Carl Finance Pty Ltd v Argent Law Pty Ltd
[2024] VSC 424
•22 July 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST
S ECI 2022 02185
| CARL FINANCE CORPORATION PTY LTD (ACN 126 165 384) | Plaintiff |
| v | |
| ARGENT LAW PTY LTD (ACN 601 448 631) | First Defendant |
| and | |
| MELISSA LOUISE PATTERSON | Second Defendant |
| and | |
| KOROIT NOMINEES PTY LTD (ACN 004 986 967) (in liquidation) | Third Defendant |
| and | |
| FRANK JULIAN MOLONEY | Fourth Defendant |
| and | |
| DAMIAN JOHN MOLONEY | Fifth Defendant |
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JUDGE: | Richards J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 27 May, 3–4 June 2024 |
DATE OF JUDGMENT: | 22 July 2024 |
CASE MAY BE CITED AS: | Carl Finance Pty Ltd v Argent Law Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2024] VSC 424 |
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CONTRACTS — GUARANTEE AND INDEMNITY — Loan agreement — Construction — Whether fourth and fifth defendants guaranteed loan — Where guarantee contained in recital to loan agreement — Whether guarantee enforceable — Whether loan agreement executed as deed or agreement — Loan agreement executed as deed — Fourth and fifth defendants guaranteed loan — Amount guarantors liable to pay under guarantee — Meaning of ‘loan in full’ — Whether guarantors made misleading and deceptive representations in relation to guarantee or security — No misleading and deceptive representations by guarantors — Corporations Act 2001 (Cth) s 127.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Cawthorn KC with Ms S Kearney | Eastern Bridge Pty Ltd |
| For the First and Second Defendants | Mr C Madder (on 24 May 2024) | Moray & Agnew Lawyers |
| For the Third Defendant | No appearance | |
| For the Fourth Defendant | In person | |
| For the Fifth Defendant | In person |
HER HONOUR:
One day in 2016, Damian Moloney had lunch with his old friend Jeff Beable, and they went to see a property at 87–89 Flemington Road, North Melbourne. Mr Moloney said that the property had been owned by his family for 30 odd years, and that he had planning approval to build a 12 storey building on the site. He asked Mr Beable if he would lend $1,500,000 to assist in finalising the development. After making some inquiries of his own, Mr Beable agreed to lend the money.
The registered proprietor of the property was a company called Koroit Nominees Pty Ltd. The sole director of Koroit was Frank Moloney, who is Damian’s brother and his business partner of more than 50 years. Together they operate a business known as the Moloney Group, which buys, develops, rents, and sells property.
Mr Beable instructed his solicitor, Melissa Patterson of Argent Law, to prepare a loan agreement. The agreed security was to be an unregistered second mortgage over the property, protected by a caveat registered on the title. In addition, the loan was to be guaranteed by Frank Moloney and Damian Moloney.
On 17 October 2016, Mr Beable, Frank Moloney, and Damian Moloney signed the loan agreement. The parties to the loan agreement were Koroit as the borrower, Mr Beable’s company Carl Finance Corporation Pty Ltd as the lender, and Frank Moloney and Damian Moloney as the guarantors. The principal sum of $1,500,000 was to be repaid after 18 months — that is, on 17 April 2018 — subject to the agreement of a further term or terms. The terms of the loan agreement are set out in more detail below.
Between November 2016 and February 2020, Carl Finance received regular monthly interest payments of $15,000 in accordance with the loan agreement. In about March 2018, Mr Beable agreed to roll over the loan for a further term. The rollover agreement was not put in writing and the details are unclear. After the onset of the COVID-19 pandemic in 2020, the monthly interest payments ceased. Damian Moloney made numerous attempts during 2020 to raise finance in order to meet the interest payments, without success.
Unbeknown to Mr Beable, Koroit had sold the property in about March 2018 to another company outside the Moloney Group. This was possible because Carl Finance had not in fact obtained the agreed second mortgage over the property, and had not registered a caveat on the title to protect its interest in the property.
In March 2021, Damian Moloney informed Mr Beable that the property had been sold. Mr Beable then took steps to call in the loan. Notices to pay were served on Koroit, Frank Moloney, and Damian Moloney on 24 March 2021, and a statutory demand was served on Koroit in May 2021. The loan was not repaid, and in June 2021 Carl Finance applied to this Court to wind up Koroit. Damian Moloney had some discussions with Mr Beable about terms for repayment of the loan, but these proved fruitless. On 29 September 2021, Steffensen JR ordered that Koroit be wound up in insolvency.
