Bank of Western Australia Ltd v O'Brien
[2012] NSWSC 456
•02 May 2012
Supreme Court
New South Wales
Medium Neutral Citation: Bank of Western Australia Limited v O'Brien [2012] NSWSC 456 Hearing dates: 02/05/2012 Decision date: 02 May 2012 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: Plaintiff entitled to summary judgment. Parties to bring in orders.
Catchwords: GUARANTEE AND INDEMNITY - enforcement of guarantees - whether bank entitled to judgment in accordance with guarantees - whether suspension of rights clauses effective - whether defendants can seek relief under s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) - whether, as a matter of construction, suspension clauses preclude the bringing of the cross-claims relying on federal law. Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth) Cases Cited: Agar v Hyde (2000) 201 CLR 552
Bitannia Constructions Pty Limited v Parkline Constructions Pty Limited (2006) 67 NSWLR 9
Capital Finance Australia Limited v Davies [2002] NSWSC 1146
Capital Finance Australia Limited v Air Star Aviation Pty Limited (2004) 1 Qd R 122
Daewoo Australia Pty Limited v Porter Crane Imports Pty Limited [2000] QSC 950
Dey v Victorian Railway Commissioners (1949) 78 CLR 62
and Esanda Finance Corporation Limited v Peat Marwick Hungerford (1997) 188 CLR 241
General Steel Industries Inc v Commissioner for Railways (New South Wales) (1964) 112 CLR 125
St George Bank Limited v Field [2007] NSWSC 902
Webster v Lampard (1993) 177 CLR 598Category: Principal judgment Parties: Bank of Western Australia Limited (ACN 050 494 454) (Plaintiff/First Cross-Defendant)
Rory Francis O'Brien (First Defendant/First Cross-Claimant)
Bakota Holdings Pty Ltd (ACN 050 060 583) (Second Defendant/Second Cross-Claimant)Representation: Counsel: P J Dowdy (Plaintiff/First Cross-Defendant)
R A Yezerski (Defendants/First and Second Cross-Claimants)
Solicitors: Ashurst Australia (Plaintiff/First Cross-Defendant)
Eakin McCaffery Cox (Defendants/First and Second Cross-Claimants)
File Number(s): 2011/229400
Judgment (Ex tempore - revised 3 May 2012)
HIS HONOUR: The plaintiff (the bank) seeks summary judgment against the defendants (the guarantors) pursuant to their guarantees of the liabilities to the bank of a company known as FOB Airlie Beach Pty Limited (the borrower). The guarantors submit that they have an arguable defence to the bank's claim against them. They rely on:
(1) misrepresentations said to have been made to the guarantors and to the borrower at and after the time the debt fell due for repayment;
(2) what they characterise, in those circumstances, as misleading or deceptive or unconscionable conduct by the bank in seeking to enforce its rights both against the borrower and against them; and
(3) breach by the bank of an alleged obligation to act reasonably and in good faith in the exercise of its powers under the loan facility documents.
The bank submits that those suggested defences (which the guarantors also seek to articulate in a cross-claim against the bank) cannot stand in the path of judgment for the bank, because of particular provisions of the facility documents.
The loan facility as amended from time to time
The facility agreement was made originally on 24 October 2006. It was varied from time to time. As finally varied, it provided for a construction loan facility of almost $176 million. According to the terms of the facility agreement as last varied, the "termination date" was 15 January 2009, and all amounts then owing were repayable on that date.
Relevant terms of the facility agreement include clauses 5.1 (repayment); 10 (events of default); 11 (rights on default); 12.4 (waiver); and 12.7 (payments). I set out those clauses, to the extent that the parties referred to them in submissions:
5.1 Repayment
The Borrower must pay to the Lender the aggregate of Advances outstanding and the balance, if any, of the Debt on the Termination Date. The Borrower may not repay the Debt except in accordance with the express provisions of this document.
10. Events of default
If any one or more of the following occur, an Event of Default at the Lenders option will have occurred. A determination by the Lender in its absolute discretion that any one or more has occurred will be final and binding on the Borrower, and the Guarantor. The Borrower must promptly inform the Lender in writing upon the happening of any of the events described in this clause.
(a) (cross default) There is default (other than by the Lender) in the performance of any term, agreement, or condition contained in or implied by this document, the Security, the Guarantee, or any other collateral document or security.
