Bowesco Pty Ltd v Westpoint Management Ltd [No 2]
[2014] WASC 207
•12 JUNE 2014
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: BOWESCO PTY LTD -v- WESTPOINT MANAGEMENT LTD [No 2] [2014] WASC 207
CORAM: CHANEY J
HEARD: 29 & 30 APRIL 2014
DELIVERED : 12 JUNE 2014
FILE NO/S: CIV 2092 of 2012
BETWEEN: BOWESCO PTY LTD
Plaintiff
AND
WESTPOINT MANAGEMENT LTD
Defendant
Catchwords:
Guarantor - Whether right to subrogation arises - Money advanced to principal debtor to complete development on secured property - Funds used to pay unsecured debtors
Legislation:
Nil
Result:
The plaintiff's claim is dismissed
Category: B
Representation:
Counsel:
Plaintiff: Mr A Metaxas
Defendant: Mr J C Vaughan SC
Solicitors:
Plaintiff: Metaxas & Hager
Defendant: Clayton Utz
Cases referred to in judgment:
Barnes v Addy (1874) LR 9 Ch App 244
Bell Group Ltd (In Liq) v Westpac Banking Corporation [No 9] [2008] WASC 239 (2008) 39 WAR 1
Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269
Dalma No 1 Pty Ltd (in liquidation) (ACN 111 772 260); Application of Bruce Gleeson and David Shannon in their Capacity as Joint and Several Liquidators of Dalma No 1 Pty Ltd (in liquidation) [2013] NSWSC 1335; (2013) 279 FLR 80
Equity Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd (1940) VLR 201
Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Ulster Bank Ltd v Lambe [1966] NI 161
CHANEY J: In 2005, Suncorp ‑ Metway Ltd (Suncorp), which carried on businesses as bank, agreed to lend a company, Lanepoint Enterprises Pty Ltd (Lanepoint) funds to purchase and develop land at 61 Great Eastern Highway and 2, 4 and 6 Armadale Road, Rivervale (Lanepoint Property). The loan was secured by a mortgage, a fixed and floating charge over the assets and undertaking of Lanepoint, and a guarantee by the plaintiff, Bowesco Pty Ltd (Bowesco). Shortly afterwards, in May 2005, the defendant, Westpoint Management Ltd (Westpoint Management), in its capacity of responsible authority for the Westpoint Income Fund, agreed to provide financial accommodation to Lanepoint to a maximum of $4 million for the development of the Lanepoint Property (Development). Westpoint Management's advances to Lanepoint were to be secured by a second ranking charge over Lanepoint's assets.
The development proceeded, and both Suncorp and Westpoint Management advanced funds in accordance with their respective loan agreements.
In October 2005, the Australian Securities and Investments Commission (ASIC) placed an interim stop order on the Westpoint Income Fund preventing it from raising funds. That order prevented Westpoint Management from providing further funds to Lanepoint. In January 2006, Bowesco agreed to advance funds to Lanepoint to enable it to complete the Development. $550,000 was advanced pursuant to that agreement. In February 2006, provisional liquidators were appointed to Westpoint Management, and in March 2006, Suncorp appointed receivers to Lanepoint.
Eventually, the Development was completed and Lanepoint's debt to Suncorp was paid out. Surplus funds from the sale of the units comprising the Development were paid by Lanepoint's receivers to Westpoint Management.
Bowesco, in these proceedings, claims that Westpoint Management holds $550,000 of those excess funds on a constructive trust for the benefit of Bowesco. The constructive trust is said to arise because Bowesco's right to subrogation of Suncorp's rights under its securities required Suncorp to account to Bowesco for the surplus funds which it realised, it failed to account in breach of its fiduciary duty to do so, and Westpoint Management took the funds with knowledge of Bowesco's rights. Westpoint Management denies that any right of subrogation exists in relation to the $550,000 advanced by Bowesco to Lanepoint, it says that it was entitled to retain those funds in satisfaction of its loan to Bowesco secured by its second ranking charge.
In order to understand Bowesco's claim, it is necessary first to set out in more detail the facts, which were largely agreed between the parties.
The facts
Bowesco, Lanepoint and Westpoint Management are all companies associated with Mr Norman Phillip Carey, who gave evidence on behalf of Bowesco at the trial of this matter. Mr Carey has been a sometime director of each of the three companies.
In about 2004, Bowesco borrowed $1,500,000 from Suncorp to assist in the refinance of land and buildings situated at 204 Warnbro Sound Avenue, Warnbro (the Warnbro Property). That loan was secured by a fixed and floating charge over the assets and undertakings of Bowesco and a first registered mortgage over the Warnbro Property.
By letter dated 15 April 2005, Suncorp offered to lend Lanepoint up to $5,875,900. The letter described the purpose of the loan facility (Suncorp ‑ Lanepoint Facility) as follows:
To assist with the acquisition and development of 40 residential apartments at 61 Great Eastern Highway and 2, 4 and 6 Armadale Road, Rivervale.
