Bank of Western Australia Limited v Leila El-Khoury
[2013] NSWSC 157
•04 March 2013
Supreme Court
New South Wales
Medium Neutral Citation: Bank of Western Australia Limited v Leila El-Khoury & Ors [2013] NSWSC 157 Hearing dates: 13 February 2013 Decision date: 04 March 2013 Jurisdiction: Common Law Before: Slattery J Decision: Summary judgment not granted. Cross-Claim not struck out for want of prosecution. Directions made for the further expeditious conduct of the proceedings.
Catchwords: PROCEDURE - Supreme Court procedure - bank applies for summary judgment and principal claim against guarantors - whether summary judgment should be granted - bank seeks to strike out cross claim for want of prosecution Legislation Cited: Real Property Act 1900; Australian Securities & Investments Commission Act 2001; Cases Cited: Bank of Queensland Ltd v Dutta [2010] NSWSC 574; GE Capital Australia v Davis & Ors [2002] NSWSC 1146; Bank of Western Ausralia Ltd v O'Brien [2012] NSWSC 456; Bank of Western Australia v Hoy [2012] NSWSC 518; St George Bank Limited v Field [2007] NSWSC 902; Capital Finance Australia Pty Ltd v Airstar Aviation Pty Ltd [2003] QSC 151 (2004) 1 Qd R 122; Bank of Western Australia v O'Brien [2012] NSWSC 456; Westpac Banking Corporation v Helicopters Brisbane Pty Ltd [2012] QSC 263 Henjo Investments Pty Ltd v Collins Marrickville (No 1) (1988) 39 FCR 546. Category: Interlocutory applications Parties: Plaintiff/Respondent:- Bank of Western Australia Limited
First Defendant/Applicant:- Leila El-Khoury
Second Defendant/Applicant:- Yves Louis El-Khoury
Third Defendant/Applicant:- El-May Pty Ltd (Receivers and Managers appointed)
Fourth Defendant/Applicant:- El-Khoury Family Company Pty Ltd (Receivers and Managers appointed)
Fifth Defendant/Applicant:- El-Khoury Family Child Care Centres Pty LimitedRepresentation: Counsel:
Plaintiff/Respondent:- P.T. Russell
First, Second, Third, Fourth and Fifth Defendants/Applicants:- P. Lowson
Solicitors:
Plaintiff/Respondent:- James Kelly Marshall, Ashurst Australia
First, Second, Third, Fourth and Fifth Defendants/Applicants:- John Mahony, Mahony Taren Lawyers
File Number(s): 2010/370818
Judgment
In these proceedings the plaintiff bank seeks summary judgment against guarantors of the bank's alleged defaulting debtors. The bank seeks to enforce a guarantee, the terms of which: (1) prevent the guarantors from relying in their defence on any amendments to the principal loan agreement; and which (2) suspend the guarantor's rights to rely on any of the principal debtor's defences, until after the guaranteed money is paid in full. The question for decision is whether the guarantors can, in the circumstances, resist summary judgment in the face of these provisions in the guarantees.
The dispute between the plaintiff bank and its customers
The short procedural history well defines the main issues in these proceedings. By notice of motion filed on 17 September 2012, and amended in November 2012, the plaintiff, the Bank of Western Australia Limited ("the Bank"), moves: (1) for summary judgment against the first and second defendants, Mrs Leila El-Khoury and Mr Yves Louis El-Khoury; (2) for the striking out of a cross-claim the El-Khourys and their three related companies bring against the Bank, the three companies being El-May Pty Ltd (Receivers and Managers Appointed) ("El-May"), El-Khoury Family Company Pty Limited (Receivers and Managers Appointed) ("Family Company") and El-Khoury Family Child Care Centres Pty Limited ("Child Care"); and in the alternative, (3) for dismissal of the Cross-Claim for want of prosecution. This is the motion presently before the Court.
The Bank commenced these proceedings by Statement of Claim filed on 8 November 2010. In that Statement of Claim the Bank seeks: (1) relief for possession of a property owned by Mr and Mrs El-Khoury in the Sydney suburb of Dural ("the Dural property"); (2) orders that the El-Khourys pay the Bank an amount of $21,956,000 in respect of three loan agreements described in more detail below, together with interest calculated under each of those agreements up to and after judgment. The Bank argues that an event of default occurred under a loan agreement between the Bank and one of the El-Khourys' family companies, El-May, which default in turn triggered further events of default under all the other agreements between the Bank and the El-Khourys. The Bank claims that El-May was in default because it had not repaid its loan facility after it expired.
In February 2011 Mr and Mrs El-Khoury filed their Defence, contesting their alleged liability to the Bank for the amounts claimed in the Statement of Claim. They allege that no default occurred under the Bank's loan agreement with El-May because the parties orally varied that agreement to extend its term and increase the facility limit. Alternatively, the El-Khourys allege that the Bank made certain oral representations to the same effect.
In March 2011 the El-Khourys filed a Statement of Cross-Claim in the proceedings, which they subsequently amended in October 2011. El-May, Family Company and Child Care joined in as cross-claimants. The Bank filed its Defence to Cross-Claim in April 2011, which it subsequently amended.
