Hu v Cheung
[2022] VCC 1565
•20 September 2022
| IN THE COUNTY COURT OF VICTORIA AT Melbourne commercial DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-21-03222
| XIAOYONG HU | Plaintiff |
| WEIYANG CHEUNG | Defendant |
| AUST LANDING GROUP PTY LTD (ACN 151 193 092) | Third Party |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15, 16, 17 and 19 August 2022 | |
DATE OF JUDGMENT: | 20 September 2022 | |
CASE MAY BE CITED AS: | Hu v Cheung & Anor | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 1565 | |
REASONS FOR JUDGMENT
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Subject:RECOVERY FROM CO-GUARANTOR – GUARANTEE AND INDEMNITY – EQUITABLE DOCTRINE OF CONTRIBUTION
Catchwords: Reliance upon assumption – security – deed of forbearance – deed of subrogation and assignment – contribution between co-guarantors – respective shareholding – indemnity
Legislation Cited: Mercantile Law Amendment Act 1856 (UK); Personal Property Securities Act 2009 (Cth); Supreme Court Act 1986 (Vic)
Cases Cited:Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342; AMP Bank Limited v Brown and Kavanagh [2017] NSWSC 313; Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; Gujarat NRE India Pty Ltd v Wollongong Coal Limited [2018] NSWSC 1459; Hong Kong Bank of Australia v Larobi Pty Ltd (1991) 23 NSWLR 593; Lavin v Toppi (2015) 254 CLR 459; Scholefield Goodman and Sons Ltd v Zyngier [1986] AC 562
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Clarke | Jiangty Law |
| For the Defendant | Mr P W Lithgow | KCL Law |
| For the Third Party | Mr T Clarke | Jiangty Law |
HIS HONOUR:
Introduction
1 The critical issue in this case is whether the plaintiff (“Hu”) is able to recover from the defendant (“Cheung”) half the money which Hu paid to Westpac Banking Corporation (“Westpac”) in order to discharge the liability of Aust Landing Group Pty Ltd (“ALG”). Hu and Cheung were directors of ALG together with Xiangmao Liu (“Liu”) and each of the three directors had given Westpac a guarantee and indemnity (“the guarantee”) for the indebtedness of ALG.
Background
2 Cheung came to Australia in 1988 when he was about 24 years old. He was born and raised in China. Cheung undertook study in Australia. He obtained an Advanced Diploma in Business Accounting from Swinburne University, a Graduate Diploma in Business Administration from Monash University and a Certificate of Completion for Domestic Builders Registration.
3 In May 2011, Cheung incorporated ALG with Liu as the other director and shareholder. Cheung met Hu around January 2014 through a mutual friend. Hu was a businessman who wanted to invest in Australia. He told Cheung he had good contacts in the banking industry in China. Hu had significant business interests in the field of clean energy.
4 During his career, Cheung has developed several projects including some in Kew and Hawthorn.
5 After some discussion, Hu became a shareholder in ALG. At the time, there were three other shareholders, including Cheung and Liu. However, soon after Hu took an interest in the company, the fourth shareholder left the company and the shareholding became Hu 50%, Cheung 25% and Liu 25%. According to Cheung, the shareholdings changed again in 2016 when the proportions became Hu 42%, Cheung 29% and Liu 29%.
6 The purpose of ALG was to undertake property development. After Hu became involved in the company, ALG considered a property in Canning Street, North Melbourne. Ultimately, it did not proceed with that project. Subsequently, in about April 2016, ALG investigated and bought the property at 137-157 Adderley Street, West Melbourne (“the Property”). This was an old warehouse which was well suited for development – largely residential but some mixed use too. ALG paid $9.4 million for the Property. The shareholders were to finance half the purchase price and borrow the balance. In around May 2016, the three shareholders made an agreement about the contribution of capital to ALG. Hu was to contribute $5 million and Cheung and Liu were to contribute $600,000 each. As a result, the shareholdings within the group changed again so that Hu held 80.64% of the shares in the company, while Cheung and Liu each held 600,000 shares which represented a 9.67% interest for each of them.
7 In June 2016, Steven Jarvis (“Jarvis”) of Westpac wrote to ALG to advise that its request for finance was approved. The loan was for $4.7 million for a term of one year and an interest rate of 3.850%. The letter set out certain conditions which applied to the facility.