(b) (non-payment) Any indebtedness or obligation of the Borrower to any person including the Lender is not paid, met, or satisfied when due or becomes due and payable before its specified maturity or any creditor of the Borrower becomes entitled to declare any indebtedness of the Borrower due or the Borrower defaults under any charge or security in favour of any person.
(c) (insolvency) An Insolvency Event occurs.
(d) (cessation of business) The Borrower ceases or threatens to cease to carry on its business or a material part of its business or disposes of or threatens to dispose of substantially all of its assets.
(e) (bankruptcy) The Borrower, being an individual, dies, is made or declared bankrupt, becomes incapable of managing his own affairs, or is jailed.
(f) (change of control) There is any change in ownership or control of the Borrower or any company of which the Borrower is a Subsidiary.
(g) (striking off) Any action is initiated by any competent authority with a view to striking the Borrower's name off any register of companies.
(h) (suspension of listing) Where the Borrower's shares are at any time listed on any stock exchange, the listing is suspended or revoked and the suspension or revocation remains in force for a period greater than 14 days.
(i) (distress or execution) Any distress or execution is levied or enforced against any of the Borrower's assets or property.
(j) (breach of undertaking) The Borrower or any person on behalf of the Borrower breaches any undertaking at any time given to the Lender or its solicitors or any condition imposed by the Lender in agreeing to anything.
(k) (material adverse change) In the Lender's opinion there is a material adverse change in the Borrower's financial condition.
(l) (reduction of capital) The Borrower reduces either its issued capital or attempts to do so without the Lender's prior written consent.
(m) (change of constitution) The Borrower changes its constitution without the Lender's prior written consent.
(n) (offence) The Borrower commits an offence under the Corporations Act 2001.
(o) (Corporations Act) The Borrower does any of the things contemplated by Part 2B.7 (change of status), Part 2J.2 (self acquisition and control of shares), or Part 2J.3 (financial assistance in respect of shares) of the Corporations Act 2001, or varies in any way the rights or obligations attached to shares in the Borrower without the Lender's prior written, consent.
(p) (misrepresentation) Any representation, warranty, reply to requisition, or any financial or other information provided to the Lender in connection with the Facility is or becomes untrue, false, or misleading.
(q) (invalidity) All or any part of this document, the Security, or the Guarantee becomes void, illegal, invalid, unenforceable, or of limited or of reduced force effect or value.
(r) (guarantor or Related Body Corporate) Any of the events described in sub-clauses (b) to (q) inclusive of this clause occur in relation to the Guarantor, or any Related Body Corporate of the Borrower or the Guarantor.
(s) (default of collateral security) Any default occurs under the Security and/or any collateral security,
(t) (increase of amount secured) The amount secured by any charge or encumbrance over the Security is increased without the Lender's prior written consent.
(u) (reduction in value) The Security suffers a material diminution in value or utility or a material part of the Security suffers total loss or destruction or damage beyond repair or damage to an extent which in the opinion of the Lender renders repair impractical or uneconomical.
(v) (illegal or improper purpose) If any of the Secured Money is used for an illegal or improper purpose or to finance an illegal improper or terrorism activity.
11 Rights on Default
Despite any other provision of this document, at any time after an Event of Default occurs how and when the Lender in its absolute discretion decides, the Lender may sign anything and do anything the Lender considers appropriate to recover the Debt and deal with the Security. The Lender may do this with or without taking possession of the Security, whether or not in conjunction with other property, despite any omission, neglect, delay, and without liability for loss, or need to account as mortgagee/chargee in possession. Without limitation the Lender may do any one or more of the following.
(a) Cancel the Facility.
(b) Demand and require immediate payment of the Debt and recover the Debt from the Borrower and/or the Guarantor.
(c) Exercise any right, power, or privilege conferred by law, equity, this document, the Security, the Guarantee, and/or any other collateral document or security.
(d) Perform any one or more of the Borrower's obligations under this document, the Security, any collateral security, or a Project Document.
