Handcock v Salemon Enterprises Pty Ltd (in Liq)
[2008] NSWADT 316
•28 November 2008
CITATION: Handcock & ors v Salemon Enterprises Pty Ltd (in Liq) [2008] NSWADT 316 DIVISION: Retail Leases Division PARTIES: APPLICANTS
Francis Charles Handcock
Anthony John Wilkins
Maureen Joan WilkinsFIRST RESPONDENT
Salemon Enterprises Pty Limited (in Liquidation)SECOND RESPONDENT
Albert SalemonFILE NUMBER: 085102 HEARING DATES: 28 August 2008 SUBMISSIONS CLOSED: 26 September 2008
DATE OF DECISION:
28 November 2008BEFORE: Molloy G - Judicial Member CATCHWORDS: Guarantor's liability CASES CITED: Commercial Banking Co of Sydney Ltd v. Patrick Intermarine Acceptances Ltd [1978] 52 ALJR 404
Corser v. Commonwealth General Assurance Co Ltd,Direct Acceptance Finance Ltd v. Cumberland Furnishing Pty Ltd [1965] NSWR 1504
Guild & Co. v. Conrad [1894] 2 QB 885
Jackson v. Digby [1854] 2 WR 540
Kindful (Australia) Pty Ltd v. Country Villa Holdings Pty Ltd (No. 2) [2006] NSWADT 357
Moschi v. L E P Air Services Ltd [1974] AC 331
McDonald v. Dennys Lascelles Ltd [1993] 48 CLR 457
Sampson v. Burton [1820] 129 ER 891
Sunbird Plaza Pty Ltd v. Maloney [1988] 166 CLR 245
Temperance Loan Fund Ltd v. Rose [1932] 2 KB 522
Total Oil Products (Australia) Pty Ltd v. Robinson [1970] 1NSWR 701
Yeoman Credit Ltd v. Latter [1961] 1 WLR 828REPRESENTATION: APPLICANT REPRESENTATIVE
RESPONDENT REPRESENTATIVE
In person
B DamcevskiORDERS: 1.The Notice of Motion filed by the Second Respondent 14 July 2008 be and is hereby dismissed.
2.The costs of the Applicant in relation to that Notice of Motion are reserved.
3.Declare that the Tribunal has jurisdiction to hear and determine the proceedings instituted in the Penrith Local Court No. 1074 of 2007 and transferred to this Tribunal by Orders made 15 May 2008.
4.I list this matter for further Directions before me on 18 December 2008 at 12 noon.
Background
1 The Applicant is the owner of Part F I 1/225735, described as Levels 1 and 2, 9 Normic Avenue Blaxland (“the Premises”).
2 By Lease dated 20 April 2001 and registered 7870653T (“the Lease”) the Applicant leased to the First Respondent Salemon Enterprises Pty Limited the Premises for a term of 5 years commencing 26 March 2001 terminating 25 March 2006 with a 5 year option to renew.
3 Clause 2 of the Lease describes who are the parties to the Lease. Clause 2.1 describes the Applicant as the Lessor; clause 2.2 describes the First Respondent as the Lessee; clause 2.3 describes the guarantor as a party “if a guarantor is named in item 9 in the schedule”. Item 9 describes “the guarantor” as the Second Respondent.
4 Clause 13 describes “the obligations of a guarantor” . Clause 13.1 provides that the clause will apply if a guarantor is named in item 9A and “has signed and executed this lease …”. On page 2 of the lease the signature of the Second Respondent appears as guarantor.
5 The substantive clauses relating to the obligations of the guarantor are set out below. It is necessary to set out this detail simply because the argument was strongly put by counsel for the Second Respondent that this Tribunal had no jurisdiction to deal with the current claim (details of which I also set out further in this Decision). The relevant clauses are as follows:
“13.2 The guarantor guarantees to the landlord the performance by the tenant of all the tenant’s obligations (including any obligation to pay rent, outgoings or damages) under this lease, under every extension of it or under any renewal of it or under any tenancy and including obligations that are later changed or created.
13.3 If the tenant does not pay any money due under this lease, or under any extension of it or under any renewal of it or under any tenancy the guarantor must pay that money to the landlord on demand even if the landlord had not tried to recover payment from the tenant.
13.4 If the tenant does not perform any of the tenant’s obligations under this lease, under any extension of it or under any renewal of it or under any tenancy the guarantor must compensate the landlord even if the landlord has not tried to recover compensation from the tenant.
13.5 If the tenant is insolvent and this lease or any extension or renewal of it is disclaimed the guarantor is liable to the landlord for any damage suffered by the landlord because of the disclaimer. The landlord can recover damages for losses over the entire period of this lease or any extension or renewal but must do every reasonable thing to mitigate those losses and try to lease the property to another tenant on reasonable terms.