The Cross-Claim repleads the Bank's alleged representations, which found the Defence. The cross claimants contend in the Cross-Claim that the Bank's representations: (1) varied the loan agreement with El-May, which variation removed the event of default founding the Bank's claim; or (2) constituted misleading and deceptive and unconscionable conduct under the Australian Securities & Investments Commission Act 2001 (ASIC Act) and under the unwritten law; or (3) otherwise created an estoppel in favour of the cross-claimants. The cross-claimants seek relief under the ASIC Act s 12GM and the unwritten law: (1) varying the loan agreement; (2) restraining the Bank from enforcing both the guarantees and the mortgage securing the obligations under that loan agreement; (3) declarations that the Bank's appointment of the receivers and managers to each of the three incorporated cross-claimants and the consequent sale of their assets was unlawful; and (4) compensation for the loss occasioned by the Bank's actions.
In the Defence to the Cross-Claim the Bank: (1) denies that the parties varied the loan agreement as alleged, and denies that it made the representations alleged; and (2) says that, in any event, the specific provisions of the guarantees with the El-Khourys prevent them from relying on the alleged variation, and moreover prevent them from raising any cross-claim prior to the payment of the guaranteed money.
These are the pleaded issues. To decide the issues on the motion more detail is required about the structure of the El-Khourys' family companies, the terms of the financial arrangements between the parties and the events that led to the Bank's claim against the El-Khourys.
Financial arrangements and corporate structures
Prior to 2009 the El-Khoury family had built up substantial business interests in motor vehicle service stations and child-care centres mainly in the Blue Moutains district, which they held through their family companies, El-May, Family Company and Child Care. Mr and Mrs El-Khoury own equal shares in the three family companies and are joint directors of El-May.
The El-Khoury family business interests and properties were held among the three companies in the following way. El-May owned a service station-supermarket business and land and the land for child-care businesses in operation and in development. El-May had owned another service station in Elanora Heights in suburban northern Sydney ("the Elanora property") which it began to redevelop into a commercial/residential complex in March 2007. Family Company owns the land on which other child-care businesses are operated. Child Care owns the various remaining child-care businesses, and all their operating assets. Outside these family companies Mr and Mrs El-Khoury are also the registered proprietors as joint tenants of the Dural property, which was and is their family residence, the acquisition of which had been funded by the ANZ Bank, until the Bank later refinanced this asset replacing the ANZ Bank as lender.
Until 2009 the evidence supports the inference that the El-Khoury family businesses were profitable. There is evidence that El-May, for example, had earnings before interest tax depreciation and amortisation of $529,996 for FY07, of $258,826 for FY08, and $786,918 for FY09. Mr El-Khoury points to the product of family assets built up over time: a highly geared but substantial family FY09 balance sheet of $31 million in assets, but with $21 million of borrowings.
Each of Mr and Mrs El-Khoury, El-May and Family Company borrowed funds from the Bank. The El-Khoury interests entered into three separate guarantees in relation to the borrowed funds and provided a first ranking mortgage to the Bank over the Dural property. Family Company also entered into a guarantee. The Bank alleges that a default has now occurred under each of those instruments, and that all the repayments are now due to the Bank.
In conformity with the Court's policy of reducing the risk of identity theft arising from publication of the Court's judgments, neither the loan account numbers nor the precise address of the mortgaged properties are recorded in these reasons.
The structure of the parties' current financial arrangements is largely to be explained by the El-Khourys' decision to develop the Elanora property from about March 2007, which development was initially scheduled for completion in August 2007. In March 2007 El-May contracted with a builder to develop the Elanora property. The valuation of the Elanora property was said to be $15.7 million on completion. On more detailed funding terms the Bank was providing funds of up 70% of this valuation amount. One trigger for the events of default that led to these proceedings, is that the Bank obtained on completion reduction for this development of $13.8 million.
It is now necessary to briefly examine the structure of the loans and guarantees on which the Bank relies. The structure of these instruments is potentially confusing, because the loans relied upon are all made in 2009, and the guarantees relied upon are all made in 2007. But the three 2009 loans are principally refinances of earlier facilities the Bank had provided in 2007, together with some fresh advances or refinances of facilities that the El-Khourys previously held with the ANZ bank. The guarantees date back to 2007 because the El-Khoury interests provided them, when the Bank first made its March 2007 advances. There is no issue for present purposes that the terms of the 2007 guarantees apply to the 2009 loans. The Bank's pleadings order and name the various loans in their date order within 2009. The guarantees were all executed between March and August 2007.
The Loans On 16 February 2009 the Bank and Mr And Mrs El-Khoury, as borrowers, entered into a loan agreement ("First Loan"). The First Loan was governed by the terms described in, and attached to, the Bank's letter of offer dated 2 February 2009 and the Bankwest General Terms of Business Lending dated December 2007 ("General Terms"). Under the First Loan the El-Khourys borrowed the amount of $2,560,000, described as a "Commercial Advance Facility". The purpose of the loan was "to assist refinance loan with ANZ bank and to pay out existing operator of Child Care Centre". The interest charged under the First Loan was described as BBSY, which is one of the Bank's standard benchmark interest rates plus a margin of 1.25% per annum. Only this First Loan was with the El-Khoury personally. The two subsequent 2009 loans were between the Bank and El-Khoury family companies.