The letter of offer provided that construction work was to commence by 30 June 2005 and was to be completed by 31 October 2005. It contained a provision for partial discharge of the security upon completion of contracts for the sale of individual lots, apartments or units. It contained certain conditions precedent to the construction funding requiring the bank to be satisfied as to the form and substance of the proposed building contract, as to the receipt of a building approval, and that the development was proceeding with agreed cash flow and project feasibility statements. The letter of offer nominated Mr Carey and Bowesco as joint and several guarantors.
A guarantee was subsequently executed by Bowesco (but not, it seems, by Mr Carey) in relation to the Suncorp ‑ Lanepoint Facility (Suncorp ‑ Bowesco guarantee). The guarantee was expressed as follows:
3.1The Guarantor unconditionally and irrevocably guarantees payment of the Moneys Secured to the Bank when they are due.
3.2The Guarantor shall pay the Moneys Secured to the Bank on demand if they are not paid by the Borrower.
3.3The Guarantor guarantees the due and punctual performance by the Borrower of the obligations of the Borrower under any Agreement and under any Security.
'Agreement' is defined in the guarantee as follows:
[E]ach and every contract in writing whether formed by acceptance of a letter or letters of offer or otherwise now or in the future made or existing in relation to the Moneys Secured in which the Bank has expressly provided for the terms of payment or repayment of the Moneys Secured.
Clause 9.1 of the guarantee specified that:
This guarantee shall be enforceable even if any Security is still current or has not matured or fallen due.
Lanepoint executed a credit facility deed (Suncorp ‑ Lanepoint Credit Facility Deed), a company charge and a mortgage of the Lanepoint property by way of security for the Suncorp ‑ Lanepoint Facility.
After April 2005, Suncorp made advances to Lanepoint pursuant to the Suncorp ‑ Lanepoint Facility.
On about 10 May 2005, a written loan agreement was made between Westpoint Management as responsible entity of the Westpoint Income Fund as lender, Lanepoint as borrower, and Perpetual Nominees Ltd as custodian. Pursuant to that loan agreement, Westpoint Management agreed to provide financial accommodation to Lanepoint to a maximum of $4 million for the development (WIF ‑ Lanepoint Loan Agreement).
Westpoint Management made advances to Lanepoint pursuant to the WIF ‑ Lanepoint Loan Agreement. Those advances were secured by a second ranking charge granted by Lanepoint to Perpetual Nominees Ltd as custodian (WIF ‑ Lanepoint charge).
On 25 October 2005, ASIC sent a letter to Westpoint Management, in its capacity as a responsible entity for the Westpoint Income Fund, advising it that it had made an interim stop order pursuant to s 1020E of the Corporations Act 2001 (Cth), the effect of which was that no offers, issues, sales or transfers of interests in the Westpoint Income Fund could be made for the following 21 days. On 23 November 2005, a final stop order was made by ASIC. Mr Carey explained that, as a result of those orders, Westpoint Income Fund (more particularly Westpoint Management) was unable to make any advances to Lanepoint pursuant to WIF ‑ Lanepoint Loan Agreement. By that time, the advances by Westpoint Management to Lanepoint were about $2.1 million, but no further advances were made after that date.
Mr Carey produced a letter dated 15 January 2006 from Bowesco to Lanepoint and Westpoint Management. The letter contained the following recitals:
A.Lanepoint Enterprises Pty Ltd ('Lanepoint') is a fully owned subsidiary of Bowesco Pty Ltd ('Bowesco').
B.In April 2005, Bowesco provided a guarantee to enable Lanepoint to procure a project loan facility from Suncorp Metway Limited ('Suncorp') on the basis that the Westpoint Management Limited as Responsible Entity of the Westpoint Income Fund ('WIF') would provide the balance of funds required to complete the project.
C.On 25 October 2005, ASIC issued an interim stop order on WIF and on 23 November 2005 issued a final stop order on WIF. The effect of the order is that WIF can no longer raise funds and therefore cannot fulfil current loan obligations.
D.As a result of the order, WIF is in default of its loan agreement with Lanepoint and is unable to make any further advances.
E.Suncorp has become aware of the ASIC stop order on WIF and the WIF default in its loan to Lanepoint. Bowesco, Lanepoint and WIF are concerned that this default will trigger a default in the Suncorp facility causing Suncorp to cease funding and sell the uncompleted project as mortgagee in possession. This will cause WIF to lose most if not all of its loan to Lanepoint.
F.To ensure the project is completed, Bowesco as guarantor will provide funding to Lanepoint required for the sole purpose of completing the project.