8 The security for the loan facility included:
· a mortgage for ALG over the Property;
· a general security agreement by ALG over all existing and future assets and undertakings of the company; and
· personal guarantees and indemnities from Hu, Cheung and Liu limited to $4.7 million.
9 Cheung and Liu accepted the offer for ALG by signing the bank documentation for the company on 27 June 2016.
10 In August 2017, the loan agreement between Westpac and ALG was varied. The loan was to expire on 4 February 2018. The interest rate was increased to 4.055%. The security for the loan remained the same.
11 The loan facility was further extended in April 2018, so that it became due to expire on 10 October 2018. The interest rate increased to 4.450% and the bank retained all the pre-existing security.
12 In July 2020, Westpac, ALG, Hu, Cheung and Liu entered into a Deed of Forbearance (“the Deed”). The Deed noted that the loan facility between Westpac and ALG expired on 10 October 2018 and that from 11 March 2020 the facility was in default. It had expired and the arrears totalled $5,153,666.49. Under the Deed, Westpac agreed to postpone the enforcement of its rights and to extend the term of the facility until 31 December 2020. Westpac also agreed to reduce the penalty interest rate payable in relation to the facility by 3% per annum. As part of the Deed, ALG and the guarantors had to reduce the outstanding amount under the facility to $4.7 million. They also had to produce evidence that they had engaged an agent to market and sell the Property or to provide a refinance proposal from another funder if Westpac advised, in its reasonable opinion, that the marketing and sale of the Property had not progressed satisfactorily.
13 During the balance of 2020 and in early 2021, ALG and the guarantors did not arrange to sell the Property. Nor did they secure any third party funding which enabled them to refinance the Westpac facility.
14 In December 2020, Westpac, ALG and the guarantors entered negotiations about varying the Deed. By email dated 8 February 2021, Vesa Prekazi (“Prekazi”) of HWL Ebsworth, the solicitors for Westpac, sent Cheung an email which referred to the Deed signed in July 2020 and noted that ALG and the guarantors had failed to comply with its terms. Prekazi attached a draft proposed Deed of Variation. She said that Hu and Liu had agreed to the proposed Deed of Variation and Westpac sought a response from Cheung (as a guarantor and director of ALG) by 10 February 2021.
15 On 10 February 2021, Cheung replied asking Westpac to prepare a formal Deed of Forbearance.
16 On 28 April 2021, Prekazi emailed Cheung to advise him that a co-guarantor had approached Westpac offering to pay out the ALG facility. She said that in the event that Westpac received payment in full pursuant to the guarantee, the guarantor would be subrogated to Westpac’s rights and title to the securities granted to the bank.
17 On 8 June 2021, Hu paid Westpac $4,687,082.22 to discharge ALG’s obligations to the bank under the facility. Hu and Westpac entered a Deed of Subrogation and Assignment the same day. By that Deed, Westpac assigned to Hu all of its legal and beneficial rights, title and interests in the “Assigned Rights”. These were defined as meaning all of Westpac’s rights (present and future, actual and contingent), title and interest in and to the “Assigned Documents”. The Assigned Documents were defined to mean the Principal Agreement, the General Security Agreement with ALG, the ALG mortgage over the Property and the guarantee. Under the Deed of Subrogation and Assignment, Hu obtained the benefit of all of Westpac’s rights, powers, authorities, discretions and remedies under or in any connection with the Assigned Documents.
18 Westpac and ALG agreed that, upon Hu paying out the company’s debt to Westpac, Hu would be fully subrogated to the Assigned Rights and any other rights which Westpac had against ALG. Hu and Liu signed the Deed of Subrogation and Assignment on behalf of ALG.
19 By letter dated 23 June 2021, Hu made demand on ALG for payment in the sum of $4,687,082.22 which he paid to Westpac to discharge the company’s indebtedness to the bank.
20 By letter dated 9 July 2021, Hu wrote to Cheung advising that he had entered a Deed of Subrogation and Assignment with Westpac on 8 June 2021 and that Westpac had assigned him its rights under the various finance documents executed between Westpac, ALG and the guarantors. Hu said that, pursuant to his rights as assignee under the Deed of Subrogation and Assignment and/or pursuant to the doctrine of contribution, he demanded payment from Cheung within seven days in the sum of $2,343,541.11. This was half the amount which Hu paid to Westpac to discharge the indebtedness of ALG.