On 20 May 2009, the Bank and Family Company entered into a second loan agreement ("Second Loan"). The Second Loan was governed by the terms described in, and attached to, the Bank's letter of offer dated 14 April 2009 and by the same General Terms. The Second Loan included three separate facilities with the following limits: a Commercial Advance Facility for $2,555,000, a Flexi Protect Facility for $700,000 and a Commercial Advance Facility for $112,000. These various facilities were granted partly to refinance existing finance facilities and partly to fund the purchase and development of a property for a childcare centre. The interest charged on the Commercial Advance and Flexi Protect Facilities was BBSY plus 1.25% per annum. The interest on the smaller Commercial Advance facility was BBSY plus 1.65% per annum. A separate default interest rate applied to any amounts owed under the Second Loan not repaid on time.
On 26 June 2009, the Bank and El-May, as borrower, entered into a third loan agreement ("Third Loan"). The Third Loan was again governed by the terms described in and attached to the Bank's letter of offer dated 24 June 2009 and the General Terms. The Third Loan included six separate facilities with the following limits: the Commercial Advance Facility for $10,778,658, the Commercial Advance Facility for $972,000, the Business Edge Loan for $80,000, the Flexi Protect Facility for $4,100,000, the Business Bonus Overdraft Facility for $100,000 and a Business extra Visa for $50,000.
These facilities within the Third Loan were granted partly as a continuation of existing facilities the Bank had provided to El-May. The Third Loan describes its purpose as the "continuation of existing facility" granted in March 2007. That existing facility had itself refinanced an earlier facility with another lender to acquire the Elanora Property, and provided further finance to develop that property. An important relevant condition of the Third Loan was that its expiry date was 30 September 2009. This date was set some 13 months after the expected practical completion of the Elanora property development to allow for some post-completion sales to occur. Presumably because of the different risk profiles, as with the First Loan, the Bank charged a different interest rate in relation to each of the facilities within the Third Loan. As with the First and Second Loans, if the amounts owed under the Third Loan were not repaid on time a separate overdue interest rate applied.
The El-Khourys and Family Company provided to the Bank various security properties, which together secured all the liabilities under the various facilities described above. On 7 October 2004, the El-Khourys granted the Bank on the terms of its "Consumer Mortgage Memorandum of Common Provisions" ("the Memorandum"), a first ranking mortgage over the jointly held domestic residential Dural property ("the Mortgage"). The Mortgage was registered under the Real Property Act 1900 in October 2007. Under clauses 3 and 4 of the Memorandum, the Mortgage secures the payment to the Bank of any money the El-Khourys owed the Bank under any "Bank Document", as defined in the Memorandum. Such a "Bank Document" includes any agreement under which the El-Khourys owe obligations to the Bank, for example a guarantee. The Mortgage is subject to a registered lease to Cejays Properties Pty Limited, a lease granted over part of the mortgaged property. Family Company also provided security to the Bank over the property on which it conducted child care centres.
The Guarantees The El-Khourys also entered into three guarantees. These guarantees are all made in 2007, on or shortly after the Bank first funded the development of the Elanora property. On 22 August 2007 they jointly entered into a guarantee and indemnity ("First Guarantee"). The First Guarantee guaranteed the payment of all money owed by Family Company to the Bank. The liability under the First Guarantee was limited, so the Statement of Claim pleads, to $3,412,000. Although the First Guarantee itself refers to a limit of liability of $2,380,000. The precise limit of the First Guarantee does not require determination on this motion.
On 30 March 2007, Mrs El-Khoury entered into a separate guarantee and indemnity ("Second Guarantee"). The Second Guarantee guaranteed the payment of all money owed by El-May to the Bank. The liability under that Second Guarantee was limited, so the Statement of Claim pleads, to $16,237,000. The Second Guarantee actually refers to a limit of liability of $9,710,000. The precise limit of the Second Guarantee does not require determination on this motion.
On the same day as the execution of the Second Guarantee, 30 March 2007, Mr El-Khoury entered into a further guarantee agreement with the Bank ("Third Guarantee"), the terms of which were relevantly identical to the First and Second Guarantees.
The Family Company, as trustee for the El-Khoury Family Trust, also entered on 10 December 2010 into a further guarantee ("Family Company Guarantee"). By the terms of the Family Company Guarantee Family Company guaranteed the payment of all money that El-May owed the Bank. There was no limit imposed on the liability to the Bank under the Family Company Guarantee.
Each of El-May, Family Company and Child Care granted securities, including mortgages and fixed and floating charges, over all the real property and businesses of El-May, Family Company and Child Care to secure the obligations to the Bank created under each of the First, Second and Third Loans and the various guarantees.
This is the structure of the financial arrangements between the parties. The Bank alleges that the El-Khoury interests are now in default under these financial arrangements.
The Bank acts on the Defendants' alleged Default
The Bank first alleges that an event of default occurred under the Third Loan. It says El-May failed to repay the Third Loan on time by 30 September 2009. And this alleged event of default triggered, so the Bank alleges, other events of default under each of the Second and Third Guarantees, the Family Company Guarantee, the First and Second Loans and the Mortgage.