The letter, executed by all three companies, recorded an agreement that Bowesco 'as guarantor' would provide funding required by Lanepoint to complete the Development 'so that the Suncorp loan facility is reduced by the amount of Bowesco's fundings of these project costs'. The letter specified that the funding was to be used for the sole purpose of paying the project costs required to complete the project. It continued:
WIF agrees that provided these funds are used for the sole purpose of paying the project costs required to complete the project, then Bowesco will take over Suncorp's security position once Suncorp has been fully repaid. Suncorp's securities are to be assigned to Bowesco and Bowesco will rank head of WIF for these funds including interest, costs and WIF agrees to indemnify Bowesco for any loss it incurs by reason of WIF's default on the same terms and conditions as the Suncorp loan facility.
Between 10 February 2006 and 3 March 2006, Mr Carey authorised transfers of funds totalling $550,000 from Bowesco's bank account to an account in the name of Lanepoint, which had been set up some time between 24 January 2006 and 1 February 2006. Prior to the establishment of that account, Lanepoint did not have its own bank account, and Lanepoint's expenses were paid out of a central treasury operated by another company in the group, Westpoint Corporation Pty Ltd, a company of which Mr Carey was managing director at the time.
On 3 March 2006, Suncorp appointed Shaun Robert Fraser and John Patrick Cronin as joint receivers and managers of Lanepoint (Suncorp ‑ Lanepoint receivers) pursuant to the Suncorp ‑ Lanepoint charge. The Suncorp ‑ Lanepoint receivers took possession of the Development and all of Lanepoint's other assets.
On 9 March 2006, Brian McMaster and Martin Madden were appointed by Perpetual Nominees Ltd as custodian of the Westpoint Income Fund as joint receivers and managers of Lanepoint (WIF ‑ Lanepoint receivers) pursuant to the WIF Lanepoint charge.
A number of cheques were drawn on the Lanepoint bank account between 14 February 2006 and 3 March 2006. The cheques written totalled $530,688.11. Upon their appointment, the Suncorp ‑ Lanepoint receivers stopped cheques which were then unpresented which totalled an amount of $203,469.74. The cheques which had been presented totalled $320,040.52. Both presented and unpresented cheques related to costs of the Development.
On 15 March 2006, Suncorp issued a written notice of demand to Bowesco pursuant to the Suncorp ‑ Bowesco guarantee for the amount of Suncorp's advances to Lanepoint pursuant to the Suncorp ‑ Lanepoint credit Facility Deed.
On 28 March 2006, Bowesco contracted to sell the Warnbro Property. On 3 April 2006, Suncorp appointed Mr Fraser and Mr Cronin as the joint receivers and managers of Bowesco pursuant to the charge granted by Bowesco in relation to Suncorp's loan to assist in the purchase of the Warnbro Property.
Settlement of the sale of the Warnbro Property was completed by the Bowesco receivers on 16 June 2006, and the Bowesco receivers were paid $2,750,000. The proceeds of the sale were applied to pay out the balance of Bowesco's loan from Suncorp for the Warnbro Property, with the balance of $972,749, being applied in reduction of the Suncorp ‑ Lanepoint facility. It is not in dispute that the payment by the Bowesco receivers in reduction of the Suncorp ‑ Lanepoint facility was a payment made by Bowesco in its capacity as guarantor of the Suncorp ‑ Lanepoint loan.
On or about 22 November 2006, Lanepoint, by the Suncorp ‑ Lanepoint receivers, paid $20,524 to Bowesco by way of partial re‑imbursement and indemnity as to the payment by Bowesco under the Suncorp ‑ Bowesco guarantee referred to in paragraph ‑ above.
The Suncorp ‑ Lanepoint loan was repaid to Suncorp on 27 March 2007, and on about that date the Suncorp ‑ Lanepoint receivers retired over all the real property assets of Lanepoint save for the proceeds from the sale of completed strata units in the Development.
On 4 April 2007, Lanepoint, by the Suncorp ‑ Lanepoint receivers, paid $985,535 to the plaintiff by way of reimbursement of the payment made by Bowesco in partial reduction of the Suncorp ‑ Lanepoint loan.
Thus, Lanepoint Deed reimbursed a total of $1,006,059 in relation to Bowesco's payment under the Suncorp ‑ Bowesco guarantee of $972,749 showing sale of the Warnbro Property.
After 4 April 2007, the Suncorp ‑ Lanepoint receivers paid the balance of the net proceeds from the realisation of Lanepoint's assets as remained in their hands to the WIF ‑ Lanepoint receivers, and Suncorp's securities which secured repayment of the Suncorp ‑ Lanepoint Facility were discharged.
Between 18 January 2008 and 9 December 2008, Westpoint Management was paid various amounts totalling $4,108,324 by Lanepoint (by the WIF ‑ Lanepoint receivers) pursuant to Westpoint Management's rights under the WIF ‑ Lanepoint charge and in satisfaction and discharge of the amounts owed by Lanepoint to Westpoint Management under WIF ‑ Lanepoint Loan Agreement.
It is that amount against which Bowesco now claims that Westpoint Management holds $550,000 (plus interest) by way of constructive trust.