(i) In addition to the other rights, powers, and remedies conferred on it by the Security, by law, or in equity enter on the Property and:
(ii) erect, complete, and/or demolish (wholly or partly) the Building Work either in accordance with the Plans and Specifications or otherwise as the Lender thinks fit and either in its own name or as attorney for the Borrower;
(iii) increase or reduce the size of the Building Work;
(iv) continue or discontinue contracts and/or contract with existing sub-contractors and like persons;
(v) call for and accept any tender;
(vi) pay, contract with, or employ any architect, contractor, or person;
(vii) use or cause to be used any materials or property on the Property.
The Lender may elect not to complete the Building Work and may sell the Property with all improvements in its existing state and condition. All money expended by the Lender in accordance with this clause will form part of the Debt.
11.2 Statutory notices
Any restriction, requirement for notice, or lapse of time stipulated or required by any state is negated so far as is lawful. The Lender need not give notice to the Borrower before exercising a right, power, or remedy under this document unless notice is required by a statutory provision which cannot be excluded. Where a statutory provision stipulates that a notice must be given then if no period of notice is prescribed, one day is fixed as the requisite period.
11.3 Collateral Security
The Debt may be recovered by the Lender exercising its rights under this document, the Security, the Guarantee, any collateral security, or any of them without prejudice or reference to the Lender's rights under any other document.
12.4 Waiver
No failure to exercise and no delay in exercising the Lender's rights, powers, or privileges under this document operates as a waiver. No waiver of the Lender's rights, power, or privileges under this document is effective unless made in writing.
The lender may exercise all of its right at any time and more than once.
12.7 Payments
All money payable by the Borrower under this document must be paid in cleared funds without set-off or counter-claim and free of all deductions as and where the Lender directs on or before 12:00 noon local time on the due date or if none on demand. Payments will be credited to the Borrower only when actually received by the Lender. The Lender will have an absolute discretion (without the need to communicate its election to anyone) to apply at any time any payment received by it in reduction of any part of the Debt it elects. Any surplus money received by the Lender will not carry interest and may be paid by the Lender to the credit of an account in the Borrower's name in any bank the Lender thinks fit including the Lender.
The guarantors were parties to each of the agreements by which the original facility agreement was varied or restated from time to time. They submitted that, thereby, they became parties to the facility agreement. It is not necessary to decide that point.
The guarantees
Mr O'Brien's guarantee was dated 28 October 2006. By cl 2.1, he guaranteed payment of the "guaranteed money". I set out that clause.
2.1 You guarantee the debtor's payment to us of the guaranteed money. Your guarantee continues until all guaranteed money has been paid in full orders you end this guarantee and indemnity under clause 6. If the debtor does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether orders not we have made demand on the debtor).
The relevant clauses of Mr O'Brien's guarantee included cl 5.2 (protection of the bank's rights); 5.5 (suspension of Mr O'Brien's rights); 8.1 (payment in full); 8.8 (certificates); and 8.20 (variation and review.) I set out those clauses.
5.2 Rights given to us under this guarantee and indemnity and your liabilities under it are not affected by any act orders omission by us orders by anything else that might otherwise affect them under law orders otherwise, including:
(a) the fact that we vary orders replace any guaranteed agreement, such as by increasing the credit limit, increasing the amount of credit agreed to be provided orders extending the term. If this guarantee and indemnity is one to which a Code;
(b) the fact that we release the debtor or give them a concession, such as more time to pay;
(c) the fact that the debtor opens another account with us;
(d) the fact that we release, lose the benefit of or do not obtain any security;
(e) the fact that we do not register any security which could be registered;
(f) the fact that we release any person who guarantees any of the debtor's obligations;
(g) the fact that the obligations of any person who guarantees any of the debtor's obligations may not be enforceable;
(h) the fact that any person who was intended to guarantee any of the debtor's obligations does not do so effectively;
(i) the fact that rights in connection with any guaranteed agreement are assigned; or
(j) the death (orders the receipt of notice by us of the death), mental or physical disability or insolvency of any person including you or the debtor.
...
8.1 Except to the extent you have a right of set-off granted by law which we cannot exclude by agreement (such as under a Code) you must pay us the guaranteed money in full without set-off, counterclaim orders deduction.
...
8.8 We may give you a certificate about a matter or about an amount payable in connection with this guarantee and indemnity. The certificate is sufficient evidence of the matter or amount, unless it is proved to be incorrect.
...
8.20 A provision of this guarantee and indemnity, or right created under it, may not be waived or varied except in writing signed by the party orders parties to be bound.
