contracts. That obligation is recognised by the Loan Agreement, and the manner in which that obligation is to be discharged during the moratorium period is varied by sub-clause 11.2.1.4, but the obligation is not one arising under the Loan Agreement. Each of the debentures granted by the various Manos companies, by operation of clause 1 thereof, guarantees the repayment of such future indebtedness, but those guarantees are given in terms quite different from the terms of the John Manos guarantee.
Clause 7 uses the expression "Money Hereby Secured", but is referring to that expression as defined in the debentures granted by the partner companies in MPI. Further, the clause is merely an acknowledgment and does not seek to impose obligations on MPI. I do not think clause 7 assists the Secured Growers' argument. It is only in clause 9 that the expression "Moneys Hereby Secured" as defined in the Loan Agreement is used in the Loan Agreement, apart from in the definition of the expression itself.
Whilst clause 9 of the Loan Agreement uses the expression Moneys Hereby Secured, it is not a provision which imposes an obligation on MPI to make payment for future services rendered by the Secured Growers under their broiler contracts. It is merely a procedural provision which, in the event of default of due payment of moneys which MPI is otherwise obliged to pay, enables the Secured Growers to accelerate the date for payment of the balance of the Principal Sum and interest thereon, and of all moneys payable by MPI under obligations incurred to the Secured Growers under their broiler contracts.
In my opinion the submission on behalf of John Manos that the John Manos guarantee does not extend to moneys which thereafter become due and owing to the Secured Growers is correct. In addition to the reasons already given there are other indications in the John Manos guarantee that this construction is correct. The definition of "the Debt" which is guaranteed is expressed in terms which reasonably describe the indebtedness of MPI which in the Loan Agreement is encompassed by the expression "the Principal Sum", and interest thereon, but is not apt to include the future indebtedness of MPI thereafter arising under the broiler contracts. The provisions of clause 2, the "Continuing Guarantee" clause, in my opinion support the argument of John Manos, not that of the Secured Growers. It is necessary that the guarantee be a continuing one to protect the Secured Growers against future breaches of the covenants contained in sub-clauses of the Loan Agreement such as 11.1, 11.2.1.1 and 11.2.1.2, and in respect of the payment of interest thereafter accruing on the Principal Sum. In these circumstances the stipulation that the guarantee is a continuing one does not imply that it extends to indebtedness arising under the broiler contracts after 14 December 1988. Moreover the provision in clause 2 that the continuing guarantee will be discharged on "payment to and acceptance by the Growers of One Hundred Cents in the Dollar of the whole of the said Debt and the payment performance and observance by the Purchaser (sic) of all the Covenants" suggests that the person drafting the deed did not contemplate that the guarantee would extend to the future indebtedness of MPI under the broiler contracts.
On the footing that the John Manos guarantee does not extend to moneys that became due to the Secured Growers by MPI under their broiler contracts after 14 December 1988, it is necessary to determine how the payment of $3,000,000.00 made to the Secured Growers pursuant to the order of Deputy Master Bowen-Pain, is to be appropriated between the Principal Sum of $2,015,000.00, the interest thereon, and moneys which have become due to the Secured Growers under their broiler contracts since 14 December 1988.
The documents are silent on how the payment of $3,000,000.00 should be appropriated in the circumstances which have happened. Generally speaking, the debtor has the primary right of appropriating a payment to a particular debt, but there is no suggestion in the Agreed Facts that this has occurred. It must be assumed that MPI has not appropriated the payment in any particular way.
It is contended on behalf of John Manos that the payment should be applied first to extinguish the interest accrued due on the Principal Sum, then the Principal Sum, and finally the moneys which have become due under the broiler contracts. The principle in Devaynes v Noble; Clayton's Case (1816) 1 Mer 572; 35 ER 781, is relied on. This submission assumes that as between the Secured Growers and MPI there was, in effect, a current account. This assumption is no doubt correct in relation to ordinary day to day trading operations between them: see In re Footman Bower and Co. Ltd (1961) 1 Ch 443. However, the transactions which took place on 14 December 1988, isolated the debt then due, made special provision for payment, and provided for the payment of interest that was not otherwise payable on the trading account between them. The liability to pay interest distinguished that indebtedness from any future indebtedness which might thereafter arise out of their day to day trading relationship. In effect one current account which had existed between the parties was brought to an end, special provision was made to discharge it, and a new current account commenced. In these circumstances I do not think the principle in Clayton's Case is applicable.
However, the general rule or presumption is that a payment by a debtor which is not specifically directed to be in respect of principal or interest shall be applied in the first place to sink the interest, before any part of the principal is discharged: Falk v Haugh (1935) 53 CLR 163. That rule should be applied in the present case. Then, as between two debts one of which carries interest and one of which does not, it should be presumed that the balance of a general payment after discharging outstanding interest would be intended by the debtor to be applied to discharge the most burdensome debt - in this case the Principal Sum.
The payment of $3,000,000.00 applied in this way was more than sufficient to discharge the Principal Sum and interest thereon. It follows that the principal and interest thereon due by MPI under the Loan Agreement has been fully paid, and John Manos has no further liability under the John Manos guarantee. The second question to be decided should be answered "no".
The order of this Court will be that the first question to be decided be stood over for further consideration at a date to be fixed, and that the second question be answered no. The question of costs will also be reserved for further consideration.

[1992] FCA 251

06 MAY 1992