21 By letter dated 23 July 2021, Hu’s lawyers wrote to Cheung’s lawyers noting that Cheung had not responded to Hu’s demand. The letter advised that, if there were no satisfactory response by 28 July 2021, the solicitors had instructions to commence proceedings against Cheung on 29 July 2021 without further notice.
22 By letter dated 23 July 2021, KCL Law, on behalf of Cheung, denied that he was liable under the guarantee which Hu relied upon. The letter said that Cheung would also rely upon the Banking Code of Practice, had a substantial cross-claim against Hu and reserved his rights in relation to an oppression claim concerning his removal as a director of ALG in April 2021.
23 On 3 August 2021, Hu issued this proceeding against Cheung.
24 On 8 September 2021, Cheung issued a third party notice against ALG seeking indemnity from the company.
Issues
25 At the conclusion of the evidence, the parties agreed that the issues which the court is required to determine are as follows:
(a) At the time of entering into the guarantee, did each of the co-guarantors, to the knowledge of the others, assume that, in the event of a default by ALG, he would only be liable to make payment to Westpac under the guarantee after the sale by ALG of the Property, and that only in the event of the proceeds of sale being insufficient to discharge the debt due to Westpac would Westpac look to the shareholders for repayment of the balance due to it (“the assumption”)?
(b) Did Cheung enter into the guarantee in reliance on the assumption?
(c) Is the existence and/or Cheung’s reliance on the assumption precluded by clause 12.18 of the guarantee?
(d) Is Hu entitled to contribution from Cheung for one-half, or for one-third, or 9.67% of the amount he paid to Westpac in discharge of the business loan facility?
(e) Does clause 9(b) and (c) of the guarantee, as assigned and/or subrogated to Hu, have the effect that Cheung is prohibited from claiming indemnity from ALG in respect of his liability to Hu unless and until Cheung makes payment in full of the sum for which he is liable on the principal claim?
Issue (a): At the time of entering into the guarantee, did each of the co-guarantors, to the knowledge of the others, assume that, in the event of a default by ALG, he would only be liable to make payment to Westpac under the guarantee after the sale by ALG of the Property, and that only in the event of the proceeds of sale being insufficient to discharge the debt due to Westpac would Westpac look to the shareholders for repayment of the balance due to it (“the assumption”)?
26 The first issue arises from Cheung’s defence where he pleaded that:
· each of the shareholders assumed that in the event of a default by ALG under the Westpac facility, each would be liable to make a payment under the guarantee only after the sale of the Property and only if the proceeds of sale were insufficient to discharge the debt to the bank;
· each of the three shareholders accepted the assumption;
· the assumption was intended to govern the legal relationship between the three shareholders;
· Cheung relied upon the assumption when signing the guarantee;
· if Cheung were obliged to make payment under the guarantee before the mortgagee sold the Property, Cheung would suffer harm from the failure to honour the assumption; and
· it would be unconscionable to allow Hu to resile or depart from the assumption and he should be estopped from doing so.
27 In my opinion, this defence raised by Cheung must fail for several reasons.
28 First, there was no evidence from Liu to the effect that he signed the guarantee in reliance on the assumption. Neither Cheung nor Hu:
(a) called Liu to give evidence; or
(b) explained in evidence why neither joined him to the case and sought to have him bound by the findings made at the trial.
Cheung’s case failed from the outset because there was no evidence from Liu about signing the guarantee and any influence which the assumption might have had upon him in causing him to provide the guarantee in favour of Westpac.
29 Secondly, Hu denied that he signed the guarantee on the assumption that Westpac could not enforce the guarantee unless and until it had sold the Property. Cheung did not challenge that evidence in cross-examination. While the failure to cross-examine does not necessarily mean that the court must accept Hu’s evidence on the issue, it is nonetheless of some significance that Cheung appeared to accept Hu’s version of events without question. Further, independently of this factor, I accept Hu’s evidence that he did not rely upon the assumption when signing the guarantee. I accept that Hu told the truth on this issue.
30 Thirdly, Hu said that Cheung did not discuss the assumption with him before he signed the guarantee. In his evidence, Cheung did not recall any such discussion. Again, if Cheung wanted to establish his case on this issue, he needed to show that all three directors/shareholders shared the assumption.