The expression "guaranteed money" was defined to mean:
...the amounts payable under each guaranteed agreement. The maximum guaranteed money in connection with each guaranteed agreement is described in the details under "maximum amount."
It is not necessary to go to "the details".
The Bakota guarantee was also dated 28 October 2006. By cl 2 it provided for both a guarantee and an indemnity. I set out cll 2.1 and 2.2.
Guarantee
2.1 You unconditionally and irrevocably guarantee payment to us of the guaranteed money. I the debtor does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether or not we have made demand on the debtor).
2.2 The guarantee in clause 2.1 is a continuing obligation and extends to all of the guaranteed money.
The Bakota guarantee contained provisions as to protection of the bank's rights, suspension of the guarantor's rights and the like, that were not materially different from the equivalent provision of Mr O'Brien's guarantee.
The definition of "guaranteed money" in the Bakota guarantee was:
Guaranteed money means, at any time, all money which the debtor owes us or will or may owe us in the future, including under an arrangement with us.
The charge
The borrower gave to the bank a fixed and floating charge dated 25 October 2006. That charge provided, among other things, that the borrower would be in default if it did not pay the amount owing on time (cl 17(a)). The amount owing was defined to mean:
"...at any time all money which one or all of you owe us or will or may owe us in the future, including under this charge or under any other arrangement with us."
The demands
The bank made demand on the borrower by letter (from its lawyers) dated 6 April 2009. That demand referred to the failure to pay on 15 January 2009 and stated, it would seem correctly, that this amounted to an "event of default". The demand;
(1) terminated the facility;
(2) required payment of the amount owing; and
(3) stated that if payment were not made the bank would exercise
its powers.
The demand stated, in particular, that the default amounted to default under the charge, and that the bank might exercise its rights under the charge, including by appointing a receiver, if the amount due were not paid.
The borrower did not pay the amount demanded. The bank appointed receivers under the charge. The receivers sold the property the subject of the charge. After that was done the bank made demand on each of the guarantors. Those demands did not place any reliance on cl 11.1 of the facility agreement. On the contrary, each stated that the borrower had failed to pay the amount borrowed, recited the terms of the guarantee, and demanded "pursuant to the terms of the guarantee" that the guarantor pay the balance said to be owed.
The proposed defences
The guarantors filed, and amended, a list response, a cross claim summons and a cross claim list statement. After the bank filed its notice of motion for summary judgment, the guarantors provided draft further amended versions of those documents. The debate before me proceeded on the basis that the defences and cross claims that the guarantors wished to assert, and which should be treated as the subject of the application for summary judgment, were those sought to be advanced in the draft further amended documents.
The list response, (as for convenience I shall call it) denied that the provisions of the documents on which the bank relied prevented the guarantors from raising any defences or from bringing any cross claim.
The list response raised various other issues. However, the fundamental defences sought to be raised were that:
(1) in the events that have happened, the bank was estopped from calling on the borrower to repay the amounts advanced and from seeking payment under the guarantees;
(2) likewise, in the events that have happened, the bank was estopped from dealing with its securities and from calling on the guarantees;
(3) there was no relevant failure to pay, nor any relevant default, because of the bank's alleged conduct amounting to breach of contract, or misleading or deceptive or unconscionable conduct and giving rise to an estoppel, in each case in relation to the exercise of the bank's rights, as (in substance) alleged in the cross claim list statement;
(4) alternatively, by reason of that alleged conduct, the guarantors were entitled to injunctive relief to restrain the bank from enforcing the guarantees.
By the cross claim summons, the guarantors seek a declaration that they are not liable to pay any amount to the bank under their guarantees; alternatively, relief under s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) or cognate legislation. The relief sought includes a permanent injunction restraining the bank from enforcing the guarantees.
The cross claim list statement (as, again for convenience, I shall call it) alleges, in substance;
(1) that the bank was seeking, in breach of an alleged implied term of the facility agreement, to exercise its powers other than in good faith and reasonably, and was seeking to exercise those powers for an improper and collateral purpose;
(2) that the bank had made various representations to the borrower and the guarantors, the effect of which was that the bank would roll the debt over after 15 January 2009, on which representations the borrower and the guarantors relied, to their detriment, by not seeking alternative sources of funding;
(3) that the bank did not give any adequate warning to the borrower or the guarantors of its intention to terminate the facility and call up the loan; and
(4) by reason of those and other matters, the bank engaged in misleading or deceptive conduct, acted unconscionably, was estopped from enforcing its rights, and acted in breach of contract because it exercised its powers under the facility agreement for an improper and collateral purpose.