How the Plaintiff puts its case
The pleaded assertions on which the claim for relief was based were as follows:
(i)By the letter agreement of 15 April 2005, Lanepoint agreed to commence and complete the Development.[1]
[1] Statement of claim [8].
(ii)Bowesco guaranteed the obligations of Lanepoint in respect of the Suncorp ‑ Lanepoint credit facility including the obligation to complete the Development.[2]
[2] Statement of claim [8.3] and [12].
(iii)It would be an event of default under the Suncorp ‑ Lanepoint Credit Facility Deed if Lanepoint failed to comply with the obligation to complete the Development.[3]
[3] Statement of claim [10.3] and [8].
(iv)On 15 January 2006, Bowesco, Lanepoint and Westpoint Management agreed that Bowesco would advance money to Lanepoint so that Lanepoint could complete the Development.[4]
[4] Statement of claim [17A].
(v)On 10 February 2006, Bowesco, through Mr Carey, agreed orally that Bowesco 'as guarantor' would pay for the Development to be completed and Suncorp would be relieved of its obligation to make further advances.[5]
(vi)From 10 February 2006, Bowesco made payments totalling $550,000 to or for the benefit of Lanepoint on the basis that those moneys would be used to complete the Development and 'thereby reduce the indebtedness of Lanepoint to Suncorp in relation to further advances required to be made by Suncorp so that the development would be completed'.[6]
(vii)The moneys paid by Bowesco to Lanepoint were expended by Lanepoint for purposes related to the 'Project' [sic Development].[7]
(viii)On 3 March 2006, Suncorp exercised its rights under the securities to appoint receivers to Lanepoint[8] and on 15 March 2006 issued a notice of demand to Lanepoint requiring repayment of its advance pursuant to the Suncorp ‑ Lanepoint Credit Facility Deed.[9]
(ix)The Suncorp ‑ Lanepoint loan was repaid to Suncorp on 27 March 2007.[10]
(x)Between 18 January 2008 and 9 December 2009, Westpoint Management was paid a total of $4,108,324 being proceeds of sale of the completed strata units in the development.[11]
(xi)Suncorp, 'by the Suncorp ‑ Lanepoint receivers' held assets, which it received in excess of the amount required to repay the Suncorp ‑ Lanepoint Facility as fiduciary with an obligation to account to Bowesco.[12]
(xii)In breach of its fiduciary duty, Suncorp paid the excess funds to Westpoint Management's receivers without accounting to the plaintiff in respect of those costs.[13]
(xiii)Westpoint Management received the assets of Lanepoint with actual knowledge of Bowesco's entitlement and thereby held those assets on constructive trust for Bowesco.[14]
(ivx)By reason of the foregoing, Bowesco is entitled to a declaration that Westpoint Management by its receivers holds the funds received by it (ie $4,108,324) on constructive trust for Bowesco.[15]
[5] Statement of claim [18].
[6] Statement of claim [19].
[7] Statement of claim [19A].
[8] Statement of claim [20].
[9] Statement of claim [22].
[10] Statement of claim [28].
[11] Statement of claim [29] and [30].
[12] Statement of claim [32].
[13] Statement of claim [33].
[14] Statement of claim [36].
[15] Statement of claim [38].
The plaintiff's claim fails at a number of points in the chain of reasoning summarised above.
Did Bowesco guarantee the performance of a covenant by Lanepoint to complete the development?
This question arises by reason of the pleadings in pars 8, 10.3 and 12 of the statement of claim as explained in subpars (i), (ii) and (iii) above.
The plaintiff's starting point is to point to the observations of Brereton J in the matter of Dalma No 1 Pty Ltd (in liquidation) (ACN 111 772 260); Application of Bruce Gleeson and David Shannon in their Capacity as Joint and Several Liquidators of Dalma No 1 Pty Ltd (in liquidation)[16] where his Honour said:
However, there is no all-embracing theory that explains when subrogation will be permitted; the equity arises from the conduct of the parties on well‑settled principles and in defined circumstances which make it unconscionable for the defendant to deny the plaintiff's right [Boscawen v Bajwa [1995] 4 All ER 769, 777 (Millett LJ); Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269, 300-1]. Pomeroy identified those circumstances as follows [Pomeroy (1941) Vol 4 p 1074, [1419], citing Louisville Joint Stock Land Bank v Bank of Pembroke 9 SW (2d) 113, 115 (Ky CA)(1928); cited with approval in Re Trivan Pty Ltd (1996) 134 FLR 368, 371 (NSWSC, Young J)]:
The doctrine is in general applied in favour of all persons who are required to pay the debt of another for the protection of their own interests. [Without attempting a comprehensive classification of cases in which the doctrine of subrogation may be applied, it is generally held that the right of subrogation will arise where the party claiming it has advanced money to pay a debt, which, in the event of default by the debtor, he would be bound to pay; or where the one making the payment has some interest to protect; or where the money advanced to pay the debt was under an agreement with the debtor, or the creditor, express or implied, that he should be subrogated to the rights and remedies of the creditor.]