31 While the above is sufficient to deal with the point, I note too that even if the shareholders did sign the guarantee in reliance on the assumption, that of itself would not make it inoperative. The views or beliefs of the guarantors would not bind Westpac. Unless Westpac acted towards the guarantors in some way which made it appropriate for the court to restrict or eliminate the bank’s right to pursue the guarantors for the debt incurred by ALG under the facility, Westpac would not be restrained from enforcing its rights against the guarantors under the security documents. It was not part of this trial that Westpac shared the alleged assumption with the guarantors. And, as Hu observed, the Deed of Forbearance entered by Westpac, ALG and the guarantors on 10 July 2020 included an acknowledgment by ALG and the guarantors that the securities secured repayments pursuant to the facility and the securities were valid and enforceable. The securities included the mortgage over the Property granted by ALG and the guarantee from each of the three directors. The point which Cheung now seeks to make is inconsistent with such an acknowledgement. Further, the position for which Cheung contends is inconsistent with clause 12.18 of the guarantee. This permits Westpac, or any assignee, to make a claim against any guarantor such as Cheung before it exercises its right against ALG or any other guarantor.
Issue (b): Did Cheung enter into the guarantee in reliance on the assumption?
32 I find that Cheung did not enter into the guarantee in reliance upon the assumption. Fundamentally, in circumstances where I have found that Cheung has not established the shared assumption, he cannot have relied upon it.
33 Even if the focus is narrowed to whether Cheung alone relied upon such an assumption (even if the other two directors/shareholders, Hu and Liu, did not), I consider that Cheung has not established that he alone relied upon it. I have reached this view for a number of reasons.
34 First, Cheung has studied and worked in Australia since 1988. Although his spoken English is heavily accented, he appears to have a sound grasp of the language. Quite often while giving evidence, he answered in English and interrupted or cut across the interpreter to make an observation.
35 Cheung said that he conducted his studies in Australia in English. He has experience in property development and the issues which can arise in that context. For a time, Cheung assisted Hu in trying to buy or obtain an interest in an Australian energy business. Cheung acknowledged that some of the concepts involved in those discussions or renegotiations were complicated. There seemed to be no dispute that Cheung was able to conduct those negotiations for Hu in English. Cheung understood what Mr Sennitt of Diamond Energy said to him in the negotiations and he was able to make himself understood as well. This is significant when the subject matter of the discussions or negotiations was commercially sophisticated. I infer from these matters that Cheung has a solid grasp of spoken and written English.
36 Secondly, the guarantee which Cheung signed and which Hu now seeks to enforce was signed on 27 June 2016. On the front page of the guarantee there was a rectangle containing text. It read as follows:
“Important notice
You need to read this guarantee and indemnity.
· You should seek independent legal and financial advice on the effect of this guarantee and indemnity before you agree to sign it.
· You can refuse to sign this guarantee and indemnity.
· There are financial risks involved in signing this guarantee and indemnity (for example, it may become necessary for you to sell your assets so that you can pay us).
· You have the right to limit your liability under this guarantee and indemnity in accordance with the Code of Banking Practice and as allowed by law.
· You can request information about the transaction or facility to be guaranteed (including any existing facility with us to be refinanced by the new facility).
· This guarantee and indemnity covers liability under a future credit contract to the extent the future credit contract (together with all other existing credit contracts secured by this guarantee and indemnity) is within a limit previously agreed in writing by you.”
37 On the signing page, where Cheung executed the document there was another rectangular box containing the following text:
IMPORTANT BEFORE YOU SIGN
1. READ THIS GUARANTEE AND INDEMNITY AND THE DOCUMENTS FOR THE TRANSACTION OR FACILITY TO BE GUARANTEED.
2. You should obtain independent legal advice.
3. You should also consider obtaining independent financial advice.
4. You should make your own enquiries about the credit worthiness, financial position and honesty of the debtor.
THINGS YOU MUST KNOW
1. Understand that, by singing this guarantee and indemnity, you may become personally responsible instead of, or as well as, the debtor to pay the amounts which the debtor owes and our expenses in enforcing this guarantee and indemnity.
2. If the debtor does not pay you must pay. This could mean you lose everything you own including your home.
3. You may be able to withdraw from this guarantee or limit your liability. Ask your legal adviser about this before you sign this guarantee and indemnity.
4. This guarantee and indemnity covers liability under a future credit contract to the extent the future credit contract (together with all other existing credit contracts secured by this guarantee and indemnity) is within a limit previously agreed in writing by you.