On 15 June 2022, Carl Finance commenced this proceeding against its former solicitors, Argent Law and Ms Patterson, for damages for negligence, breach of retainer, and misleading and deceptive conduct. The essence of the claim was that the solicitors had failed to take reasonable care in relation to the loan agreement, specifically by failing to ensure that it contained an operative guarantee and by failing to put in place the agreed security.
In June 2023, Carl Finance joined Koroit, Frank Moloney, and Damian Moloney as defendants to the proceeding. No relief was claimed against Koroit, and its joinder appears to have been a formality. Carl Finance claimed that Koroit had been in default of the loan agreement since February 2020, that the Moloneys had breached the guarantee by not repaying the principal sum and outstanding interest, and that they were indebted to Carl Finance for the full amount outstanding. In the alternative, Carl Finance claimed that the Moloneys had made misleading and deceptive representations in relation to the guarantee and the security, which it had relied on to its detriment, for which they were liable to pay damages.
Frank Moloney and Damian Moloney filed separate defences, in which they admitted Koroit’s default but denied that they had breached the guarantee or engaged in the alleged misleading and deceptive conduct.
On 22 May 2024, the parties advised the Court that Carl Finance’s claims against the solicitors had been resolved between them. At the commencement of the trial on 27 May 2024, counsel for the solicitors sought an order by consent that the claims as against his clients be dismissed with a right of reinstatement. I was informed by senior counsel for Carl Finance that the solicitors had accepted an offer to compromise the claims against them for a payment of $1,000,000 inclusive of costs. I therefore made orders by consent, dismissing the claim against the solicitors with a right of reinstatement and no order as to costs.
Carl Finance’s claims against the Moloneys remained for determination. Damian Moloney applied to adjourn the trial for 30 days, primarily to enable him to secure the attendance of Ms Patterson as a witness. He also wished to engage in a further mediation and to secure legal representation. Carl Finance opposed any adjournment, on the basis that the trial date had been set in July 2023, the claims against the Moloneys were independent from the claims against the solicitors, and the Moloneys had no reason to believe that Ms Patterson had intended to give evidence at the trial. I determined that the best course was to hear Carl Finance’s opening and evidence, to refer the matter for judicial mediation on 29 May 2024, and to adjourn the balance of the trial to the following Monday, 3 June 2024.
The mediation was not successful, and the trial resumed on 3 June 2024. The Moloneys had not engaged legal representation, and continued to represent themselves.
The remaining issues for determination in the proceeding are:
(a) Did the Moloneys guarantee the loan?
(b) If so, how much are they liable to pay under the guarantee?
(c) Did Frank Moloney or Damian Moloney make misleading representations in relation to the guarantee or the security?
In summary, my conclusions in relation to each issue are:
(a) By signing the loan agreement, the Moloneys guaranteed the loan. The loan agreement contains a valid and binding promise to guarantee the loan in full, and was executed as a deed. In addition, Carl Finance gave consideration for the Moloneys’ promise to guarantee the loan when it advanced the principal sum to Koroit following the execution of the loan agreement. It was not a condition of the guarantee that Carl Finance take the agreed security under the loan agreement.
(b) The Moloneys guaranteed the ‘loan in full’, which means both the principal sum and the agreed interest on that sum. Taking into account the settlement payment of $1,000,000 from the solicitors, the Moloneys are liable to pay $1,515,890.41 under the guarantee.
(c) Neither Frank Moloney nor Damian Moloney made misleading representations in relation to the guarantee or the security for the loan.
My reasons for those conclusions follow.
Did the Moloneys guarantee the loan?
I will set out the relevant terms of the loan agreement, before turning to the submissions of the parties.
Loan agreement
As mentioned, the loan agreement is dated 17 October 2016. The parties to the agreement are:
(a) Koroit, the ‘Borrower’;
(b) Carl Finance, the ‘Lender’; and
(c) Frank Moloney and Damian Moloney, the ‘Guarantor’.
The recitals to the loan agreement are:
A The Borrower has requested the Lender to advance to the Borrower the principal sum the amount of which is set out in the schedule (Principal Sum).