[16] Dalma No 1 Pty Ltd (in liquidation) (ACN 111 772 260); Application of Bruce Gleeson and David Shannon in their Capacity as Joint and Several Liquidators of Dalma No 1 Pty Ltd (in liquidation) [2013] NSWSC 1335; (2013) 279 FLR 80 [24].
Bowesco submits that it paid to finish the units in the Development to protect its interests as a guarantor liable to pay Suncorp. As I understand its argument, it is that:
•Lanepoint was obliged by its letter agreement of 15 April 2005 with Suncorp to complete the Development;
•to complete the Development, Lanepoint would have drawn down further on the Suncorp ‑ Lanepoint Facility;
•had Lanepoint drawn down further on the Suncorp ‑ Lanepoint Facility, Bowesco would have been liable under the Suncorp ‑ Bowesco guarantee in respect of the additional funds drawn down;
•Bowesco guaranteed the performance of the covenant to complete the Development;
•by Bowesco providing funds to Lanepoint to enable it to complete the development, Bowesco was reducing Lanepoint's liability to Suncorp;
•in those circumstances Bowesco was protecting its interests by reducing the sum which it would otherwise have had to pay as guarantor of the Suncorp ‑ Lanepoint facility.
The plaintiff's claim cannot be sustained on this basis. It can be accepted that the letter of agreement of 15 April 2005 assumed that the Development would proceed, and based many of its terms and conditions on that assumption. That is, Suncorp's obligation to advance funds from time to time was conditioned by the Development proceeding as contemplated. Various conditions precedent to construction funding which dealt with requirements as to a building contract, building approval and the Development proceeding in accordance with agreed cash flow and project feasibility statements were directed to that end. One condition precedent was said to be 'construction is to commence by 30 June 2005 and is to be completed by 31 October 2005'. Contrary to Bowesco's submissions, that condition precedent cannot properly be construed as a covenant by Bowesco to complete the Development. Rather, it is a condition affecting Suncorp's liability to commence or continue funding.
Counsel for Bowesco accepted that the provisions of the 15 April 2005 letter agreement would not entitle Suncorp to obtain an order requiring Lanepoint to complete the development as and by way of specific performance of the agreement. Rather, he submitted that, were Lanepoint to fail to complete the Development in breach of its agreement with Suncorp, Suncorp could obtain damages so that it could complete the Development. That, he submitted, was a secured obligation so that 'if … the guarantor takes steps to procure completion of the development … he is performing … one of the obligations that … he is bound to perform to ensure the development comes to completion'.[17]
[17] ts 109 (30 April 2014).
That submission cannot be accepted. That is because there was no covenant by Lanepoint to complete the Development, either expressly or by implication. However, even if there were such a covenant, there is at least considerable doubt that Suncorp's damages for breach of that covenant would be measured by the cost of Suncorp completing the Development as Suncorp had no right under its securities to complete the Development itself, and it is difficult to see how it could have done so given that Suncorp did not own the land and had no contractual relationship with the contractors undertaking the Development. It is far more likely that any damages for a breach of a covenant to complete the Development would be measured by the difference between the sum advanced by Suncorp and the amount realised on the exercise of its securities, the securities being worth less by reason of the breach. Suncorp was ultimately only entitled to receive the amount it had advanced to Lanepoint under the Suncorp ‑ Lanepoint Credit Facility Deed.
Furthermore, it cannot be said that Bowesco's obligation under the Suncorp ‑ Bowesco guarantee encompassed an obligation to perform the contractual term guaranteed (even if there was a positive covenant by Lanepoint to complete the Development). The obligation of Bowesco was, as the defendant submits, no more than the conventional obligation to pay damages in the event of breach. It cannot, therefore, be said that by advancing funds to Lanepoint to enable it to complete the Development, Bowesco is performing an obligation under the Suncorp ‑ Bowesco guarantee.
The existence of a covenant by Lanepoint to complete the Development, and the proposition that performance of that covenant was guaranteed by Bowesco, is central to Bowesco's claim. The consequence of the conclusions I have reached as to those matters is that Bowesco's claim cannot succeed.
Was Bowesco entitled to subrogation of Suncorp's securities in relation to the $550,000 payment?
In Bofinger v Kingsway Group Ltd[18] (Bofinger) the Court described as 'plainly correct' the principle explained by Lowe J in Equity Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd[19] where he said:
When a guaranteed debt is paid by the surety he is entitled, unless the right is excluded by agreement or his conduct makes it inequitable to enforce it, in respect of the amount he has paid under his guarantee to the securities which the creditor holds for the debt guaranteed. This right arises not from any agreement between the surety and the creditor, though it may be excluded by agreement between them. It rests on equitable principle.
[18] Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269, 52.
[19] Equity Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd (1940) VLR 201, 205.