Given the warnings contained in the guarantee and the obvious attempt by Westpac to bring to the attention of prospective guarantors the risks associated with becoming a guarantor, I find it unlikely that Cheung failed to read and understand the document. As a result, I find it most likely that he was aware of the consequences of acting as a guarantor and did not rely upon the assumption when executing the guarantee.
38 Further, various terms of the guarantee provided that Cheung gave Westpac an unconditional and irrevocable guarantee to pay the guaranteed money[1] if ALG did not. Cheung’s liability under the guarantee was not affected by:
[1]Guaranteed money was defined in clause 13 of the guarantee. It includes all money which, at any time, for any reason or circumstance in connection with any agreement, such as a loan agreement, guarantee, indemnity or other facility document, the customer is or may become actually or contingently liable to pay the bank.
· any act or omission of Westpac which might otherwise affect the enforceability of the guarantee;
· Westpac releasing ALG or granting the company some concession;
· Westpac releasing or not obtaining any encumbrance;
· Westpac releasing any guarantor of the customer’s obligations;
· Westpac not having first made demand on ALG or another guarantor for the amount outstanding under the facility.
39 Thirdly, I have reservations about the creditworthiness of Cheung. He gave evidence at some length and did not impress me as a credible and reliable witness whose evidence I could accept. This was apparent from some aspects of his testimony. For example, in cross-examination counsel took Cheung to an interview checklist document which Jarvis completed on 27 June 2016 when Cheung signed the guarantee. Cheung agreed that he met Jarvis and Jarvis gave him a copy of the guarantee document and the loan facility agreement with ALG. Cheung said that Jarvis filled out the checklist document after Cheung signed the guarantee.
40 The checklist had the following points:
“Please answer the following questions in the space provided
Have you
1. met the guarantor and given him or her the guarantee pack personally, which includes *a copy of the guaranteed transaction (T&C)?
……
2. during the interview, pointed out or read to the guarantor the warning on the front cover?
……
3. recommended the guarantor get legal advice and financial advice?
……
4. given the guarantor the chance to take the guarantee pack away to read the guarantee and other documentation?
……
5. *told the guarantor fully and frankly the financial problems affecting the borrower (if any), that is only your understanding of the position and he or she should check the position?”
Jarvis wrote “Yes” against each point.
41 At first, Cheung denied that Jarvis:
(a) directed Cheung’s attention to the warning on the front cover of the guarantee document (point 2);
(b) told him that he should get legal and financial advice (point 3);
(c) gave him the chance to take the guarantee pack away and to read the guarantee and related documentation (point 4).
42 Cheung repeated these denials. However, when asked if Jarvis had made false statements by writing “Yes” opposite points 2,3 and 4 of the document, Cheung said that Jarvis might have mentioned the matters raised in those points. Cheung said that it was a long-time ago and he could not recall. However, Cheung said that Jarvis told him to sign the guarantee on 27 June 2016 or the loan funds would not be released in time for the scheduled settlement.
43 Apart from Cheung substantially changing his evidence about Jarvis, this was the first time in the case that he raised the matter of having to sign the guarantee on 27 June 2016 because the loan funds would not otherwise be available on the due date.
44 More generally, Cheung was not an impressive witness. Even allowing for the interposing of the interpreter and the effect which that had on the flow of evidence, Cheung was frequently evasive, vague and unwilling or unable to answer questions directly. In these respects, he was similar to Hu. But Hu was even more evasive and blatant in his refusal to answer questions directly. Hu conducted himself more like a politician who had some key points he wanted to convey irrespective of the question asked. It is fortunate for Hu that the crucial issues in the case can be determined without major reliance on his credit.
45 Fourthly, I referred in the background section of this judgment to some correspondence between Prekazi and Cheung regarding the second proposed Deed of Forbearance in February 2021. Prekazi informed Cheung that Westpac had certain requirements in relation to the second proposed Deed of Forbearance, namely –
· by 18 February 2021 Westpac wanted an executed copy of the Deed of Variation which recorded the arrangements to be entered into by the borrower and guarantors;
· the sum of $150,000 was to be immediately deposited into account number 033157 – 734433 to service interest and expenses that were accruing on the facility and would continue to accrue to 30 June 2021; and
· the borrower was to provide access to the Westpac valuer for the purpose of obtaining a current valuation of the secured Property with the costs of the valuation to be paid by the borrower.