Those suggested defences raised, in very broad outline (and I have given that the barest summary of the "pleadings") three areas of controversy;
(1) the proper construction of relevant provisions of the facility agreement, in particular the so called "preservation" and "suspension" clauses;
(2) the alleged improper use of powers under the facility agreement; and
(3) the arguments based on estoppel, misleading or deceptive or unconscionable conduct, relied upon as an answer to what the guarantors characterise as the bank's attempts to exercise its powers under the facility agreement.
Mr Gleeson of Senior Counsel, who appeared with Mr Yezerski of counsel for the guarantors, sought to support those suggested defences at three successive levels:
(1) as a matter of construction, he submitted that the suspension clauses did not preclude the bringing of the cross-claims relying on federal law, and thus that, as a matter of discretion at least, the associated claims in the defence should proceed in any event;
(2) alternatively, the claims under federal law provided for remedies that would sterilise the suspension clauses, because the operation or effect of those clauses formed part of the loss or damage which the application of remedies under federal law would alleviate; or
(3) if and only if the suspension clauses should be given effect according to their terms, the result would be the impermissible splitting, contrary to Chapter III of the Constitution, of what was (and was agreed to be) one only "matter" that was wholly within federal jurisdiction; because the bank's case would be heard and decided before, and apart from, the cross claim that is inextricably linked with it.
The case for summary judgment
It was, I think, accepted that bank would be entitled to summary judgment only if it could show that the defences proposed showed no triable issue. It is not sufficient to say that the guarantors' prospects of success might be slight. The question is whether they have any prospects of success at all. That statement of the test is supported by cases such as Dey v Victorian Railway Commissioners (1949) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (New South Wales) (1964) 112 CLR 125; Webster v Lampard (1993) 177 CLR 598; Agar v Hyde (2000) 201 CLR 552; and Esanda Finance Corporation Limited v Peat Marwick Hungerford (1997) 188 CLR 241.
I proceed on the basis that the test for summary judgment is as I have just stated it.
The effect of the suspension clauses
In general terms, it is both clear and uncontroversial that a creditor and a debtor may agree that the creditor is entitled to be paid in full before the debtor may exercise any rights (including by way of set off or cross claim) against the creditor. Clauses having that effect are commonly referred to as "suspension" or "suspension of rights" clauses.
Bryson J stated the principles, in my respectful opinion correctly, in Capital Finance Australia Limited v Davies [2002] NSWSC 1146. After a detailed examination of the cases, his Honour concluded at [93] that suspension clauses do not in principle oust the jurisdiction of the courts. At most, they suspend, but do no otherwise impair, the rights of, the relevant party. The party whose rights are suspended is, and remains able, to enforce those rights provided it conforms with its primary obligation of payment.
At [95], Bryson J appeared to recognise that there might be a limiting case where a "colourable condition" produces a "practically insurmountable obstacle to resort to the courts". However, his Honour concluded, a clause which did no more than postpone the right of resort to the courts until the primary obligation was satisfied could not be so characterised.
His Honour's views were, I think, summarised at [97]. His Honour said:
97 The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off.
In St George Bank Limited v Field [2007] NSWSC 902, I concluded that a lender's contractual entitlement to be paid in full and without deduction prevented the guarantor from raising defences as to the conduct of the lender in (allegedly) impairing the value of the security, and acting (again, allegedly) in a way that was effectively equivalent to equitable waste. However, I said, there was a distinction between a defence that impeached the guarantee itself on the one hand, and a defence that impeached only the exercise of rights under the guarantee on the other.
I remain of the view that I expressed in Field.
White J expressed a similar view in Daewoo Australia Pty Limited v Porter Crane Imports Pty Limited [2000] QSC 950. In the circumstances where the defendant did not seek to impeach the contract, but sought damages under the Trade Practices Act for allegedly misleading or deceptive conduct in connection with the formation of that contract (on which the defendant relied as a source of its rights), her Honour held that the plaintiff was entitled to judgment, and that the defendant should be left to pursue its claims by way of cross claim.