B. The Lender has agreed to advance the principal sum subject to the execution of certain additional securities.
C. The Guarantor by his execution of this Deed guarantees the loan in full.
Various key matters are set out in the schedule, as follows:
THE PRINCIPAL SUM:
$1,500,000.00
ADVANCE DATE:
17 October 2016
REPAYMENT OF
PRINCIPAL SUM:
18 months after the Advance Date, subject to the agreement of a further term or terms.
INTEREST RATE:
12% per annum, payable monthly in arrears, on the 1st day of each month.
DEFAULT INTEREST RATE:
A default rate of 15% per annum.
COLLATERAL SECURITIES:
A unregistered Second Mortgage over the property at 87-89 Flemington Road, North Melbourne in the State of Victoria more particularly described in the following Certificates of Title Volume 10579 Folios 412-423 (Both Inclusive) which the borrower hereby charges in favour of the Lender.
A registered Caveat over the property at 87-89 Flemington Road, North Melbourne in the State of Victoria, more particularly described in Certificates of Title Volume 10579 Folios 412-423 (both inclusive), which the borrower hereby charges in favour of the Lender.
Clause 2.1 obliges the Borrower to repay the Principal Sum ‘within 18 months of the date of this deed of loan’.
Clause 4 provides for the collateral securities, relevantly:
4.1 Simultaneously with the execution hereof the Borrower herby charges any security property and shall give or cause to be given to the Lender the additional securities and guarantees set out in the Schedule (The Collateral Securities) each of which shall be collateral hereto and vice versa and any default thereunder shall be deemed a default hereunder (and vice versa) and under all agreements collateral or subordinate hereto and in such event the Lender shall be entitled to exercise the Lender's rights and remedies accordingly.
…
4.5Notwithstanding any settlement of account or granting of time and notwithstanding that the whole or any part of the security given by the Borrower or any other person whatsoever may be released or discharged prior to the repayment of the whole of the principal sum Interest damages and other moneys secured the Borrower and every such other person shall remain liable to perform and observe the several covenants conditions and obligations in all agreements collateral or subordinate hereto and in this Agreement contained or implied until such time as the whole of the principal sum Interest damages and other monies are paid.
…
Clause 7 provides for perfection of security in the following terms:
The Borrower and every person claiming by or through the Borrower any interest is any of the property (real or personal) for the time being comprised in any security collateral hereto or held by the Lender under or by virtue of this Agreement shall from time to time do an execute all such assurances and things for the perfecting of this Agreement and the collateral securities and for the further and better assuring such property to the Lender and to enable the Lender to obtain possession of any part or parts of such property as by the Lender may be lawfully required. The Borrower hereby authorises the Lender to make such amendments. The Borrower hereby authorises the Lender to make such amendments and additions to this Agreement and the collateral securities as may be required to obtain stamping and registration thereof in the Corporate Affairs Office or the Office of Titles (as appropriate) or as may be necessary to perfect its security and ensure that such instruments conform to the circumstances of the transaction to which the same relate in all such cases as agreed between the parties.
Clause 9 is titled ‘Exercise of Lender’s Powers’ and provides:
It shall not be incumbent on the Lender to enforce or realise any security collateral hereto or held by the Lender under to by virtue of this Agreement or to enforce any covenant agreement provision or condition therein or herein or to take any steps or proceedings for that purpose or for the payment of any moneys owning hereunder or thereunder or to exercise its rights unless it shall think fit nor shall any security for the time being held by the Lender nor any of the rights or powers express or Implied conferred upon the Lender be prejudiced or affected in any way by the Lender's failure or omission to act and the Lender shall not be answerable or accountable for any loss of any kind whatsoever which may happen in or about the exercise of or attempted exercise of any of the powers herein contained or implied or in or about its failure or omission to act and the Lender and any officer attorney or other person appointed by the Lender and any office entitled to be indemnified b the Borrower in respect of all liabilities and expenses incurred in the exercise or purported exercise or purported excise of any of the powers herein or therein contained.
Clause 17 contains various matters relating to interpretation of the loan agreement. Clause 17.2 provides:
In this Agreement:
Borrower shall include where the context permits means the Borrowers jointly and each of them severally and included their successors and permitted assigns
Lender shall include where the context permits means the Lenders jointly and severally and includes their successors and assigns.
Guarantors shall include where the context permits mean the Lenders jointly and severally and includes their successors and assigns
…
Clause 17.4 provides that the Schedule has effect as if set out in full in the agreement.