46 When he responded, Cheung sent Prekazi an ASIC search which showed that his shareholding in ALG was 9.67%. Cheung agreed that he did this in order to make the point that his liability under the guarantee should be 9.67%, the same as his shareholding.
47 Cheung sent the shareholding information to Prekazi a second time in March 2021 to emphasise the point. What Cheung did not do was argue that Westpac could not sue him on his guarantee until after Westpac had sold the Property and established a shortfall between the sale proceeds and the amount owed to the bank. If at all relevant times, Cheung genuinely believed that Westpac could not enforce its rights against him under the guarantee until these conditions were met, then one would have expected him to make this argument at the earliest opportunity.
48 Also, Cheung did not respond to Prekazi’s correspondence by saying that he was not liable for the full $4.7 million but, consistent with his shareholding, he was liable only for 9.67% of the guaranteed amount. Cheung implied that there was a document he sent Prekazi making this argument but the document was neither discovered nor produced in re-examination.
Issue (c): Is the existence and/or Cheung’s reliance on the assumption precluded by clause 12.18 of the guarantee?
49 Clause 12.18 of the guarantee provides as follows:
“We may claim against you under this guarantee and indemnity before we enforce other rights or remedies:
(a) against the customer or any other person (including any other person who signs this guarantee and indemnity as guarantor); or
(b) under another document such as a guarantee or encumbrance.
If we have more than one guarantee and indemnity or encumbrance, we may enforce them in any order that we choose.”
50 The effect of this clause is clear. Westpac had a broad discretion whereby it could choose to sue any guarantor such as Cheung before enforcing any rights against ALG or the other guarantors and before enforcing any rights or remedies which it had under any other guarantee or encumbrance.
51 The latter, as defined in clause 13 of the guarantee, includes security interests such as those under the Personal Property Securities Act 2009 (Cth), mortgages and charges. If the bank had the benefit of more than one guarantee or encumbrance, it could enforce them in any order which it chose.
52 As observed earlier, the assumption for which Cheung contends is inconsistent with this clause. In practical terms, the assumption requires that the bank enforce first the mortgage over the Property and exercise the power of sale to realise ALG’s equity in the Property in order to repay or reduce the debt owing to the bank. Comparing the purchase price of the Property with the debt owing to the bank, it appears virtually certain that, if the Property were sold, then the proceeds of sale would be more than sufficient to discharge in full the debt to Westpac.
53 The guarantee does not contain any term that purports to embody the assumption upon which Cheung seeks to rely. Indeed clause 12.18 is inconsistent with such a term. The presence of clause 12.18 is another reason why Cheung’s argument about his reliance upon the assumption must fail.
Issue (d): Is Hu entitled to contribution from Cheung for one-half, or for one-third, or 9.67% of the amount he paid to Westpac in discharge of the business loan facility?
54 The equitable doctrine of contribution seeks to distribute equally the burden which rests upon those liable to contribute. In the case of co-guarantors, the concern is to ensure that the payment by one guarantor is borne equally between all co-guarantors.[2]
[2]See Lavin v Toppi (2015) 254 CLR 459 at [32]
55 Cheung’s initial defence was confined to the question of quantum – whether he was required to contribute one-half of the amount claimed, sharing that burden equally with Hu; or whether he was to share the burden equally with both Hu and Liu and be liable for one-third of the indebtedness. Cheung initially contended that the prima facie position in this case would render each co-guarantor liable for one-third of the amount paid to Westpac.
56 However, by way of his Amended Defence, Cheung contended that the prima facie position of equality should be varied to reflect a contribution by each co-guarantor by reference to his respective shareholding in ALG. Cheung relied upon section 52(5) of the Supreme Court Act 1986 (Vic) (“the SCA”) and said that contributions by reference to each co-guarantor’s shareholding would reflect the amount for which each was “justly liable” within the meaning of section 52(5) of the SCA. If I accepted this submission, then Cheung’s contribution would instead be limited to 9.67% which is equal to his current shareholding in ALG.
57 Hu claims entitlement to judgment against Cheung for a contribution of one-half of the amount he paid to Westpac. As assignee of the guarantee, he has the benefit of all Westpac’s rights, powers and remedies under or in respect of the guarantee, including his rights to enforce the guarantee against Cheung and Liu:
(a) jointly or severally pursuant to clause 1.3; and
(b) in any order that he chooses, in any way he considers appropriate, and at any time (clauses 12.17, 12.18 and 12.19).
