Esanda Finance Ltd v McDonald, N. E

[1993] FCA 682

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JUDGMENT NO. ........ ........ .. I ........ ....

IN THE FEDERAL COURT OF AUSTRALIA ) No. NG 457 of 1993

GENERAL DIVISION i

ON A P P W FROM A SINGLE JUDGE
IN THE

FEDERAL COURT OF AUSTRALIA

BETWEEN:	ESANDA FINANCE LIMITED Appellant
AND :	N E McDONALD and J A
McDONALD
Respondents

CORAM:	WILCOX, SPENDER h FOSTER 33
PLACE :	SYDNEY
DATE :	22 SEPTJWBER 1993

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondents' costs of the appeal.

Note:	Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

1 No. NG 457 of 1993

m SOUTR W ~ S	DI TRICT REGISTRY j
GENERAL DIVISION	1

ON APPEAL FROM A SINGLE JDDGE
IN THE

FEDERAL COURT OF AUSTRALIA

BETWEEN:	ESANDA FINANCE LIWITED Appellant
AND :	N E McDONALD and J A
McDonald Respondents

C O M :	WILCOX, SPENDER h FOSTER JJ
PLACE :	SYDNEY
DATE :	22 SEPTEMBER 1993

EXTEMPORE REASONS FOR JUDGMENT

WILCOX J: This is an appeal from a decision of a judge of the

Court, Davies J, in relation to a complaint by the present respondents, the applicants below, that the present appellant,

misleading conduct in connection with the taking of a mortgage	Esanda Finance Corporation Limited ("Esanda"), engaged in
over their property, "Hillview" near Lithgow. I do not find it necessary to refer in detail to the facts. They have been canvassed with counsel today and are referred to in their very comprehensive submissions, which the Court has read.
There are really two principal questions for determination. They involve the question whether Mr Bruce Smith, the Orange manager of Esanda, was involved in misleading conduct vis-a-vis Mr and Mrs McDonald in connection, firstly, with the information given to them as to the purpose of a loan of $100,000 which they were to make to Lithgow Motors; and, secondly, as to the extent of their liability to Esanda under the arrangements being negotiated and documented.
In relation to the first matter, the trial judge referred to the affidavit evidence of Mr Smith as to a conversation which occurred on 29 June 1990 at the home of Mr and Mrs McDonald. Mr McAuley, who was the accountant of Mr and Mrs McDonald and also a director of Lithgow Motors, was present, together with Mr Smith. Mr McAuley dnd Mr Smith put a proposition to Mr and Mrs McDonald which involved them advancing the sum of $100,000 to Lithgow Motors. According to Mr Smith's own evidence, during the course of that conversation, Mr McAuley said that the $100,000 would be used in the business to clear sales tax of about $70,000 and that
the rest was for working capital. The evidence discloses that, at the time, Mercantile Credits Limited, which was then a subsidiary of Esanda, had a
floor plan agreement with Lithgow Motors. The total amount covered by the floor plan was $325,000, but this amount had been exceeded, with the agreement of Mr Smith, for a considerable period of time. The evidence also discloses that, for a considerable time, Mr Smith had been urging Mr McAuley to obtain security, in order to enable him to increase the extent of his floor plan and thereby take in more stock and thus, hopefully, make more sales. There was a problem in obtaining security. Neither of the existing proprietors of the company had any worthwhile equity. An attempt to obtain a guarantee, or perhaps a bank guarantee, through another person foundered when that person took legal advice.
The exact position of the floor plan account as at 29 June does not appear from the evidence. One of the problems that beset the trial was the loss of many records. But it seems to be the position that on 18 July, when the transaction was settled, a sum of $445,992 was transferred from the floor plan account of Mercantile Credits to Esanda. On that same day, a sum of $171,036 was paid to Mercantile Credits in relation to floor plan liabilities, apparently being the amount due on sales of dars made prior to that date.
The details of the dates of the sales do not appear be added together, immediately before the payment, the amount from the evidence. But it is apparent that, if these two sums
owing to Mercantile Credits was $617,028. This not only
considerably exceeded the existing approved limit of $325,000; it exceeded even the proposed new limit of $550,000 approved by senior Esanda officers. The inference is irresistible that a major purpose in obtaining $100,000 from Mr & Mrs McDonald was to reduce the liability to Mercantile Credits or the overall amount owing under the floor plan agreement.
The real question in the case, which has emerged from discussion with counsel, is whether Mr Smith knew of that purpose. When one reads the history of the matter and the reports he made to his superiors about Lithgow Motors, it is apparent that Mr Smith had a close personal knowledge of the business and its vicissitudes over the previous couple of years. He obviously had frequent contact with Mr McAuley. The account was a substantial one. I surmise that it would be amongst the more significant accounts of this regional office.
I find it impossible to doubt that Mr Smith was aware of the
situation.
It should also be borne in mind that Mr Smith was in the witness box for a considerable time. The situation of the account was squarely put to him by counsel in cross- examination and his Honour obviously formed an unfavourable view about Mr Smith. As always on matters of credit, the view of the trial judge assumes great importance. It seems to me that the conclusion of his Honour, that Mr Smith was party to the misleading of Mr & Mrs McDonald regarding the purpose of
the loan, was one he was entirely justified in reaching.
As to the second matter, the question is whether or not Mr & Mrs McDonald were made aware that the documents that they signed included provisions which cast upon them liability for any moneys which might be owing by Lithgow Motors to Esanda under the floor plan; or, alternatively, a sum of $105,000 out of those moneys. Both Mr & Mrs McDonald swore
that they had no such knowledge. They were cross-examined about the matter. Once again, his Honour had the opportunity of assessing them about this matter. He took the view that, although relatively unsophisticated in business matters, they were honest witnesses and he accepted their evidence. I see no basis whatever for this Court interfering in that conclusion. It follows that, in my view, the attack on his Honour's conclusions totally fails. I would dismiss the appeal with costs.
SPENDER J: I agree with the observations and proposed orders by the presiding judge. I want to make observations about two short matters. I accept that a possible inference from the evidence, and in particular from the references to the indebtedness of Lithgow Motors to Esanda which appears in the solicitor's certificate and in the mortgage and in the definition of Lithgow Motors as borrower appearing in the
mortgage, was that both Mr & Mrs McDonald were aware that the
funds in respect of which the mortgage security and .the
primary judge to the effect contrary to that inference. There guarantee were given went beyond the $100,000 borrowed by them from Esanda. However, there was an express finding by the
was evidence on which that conclusion could be reached, in particular the evidence which appears at page 16 of his
Honour's judgment where Mr McDonald was asked:

"When you went to the meeting you understood that you would be asked to sign a mortgage which would secure Esanda's

loans to the company, Lithgow Motors; that
i s what y o u r u n d e r s t a n d i n g was, was i t

no t?"

To which Mx McDonald replied:

" N o , the u n d e r s t a n d i n g was t h a t we l o a n t o

L i t h g o w Hotors $100,000 for the f loor p l a n

on a s i m p l e mor tgage and t h a t ' s what was

e x p l a i n e d t o u s . "

That evidence was accepted by the primary judge based on his observation of the witnesses and it is just not competent for us to reach a contrary conclusion.

The second matter relates to a suggestion that the primary judge was in error in his understanding of the effect of the mortgage document. That submission is based on the sentence which appears at page 15 of his Honour's reasons where he said:

"Those g u a r a n t e e s were the m o s t

i m p o r t a n t documents for they

p r o v i d e d	the	personal	l i a b i l i	t v
w h i c h	e x t e n d e d	the	o p e r a t i o n	02

$100,000. "

the mor tgage beyond the l o a n o f

That statement, however, has to be read in the context of what had earlier been said by his Honour and in particular the statement at page 10 of his reasons where, having referred to the mortgage, he said:

"The amount s e c u r e d was d e s c r i b e d i n these

t e r m s . ' T h e mor tgagor w i l l p a y t o the

mor tgagee a l l amounts for which the

mortgagor or the borrower is indebted or otherwise liable to the mortgagee and/or any associated company of the mortgagee on

any account ' . "

In another clause the borrower was defined as Lithgow Motors. Having referred expressly to those provisions in the mortgage, it seems to me not able to be maintained that his Honour was in error either as to the effect of the terms of the guarantees which the McDonalds signed or to the terms of the mortgage which they also signed. I agree with the orders proposed by wilcox J.

FOSTER J: Yes, I am not persuaded that his Honour was in any way in error on the findings that he made or on the orders that he made. I agree that the appeal should be dismissed otherwise I agree on the orders proposed.

WILCOX J: The order of Court therefore will be that the

appeal be dismissed and that the appellant pay the

respondents' costs of the appeal. The Court will now adjourn.

I certify that this and the preceding six (6) pages

are a true copy of the Reasons for Judgment

of the Court.

Associate:

Dated:  22 September 1993

APPEARANCES

Counsel for the Applicant:	J Campbell QC and
M Cashion
Solicitors for the Applicant:	Kemp Strang & Chippindall
Counsel for the Respondent:	G J McVay
Solicitors for the Respondent:	Diana Perla & Associates
Dates of hearing:	22 September 1993