It can be noted that the entitlement to the securities was said to be 'in respect of the amount he has paid under his guarantee'. Similarly, in the passage cited in Dalma No 1 set out at [38] above, the right to subrogation was said to be in relation to payment of a debt 'which, in the event of default by the debtor, he would be bound to pay', or, where money was advanced 'to pay the debt', there was an agreement that the payer should be subrogated to the rights and remedies of the creditor.
In Ulster Bank Ltd v Lambe,[20] Lowry J said:
If a guarantor decides to make a payment on behalf of a debtor or to give to the debt money in order that he may pay it to the creditor himself, then he can bring about a situation where the debt is reduced by the amount of the payment. The guarantor in such a case will not have paid on foot of the guarantee or acquired any right of ultimate reimbursement in respect of the money paid.[21]
[20] Ulster Bank Ltd v Lambe [1966] NI 161, 169.
[21] Cited with approval by Owen J in Bell Group Ltd (In Liq) v Westpac Banking Corporation [No 9] [2008] WASC 239 (2008) 39 WAR 1 [9470].
In this case, the $550,000 was paid to Lanepoint for the purpose of enabling Lanepoint to pay off unsecured creditors, and at least to some extent was used for that purpose. The payment did not reduce Lanepoint's debt to Suncorp, a proposition which Mr Carey accepted in evidence. Because Suncorp was not the creditor which received the payment from Bowesco, and because Lanepoint's debt to Suncorp was completely unaffected by the advances to it by Bowesco, there is no basis upon which Bowesco could be subrogated to the rights and remedies of Suncorp under the securities in relation to Lanepoint's debt to Suncorp.
It is no answer to say that, if Suncorp had advanced more money to Lanepoint, the balance of the guaranteed debt would have increased. A right to subrogation arises to the extent that a guarantor pays off the debt owed by the debtor to the secured creditor. It does not extend to funds which the guarantor advances to the debtor which never form any part of the debtor's liability to the secured creditor. I note in passing that the letter of 15 April 2005 suggests, by its recitals, that the money was advanced by Bowesco by reason of Westpoint Management's inability to continue funding Lanepoint (not in substitution of further advances by Suncorp). That, together with the fact that at least some of the funds advanced (and on the plaintiff's case ‑ all of the funds advanced) were used to pay Lanepoint's debts to unsecured creditors, demonstrates that the payment by Bowesco of $550,000 was not a payment under the Suncorp ‑ Bowesco guarantee.
Did Suncorp hold surplus funds with the fiduciary obligation to account?
The obligation of a first mortgagee to account in relation to surplus funds to a surety who has made payments under a guarantee in reduction of the debt to the first mortgagee was recognised in Bofinger. The Court held that in those circumstances the first mortgagee was obliged in good conscience to account to the appellants from the surplus monies and securities it held, and not to undertake or perform any competing engagement in that respect without prior release by the appellants.[22] It described those obligations as fiduciary in character. If there were a misapplication of the surplus monies and securities and consequent loss to the surety, the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the surety as a defaulting fiduciary.[23]
[22] Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 [49].
[23] Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 [50].
The plaintiff's pleaded case clearly relies on those propositions. To make good those propositions, the plaintiff must establish that Suncorp received and misapplied surplus funds. That element of the plaintiff's claim fails on the facts.
The Deed of Appointment of the Suncorp ‑ Lanepoint receivers provided that they were appointed as agent of Lanepoint. The Statement of Agreed Facts, which was marked as an exhibit of the hearing, records that the payments of $4,108,324 in respect of which the constructive trusts was said to arise were paid 'by Lanepoint (by the WIF ‑ Lanepoint receivers) pursuant to Westpoint Management's rights under the WIF ‑ Lanepoint charge'. Thus, to the extent that the Suncorp ‑ Lanepoint receivers obtained funds in excess of the amount necessary to discharge the Suncorp ‑ Lanepoint facility, they received those funds as agents for Lanepoint, and dealt with them in that capacity. In those circumstances, Suncorp cannot be said to have owed fiduciary duties in relation to those funds.
This is a further element of the plaintiff's claim which it cannot make out.
It follows that Westpoint Management cannot be said to have received the surplus funds with knowledge of a failure by Suncorp to account in breach of a fiduciary duty.
Paragraph 36 of the Statement of Claim, which pleads the issue of Westpoint Management's knowledge, refers to 'knowledge of the plaintiff's entitlement' rather than knowledge of Suncorp's breach of fiduciary duty which might be expected if, as I apprehend to be the case, the plaintiff seeks to invoke the principles associated with the 'second limb' in Barnes v Addy.[24] If, contrary to that apprehension, the expression 'the plaintiff's entitlement' in paragraph 36 of the Statement of Claim is a reference to something other than an entitlement to the benefit of the duty to account, I am unable to identify any relevant entitlement.
[24] Barnes v Addy (1874) LR 9 Ch App 244 as explained in Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 [59].
The plaintiff has failed to make out this element of its claim.