58 There is a risk that Liu may be insolvent or unable to meet any judgment against him. Hu contends that the rights which Westpac assigned to him under the guarantee entitle him to bear this risk equally with Cheung, rather than alone.
59 Furthermore, Hu contends that he is entitled under section 52 of the SCA to seek contribution from Cheung alone. Subsection (3) permits Hu to stand in the place of Westpac and use all of Westpac’s remedies in “any proceeding” against “any co-surety” (emphasis added). Subsection (5) does not impose any obligation on Hu to join all of his co-guarantors in a proceeding for contribution but provides that in a proceeding against a co-surety, such as this one, he is not entitled to recover more than the proportion to which Cheung is justly liable “as between those parties themselves”. Hu submits that as between Cheung and himself, each would be justly liable to an equal contribution of one-half.
60 The equitable doctrine of contribution requires that persons, such as co-guarantors, who share co-ordinate liabilities to make good the one loss, must share the burden pro-rata, and where one co-obligor discharges a debt, or pays more than his rateable share, he is entitled to contribution from his co-obligors to equalise the burden.[3]
[3]See Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342 at 349-51 per Kitto J with Windeyer J agreeing
61 The Supreme Court of New South Wales confirmed in AMP Bank Limited v Brown and Kavanagh (AMP Bank)[4] the four circumstances in which a surety’s right to equal contribution from a co-surety will be modified or displaced:
(a)contract, or something less than contract, being the manifestation of a common intention to modify or exclude rights to contribution;
(b)where one surety has obtained the whole benefit of the guarantee;
(c)where one surety is guilty of “fraud, illegality, wilful misconduct or gross negligence”;
(d)equitable defences, such as clean hands.
[4][2017] NSWSC 313 at [40] per Kunc J
62 In the AMP Bank case, it was accepted that the mere fact that the co-guarantors held different shareholdings in the principal debtor was, of itself, not a sufficient basis for the court to adjust their obligations between themselves as co-guarantors accordingly.[5]
[5]Ibid at [25]
63 The facts of the case before me do not lend themselves to the possibility of modification or displacement of Hu’s rights to equal contribution from Cheung by reason of circumstances such as those identified in paragraph 61(b)-(d).
64 With regard to the circumstances identified in paragraph 61(a), Cheung has given evidence that there was no agreement between the co-guarantors that their rights of contribution against one another should be modified or limited. The guarantee states that Cheung, Liu and Hu each guaranteed ALG’s debt in the same amount namely, up to $4.7 million plus a further 20% to cover excesses. Cheung signed this guarantee without taking any steps to limit his liability.
65 New shares in ALG were issued in March 2018 and Cheung’s shareholding reduced from 29% to 9.67%. At this time, Cheung did not raise any issue with his co-guarantors about whether his personal liability under the guarantee should be reduced. Nor did he object when told by Prekazi in March 2021 that his obligations under the guarantee were different to his shareholding.
66 I am not satisfied that there was any common intention between the co-guarantors that their rights to contribution would be modified or limited to reflect their shareholding in ALG.
67 In the alternative, Cheung relies upon section 52(5) of the SCA and contends that he is only “justly liable” for 9.67% of the amount paid to Westpac by reference to the extent of his shareholding in ALG.
68 Section 52 of the SCA derives ultimately from section 5 of the Mercantile Law Amendment Act 1856 (UK). As the High Court has recognised, these provisions confer upon sureties statutory rights and remedies which furnish a summary mode of carrying into effect those rights and remedies otherwise available in courts of equity.[6] In this respect, section 52(5) and its antecedents operate differently from the mechanism for judicial apportionment of contribution between joint tortfeasors. Section 52(5) operates “upon the maxim, that equality is equity”.[7] There is no recognised principle that rights of contribution as between co-guarantor shareholders are presumptively to be limited to the extent of their respective shareholdings.
[6]Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [37]
[7]See Scholefield Goodman and Sons Ltd v Zyngier [1986] AC 562 at 571C-E referring to section 72 of the Supreme Court Act 1958 (Vic) which was materially identical to section 52 of the Supreme Court Act 1986 (Vic).
69 Accordingly, I accept that as between Hu and Cheung, Cheung is justly liable for equal contribution of one-half of the amount paid to Westpac in discharge of the business loan facility.
