Chaudhary v R.J. and R.C. Electrical Solutions Pty Ltd &

[2011] VCC 1350

IN THE COUNTY COURT OF VICTORIA Revised

(Not) Restricted

AT MELBOURNE
COMMERCIAL LIST

GENERAL DIVISION

Case No. CI-11-03207

HEMANT CHAUDHARY	Plaintiff
v.
R.J. & R.C. ELECTRICAL SOLUTIONS PTY	Defendants
LTD and ANOR

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JUDGE:	His Honour Judge Anderson
WHERE HELD:	Melbourne
DATE OF HEARING:	29 September 2011
DATE OF JUDGMENT:	29 September 2011 (revised 30 September 2011)
CASE MAY BE CITED AS:	Chaudhary v. R.J. & R.C. Electrical Solutions Pty Ltd & Anor
MEDIUM NEUTRAL CITATION:	[2011] VCC 1350

REASONS FOR JUDGMENT

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Catchwords:  Practice and procedure – Summary judgment application – Guarantee
by sole director of company – Borrowing company to provide agreed
security – Whether guarantee should be avoided because security not
given – Guarantor fully aware of what was happening – Waiver or
acquiescence – Sonntag v Graziano 1994 New South Wales Supreme
Court, Court of Appeal case no. BC9404490 followed.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M. Campbell	Heniz & Partners
For the First Defendant	No appearance	Simon Nixon
For the Second Defendant	Mr A. Schlicht	Simon Nixon
HIS HONOUR:

1           This is a summary judgment application by the plaintiff as lender against the second defendant as guarantor. The first defendant was the borrower. It is a company, which I am informed passed a resolution today that a liquidator be appointed. The summary judgment application is against both defendants. The same solicitor filed an appearance on behalf of the defendants and I was informed the information about the present state of the first defendant came from the defendants’ solicitor who is in Court.

2           The three parties, the plaintiff as lender, the first defendant as borrow and the second defendant as guarantor, entered into what was described as a “loan deed” dated 29 June 2010. The deed was executed by the plaintiff and was separately executed by the second defendant, firstly, on behalf of the borrower as the sole director of the company, and secondly, on his own behalf as guarantor. The second defendant was a director of the first defendant from 26 June 2009 to 22 September 2010 and has, at all relevant times, been a shareholder of the first defendant.

3           The deed provided, in Clause 4.1, that, “The borrower has requested the lender to

advance the loan to the borrower and the lender has agreed to do so, in

consideration of the borrower’s agreement to provide the security”. The loan was
defined in Clause 1.1 of the deed as meaning “the amount of $1m, do be advanced
by the lender to the borrower, pursuant to the terms of the deed”. The due date of the
loan was 30 June 2011 and the interest rate was 20 percent. Security was defined as
meaning:

“i. a second ranking registered mortgage over the land, provided by the

borrower in favour of the lender; and

ii. a second ranking registered fixed and floating charge over all of the assets

and undertaking of the borrower”.

4 security, as envisaged by the deed, was not put in place on that day, and a request

The loan amount of $1m was paid to the first defendant on 30 June 2010. The On 30 June 2010, a caveat was prepared, which carries the signature of the second defendant as agent for the plaintiff as caveator. The caveat notes that it was lodged by Capital Securities (Aust) Pty Ltd, a company of which the second defendant was at that time a director. The caveat notes as the “grounds of claim” that the caveat was lodged by the caveator “as mortgagee pursuant to a mortgage dated 30 June 2010” between the plaintiff and the first defendant.

5           The second defendant asserts that it was an “essential term” that the plaintiff obtain the security before the money was advanced to the borrower, if the guarantee was to be enforceable against him. This assertion is formulated alternatively as a condition of, or as fundamental to, the giving of the guarantee. It is asserted that the second defendant only gave the guarantee in reliance upon security being provided by the borrower before the advance was made.

6           The second defendant states in an affidavit that a valuation of the security property would disclose, if that document was presently available, that there was as at 30 June 2010 sufficient equity in the property to cover the advance to the borrower. The borrower subsequently defaulted under the loan deed and recovery, although initially sought against both defendants, is now sought against the second defendant.

7           The prima facie position is that, “Where a transaction of which a guarantee is part

envisages that a security will be given for the performance of the principal obligation

guaranteed and that security is not given, prima facie the guarantee is avoided” (see Sonntag v Graziano, Supreme Court of New South Wales, Court of Appeal, Case no. BC9404990 per Mahoney JA, citing Halsbury’s Laws of England, Vol. 20, paragraph 282 and other authorities). In that case, the loan agreement relied upon provided that “the borrower shall not be entitled to any advance pursuant to this agreement unless and until the lender holds the security specified”. The loan moneys were advanced

without the lender holding the specified security. The guarantor submitted that, in
accordance with the general principle I have referred to, the failure to give the
security avoided the guarantee.

8           Essentially, the Court of Appeal held, “That principle has no application in the present case”. The Court accepted that the guarantor “at all times knew what was happening;

in particular, he knew that the advance of money was taking place notwithstanding

that the security had not been given” by the borrower to the lender. The Court stated
that, in that case, if the guarantor, “Mr Sonntag had caused the company to omit to

give the security and/or had instructed the solicitor acting for all parties not to take the
security or to delay having it executed, Mr Sonntag could not, I think, have relied
upon the failure of the company to give the security as a ground for avoiding the

guarantee”.

9           The Court considered that it was “necessary to determine what was the precise

10         In the present case, the consideration expressed in the deed for the “guarantee and indemnity” was stated to be that “the guarantor has requested the lender to advance

the loan to the borrower and the lender has agreed to do so in consideration of this

guarantee and indemnity”. In my view, there is nothing in the terms of the loan deed in the present case or the knowledge or actions of the second defendant which would distinguish this case from the facts of Sonntag v Graziano.
11	Civil Procedure Act 2010 has introduced what is accepted to be a less stringent test than previously for summary judgment applications. Under the Act, the Court may give summary judgment in a proceeding if the defendant’s defence “has no real prospect of

Although this is a summary judgment application, s.61 of the which would indicate that at trial there would be a factual or legal basis for the second defendant successfully defending the plaintiff’s claim.

12         In the circumstances, it is appropriate to enter judgment for the plaintiff against the second defendant.

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Certificate

I certify that these 3 pages are a true copy of the reasons for decision of His Honour Judge

Anderson delivered on 29 September 2011 (and revised on 30 September 2011).

Dated: 30 September 2011

Caroline Dawes

Associate to His Honour Judge Anderson