While the Guarantors are parties to the loan agreement, and Recital C says that they guarantee the loan in full, the agreement does not contain an operative clause regarding the guarantee.
The execution page commences with the words ‘Executed as an agreement’. Both Koroit and Carl Finance executed the document ‘in accordance with Section 127 of the Corporations Act 2001’. Both of the Guarantors, Frank Moloney and Damian Moloney, signed, sealed, and delivered the loan agreement in the presence of a witness.
Carl Finance’s submissions
Carl Finance argued that the statement at Recital C of the loan agreement was a valid and binding agreement by each of the Moloneys to act as guarantor for the loan to Koroit. While it acknowledged that the usual position is that the recitals form part of the background to the agreement and do not contain promises as to future conduct, it said that this case was different because Recital C was a promise to guarantee the loan, which did not conflict with any operative clause of the loan agreement.
In its written outline of closing submissions, Carl Finance developed this submission as follows:
(a) A guarantee is to be construed in the same way as any other commercial contract.[1] This calls for attention to the language used by the parties, the commercial circumstances the document addresses, and the objects it is intended to secure.[2] The Court is to take the approach that the parties intended a commercial result, and the contract should be construed to avoid it making commercial nonsense or working commercial inconvenience.[3]
[1]Referring to Paradise Constructors Pty Ltd v Loffs Quarries Pty Ltd [2003] VSC 370, [38]; W.N. Hillas & Co Ltd v Arcos Ltd [1932] UHKL 2, 4.
[2]Referring to McCann v Switzerland Insurance Trust Ltd (2000) 203 CLR 579, [22]; Adaz Nominees v Castleway [2020] VSCA 201, [70] (Whelan JA and Riordan AJA); Mount Bruce Mining v Wright Prospecting (2015) 256 CLR 104, [47] (Mount Bruce).
[3]Referring to Mount Bruce, [51].
(b) The essence of a guarantee is an assurance that payment will be made and that the guarantee will continue for as long as the debt is outstanding.[4]
[4]Referring to Commercial Bank of Australia v Colonial Finance Mortgage Investment and Guarantee Corp (1906) 4 CLR 57, 65 (Griffith CJ).
(c) Recitals in explicit terms can create presently binding covenants.[5]
[5]Referring to Ivory Land Developments v Goorigubba [2015] NSWSC 224, [15], [17] (Ivory Land).
(d) The words in the guarantee are clear: the guarantors by their execution guarantee the loan in full. The loan includes interest.[6]
[6]Referring to Ivory Land, [22].
(e) Recital C is a promise to carry out a particular action, and is to be distinguished from recitals which merely set out the objects of the parties.[7]
(f) The context of the loan agreement, including the references to the Moloneys as guarantors and their execution as such, makes it clear that the parties intended them to guarantee the loan. This is a circumstance ‘where in the recitals to a deed or an agreement it is acknowledged that the parties have agreed to do, or will do, certain acts, [and therefore] a promise to do those acts will be read into the agreement in the absence of an express promise to that effect’.[8] The absence of an express promise to that effect in the body of the agreement ‘may be safely inferred … [as] due to oversight or inadvertence’.[9]
(g) The use of the future tense in Recital C in this case means that the words created a contractual obligation.[10] They, in effect, provide that the guarantors agree to give the guarantee because it is provided that by their execution the guarantors guarantee the loan in full. The words are operative words containing operative covenants to pay if the principal debtor does not. A covenant to guarantee is to be inferred from the actual words used.
[7]Referring to Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, [380](5) (Campbell JA) (Franklins).
[8]Referring to Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia (1977) 139 CLR 54, 72 (Mason J) (Ansett).
[9]Referring to Ansett, 72 (Mason J).
[10]Referring to Franklins, [392]–[394] (Campbell JA).
In oral closing submissions, Carl Finance added that the loan agreement had been executed as a deed, because it had been ‘signed, sealed and delivered’ by both of the Moloneys. The loan agreement was executed by Koroit and Carl Finance in accordance with s 127 of the Corporations Act 2001 (Cth), which suggested that the companies had also executed the agreement as a deed.[11]
[11]Referring to Backstop Nominees Pty Ltd v Goscor Pty Ltd [1990] VR 468, 469–70 (Backstop Nominees); Nom De Plume Nominees Pty Ltd v Fingal Developments Pty Ltd (2016) 337 ALR 303, [79]–[80] (Tate JA, with McLeish JA and Ginnane AJA agreeing) (Nom De Plume Nominees).