13.6 Even if the landlord gives the tenant extra time to comply with an obligation under this lease, under any extension of it or under any renewal of it or under any tenancy, or does not insist upon strict compliance with the terms of this lease or any extension of it or any renewal of it or of any tenancy, the guarantor’s obligations are not affected.
13.7 If an amount is stated in item 9B in the schedule the guarantor’s liability under this clause is limited to that amount.
13.8 The terms of this guarantee apply even if this lease is not registered, even if any obligation of the tenant is only an equitable one, and even if this lease is extended by legislation”.
6 Clause 13.7 refers to Item 9B and this item states:
“Limit of Guarantor’s Liability: All the moneys due under the Lease”.
The Proceedings Thus Far
7 The Applicant, then legally represented, commenced proceedings in the Penrith Local Court by Statement of Claim filed 20 November 2007 No. 1074/07 against both Respondents.
8 The Statement of Claim sought an order that both Respondents (as Defendants) pay to the Applicant (as Plaintiffs) $33,396.14, interest and costs, in total $40,199.22.
9 The Statement of Claim pleaded, inter alia, that the First Respondent “operated a Block BusterVideo Store from the premises”; that the Second Respondent guaranteed the obligations of the First Respondent, “under the Lease”; that as at 20 February 2006 the First Respondent owed the Applicant “outstanding rent and outgoings in the sum of $53,215.72”; that the parties agreed in consideration of the Applicant “not taking immediate steps to recover those moneys and eject the First Respondent” from the premises to vary the terms of the lease, such variation being “conditional upon the (First Respondent) abiding by the terms of the agreement (set out in a letter from the Applicant’s solicitors 10 March 2006) yet the First Respondent failed to abide by the terms of the (asserted) variation. In any event, the lease expired by effluxion of time on 25 March 2006; yet the First Respondent continued in occupation “as a tenant from month to month … terminable on one month’s notice”; the First Respondent vacated the premises on or about 18 April 2006; the Applicants pleaded numerous asserted breaches by the First Respondent, set out in detail particulars of certain restoration works, outstanding rent and interest.
10 The Respondents filed a Defence on 27 December 2007 pleading that the Applicant as Plaintiff was “not entitled to seek … orders” in the Local Court but rather “the proper forum and jurisdiction for this claim” is this Tribunal. The Respondents pleaded that the Retail Leases Act applies.
11 By Notice of Motion filed in the Penrith Local Court on or about 18 February 2008 the Respondents sought an order that the Statement of Claim “be struck out and the matter referred to the Retail Tenancy Tribunal” and an order for costs. The Court ultimately made the following orders on 15 May 2008:
“1. That the proceedings be transferred to the NSW Administrative Decisions Tribunal, Retail Leases Division pursuant to Section 75 of the Retail Leases Act 1994.
2. No order as to costs.
That order was made by consent.
12 The proceedings thus transferred came before me for Directions 19 June 2008. The Applicants appeared in person represented by the First Applicant and Mr Damcevski of counsel appeared for the Second Respondent. It appeared that the First Respondent was, by creditor’s voluntary winding up, placed into liquidation on 27 February 2008, Mr M W Ball being appointed liquidator. It appeared that the Second Respondent wished to advance an argument that this Tribunal did not have any jurisdiction. Leave was granted to file any appropriate strike out/dismissal application.
13 The Second Respondent filed a Notice of Motion on 10 July 2008 seeking the following Orders:
“1. The Tribunal Claim 085102 be struck out.
2. The Applicants pay the Respondent’s costs of and incidental to this Notice of Motion (in particular the Second Respondent).
3. The Applicants pay the Respondents costs thrown away by reason of the Tribunal claim 085102 and on an indemnity basis (in particular the Second Respondent).”
14 This Motion came on for hearing before me 26 August 2008. The gravamen of the Second Respondent’s case is that there must be a proven default and the Applicant cannot prove default because the First Respondent is in liquidation.
15 The Second Respondent has been to considerable trouble, and no doubt considerable expense, in, not only oral argument, but also very detailed written submissions and reference to some 14 cases and various other documents. In my opinion, it is therefore appropriate that I give to this Decision the care and attention that has clearly been given by the Second Respondent in his counsel’s very careful and detailed submissions; similarly, and in response, the Applicant has also provided very careful and detailed submissions. The point is a peculiarly legal point – although I have set out some basic pleadings above I have not yet ventured into the facts as asserted by the Applicant and have not embarked upon any factual analysis but have confined myself to the terms of the Lease (as set out above) and the legal submissions made.