Holmes J expressed a similar view in Capital Finance Australia Limited v Air Star Aviation Pty Limited (2004) 1 Qd R 122. In that case, her Honour considered a clause in a guarantee which provided for the guarantor to pay in full without exercising any right of set off, counter claim etc. Her Honour concluded that such a clause would not preclude the guarantor from relying on matters which went to the invalidity or complete discharge of the guarantee.
If I may say so with respect, my decision in Field would have been made very much easier had I had the benefit of being referred to, and considering, her Honour's reasons before I gave judgment in that case.
Federal jurisdiction
It was common ground that, because of the arguments raised under federal legislation, the entire controversy is one in federal jurisdiction, and that this Court was accordingly vested with federal jurisdiction to hear, and quell, that entire controversy. It does not follow, in my view, that this Court can or must do so in one hearing only. It is commonplace that a Chapter III Court may (for example) deal with certain issues in a proceeding by a separate and prior determination of those issues.
What is the consequence where a defence arising under federal law is pleaded in answer to a claim arising under state law (including, for that purpose, the common law)?
In Bitannia Constructions Pty Limited v Parkline Constructions Pty Limited (2006) 67 NSWLR 9, the Court of Appeal concluded that a provision of a state statute preventing certain defences from being raised to a claim in a state court, could not prevent the defendant from raising, in answer to that claim, a defence said to be available under federal law.
The parties' submissions
The parties provided detailed written submissions, and supplemented them with extensive oral argument. In the interests of brevity, I will not repeat the detail of those submissions.
In substance, Mr Gleeson submitted for the guarantors that the suspension and preservation clauses could not operate to prevent his clients from asserting their rights in respect of the alleged breaches of contract, alleged misrepresentation or deceptive or unconscionable conduct, or arising from the alleged estoppels.
In my view there is a simple answer to the case that is put for the guarantors. That part of the case focuses on the alleged exercise by the bank of powers under cl 11.1 of the facility agreement. That exercise of powers, which is said to be susceptible to the defences of misleading or deceptive or unconscionable conduct and the like, was said to include:
(1) termination of the facility;
(2) making demand on the borrower for immediate payment of the amount due;
(3) appointing receivers; and
(4) making demand on the guarantors.
The argument is predicated on the exercise of powers under cl 11.1 of the facility agreement. It is that exercise of powers which is said to be susceptible to the various defences that I have outlined.
Certainly, each of the steps that were taken was a step authorised by cl 11.1. But it does not follow either that it was a step in fact taken in reliance upon cl 11.1 or a step (more accurately, perhaps, an act) that depended for its validity and effect upon cl 11.1.
Mr Sheahan of Senior Counsel, who appeared with Mr Dowdy of counsel and Mr Flecknoe-Brown of counsel for the bank, submitted that cl 11.1 had nothing to do with the matter, and thus that a defence which in some way sought to impeach the exercise of powers under cl 11.1 must fail. On that basis, Mr Sheahan submitted, it mattered not that the defence was one articulated at least in part by reference to rights arising under federal law.
Mr Gleeson replied that the bank's pleading expressly asserted reliance on cl 11.1, and that the reliance was not (as Mr Sheahan had put it) merely "adjectival".
However, as Mr Sheahan submitted, it seems to me that the real question is not so much how the bank has framed its case, but rather how, if at all, the alleged wrongful conduct (if I may use that phrase comprehensively to summarise all the complaints made against the bank) contributed in some way to the position in which the guarantors now find themselves, and against which they seek relief under (among other things) federal law.
If one examines the steps taken by the bank, it is apparent, in my view, that none of them depended for its validity upon cl 11.1.
Thus, the facility came to an end because it had reached its termination date. There was no need for any step to be taken to cancel it. It terminated of its own accord, or by the force of its own provisions. There was no step necessary to be taken on the part of the bank to achieve that result. To the extent that the bank relied on cl 11.1(a) to cancel the facility, that was, having regard to the terms of the facility agreement, mere surplusage, and as a matter of law ineffectual.
Of course, cl 11.1(a) authorised cancellation of the facility on default. Clearly, in my view, that was aimed at a situation where an event of default occurred prior to the termination date of the facility. In such a circumstance, there might be a valid reason for the bank to be in a position to terminate the facility: for example, to protect itself from any argument that it might be required to make further advances.