In any event, Carl Finance argued that the guarantee was supported by consideration moving from it to the Moloneys. It said that the consideration was based on mutual promises — Carl Finance promised to lend money to Koroit, and the Moloneys promised to guarantee the loan.[12] The actual advance of the money initially requested by Damian Moloney constituted good consideration for the Moloneys’ guarantees.[13]
[12]Referring to Matouk v The Entrance Seabreeze Pty Ltd [2010] NSWSC 649, [63]–[66] (Matouk).
[13]Referring to Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88, 94; Breusch v Watts Developments Division Pty Ltd (1987) 10 NSLWR 311, 314; Macquarie Bank v Thomas [2010] NSWSC 843, [15]–[16], [19]–[20].
Carl Finance rejected the suggestion that the loan agreement required it to provide specific consideration by perfecting the agreed security. In that regard, it relied on cl 9 of the agreement, and the fact that the agreed security was collateral to the loan agreement. It said that it was not a condition of the guarantee that it take the security provided under the agreement.[14] It argued that this case was similar to JGL Investments Pty Ltd v Maracorp Financial Services Ltd,[15] in which the lender’s failure to obtain the contemplated security for the loan was held not to release the surety.[16]
[14]Contrasting this case with Ankar Pty Ltd v National Westminster Finance (Australia) Pty Ltd (1987) 162 CLR 549, 561 (Mason ACJ, Wilson, Brennan and Dawson JJ); Williams v Frayne (1937) 58 CLR 710, 738 (Dixon J) (Williams v Frayne); Re Kwan; Ex parte Hastings Deering (Solomon Islands) Ltd (1987) 15 FCR 264, 267.
[15][1991] 2 VR 168 (JGL Investments).
[16]Referring to JGL Investments, 175–6.
Carl Finance further submitted that there was obviously a mistake in the definition of ‘Guarantors’, and that it was clearly necessary to read the word ‘Lenders’ as ‘Guarantors’ in order to avoid absurdity and inconsistency.[17]
[17]Referring to Fitzgerald v Masters (1956) 95 CLR 420, 426–7; Mount Bruce, [47], [51].
The Moloneys’ submissions
Frank Moloney did not make closing submissions. In his evidence at trial, he acknowledged that he had guaranteed the repayment of the loan by Koroit, and that it had not been repaid.[18]
[18]Transcript, 3 June 2024, 84:25–30.
Damian Moloney contended that the loan agreement was poorly drafted and contained a number of glaringly obvious errors, some of which caused it to be unenforceable. He argued that the loan agreement was incomplete and that the guarantee could not be enforced against him, for several reasons. He pointed out that the guarantor’s obligation is expressed in a recital and not in an operative provision of the loan agreement, and that the definition of ‘Guarantor’ includes, where the context permits, the Lender. The ‘loan’ referred to in Recital C is not defined and there is no mention of interest or costs.
Damian Moloney submitted that Carl Finance had not given him consideration for entering into the guarantee and promising to guarantee the loan. He said that specific consideration is treated as a condition of the operation of the guarantee and, where the specific consideration is not given, the guarantor is not obliged to pay under the guarantee. He pointed out that he had no connection with Koroit, either as a shareholder or a director, and said that the loan agreement did not explicitly state that the loan was contingent on the giving of the guarantee, or make an obvious connection between the making of the loan and the guarantors’ promise to guarantee the loan.[19]
[19]Referring to Scott v Forster Pastoral Co Pty Ltd (2000) 35 ACSR 294, [37]; Matouk, [64]–[66].
Next, he argued that the loan agreement was not a deed but an agreement, noting the title of the document and the heading on the execution page. He said that the parties agreed to do certain things on the basis that each one owed a duty of care to the other, and as such Carl Finance was obliged to perform the loan agreement by perfecting its security.[20]
[20]Referring to Williams v Frayne; Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654, 674–5.
In oral submissions, Damian Moloney identified several warnings that should have indicated to Mr Beable that the agreed security had not been taken. These ‘red flags’ included that no mortgage was provided when the loan agreement was signed, and that he did not obtain a title search for the property to confirm that a caveat had been registered. Carl Finance failed to take the agreed collateral security through the negligence and incompetence of its solicitors and Mr Beable, and was therefore responsible for its own loss. Mr Moloney contended that he should not be bound by the guarantee, which was only given on the basis of Carl Finance’s agreement to obtain a mortgage and a registered caveat. He called cl 9 of the loan agreement a ‘gotcha clause’ and submitted that there was an implied obligation on Carl Finance to perfect its security.