16 I also note, from the company search tendered as part of the Second Respondent’s submissions 11 July 2008, that the liquidator has filed three Notices of Disclaimer of Onerous Property. No party put those Notices, or any of them, before the Tribunal.
Second Respondent’s Submissions
17 In oral submissions counsel for the Second Respondent submitted that one does not have a case against a guarantor unless one first proves it against the primary or principal debtor. In this case it cannot be proved because the principal debtor is in liquidation. Corporations Act Section 500(2) prohibits actions against the principal debtor (First Respondent) therefore the debt cannot be proved against the principal debtor and therefore it cannot be proved against the guarantor.
18 It was strongly put that the liquidator has not looked at the proofs of debt and therefore the liquidator has made no adjudication of the asserted debts and therefore there is no proof against the principal debtor. It was submitted that the proper course of action is for the Applicant to lodge a proof of debt with the liquidator, have that adjudicated and, if rejected, appeal that decision. This is unlikely to happen (so I was told) because there was simply no money available for the liquidator to adjudicate on any debts.
19 The Second Respondent filed detailed Written Submissions and a Response to the Submissions made by the Applicant. The Written Submissions were dated 11 July 2008, the Response 15 August 2008 and by a document styled “Index of Principles and Cases” dated 28 August 2008 counsel for the Second Respondent set out what he submitted were the relevant principles of law that should apply in this case.
20 In the submissions 11 July 2008 the Second Respondent observed that at the time of the lease and the occupation of the premises the First Respondent was solvent. The First Respondent vacated the premises on 18 April 2006 and went into liquidation on 27 February 2008. Counsel referred to Corporations Act Section 500(2) which is in the following terms:
“S500(2) After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.”
It was submitted that that sub–section prohibited the Applicant from recovering against the guarantor because firstly, by e-mail dated 14 May 2008, the liquidator informed (counsel) that the Applicant’s proof of debt would and could not be adjudicated as no dividend could be paid . Secondly, the liquidator “is in control of the First Respondent corporation and the liquidator is the only person that can carry out a defence (to) these proceedings … the Applicant’s proof of debt will not be adjudicated”. It was submitted that the Applicant could challenge the liquidator’s decision by commencing a Section 1321 Corporations Act appeal “which will ultimately fail as there are insufficient funds in Liquidation to carry out a defence and pay a dividend as well”.
21 It was further submitted that if the Applicant cannot get an adjudication of its proof of debt and the Liquidator is not compelled to defend the proceedings, “then the Applicant cannot prove against the First Respondent corporation and the Applicants’ claim not only fails against the First Respondent corporation but also against the Second Respondent’s director’s guarantee”; the Applicant’s claim was based “on an alleged breach of the lease and at the time the First Respondent corporation was solvent, (the) lease ended and then the First Respondent corporation went into liquidation. There was no technical breach in this case as the lease ended before the Liquidation”.
22 It was submitted that the “only way the Second Respondent guarantor could be held liable under this claim is the Applicant must prove against the First Respondent in the following scenarios:
1. By the Liquidator declining to file a defence (by admitting the allegations) and admitting the Applicant’s proof of debt in part or whole. The Applicant must prove that the First Respondent breached the lease before the Second Respondent can be held liable.
2. If the Liquidator is unable or is unwilling to adjudicate the Applicant’s proof of debt, then the Applicant must commence Section 1321 Corporations Act proceedings in the Supreme Court”.
23 It was submitted that those scenarios the liquidator “already had stated its position and will not defend, admit or adjudicate”, such that the current proceedings against the Second Respondent as guarantor ought to be “struck out with costs”.
24 In the Response 15 August 2008 the Second Respondent expanded upon the above submissions. Firstly, it was submitted that the “debt is an alleged debt which the company filed a Defence prior to its liquidation. The Applicant can proceed against the Respondent company only by filing a claim against the liquidator in the Supreme Court. The Applicant is not making a claim based on clause 13 Guarantee of the Lease and it can not. Clause 13 presupposes a default or breach which the Applicant has not yet proved or can prove”.
25 Counsel for the Second Respondent submitted that there were a number of “Principles of Law” which applied in these circumstances and which he set out in detail in an “Index” dated 28 August 2008. What I propose to do, in deference to the detail submitted by counsel, is set out his submitted “Principles” seriatim and address each in turn.