Under the Third Loan, El-May had responsibility to repay the largest of the facilities offered to the El-Khoury interests. The Third Loan provided the Commercial Advance Facility of $10,778,658 to El-May. The Bank alleges that this facility expired on 30 September 2009. But the defendants/cross-claimants allege that the expiry date was deferred until 31 March 2010 and the facility limit lifted by agreement by $800,000 to allow finance to complete the project at the Elanora property. The defendants/cross-claimants allege in the alternative the making of representations to the same effect. These allegations are in dispute between the parties. The El-Khourys' version is explained in more detail in the next section of these reasons.
The Bank alleges default through the following course of events. If the expiry date of the Third Loan were not extended, as the El-Khourys allege that it was, an event of default under that facility would have occurred on 30 September 2009. As the Bank contends that an event of default did occur at that time, it issued a notice of default to El-May under the Third Loan on 2 October 2009. El-May did not pay pursuant to this notice. So, on 27 November 2009, the Bank issued to El-May a notice of demand for $9,443,770.84, the amount owed under what it claims was the then expired Third Loan facility. But El-May did not pay this amount. So on 1 and 2 December 2009, the Bank issued to each of the El-Khourys and Family Company, as guarantors, a notice of demand requiring payment of $9,443,770.84. Those demands were made respectively under the Second Guarantee, the Third Guarantee and the Family Company Guarantee, all guarantees which guaranteed El-May's obligations under the Third Loan.
But the guarantors did not comply with these demands. This in turn triggered an event of default under each of the First and the Second Loans. As a result in July 2010 the Bank demanded further repayments from the El-Khourys as follows: (1) $2,351,000 said then to be owed by the El-Khourys under the First Loan; (2) $3,412,000 said then to be owed by the Family Company under the Second Loan and being the maximum amount guaranteed by the El-Khourys under the guarantee; (3) $9,443,774.84 said to be owed by El-May under the Third Loan and guaranteed by the El-Khourys under the Second and Third guarantees. The Bank also required the Family Company to repay the amount of $3,617,446.50 that Family Company owed under the Second Loan. None of these payments were made.
The Bank exercised its rights under the Mortgage. On 11 December 2009 it issued a notice of demand under s 57(2)(b) of the Real Property Act 1900. The El-Khourys did not comply with this notice. And an event of default under the Mortgage then occurred.
In December 2009, and consequent upon these various alleged defaults the Bank appointed receivers and managers to each of El-May, the Family Company and Child Care. The receivers began selling the security assets to discharge these three entities' and the El-Khourys' various obligations to the Bank. The lawfulness of those appointments and subsequent sales is the subject of some of the claims raised in the Cross-Claim. The only security property presently unsold is the Dural property, possession of which the Bank seeks in these proceedings.
Argument was conducted on the motion on the basis that but for the issues discussed below the Bank has established the various defaults it alleges, the course of which is described in these reasons. The El-Khourys did not argue that the cross-collateralization provisions did not operate as the Bank contended. It is therefore not necessary to set these provisions out in any detail in these reasons, which instead focus on the case that the El-Khourys mount against summary judgment.
The El-Khourys' case
The El-Khourys have a very different version of what happened in the last four months of 2009. They contend that they, on behalf of El-May and all their other family companies, agreed with the Bank at a meeting with senior Bank officers on 21 August 2010 to extend the Third Loan by $800,000 and to expire on 31 March 2010. On the motion the El-Khourys tendered their affidavit evidence that they prepared to read at trial. This account emerges from that evidence.
The course of events according to the El-Khourys may be shortly stated. The development at the Elanora property had been delayed by unforeseen site and building problems, which had added extra costs to the project. It was not completed by the planned August 2008 date. The building was 90% complete and close to "lock up" stage in June 2009 but still some months short of practical completion that month. The Bank commissioned a valuation which showed a revised valuation on completion of $13.95 million (down from the March 2007 valuation of $15.69 million). The Bank was pressing Mr El-Khoury to achieve more pre-sales, as only two of the (12 residential and 4 commercial) units had by then been pre-sold (at $849,000 each). But pre-sales were difficult as there was no completed display unit to show to prospective purchasers.
In mid-August 2009 the Bank's Relationship Manager, Mr Rod McLellan, the Bank's Assistant State Manager, Mr Ray Beshara, and an assistant visited the El-Khourys' child care centres and service station in the Blue Mounts area. During this visit, Mr El-Khoury says that Mr Beshara said: "we want to make sure that the extra costs at Elanora property because I don't want you to go down the chute. I can see that you are a hard worker and you have a very good operation in the service station and childcare centres."
A meeting was organised at the Bank's offices on 21 August 2009, to see if the Elanora property development could be finished by mid October 2009, and to resolve "a way forward especially regarding time/cost to complete". Mr El-Khoury thought he then had some $1.6 million drawdown capacity on the existing Third Loan and that El-May would require 8 to 12 weeks to complete the project, using an additional $800,000 in excess of the then presently available $1.6 million.