Consideration
The rights and liabilities of the parties to the loan agreement are to be determined objectively, by reference to its text, context, and commercial purpose. The loan agreement should be construed so as to avoid it making commercial nonsense or working commercial inconvenience, by asking what a reasonable businessperson would have understood its terms to mean.[21]
[21]Mount Bruce, [46]–[47], [51] (French CJ, Nettle and Gordon JJ).
Taking that approach to the loan agreement, I accept the submission of Carl Finance that Recital C is effective as a promise.[22] It is a clear promise by the ‘Guarantor’ — that is, Frank Moloney and Damian Moloney — to guarantee the loan in full.
[22]See [29]–[30] above.
While recitals to an agreement are usually backward-looking, setting out the relevant background, they may on occasion look forward to the performance of the agreement and contain promises about future conduct. Where such a recital is not inconsistent with an operative provision of the agreement, it may have effect as a binding promise, either directly or by implication.[23] Here, Recital C does not conflict with any operative provision of the loan agreement.
[23]Ivory Land, [15]–[16]; Ansett, 72 (Mason J).
I consider that a reasonable businessperson, reading the loan agreement as a whole, would have understood that the Moloneys were parties to the agreement and had agreed to guarantee the loan by Carl Finance to Koroit. It would make a commercial nonsense of the loan agreement to disregard the identification of the Moloneys as the ‘Guarantor’, to overlook Recital C, and to ignore the fact that both Frank Moloney and Damian Moloney signed, sealed, and delivered the agreement in an individual capacity.
I accept that the loan agreement was executed as a deed. Although it is not called a deed, and the execution page states that it was executed as an agreement, both of the Moloneys ‘signed sealed and delivered’ the loan agreement before a witness. The corporate parties, Koroit and Carl Finance, executed the loan agreement in accordance with s 127 of the Corporations Act, which provides for the execution of documents (including deeds) by a company. The attestations of all four signatories are therefore consistent with the loan agreement having been executed as a deed.[24]
[24]The same conclusion was drawn in similar circumstances in Backstop Nominees, 470; Nom de Plume Nominees, [79]–[80] (Tate JA, with McLeish JA and Ginnane AJA agreeing).
Even if the loan agreement was not executed as a deed, there was clearly consideration from Carl Finance to support the promised guarantee, in that Carl Finance advanced the principal sum following execution of the agreement. As Carl Finance submitted, this is sufficient consideration to support a promise to guarantee a loan to a third party.[25]
[25]See [32] above and the authorities referred to there.
It is the case that Damian Moloney was not a director of Koroit and had no direct interest in the company. As mentioned, Frank Moloney was the sole director. One of the two shares in Koroit was owned by Frank and Damian’s sister, Claire Gualtieri. The other share was owned by ACN 005 094 655 Pty Ltd, formerly Rialton Nominees Pty Ltd, as trustee for Ms Gualtieri.
However, I do not accept Damian Moloney’s contention that he had no connection with Koroit and did not stand to benefit from the loan. The Moloney Group operates through various companies. One of those companies is Rialton, which is the trustee of the Damian Moloney Family Trust as well as trustee for Ms Gualtieri. Damian was a director of Rialton at the relevant times.[26] Koroit was thus embedded within the Moloney Group of companies. In addition, Damian Moloney represented to Mr Beable that the Flemington Road property was held by his family and was being developed by the Moloney Group. His interest in obtaining funds to progress the development was enough that he was prepared to guarantee the loan from Carl Finance.
[26]With the exception of a short period between 6 April 2020 and 22 June 2020, Damian Moloney has been a director of Rialton since February 1982.
I have some sympathy for Damian Moloney’s argument that the guarantee was conditional on the provision of specific consideration by Carl Finance, in the form of taking out the agreed security. If that had been done, Frank would not have been able to sell the property without Mr Beable’s agreement, the guarantee would not have been called on, and Damian would not be in his current predicament.