26 The first submitted “Principle of Law” is that a “guarantee is a contract in which the guarantor promises to answer to the person in whose favour the guarantee is given for a debt or obligation of a principal debtor if the debtor defaults”. Reliance was placed on three decided cases. Firstly, Sunbird Plaza Pty Ltd v. Maloney [1988] 166 CLR 245 per Mason CJ at 254. Here the Chief Justice commenced his discussion of the principles with an analysis of the Statute of Frauds 1677 (Section 4) by observing “that a contract of guarantee is, subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given … Such a promise was required … to be evidenced in writing, unlike a contract of indemnity, which stands outside the statutory requirement … (an) indemnity is a promise by the promisor that he will keep the promisee harmless as against loss as a result of entering into a transaction with a third party … (in) their endeavours to distinguish between a guarantee and an indemnity the courts have emphasised the difference between the guarantor’s secondary liability and the indemnifier’s primary liability … (once) default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation … (and), just to add to the confusion, guarantees are sometimes expressed so as to impose a primary liability on the guarantor”. His Honour went on, at 255, to reinforce the basic proposition “that a creditor’s rights against a guarantor depend upon the terms of the guarantee and the nature of the obligation, performance of which is guaranteed. If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit of the guarantee may, upon default, sue the guarantor for damages for breach of contract”.
27 Counsel also relied upon Direct Acceptance Finance Ltd v. Cumberland Furnishing Pty Ltd [1965] NSWR 1504. Again, this case depended upon its particular contractual terms. The Full Court regarded the issue as a construction issue and observed (at 1507) that “in the end … it is clear that the answer to the question before the Court must depend upon the construction of the agreement between the plaintiff and defendant”. There is no doubt, and this case only supports the most basic proposition, that almost everything depends upon the facts and, in the case now before the Tribunal, the construction to be placed upon the relevant clauses in the Lease.
28 Finally, reliance was placed upon Total Oil Products (Australia) Pty Ltd v. Robinson [1970] 1NSWR 701. The primary question here was whether an agreement constituted a guarantee or indemnity. Asprey JA (at 703) noted that a “guarantee of a debt is a contract whereby the promisor (the guarantor) undertakes to the promisee (the present or prospective creditor of the guarantor) to be answerable to the promisee for the debt of a third person (the debtor) who is or is contemplated to be primarily liable in respect of that debt to the promisee … (an) indemnity is a contract whereby the promisor (the person giving the indemnity) undertakes to the promisee (the person indemnified) to save the promisee harmless from such loss as the promisee might suffer as the result of entering into a transaction with a third party at the request of the promisor”.
29 But here, again, the Court of Appeal was at pains to carefully consider and analyse the actual documentation – it is simply a matter of construction.
30 The second “Principle of Law” asserted by the Second Respondent was said to be that the “essential distinguishing feature of contract of guarantee is the secondary, or ancillary, nature of the obligation that the guarantor assumes”. Reliance was placed upon McDonald v. Dennys Lascelles Ltd [1993] 48 CLR 457 per Dixon J at 479-480. Here the question arose on what was the liability of a surety/guarantor when the liability of the principal ceased. Here again the Court looked carefully at the document as a matter of construction, noted that any right to recover “arises out of the nature of the contract itself”, and then His Honour observed that the “consequences of the dissolution of the principal obligation (are that it) results from the definition of a surety’s engagement, as being assessory to a principal obligation, that the extinction of the principal obligation necessarily induces that of the surety; it being of the nature of an accessory obligation, that it cannot exist without its principal; therefore, wherever the principal is discharged, in whatever manner it may be, not only by actual payment or a compensation, but also by a release, the surety is discharged likewise; for the essence of the obligation being, that the surety is only obliged on behalf of a principal debtor, he therefore is no longer obliged, when there is no longer any principal debtor for whom he is obliged” (quoting Pothier on Obligations, Evans’ Translation (1806), Vol. I, p.235). His Honour went on to observe the above was a “general proposition subject to … qualifications and exceptions”.
31 The third “Principle of Law” asserted by the Second Respondent was the “guarantor’s liability is secondary in the sense that it depends upon the principal debtor’s continuing liability and, ultimately, the debtor’s default”. In support of this proposition counsel relied upon a number of court decisions. Reference was made to Commercial Banking Co of Sydney Ltd v. Patrick Intermarine Acceptances Ltd [1978] 52 ALJR 404. There, the Privy Council spent some time in a detailed analysis of the contractual relationship between the various parties, expressed themselves (at 406) to be “at a loss to see how any equitable assignment to the (Appellant) of any kind of proprietary interest in the debt owing by (the principal debtor to the Respondent) can be spelt out of the various contracts between the 5 original parties to the action”. Their Lordships spoke of “irrevocable credits … (and) irrevocable banker’s credit” and then stated: “The liability which the banker assumes to the seller who is the beneficiary of the credit to honour drafts presented in accordance with its terms, is unqualified; it is not contingent upon non-payment by the buyer. In the instant case, however, the obligation of the issuing bank under each of the credits was contingent only. It arose if the principal debtor defaulted in repaying the loan upon demand at its due date, but not otherwise. The essential nature of the contract between the bank and the beneficiary is that of guarantee, and whether it attacks all the incidents of a contract of guarantee, particularly in relation to dealing between the beneficiary and the principal debtor, is not a matter that is necessary for their Lordships to consider”. This case seems to be to be decided peculiarly on the facts and the contracts that were before the Board and is not an authority (in my opinion) for the proposition as submitted.