The 21 August meeting discussed a report that the Bank's quantity surveyors, BMG, had prepared for the cost to complete the project, as at late August 2009. Mr El-Khoury and his site manager, Mr Ted Small, expressed some minor reservations about double counting of expenses in the report, and said "Essentially we would like to complete the project in accordance with that set out in the BMT Report". Mr Beshara accepted the errors in the BMT Report. The builder, who was also present confirmed a time to complete of 8 to 12 weeks. Then Mr Beshara said, "OK, I accept your submission. Let's get on with this project. I agree that your proposed timeframe for completion is reasonable as is the further cost to complete. I will approve a variation to increase the facility by approximately $800,000 and in view of the Christmas period and the additional time to complete I am happy to extend the facility repayment date from 30 September until the end of March 2010." None of this evidence has yet been tested, of course, and should the matter go to trial Mr Beshara and other Bank officers may have quite a different version of these events.
But to emphasis the immediacy of his statements, Mr Beshara, went on, according to Mr El-Khoury (and supported by Mr Small), explaining that he did not have the required document then and there: "However I am prepared to approve the immediate funds right now as completion of the project can't wait and the subbies need to be paid. I am therefore relying upon you, Yves, to agree that you will sign all of the necessary documents and return them to the Bank as soon as they have been signed". Bank funded payments to sub-contractors had been delayed prior to this meeting. Mr El-Khoury says he replied: "Of course Ray, you have my word".
The next working day after this meeting was Monday 24 August 2009. The Bank released $45,631 to the builder from the existing facility, supporting the El-Khourys' case that such an agreement was made, and supporting their case that Mr Beshara further said at this meeting: "OK, good, the money will be available next week". The El-Khourys say they then took various steps including listing properties for sale and seeking further pre-sales in the belief that the facility would be varied, as Mr Beshara had said. In particular he says he did not take any steps to refinance the Elanora property development before and immediately after 30 September 2009. His affidavit lists the many steps that he says he would have taken in this direction. Of course these are all untested at this stage and whether they would have borne fruit or not would be a matter for a further contest should the proceedings go to trial.
Finally, Mr El-Khoury says that for several weeks during late August and September 2009 he received no clear indication from Mr Beshara or other Bank officers that the Bank was going back on Mr Beshara's alleged promise. He says that his and his staff's efforts to find out what was going on with this issue at the Bank were rebuffed. Instead in mid-September 2009 the Bank appointed Deloitte Touche Tomatsa as investigating accountants into the El-Khoury family financial situation. But the El-Khourys say they received no information from either the Bank or the investigation accountant as to what would happen on 30 September 2009.
The Bank communicated with the defendants in early October 2009 saying that an event of default had occurred, upon expiry of the existing facility on 30 September 2009. The other consequential events of default on which the Bank relies have been set out above. The El-Khoury interests were given a copy of the investigating accountants' report in mid-October 2009. They took issue with it.
Receivers were appointed on 2 December 2009. The El-Khoury's claim the Receiver sold many properties at an undervalue. Their evaluation evidence has not been filed. The Bank has not had a chance to comment on it, and will no doubt have a quite different view of the quality of these sales. The Elanora property was sold in its incomplete but locked up state in May 2010 for $2.7 million.
Specific relevant provisions in the guarantees
Each of the First, Second and Third Guarantees on which the Bank sues, contains provisions (Clauses 10.1, 11 and 14.1) regulating the parties' exercise of their respective rights and liabilities under these guarantees. The form of these provisions is addressed to the guarantors in the second person and refers to the Bank in the first person plural. These provisions relevantly have a number of functions: protecting the Bank from a discharge of the guarantors' liability which would ordinarily follow from variations to the principal loans (clause 10.1); suspending all the guarantors' rights of set off, or counterclaim, until the guaranteed money is paid in full (clause 11); and, requiring payment in full without set-off, counterclaim, or deduction (clause 14). The full text of these relevant provisions, which are identical for each of the guarantees, follows:
10.1
Rights given to us under this guarantee and indemnity and your liabilities under it are not affected by any act or omission by us or by anything else that might otherwise affect them under law or otherwise, including:
(a) the fact that we vary or replace any guaranteed agreements, such as by increasing the credit limit, increasing the amount of credit agreed to be provided or extending the term. If this guarantee and indemnity is one to which a Code applies, we cannot increase your liabilities under this guarantee and indemnity by changing the terms of any guaranteed agreement except in compliance with the Code. ... ("Clause 10")
11 As long as any of the guaranteed money remains unpaid, you may not, without our consent:
(a) reduce your liability under this guarantee and indemnity by claiming that you or the debtor or any other person has a right of set-off or counter claim against us (except to the extent that you have a right of set-off granted by law, which we cannot exclude by agreement)... ("Clause 11")
14.1
Except to the extent that you have a right of set-off granted by law, which we can not exclude by agreement (such as under Code) you must pay us the guaranteed money in full without set-off, counterclaim or deduction. ("Clause 14")
The Bank relies on these provisions in answer to the Defence and Cross-Claim. The Bank contends that the guarantors' obligations are unaffected by the variations which the defendants/cross-claimants allege occurred with respect to the Third Loan.