However, the argument is inconsistent with the express terms of the loan agreement, in particular cl 9. The Moloneys did not give the guarantee on condition that Carl Finance take the agreed security. Clause 9 of the loan agreement provides that it is not incumbent on the Lender to enforce the security or any provision of the agreement unless it shall think fit, and that it is not answerable for loss of any kind that might happen in or about its failure or omission to act. In other words, Carl Finance was not obliged to take the agreed second mortgage or register a caveat on the title, and was not accountable to the other parties if it omitted to do so. I accept the submission of Carl Finance that this case is similar to JGL Investments,[27] and unlike cases such as Scott v Forster Pastoral Co Pty Ltd[28] where the guarantee was conditional on specific consideration.
[27]See [33] above.
[28](2000) 35 ACSR 294; see [37] above.
For those reasons, I conclude that Frank Moloney and Damian Moloney guaranteed the loan.
If so, how much are they liable to pay under the guarantee?
In its amended statement of claim, Carl Finance sought payment from the Moloneys in the sum of $2,257,602.74, being the principal sum of $1,500,000 and $757,602.74 for outstanding interest to 30 May 2023. It also sought further interest at the rate of 15% under the guarantee from 30 May 2023 to the date of judgment.
In its closing submissions at trial, Carl Finance sought judgment in the amount of $1,485,684.93, with interest calculated to 3 June 2024, and taking into account the settlement payment of $1,000,000 from the solicitors. It said that its actual entitlement might be higher, on the basis that the settlement payment would not be deducted from the debt owed under the guarantee, and also included compensation for its costs incurred against the solicitors. However, it did not press its claim for a higher amount.
The full calculation of the amount claimed by Carl Finance under the guarantee is set out below:
Description Amount Amounts due pursuant to the loan agreement
Principal $1,500,000 Interest owing at the rate of 12% per annum in the period between 17 November 2016 and 17 January 2020 $585,000 (being equal to $15,000 for 39 months, as set out in the Court Book at pp 185-186) Interest owing at the default rate of 15% per annum in the period from 17 January 2020 to 3 June 2024
$985,684.93 (being equal to 1,599 days / 365 * 0.15 * $1,500,000)
TOTAL $3,070,684.93 Less amounts paid/to be paid shortly
Interest owing at the rate of 12% in the period between 17 November 2016 and 17 January 2020
$585,000
Settlement payment by First and Second Defendants
$1,000,000
TOTAL OWING $1,485,684.93
These amounts were claimed on the basis that the Moloneys had agreed to guarantee ‘the loan in full’, which Carl Finance contended meant both the principal sum and the agreed interest.
The word ‘loan’ is not defined in the interpretation clause of the loan agreement. The schedule does not refer to the ‘loan’, but provides separately for the principal sum, the interest rate, and the default interest rate. Clause 1 of the loan agreement provides:
Loan
Subject to the provisions hereof the Borrower shall borrow and the Lender shall lend the Principal Sum.
Noting that cl 17.3 provides that ‘headings are for convenience only and do not affect interpretation’, I do not take cl 1 to be a definition of ‘loan’. However, it provides that the principal sum is lent subject to the provisions of the agreement. Those provisions include the payment of interest on the principal sum in accordance with cl 3, which provides:
Interest (Credit Fee)
3.1The Borrower shall pay to the Lender Interest and/or a Credit Fee upon the Principal Sum or so much thereof as shall from time to time be outstanding at the rate set out in the schedule. If the Interest and/or Credit Fee payable is not paid on the due date for payment thereof or within seven days thereafter the rate shall be at the default rate set out in the schedule. The default rate of Interest is applicable during the whole of the time he Interest is overdue and reverts back to the agreed rate when the Interest is brought up to date.
3.2The interest and/or Credit Fee payable to the Lender pursuant to this clause shall be made at such address as the Lender may nominate from time to time and shall be paid in advance and deducted from the loan funds on the day of settlement, unless otherwise agreed.
As mentioned, the interest rate set out in the schedule is 12% per annum, payable monthly in arrears, on the first day of each month, and the default interest rate is 15% per annum.
A commercially sensible reading of the loan agreement as a whole indicates that ‘the loan in full’ means both the principal sum and the agreed interest on that sum. Neither Frank Moloney nor Damian Moloney submitted otherwise.
Adding interest at the default rate of 15% for a further 49 days, the amount that the Moloneys are liable to pay under the guarantee as at the date of judgment is $1,515,890.41.
Did Damian Moloney or Frank Moloney make misleading representations in relation to the guarantee or the security?