32 The second authority relied upon was Guild & Co. v. Conrad [1894] 2 QB 885. Again, the Court carefully analysed (at 890) “the nature of the promise which the defendant made to the plaintiff”; concluded that there was “no question that (it) was a guarantee in the proper sense of the term; that is to say, it was an undertaking by the defendant to be responsible for (the debt of a person who is subsequently adjudicated bankrupt”); the guarantee “was in writing” but verbally extended or enlarged and there was an argument as to what happened at various interviews where (at 891) “promises said to have been paid were verbal only” such that the real issue was whether the Statute of Frauds applied thus rendering the promises nugatory unless they were in writing. The trial Judge and the Court of Appeal were all of the view that writing was not required because the contract was not a contract to pay if the (bankrupt) did not pay but was rather “a contract to pay in any event”. Again, this case depends upon its own particular facts and it certainly is not authority for the proposition advanced simply because it was a promise of indemnity (at 894) and not that of a guarantee and therefore did not need to be in writing. Lopes LJ (at 895) observed that a “promise to be liable for a debt conditionally on the principal debtor making default is a guarantee, and is a promise to make good the default of another within the statute. On the other hand, a promise to become liable for a debt whenever the person to whom the promise is made should become liable, is not a promise within the Statute of Frauds and need not be in writing”.
33 In other words, each case depends upon its own individual facts and analysis of the relevant contract.
34 The fourth “Principle of Law” asserted was that the “guarantor is not liable unless and until the principal debtor has failed to perform his or her obligations”. Counsel relied upon three cases. Firstly, Lakeman v. MountStephen [1874] LR7 HL17 per Lord Selbourne at 24. This was strictly a case involving the Statute of Frauds. Lord Selbourne made this observation at 24: “There can be no suretyship unless there be a principal debtor, who of course may be constituted in the course of the transaction by matters ex post facto, and need not be so at the time, but until there is a principal debtor there can be no suretyship. Nor can a man guarantee anybody else’s debt unless there is a debt of some other person to be guaranteed”. This is similar to the proposition advanced in counsel’s submissions 11 July 2008 in or to the effect that the “liability of a guarantor is co-extensive with that of the principal debtor, so that if the principal debtor is not liable [because, for example, the contract is void or unenforceable] neither is the guarantee”. I shall re-visit this proposition later.
35 Nextly, counsel relied upon Guild & Co v. Conrad (cited above at [32]) and the remarks of Lopes LJ at 895.
36 Finally, counsel relied upon Sampson v. Burton [1820] 129 ER 891 per Burrough J at 894. I confess I am unable to see anything in this Judgment that bears upon the issues now agitated.
37 The fifth “Principle of Law” was asserted to be: “Once the principal debtor is in default the creditor may sue the guarantor instead of the debtor for the amount owed”. Reliance was placed upon 5 cases. Firstly, Yeoman Credit Ltd v. Latter [1961] 1 WLR 828 per Pearce LJ at 830-831. This case involved an argument whether a document amounted to a guarantee or an indemnity. Various handwritten notes on the copy supplied to me shows that the decision has been not only distinguished but also disapproved. However, Pearce LJ stated: “There are, therefore, two questions raised by this appeal. First, is the document in question a guarantee although styled an indemnity? And, if it is a guarantee, is it void? In its widest sense a contract of indemnity includes a contract of guarantee. But in the more precise sense used in various cases dealing with Section 4 of the Statute of Frauds 1677 … a contract of indemnity differs from a guarantee. An indemnity is a contract by one party to keep the other harmless against loss, but a contract of guarantee is a contract to answer for the debt, default of miscarriage of another who is to be primarily liable to the promisee”. The case was determined by the construction Court of Appeal put upon the actual document.
38 The next case was Sunbird Plaza Pty Limited v. Maloney (cited above) per Mason CJ at 255 (properly commencing at 254) where the Chief Justice said this:
“Because many guarantees are given in relation to the payment of debts, it is common to speak of the parties to the relationship as creditor, guarantor and principal debtor. However, the payment of a debt is but one instance of a wide range of obligations the performance of which may be the subject of a guarantee. Just as I may guarantee the payment of a debt so I may guarantee the performance of a contractual obligation which does not involve the payment of money. So it is that a creditor’s rights against a guarantor depend upon the terms of the guarantee and the nature of the obligation, performance of which is guaranteed. If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit of the guarantee may, upon default, sue the guarantor for damages for breach of contract”.