The Parties' Submissions
Summary judgment and striking out the Cross-Claim. The Bank submits that it did not vary the expired Third Loan facility and did not extend the time of repayment of that facility. But the Bank says that even if such an extension were to have occurred, the ElKhourys do not have a defence to the Bank's claim on the guarantees in these proceedings because of the operation of Clause 10. As indicated above, that clause provides that no changes to the relevant guaranteed agreement, here the Third Loan, can affect the liability of the guarantor under the guarantee. The El-Khourys are still bound to pay the full guaranteed amount on demand.
The Bank submits further that even if the El-Khourys had an available defence, Clause 11 prevents them from relying on that defence. It also prevents them from seeking relief under the Cross-Claim. Clause 11 suspends any rights of the guarantor to rely on a defence or a Cross-Claim, until the guaranteed moneys are paid in full.
The Bank submits further that Clauses 10, 11 and 14 are valid, do not oust the jurisdiction of the Court and are not otherwise contrary to public policy. They are not exclusion clauses and should not be construed as such. The Bank contends that these provisions preclude the guarantors from relying on matters that go to the enforcement of the guarantees. But the Bank says these provisions are not matters that go to invalidity or complete discharge of the guarantees.
In contrast, the defendants submit that the Bank's application for a summary judgment should fail. The defendants contend that the Bank cannot demonstrate that the prerequisites for a summary judgment under r 13.1 of the Uniform Civil Procedure Act 2005 (UCPR) are satisfied.
This is said to be so for several reasons: (1) the Bank has not discharged the onus of demonstrating that the Defence cannot succeed; the Defence will involve determination of serious conflicts on matters of fact and complex questions of law in relation to the representations the Bank allegedly made, and if the factual matters are determined in favour of the defendants, the Defence has good chances of success; (2) the Bank has not adduced evidence as to its belief that the defendants have no defence to the claim as required under r 13.1(b) of the UCPR; and (3) although the Bank presents evidence in support of its claim, parts of that evidence are disputed by the defendants/cross-claimants, and the Court will need to decide upon those disputed facts, but the Bank's evidence is not so cogent or clear as to permit the Court to conclude that there is a proper basis for summary judgment.
The defendants submit further and in the alternative that even if the prerequisites for a summary judgment were otherwise satisfied that this Court should not enter summary judgment as a matter of discretion. The defendants contend that the lending practices of the Bank in 2008-2009 were the subject of a Senate Parliamentary Committee Inquiry. The practices explored by that Inquiry included allegations similar to the ones pleaded in the Cross-Claim: the Bank abandoning otherwise binding arrangements to extend time and facility limits on particular loans to customers. The defendants contend they should have the opportunity to explore those practices in cross-examination of the Bank's employees. Moreover the defendants say in the alternative that the summary judgment should be stayed pending the determination of the Cross-Claim.
The defendants oppose the strikeout of the Cross-Claim and: (1) rely on their submissions as to the cogency of their claims based on the Bank's alleged misrepresentations; and (2) say that the Bank's submissions in relation to the effect of Clauses 10, 11 and Clause 14 ignore the fact that the defendants were not only guarantors but also borrowers in their own right (under the First Loan), and in that capacity have claims against the Bank, which cannot be defended by reference to the provision in the guarantees.
The Consumer Credit Code. In the course of submissions the Court raised the possible application of the Consumer Credit Code and Banking Code to the issues in these proceedings. The defendants have taken up this issue and submit that: (1) the Bank bears the responsibility of establishing that the Code does not apply and has not discharged it; (2) the Code applies if more that half of the amount borrowed under a particular facility is intended to be used for personal purpose. And 80% of the First Loan is attributable to a personal purpose, refinancing of a home loan with ANZ; (3) the Bank has the onus to demonstrate the compliance with the Code, and it did not. This would prevent summary judgment being entered in relation to the First Loan. And as the summary judgment is sought in relation to all three loans it should not be issued.
The Bank submits that the Code does not apply because: (1) the Second and Third Loans did not provided credit to natural persons; and (2) none of the three loans provided credit wholly or predominantly for personal, domestic or household purposes. They submit further that although section 11 of the Code creates a presumption that the Code applies, that presumption is triggered only if a party claims under the Code. There is no such claim in these proceedings.
The Bank is prepared to concede that the Banking Code applies. But says that there is no pleading suggesting that this would affect these proceedings in any way.
Dismissal for want of Prosecution. The Bank also submits, in the alternative, based on its Amended Motion, that the Cross-Claim should be dismissed for want of prosecution. Since December 2011 the defendants/cross-claimants have defaulted several times in relation to the Court's orders to file lay evidence supporting the Cross-Claim. Moreover, the Bank submits that the defendants have still not filed any expert evidence in these proceedings.
The defendants oppose the dismissal of the Cross-Claim for want of prosecution. They submit that: (1) the delay in complying with the Court's directions was caused by the defendant's solicitor; (2) the lay evidence has now been filed; (3) the expert evidence has not been filed due to lack of funds, but there is some evidence that funds will be available shortly; (4) even if struck out for want of prosecution the Cross-Claim is still within time and could be recommenced, albeit at significant cost to the defendants; (5) the Bank has not specified what prejudice was caused to it by the delay; and (6) the Bank did not pre-warn the defendants about its intention to attempt to strike out the Cross-Claim for want of prosecution in the Amended Motion.