Carl Finance made a further or alternative claim that Frank Moloney and Damian Moloney had engaged in misleading and deceptive conduct in relation to the loan to Koroit, which had caused Carl Finance to suffer loss, for which the Moloneys were liable in damages. Two sets of representations were alleged: the ‘Guarantee Representations’ and the ‘Property Representations’.
The Guarantee Representations were pleaded in the event that the guarantee was found not to be a valid and binding agreement. As I have found that it was, any representations by the Moloneys that they would guarantee the loan could not have been misleading.
The Property Representations were said to be representations by Frank Moloney and/or Damian Moloney, in trade or commerce, that:
(a) the property was charged as security in relation to Koroit’s obligations pursuant to the loan agreement and the rollover agreement; and
(b) they agreed not to act inconsistently with Carl Finance’s right to have such recourse to the property.
The only particulars given of the Property Representations were that they were partly contained in the provisions of the loan agreement, and partly to be implied as a matter of law to give business efficacy to the conduct of the respective parties.
The Property Representations were alleged to have been false or misleading and deceptive because, in about March 2018, Koroit effected a transfer of the property to a third party.
The misleading and deceptive conduct claim was put rather differently in closing submissions. The argument was that the Moloneys had misrepresented that the expected security would be put in place and they would not act inconsistently with that security, and that the guarantee would be effective, by:
(a) on 14 October 2016, raising no objection in response to Ms Patterson’s email to Frank Moloney, copying Damian Moloney and Mr Beable, relevantly stating ‘[t]he Lender has sought that Damian is also a guarantor as we are not going to register the second mortgage’; and
(b) signing the Koroit Loan Agreement without objection to the provisions it contained relating to the expected security,
in circumstances where the expected security was not put in place, and they acted inconsistently with such security, by selling the property at 87–89 Flemington Road, North Melbourne.
The evidence did not support either version of the claim that the Moloneys misrepresented the security for the loan.
By signing the loan agreement as the director and secretary of Koroit, Frank Moloney represented only that security was available for the loan on the terms set out in the agreement. Frank Moloney had reasonable grounds to make that representation,[29] because the loan agreement enabled Carl Finance to take collateral security for the loan in the form of an unregistered second mortgage and a registered caveat over the property. Clause 7 of the loan agreement bound Koroit to execute all documents necessary to perfect the security.
[29]Competition and Consumer Law Act 2010 (Cth), Sch 2 — Australian Consumer Law, s 4.
The loan agreement did not contain any agreement by Koroit not to act inconsistently with the security if Carl Finance did not take it. Nor was any such representation conveyed in Frank Moloney’s email correspondence with the solicitors about the security for the loan.[30]
[30]Exhibit P1 — Email from Melissa Patterson to Frank Moloney, copying Damian Moloney and Jeffry Beable, dated 14 October 2016.
Damian Moloney signed the loan agreement only in his capacity as a guarantor. I am not satisfied that this amounted to a representation about the security to be provided by Koroit for the loan. Even if it did, he also had reasonable grounds to represent that security was available for the loan on the terms set out in the loan agreement, because that is what the agreement provided.
In the event, Carl Finance did not exercise its rights under the loan agreement to require Koroit to execute a second mortgage, and it did not register a caveat. There is no evidence that either of the Moloneys, when they signed the loan agreement in October 2016, anticipated that the agreed security would not in fact be taken.
Frank Moloney did not realise that a caveat was not in place until early 2018, when he did a title search in preparation for selling the property. He took advantage of that circumstance, selling the property without Mr Beable’s knowledge or agreement. While the sale might be described as sharp practice, I am satisfied that it was opportunistic and not the result of misleading representations made in October 2016.
I accept Damian Moloney’s evidence that he did not know that Carl Finance had not taken the agreed security until March 2021, about three years after the property had been sold. When he found out, he promptly informed Mr Beable what had occurred. I have not overlooked the evidence of their mutual friend Donald McKay, that Damian Moloney told him on a regular tennis night that the property had been sold on to a developer, and that they had made quite good money from the sale. Mr McKay did not say when this conversation took place, and I am not persuaded that the property referred to was the Flemington Road property.
Carl Finance has not made out its claim that Frank Moloney or Damian Moloney made misleading statements in relation to the guarantee or the security for the loan.
Disposition
There will be judgment for Carl Finance in the amount of $1,515,890.41, which includes interest under the loan agreement to the date of judgment. I will hear the parties in relation to the costs of the proceeding.
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