And, at 256:
“However, the modern view that the guarantor promises to answer for the debtor’s debt or default has led to the practice of suing the guarantor for the money sum which the debtor has failed to pay …”.
The Chief Justice went on to observe (also at 256) that:
“the parties are at liberty to make such agreement as they chose. There are, however, two common classes of guarantee of the payment of instalments by the principal debtor. The first is an undertaking by the guarantor that if the debtor fails to pay an instalment he will pay. This is a conditional agreement. The guarantor’s obligation to pay arises on the debtor’s failure to pay. The second is an undertaking by the guarantor that the debtor will carry out his contract. Then a failure by the debtor to perform this contract puts the guarantor in breach of his.”
39 Nextly, counsel relied upon Jackson v. Digby [1854] 2 WR 540; quite frankly, I am unable to find anything in this decision that bears upon the issues in the case.
40 Lastly, counsel relied upon Moschi v. L E P Air Services Ltd [1974] AC 331 per Lord Diplock at 348. His Lordship was here reviewing the development of the law of guarantee, noting “that the contractual promise of a guarantor to guarantee the performance of a debtor of his obligations to a creditor arising out of contract gave rise to an obligation on the part of the guarantor to see to it that the debtor performed his own obligations to the creditor … it was taken for granted that this was the legal nature of the guarantor’s obligation arising out of a contract of guarantee … It is because the obligation of the guarantor is to see to it that the debtor performed his own obligations to the creditor that the guarantor is not entitled to notice from the creditor of the debtor’s failure to perform an obligation which is the subject of the guarantee, and that the creditor’s cause of action against the guarantor arises at the moment the debtor’s default and the limitation period then starts to run. It is also why, where the contract of guarantee was entered into by the guarantor at the debtor’s request, the guarantor has a right in equity to compel the debtor to perform his own obligation to the creditor if it is of a kind which a court of equity is able to compel performance … It is the existence of this right on the part of the guarantor that accounts for the rule … that where the creditor, after the guarantee has been entered into, gives a contractual promise to the debtor to allow him time to pay the guaranteed debt, the guarantor is discharged from his obligations to the creditor. This is because the creditor by altering the debtor’s obligations to him has deprived the guarantor of his equitable right to compel the debtor to perform his original obligation to the creditor, which was all that the guarantor had guaranteed. In contrast the guarantor is not discharged by the mere voluntary forbearance of the creditor to take steps to obtain timeous performance by the debtor of the obligation which is the subject of the guarantee; for this does not affect the guarantor’s equitable right to compel the debtor to perform it. It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee gives rise that it is not an obligation himself to pay a sum of money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditor’s remedy for the guarantor’s failure to perform it lies in damages for breach of contract only. That this was so, even when the debtor’s own obligation that was the subject of the guarantee was to pay a sum of money, is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit.”
41 However, it is important to read further. At page 349 Lord Diplock said this:
“The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantee the creditor can recover from the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debt or himself as a consequence of that failure. The debtor’s liability to the creditor is also the measure of the guarantor’s. Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise. Even the use of the word “guarantee” is not in itself conclusive. It is often used loosely in commercial details to mean an ordinary warranty. It is sometimes used to mis-describe what is in law a contract of indemnity and not of guarantee. Where the contractual promise can be correctly described as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from it being classifiable as a guarantee. Every case must depend upon the true construction of the actual words in which the promise is expressed”.
42 I shall refer back to these observations later in this Judgment.
43 The sixth “Principle of Law” relied upon was stated as follows:
“Guarantees are closely related to indemnities. The essence of the distinction between them is that a guarantee is a collateral or secondary obligation while an indemnity is a principal obligation. A guarantor’s promise to answer for the debt or default of another involves an obligation that is secondary or ancillary to the obligation of that other, who is primarily liable to the person to whom the guarantee is given. A promisor under an indemnity agrees, in terms that create a primary liability in the promisor, to keep the other party to the contract harmless against loss as a result of that party’s entry into a transaction with a third party”
and reliance was placed again upon the quotation from Mason CJ (cited above at [38]) in Sunbird Plaza Pty Limited v. Maloney.
44 The seventh “Principle of Law” was submitted to be as follows:
“It is not always easy to determine whether a contract is one of guarantee or indemnity. For example an agreement is likely to be construed as indemnity if the contract operates to render the promisor liable in circumstances in which the principal debtor is not in default. (Counsel cited Direct Acceptance Finance Ltd v. Cumberland Furnishing Pty Limited (referred to above [at 27])). For example, if the agreement contains a provision preserving the liability of the guarantor in the event the lender giving time to the borrower to perform the principal obligation, the contract is likely to be one of guarantee since, if the contract were only one of indemnity, there would be no such provision, an indemnifier generally not being discharged by such conduct of the lender” and counsel relied upon Western Credit Limited v. Alberry [1964] 2 All ER 938 per Davies LJ at 940. Again, I am unable to see anything in this Judgment that bears upon the issue now agitated.