It is convenient to deal with the issues the parties have presented for determination in this order: the application of the Code, Summary dismissal based on the guarantee clauses 10.1, 11 and 14, and dismissal of the Cross-Claim for want of prosecution.
The Application of the Code
In its Statement of Claim (paragraph 64(f)) the Bank has pleaded that the Code does not apply to this transaction in the sense that the commencement of the proceedings is not barred by Code s 80. In its evidence in support, affidavit of Charles Perry of 14 September 2012 (paragraph 13), the Bank advances material to the effect that Mr and Mrs El-Khoury have no defence to the whole or any part of the Bank's claim, and to support its contention that the Code does not apply to this transaction.
The El-Khourys' current defence to the Statement of Claim does not plead that the Code applies to any part of this transaction. That being so the El-Khourys do not get the immediate benefit of the presumption in the Code s 11 that the Code is presumed to apply "unless the contrary is established" where a party in proceedings claims that it applies. But it seems at least arguable that the Code may apply to the First Loan. This is because a substantial part (80% the El-Khoury's say) of this advance was to pay out a facility with the ANZ Bank for the purchase of the Dural property, their family residence.
The Code does not relevantly apply unless: the debtors are natural persons (s 6(a)); and the credit is "provided or intended to be provided wholly or predominantly for personal, domestic or household purposes" (s6(b)). This term has been recently analysed by Davies J in Bank of Queensland Ltd v Dutta [2010] NSWSC 574. The Code applies to a guarantee if it guarantees obligations under a Credit Contract to which the Code applies and the guarantor is a natural person: Code s 9. If the "personal, domestic or household purposes" test is passed for the Code's application it may otherwise qualify for the Code's application because Mr and Mrs El-Khoury are personally parties to the First Loan. But the Second and Third Guarantees do not so qualify because the Second and Third Guarantees guarantee the obligations of corporate borrowers.
The Bank rightly argues that its path to judgment does not depend on the First Loan. Default on the First Loan was consequential on the alleged default on the Third Loan to El-May and the guarantee obligations under the Second and Third Guarantees are triggered by default on the Third Loan. But despite this argument, what remains quite uncertain in my view and is a matter for evidence, is the effect that a need to comply with the Code with respect to the First Loan, especially Code s 80, would have had on the Bank's overall enforcement of all its remedies. I also regard the question of the purpose of the First Loan, as possibly attracting the Code, as a matter for evidence.
But why should defendants/cross-claimants be able to claim the benefit of the Code when they have not pleaded it? This in my view is a discretionary matter. The issue of the application of the Code emerged in the course of submissions on 13 February 2013. The El-Khourys then, through their counsel, Ms Lowson, put on submissions claiming that the Code applies Code s 11. In my view that written submission is part of proceedings "in which a party claims that the credit contract is ... one to which this Code applies". Even if it were not, I would give leave to the defendants/cross-claimants to plead the Code because of the circumstances in which this application was argued. On Monday, 11 February 2013, Ms Lowson, of counsel for the El-Khourys, sought an adjournment of the summary judgment application. The Bank opposed it She had only been briefed the previous Friday. The Court declined to allow the adjournment and the matter proceeded on Wednesday, 13 February 2013. Both Ms Lowson and Mr Russell for the Bank capably advanced their clients' cases on 13 February 2013. But it is appropriate in my view to allow a degree of latitude in relation to amendments on a point such as this, for counsel so recently briefed.
Summary Dismissal based on guarantee clauses 10.1, 11, and 14.
The Bank contended in written and oral submissions that there is no doubt about the validity of suspension of rights clauses such as clause 11(a). The Bank is correct that such cases have been considered and upheld in many cases both by this Court and in any other jurisdictions: see for example GE Capital Australia v Davis & Ors [2002] NSWSC 1146 at [17], [93]-[100] per Bryson J, Bank of Western Ausralia Ltd v O'Brien [2012] NSWSC 456 at [7] and [25]-[32] per McDougall J and Bank of Western Australia v Hoy [2012] NSWSC 518 at [9] and [16]-[17] per Adamson J.
But many of these cases advert to an important distinction between a defence that impeaches a guarantee itself and a defence that impeaches the exercise of rights under the guarantee. As McDougall J pointed out in St George Bank Limited v Field [2007] NSWSC 902 at [18], clauses of this kind (suspension of rights clauses) "may not prevent a defence being raised to liability under a guarantee where it is said (for example) the taking of the guarantee was itself affected by some vitiating circumstance. But no such issue is raised in this case. There is no challenge to the validity of the guarantee. The allegations that I have summarised seek to attack the exercise of rights under it. In my view that is the kind of exercise prohibited by the terms of the guarantee which terms, as I have said, are to be enforced according to their wording."