Conclusion
For those reasons, the plaintiff is not entitled to the declaration which it seeks, and its claim should be dismissed.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: BOWESCO PTY LTD -v- WESTPOINT MANAGEMENT LTD [No 2] [2014] WASC 207 (S)
CORAM: CHANEY J
HEARD: 20 JUNE 2014
DELIVERED : 3 JULY 2014
FILE NO/S: CIV 2092 of 2012
BETWEEN: BOWESCO PTY LTD
Plaintiff
AND
WESTPOINT MANAGEMENT LTD
Defendant
Catchwords:
Costs - Whether costs should be awarded on an indemnity basis - Plaintiff not accepting Calderbank offer - Whether rejection of Calderbank offer unreasonable
Legislation:
Nil
Result:
Plaintiff ordered to pay costs of the defendant and former defendant to be taxed if not agreed
Category: B
Representation:
Counsel:
Plaintiff: Mr A Metaxas
Defendant: Mr J C Vaughan SC
Solicitors:
Plaintiff: Metaxas & Hager
Defendant: Clayton Utz
Cases referred to in judgment:
Bowesco Pty Ltd v Read [2012] WASC 340
Bowesco Pty Ltd v Westpoint Management Ltd [No 2] [2014] WASC 207
Calderbank v Calderbank [1975] 3 WLR 586
Eccles v Koolan Iron Ore Pty Ltd [2013] WASC 418 (S)
Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115; (2009) 41 WAR 1
CHANEY J: On 12 June 2014, I delivered reasons in this matter in which I found that the plaintiff was not entitled to the declaration which it sought, and that its claim should be dismissed.[25]
[25] Bowesco Pty Ltd v Westpoint Management Ltd [No 2] [2014] WASC 207.
Following delivery of those reasons, the defendant moved for orders dismissing the action, and sought orders for costs in the following terms:
2.The plaintiff pay the costs of the action of the defendant and the former defendant (namely, Simon Andrew Read in his capacity as liquidator of the defendant) on the basis that there be only one set of costs for the defendant and the former defendant, to be taxed in accordance with par 3 below and paid forthwith (if not agreed).
3.The defendant and the former defendant's costs of the action:
(a)to 15 October 2012, be taxed and paid on a party and party basis; and
(b)from 16 October 2012, be taxed and paid on an indemnity basis, namely, that the plaintiff pay all of the costs incurred by the defendant and the former defendant except in so far as they are of an unreasonable amount or have been unreasonably incurred so that, subject to those exceptions, the defendant and the former defendant are completely indemnified by the plaintiff for their costs.
The plaintiff opposes the order for costs, and submits that there should be an order that the plaintiff pay the costs of the action of the defendant and the former defendant, as one set of costs to be taxed. The issue for determination is, therefore, whether or not the defendant's costs after 16 October 2012 should be taxed and paid on an indemnity basis, or on a party and party basis.
The defendant's position is based on the plaintiff's rejection of an offer made on 15 October 2012 without prejudice save as to costs, invoking the well‑known principles contained in Calderbank v Calderbank.[26] The defendant's offer was as follows:
[26] Calderbank v Calderbank [1975] 3 WLR 586.
1.The defendant pay the plaintiff $25,000 in full and final satisfaction of claims made in the action (such payment compromising all such claims as against both the defendant and Westpoint Management Pty Ltd (In Liq) (Receivers and Managers Appointed). The $25,000 will be paid within 7 days after acceptance of this offer.
2.The defendant pay the plaintiff's costs of the action, to be taxed if not agreed.
That offer was expressed to remain open for a period of 28 days, but was not accepted within that time, or at all. In the event, the result achieved by the plaintiff following trial was clearly less favourable than the defendant's offer of 15 October 2012.
The offer specified that, should the plaintiff not accept the offer and obtain a less favourable outcome following trial, the defendant reserved its right to produce the offer to the Court on the questions of costs, and advised that, in that event, the defendant would be seeking an order for full indemnity costs from the date of the offer.
The applicable principles
The principles applicable to an award of indemnity costs in the context of a Calderbank offer were considered by Buss JA, with whom Wheeler JA agreed, in Ford Motor Co of Australia Ltd v Lo Presti.[27] Le Miere J, in Eccles v Koolan Iron Ore Pty Ltd,[28] helpfully summarised the principles explained by Buss JA in the following way:
[27] Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115; (2009) 41 WAR 1.
[28] Eccles v Koolan Iron Ore Pty Ltd [2013] WASC 418 (S) [9].