45 In his Written Submissions 11 July 2008 counsel for the Second Respondent relied upon also the principle that the “liability of a guarantor is co-extensive with that of the principal debtor so that if the principal debtor is not liable (for example where the contract is void or unenforceable) neither is the guarantor”. Reliance was placed upon Corser v. Commonwealth General Assurance Co Ltd, where there was a finding that the contract itself was void for uncertainty and therefore the guarantee was unenforceable; McDonald v. Dennys Lascelles Ltd (also cited above [at 30]); and Temperance Loan Fund Ltd v. Rose [1932] 2 KB 522, this being a case resting peculiarly on the terms of a local statute.
46 Counsel also relied upon a portion of Report 107 of the NSW Law Reform Commission , November 2006, titled “Guaranteeing someone else’s Debts” I confess I am not entirely sure what I am to do with this document. It is some 60 pages long, contains a series of recommendations, refers to the cases to which I have made reference above, refers to different types of guarantees but, importantly, is not the law, although (admittedly) a useful guide.
Applicant in Response:
47 The Applicant was quite scathing in their response to the Notice of Motion. In oral submissions the Applicant relied upon clause 13.4 of the Lease (recited above) and submitted that the Applicant could proceed directly against the guarantor. In their Response filed 26 August 2006 they again relied on clause 13, in particular clauses 13.2 and 13.4. It was submitted that the First Respondent as lessee “has not paid monies under the lease”; the fact that the First Respondent is in liquidation “does not extinguish the debt. There is no precondition to the maintenance of the Applicant’s claim against the (Second Respondent guarantor) that the Applicants first made claim for bring proceedings against the First Respondent company”. The Applicants submitted that their claim was based on clause 13, in particular 13.2, 13.3 and 13.4. In particular, the Applicant relied upon clause 13.3.
48 Nextly, and pursuant to my Directions the applicants filed a detailed Response 26 September 2008. They submitted that on “a fair and proper reading” of clause 13 of the lease it is apparent from sub-clause 13.3 that recovery under a guarantee does not require the landlord to have first “tried to recover payment from the tenant”.
49 Nextly, they referred to Corporations Act 2001, Section 444J, which notes that matters dealing with Deeds of company arrangements (not in issue here) do “not affect a creditor’s rights under a guarantee or indemnity”. They submitted that it was effectively a nonsense for the Second Respondent to “suggest that the liquidation of a company stays or extinguishes the creditor’s rights to proceed against the guarantor until a proof of debt is lodged and adjudged” because such “would turn the case law and applicable legislation” on its head. It was submitted that a “creditor relying on a guarantee does not first have to exhaust his remedies against the principal debtor”. They observed that if the Second Respondent was obliged to pay the Applicant then it was still open to the Second Respondent to himself lodge a proof of debt with the liquidator and in those circumstances the Second Respondent would be subrogated to the rights of the Applicant against the First Respondent company in liquidation.
50 They submitted that in any such case as the present “it is open to the guarantor to raise any defence legitimately opened to the company … this is a safeguard which protects the guarantor” – in other words, if the Applicant’s case against the company cannot be made out then it similarly cannot be made out against the guarantor.
51 The Applicant submitted that if it is argued that a breach of the lease had not occurred at the time of the commencement of proceedings and therefore cannot be relied upon, then reference should be made to Civil Procedure Act Section 64 and the Court of Appeal Decision in Hill & Anor v. Reglon Pty Ltd [2007] NSW CA 295.
52 The Applicant was very critical of the Second Respondent supplying to this Tribunal “some 238 pages” of case law and reports. It was submitted that a reading of the Headnotes failed to reveal any that support the contention that the bankruptcy of the lessee extinguishes the guarantee, or prevents the Applicant enforcing the guarantee against the Second Respondent. There was some suggestion that because the Applicant was unrepresented the provision by the Second Respondent of 238 pages of case law amount to “oppression” (a view which I emphatically reject).
53 The Applicant also noted that the Law Reform Commission Report made this observation at para 1.8:
“At common law, the secondary liability of the guarantor does not prevent the creditor from enforcing the guarantee before instituting proceedings against the principal debtor. In other words, subject to legislative or contractual provision to the contrary, once the principal debtor is in default, the creditor may sue the guarantor instead of the debtor for the amount owed”.