Holmes J expressed a similar view in the Queensland case of Capital Finance Australia Pty Ltd v Airstar Aviation Pty Ltd [2003] QSC 151 (2004) 1 Qd R 122 at [17]. When referring to a similar clause, her Honour said that matters raised in a cross-claim which are more properly matters of defence "allegations of misrepresentation or misleading conduct, and breaches of conditions which may lead to vitiation of the guarantees or discharge of the guarantors' liability under them", because they go to "invalidity or complete discharge of the guarantees, could properly be repleaded in the defence". McDougall J referred to her Honour's reasoning in a recent case in this court and summarized it thus that "such a clause would not preclude the guarantor from relying on matters which went to the invalidity or complete discharge of the guarantee": Bank of Western Australia v O'Brien [2012] NSWSC 456 at [32].
Finally, in another Queensland case on the subject, Westpac Banking Corporation v Helicopters Brisbane Pty Ltd [2012] QSC 263 at [23] and [24], Martin J, in declining to grant summary judgment, expressed the view that "no set-off" clauses could not prevent a guarantor from seeking certain kinds of relief under the Trade Practices Act, especially relief which sought to impeach the validity of the guarantee or at least its continuing operation.
Although clauses such as clause 10, 11(1) and 14 are not exclusion clauses that bar the making of claims or enforcing of rights, and instead operate as suspensions of rights so long as the guaranteed money remains unpaid, Martin J reasons that the cases with respect to exclusion clauses and the Trade Practices Act may be able to be applied by analogy: see for example the reasoning of Henjo Investments Pty Ltd v Collins Marrickville (No 1) (1988) 39 FCR 546 and [1988] FCA 40 at [49] and [50] per Lockhart J.
But have the El-Khourys made a claim which impeaches or vitiates the guarantee, and in particular clauses 10.1, 11 and 14? Ms Lowson of counsel indicated that the cross-claimants challenge to these clauses in the Second and Third Guarantees. But the Bank is correct, that this is less than entirely obvious from paragraph 3 of the amended Cross-Claim that seeks "varying the Third Loan Agreement" and "refusing to enforce the First and Second Guarantees". If the El-Khourys say that something which was agreed on 21 August 2012 somehow extinguishes or alters the operation of clauses 10, 11 or 14 for a period then they must articulate their case with greater clarity. If such an effect on these clauses is said to flow from misleading or deceptive conduct in contravention of the ASICAct then the decisions of the Queensland Supreme Court I have quoted would suggest that the point is at least arguable and is not apt for summary judgment. But I will direct the defendants cross-claimant to articulate this issue by a further amended pleading.
Dismissal for want of prosecution
The Claim for dismissal on the basis of want of prosecution is not successful at this time. But for the reasons which follow the Court will adjourn it for determination after the defendants have had an opportunity to file their expert evidence.
This is not a case where the Amended Cross-Claim should be dismissed under UCPR r 12.7(1) for want of due dispatch, despite a most unfortunate procedural record over the last two years. As my interlocutory judgment on 11 February 2013 makes clear Mr Mahony, the solicitor with carriage of the matter for the El-Khourys, has explained some of the defaults on the El-Khourys' side in recent times are due to the other pressing business of his practice. But there is evidence that such issues have now been addressed. Some funds are to become available for the future conduct of the proceedings from the sales of property.
It seems to me that the El-Khourys should be given one last chance to file their expert evidence with the benefit of the funds they say they will have available. Subject to hearing from the parties I would direct that this valuation report must be filed or served within 28 days. If not the Bank should be at liberty to relist this part of the motion and to strike out the cross-claim for want of due disposal. I will adjourn the proceedings to a suitable date for that purpose.
Conclusions and Orders
In the result therefore the Court has concluded: that it is arguable that the Code applies to the First Loan; that there is no evidence in support of the Bank's summary judgment application that shows that the defendants cannot maintain that the Code applies to the transactions the subject of these proceedings; and that there is no evidence that the Bank has complied with the Code in the actions that the Bank has taken in relation to the enforcement of the guarantees relied upon. The Court has concluded that the defendants cannot maintain that the Second and Third Guarantees are governed by the Code. But it is not easy to see on a summary judgment application whether or not the First Loan had been subject to the Code, that enforcement of the Second and Third Guarantees may yet have taken a different course. The defendants should not be deprived of the procedural fairness of a final hearing, at which the Code's application and its overall effect, if it applies, can be considered.
In light of the Court's conclusions in relation to the possible application of the Code, it is not necessary for the Court to decide whether or not to strike out the El-Khourys' Cross-Claim or their defence on the basis of Clauses 10, 11 or 14 of the guarantees. But their pleaded case must be clarified to see how they are impeaching these clauses as they claim to be doing.
Finally the Court has not upheld the Bank's claim for dismissal for want of prosecution but has decided to adjourn it. Although the defendants/cross-claimants have undoubtedly been tardy in their recent conduct of these proceedings, they have declared that their evidence is complete. They should now be put on a strict timetable to file their expert evidence, which on the evidence of their solicitor has been substantially paid for and should be able to be produced and served. If their expert evidence cannot be filed strictly on time then the Bank should still have liberty to apply to seek to strike out their Cross-Claim on this basis.
In the result therefore I will direct the parties to bring in short minutes of order to give effect to these reasons.
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I certify that this and the preceding pages are a true copy of the reasons for judgment of Justice Slattery delivered on 1 March 2013.
Associate..................................
Decision last updated: 06 March 2013
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