I note, in passing, that Mr Gleeson submitted that this was indeed the reason why the bank purported to terminate the facility by its notice of demand on the borrower. I do not accept that submission. At that time, the facility having come to an end of its own force, there was no further obligation on the part of the bank to make any further advances.
Again, cl 11.1(b) empowered the bank to make the amount due under the facility agreement payable on default. But again, in my view, that clause was directed to a situation where the default occurred before the facility had come to an end according to its terms. In the present case, the bank did not need to do anything to make the amount due under the facility payable. It became payable when, on the termination date, the facility expired without any extension having been renegotiated.
In each case, the bank's act in purporting to terminate and in purporting to make the amount then due payable, was legally irrelevant and in that sense legally ineffectual.
It must be borne in mind that the facility agreement was drafted to cover, so far as the parties could foresee them, events that might occur during the life of the facility as well as events that would become relevant only on termination of the facility. Thus, it is not at all strange that there is, to that extent, some possible tension between various provisions of the facility agreement. But that tension does not seem to me to be a reason for imputing to the bank either the need or the volition to act in a way that was ineffectual, or legally irrelevant, having regard to the particular terms of the facility agreement which governed the situation as of 15 January 2009.
Again, it may be accepted that cl 11.1(c) authorised the bank to exercise its powers under the various security agreements. By definition, those security agreements included the charge and the guarantees. But again, cl 11.1(c) was not a necessary source of power for the exercise of rights given by those security agreements. Those agreements themselves furnished the necessary powers.
Thus, by cl 17(a) of the charge, the borrower fell into default when it did not pay the amount owing under the facility agreement on the termination date. By cl 18.1, the amount owing became payable on demand upon the occurrence of that default, and by cl 18.2(b), on the occurrence of that default, the bank became entitled, among other things, to appoint a receiver. None of those things depended in any way, for its validity, on cl 11.1(c) of the facility agreement.
Under the guarantees (and it is not necessary to consider them individually) the guarantors guaranteed payment of the specified money to the borrower. If the borrower did not pay on time (as in this case it did not), simply because of cl 5.1 of the facility agreement, the guarantors became liable to pay "on demand from" the bank.
The liability to pay on demand arose whether or not the bank made demand on the borrower. Thus, first, the power to make demand on the guarantor follows from the terms of the guarantee; and secondly, it was not necessary for any demand to have been made on the borrower before the secondary liability of the guarantor could be enforced.
In those circumstances, it is not necessary to consider the separate arguments raised in the case of Bakota, because it agreed to indemnify as well as to guarantee.
It follows, in my view, that the matters suggested in the list response and list cross claim statement cannot afford any answer to the bank's claim for summary judgment.
On that basis, it is not necessary to consider the various arguments raised as to the consequences of the undoubted fact that the court is exercising federal jurisdiction, or the arguments as to inconsistency between state and federal law.
Other matters
The bank sought, in the alternative, an order that certain paragraphs of the cross claim list statement be struck out. It did so on the basis that they were predicated on the proposition that the bank had acted pursuant to cl 11.1. For the reasons that I have just given, those paragraphs should be struck out if it is necessary to do so.
The bank sought also an order that a certain notice to produce be set aside. That notice to produce sought the production of a document which was said to be, and which I am content to assume is, highly confidential. The bank submitted that the document was irrelevant because it could go only to the case, however articulated, based on an improper exercise of powers under cl 11.1.
Again, it follows from what I have said that the notice to produce should be set aside. I note however that the parties agreed that, had I come to a different view, the Court should leave it to the parties to reach some agreement as to protection of confidentiality.
The guarantors submitted that, if I were to come to the conclusion that I have, the judgment to be entered should be stayed while they prosecute their cross claim. That submission was not argued in full. In my view it is one that should be dealt with by way of separate application, once judgment has been entered pursuant to the reason I have just given.
Orders
I am not sure that the evidence is sufficient to enable me to quantify the judgment to which the bank is entitled. Accordingly, I stand the matter over until tomorrow morning (3 May 2012) at 10 am before me for the parties to bring in short minutes of order to give effect to these reasons. If there is any argument as to the orders to be made, I will deal with it at that time.
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Decision last updated: 09 May 2012
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