The Applicant also referred to paragraph 1.9 of the Report where the Commission observed that guarantees were used “in a broad range of situations” and provided the example:
“The borrower is a company and the lender seeks security to meet the potential risks not only in the company’s business but also those associated with the use of a corporate structure to operate the business. For example, to avoid its financial obligations to lenders, a company may divert funds and assets to shareholders, related companies or beneficiaries. In the case of a company with a small-paid up capital, the lender may require its directors to give a personal guarantee as a security in case the limited liability of the company has the effect of it not meeting its financial obligations”.
54 The Applicant was highly critical of the Second Respondent in its submissions, in particular at paragraphs 18-35 where the Applicant spent some time in attempting to come to grips with the case law cited by the Second Respondent.
55 The Applicant also referred to Retail Leases Act Section 16B which imports into a retail lease the obligation on a lessor to not “unreasonably refuse to accept a guarantee from … a third party guarantee for the performance of the lessee’s obligations under the lease”.
Tribunal’s Opinion
56 I have been to some more than considerable trouble to analyse the detailed submissions that have been placed before me by the Second Respondent who seeks an order that the current proceedings “be struck out”. The Second Respondent through its counsel, made it plain in oral argument that to hold that the Tribunal had jurisdiction was to go against the law and hundreds of years of precedent. I confess I am totally and absolutely unable to agree with that submission.
57 I am totally unable to see any prohibition or impediment upon the Applicant seeking to agitate their claim against the Second Respondent. Corporations Act Section 500(2) has nothing to do with this case – it is directed to actions against the First Respondent and is not a pre-requisite to actions against a guarantor. The Second Respondent can raise such arguments as are reasonably available to him and as would have been reasonably available to the First Respondent. But there is nothing, so it seems to me, in the law or statute that would require the Applicant to travel down the path as submitted by the Second Respondent, ie that the Applicant must first prove its claim against the primary or principal debtor; and because the liquidator has not made any adjudication, and is not likely to make any adjudication, then there has been no proof against the principal debtor, and thus the Applicant’s case in this Tribunal is doomed to fail, alternatively, the Tribunal simply does not have jurisdiction.
58 I refer again to the observations of Lord Diplock in Lep Air Services v. Rolloswin Limited (cited above at [41]). In addition, His Lordship also made this observation, also at 349:
“In the instant appeal, however, the actual words used are simple, unambiguous, and contain no qualification except to impose a limit upon the guarantors maximum liability under the guarantee”.
In my opinion the words used in the lease, in clause 13 and otherwise and to which I have made reference, are also “simple, unambiguous and contain no qualification”. The plain fact is, and there was no challenge to this principle, that the First Respondent has not paid moneys “due under this lease” and in those circumstances Clause 13.3 makes it absolutely plain that “the guarantor must pay that money to the landlord on demand even if the landlord has not tried to recover payment from the tenant”. Clause 13.4 is an extension of that obligation. And, as importantly, Clause 13.2 makes it plain that the Second Respondent, “guarantees to the landlord the performance by the tenant of all the tenant’s obligations … under this lease …”. By Item 9B the liability of the Second Respondent as guarantor is stated to be “all the moneys due under the lease” and there was no submission made to me that that clause/obligation did not include the claims made by the Applicant in this Tribunal.
59 There was one clear thread that runs through most of the cases relied upon by the Second Respondent and that is this: in order to determine liability against a guarantor or indemnifier the Court will construe the actual words used in the contractual documentation. It is upon the words as used, as chosen by the parties, that liability hangs or falls. In the case before me it is Clause 13 of the Lease coupled with Item 9. In my opinion the words therein are clear and unambiguous, in particular Clauses 13.2, 13.3 and 13.4 – nothing could be plainer. The caselaw relied upon by the Second Respondent does not in any way affect or read down those contractual terms in the manner suggested by the Second Respondent, or at all.
60 Finally, and it was not argued otherwise, this Tribunal has jurisdiction in respect of claims against guarantors: see Kindful (Australia) Pty Ltd v. Country Villa Holdings Pty Ltd (No. 2) [2006] NSWADT 357 at [13-18].
61 In my opinion the Notice of Motion has no merit and should be dismissed. I will hear the Applicant on the question of costs if the Applicant is so advised.
Orders:
I make the following Order and Declarations:
1. The Notice of Motion filed by the Second Respondent 14 July 2008 be and is hereby dismissed.
2. The costs of the Applicant in relation to that Notice of Motion are reserved.
3. Declare that the Tribunal has jurisdiction to hear and determine the proceedings instituted in the Penrith Local Court No. 1074 of 2007 and transferred to this Tribunal by Orders made 15 May 2008.
4. I list this matter for further Directions before me on 18 December 2008 at 12 noon.
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