(1)a Calderbank offer will not justify an award of indemnity costs unless its rejection was unreasonable;
(2)all of the relevant facts and circumstances must be considered in determining whether a party's rejection of a Calderbank offer was unreasonable;
(3)the mere fact that the recipient of a Calderbank offer is ultimately worse off than he or she would have been had the offer been accepted, does not mean that its rejection was unreasonable;
(4)whether conduct is reasonable or unreasonable always involves matters of judgement and impression;
(5)it is not possible nor desirable to enumerate exhaustively all circumstances which must be taken into account, in a particular case, in deciding whether the rejection of a Calderbank offer was unreasonable, but, ordinarily, regard should be had to, at least, the following:
(a)the stage of the proceeding in which the offer was received;
(b)the time allowed to the offeree to consider the offer;
(c)the extent of the compromise offered;
(d)the offeree's prospects of success, assessed as at the date of the offer;
(e)the clarity with which the terms of the offer were expressed; and
(f)whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it;
(6)the party who makes a Calderbank offer that is rejected bears the onus of satisfying the court that it should make an award of indemnity costs in his or her favour; and
(7)the standard to be applied in awarding indemnity costs should not be allowed to diminish to the extent that an unsuccessful party will be at risk of an order for costs assessed on an indemnity basis absent some blameworthy conduct on its part ‑ a test of unreasonableness should not be upheld on other than clear grounds.
The central question is, therefore, whether having regard to all relevant facts and circumstances, the plaintiff's rejection of the defendant's offer in this case was unreasonable.
The circumstances of the offer
The offer was made on 15 October 2012. On 18 September 2012, Master Sanderson delivered reasons refusing a summary judgment application by the then defendant, who was the liquidator of Westpoint Management Ltd (In Liq) (Receivers and Managers Appointed). (The company itself was subsequently substituted as defendant.) At that stage, the plaintiff's claim was not limited to the sum of $550,000 which was the amount of the claim as it eventually went to trial. At the time of the application to the Master, the plaintiff was claiming for additional amounts, one of which was not included in the re‑amended statement of claim filed on 9 December 2013, and the other three of which were abandoned at the conclusion of the plaintiff's opening at trial. It is clear from the Master's reasons[29] that each of the amounts claimed were claimed on the basis of the plaintiff's right to subrogation of Suncorp's securities. The learned Master considered the claims and concluded:
[29] Bowesco Pty Ltd v Read [2012] WASC 340.
To enter judgment for the defendant I would have to be satisfied the plaintiff's position is not arguable. There are no cases, it would seem, where a similar argument has been raised. It may be equity will adapt remedies to cover losses such as those allegedly sustained by the plaintiff. In any event, I am not satisfied the position is so clear as to allow judgment to be entered for the defendant on the plaintiff's claim.[30]
[30] Bowesco Pty Ltd v Read [2012] WASC 340 [15] (Master Sanderson).
The defendant submits that:
•its offer was made at a stage in the proceedings where the issues had crystallised;
•the offer was made after comprehensive submissions had been filed in the application before the Master so the defendant's position was abundantly clear;
•at trial, the plaintiff did not seek to develop or expand principles of equity as the Master suggested would be necessary; and
•three of the plaintiff's heads of damage were abandoned at trial without prior notice.
The defendant also submits, having regard to the factors set out in par 5 of Le Miere J's summary, that:
•28 days was provided for acceptance of the offer which was a sufficient period;
•the offer was for $25,000 plus costs to be taxed which constituted a real compromise of the action;
•the defendant's prospects of success were clearly identifiable from the detailed submissions made to the Master;
•the offer was in clear terms; and
•the offer expressly foreshadowed an application for indemnity costs in the event that the offer was rejected.
Was rejection of the offer unreasonable?
Save for one matter, the defendant's submissions as to the circumstances surrounding the offer can be accepted. The exception relates to characterisation of the learned Master's decision rejecting summary judgment for the defendant. I do not take the Master's observation (which is set out above) as indicating that the defendant would need to 'develop the law of equity' to succeed. Rather, the Master was, as I apprehend his reasons, simply indicating that the reach of a remedy of subrogation may arguably extend to payments or losses of the type pleaded. In the result, of course, I concluded that, in relation to the one head of claim which remained at trial, that was not the case.
In light of the rejection of the defendant's summary judgment application, I do not consider that can be said that the plaintiff should have accepted that its case was unarguable, or that to pursue its claim was unreasonable. Certainly, it is fair to conclude that the plaintiff faced significant difficulties in establishing its claim. In the end, as Buss JA recognised in Ford Motor Co of Australia Ltd v Lo Presti,[31] the question of whether conduct is reasonable or unreasonable necessarily involves matters of judgment and impression. Whilst this case comes close to one in which indemnity costs might be ordered, the relevant facts and circumstances render it, in my judgment, short of those which would justify an indemnity costs order.
[31] Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115; (2009) 41 WAR 1 [19].
Conclusion
The parties agree that I should pronounce final orders by way of judgment on the action in light of these reasons, without the need for a further attendance by counsel. Accordingly, judgment will be entered in the following terms:
1.The action be and is hereby dismissed.
2.The plaintiff pay the costs of the action of the defendant and the former defendant (namely, Simon Andrew Read in his capacity as liquidator of the defendant) on the basis that there be only one set of costs for the defendant and the former defendant to be taxed if not agreed.
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