Issue (e): Does clause 9(b) and (c) of the guarantee, as assigned and/or subrogated to Hu, have the effect that Cheung is prohibited from claiming indemnity from ALG in respect of his liability to Hu unless and until Cheung makes payment in full of the sum for which he is liable on the principal claim?
70 On 27 June 2016, Cheung and Liu signed the Westpac guarantee in the presence of Steven Jarvis.
71 Clause 9 of the guarantee read as follows:
“9 Your rights are suspended
As long as any of the guaranteed money (or any other amounts secured by any encumbrance that secures amounts included in the guaranteed money) remains unpaid, you may not, without our consent: …
(b) claim or exercise any legal rights to claim to be entitled to the benefit of another guarantee, indemnity or encumbrance:
(i)given in connection with the guaranteed money or any other amount payable under this guarantee and indemnity. (For example, you may not try to enforce any mortgage we have taken to ensure repayment of the guaranteed money); or
(ii)in favour of a person other than us in connection with any obligations of, or any other amounts payable by, the customer to, or for the account of, that other person; or
(c) claim an amount from the customer, or another guarantor of the customer’s obligations (including a person who has signed this guarantee and indemnity with you), under a right of indemnity or contribution; …”
72 On 8 June 2021, Westpac assigned to Hu its rights (present and future, actual and contingent), title and interest in and to the Assigned Documents including the benefit of all of Westpac’s rights, powers, authorities, discretions and remedies under or in any connection with the Assigned Documents. The guarantee document was included in the Assigned Documents.
73 Hu joins ALG’s submission that, by reason of clauses 9(b) and 9(c) of the guarantee, as long as any of the “guaranteed money” for which Cheung is now liable to pay contribution to Hu remains unpaid, Cheung may not, without Hu’s consent:
(a) claim an amount from ALG (or from another co-guarantor), under a right of indemnity or contribution (clause 9(c));
(b)claim or exercise any legal rights to claim to be entitled to the benefit of another indemnity or encumbrance given in connection with the guaranteed money or any other amount payable under the guarantee (clause 9(b)).
74 Cheung submits that clause 9 of the guarantee is no longer of any force and the suspension of a guarantor’s rights pursuant to subclauses 9(b) and 9(c) is no longer relevant. Cheung says that Hu has paid the “guaranteed money” in full and is entitled to claim an indemnity from ALG. Hu is now both the secured creditor and a guarantor and, as such, is entitled to an indemnity from the company. Accordingly, on Cheung’s submission, the other guarantors should also be entitled to indemnities from the company to the extent of any actual contribution.
75 Clause 9 is a “suspension” or “no competition” clause with the commercial purpose of postponing a surety’s rights and claims in respect of the guaranteed money, until the primary creditor has been paid in full.[8]
[8]See Hong Kong Bank of Australia v Larobi Pty Ltd (1991) 23 NSWLR 593 at 596D-E
76 In Hong Kong Bank of Australia v Larobi Pty Ltd (Larobi)[9] Rogers CJ Comm D held that the suspension clause, which was in similar form to clause 9 of the guarantee in this case, did not oust the court’s jurisdiction to order contribution. Rather, it was simply a time limitation clause that merely deferred, rather than precluded, a non-paying or part-paying co-surety’s right to contribution.[10]
[9](1991) 23 NSWLR 593
[10]Ibid at 597G-599C
77 In Gujarat NRE India Pty Ltd v Wollongong Coal Limited[11] Robb J considered the application of Larobi to the suspension of claims for indemnity rather than contribution.
[11][2018] NSWSC 1459
78 His Honour observed that:
(a) he was unaware of any authority to the effect that equity imposed a limitation on creditors that restricted the operation of “no competition” provisions, insofar as they deferred the right of indemnity before the creditor had been repaid its debt in full;[12] and
(b) if it is accepted (as it had been in Larobi) that the law recognised the effectiveness of suspension clauses before the creditor had been fully repaid, there might nonetheless be grounds to consider whether a term in a contract that purported perpetually to prohibit a guarantor from enforcing a right of indemnity (that is, after the creditor had been paid in full, as well as before) might properly be read down so that it applied only to the period before payment in full.[13]
[12]Ibid at [164]
[13]Ibid at [165]-[166]
79 Accordingly, I am satisfied that there is no proper basis at law or in equity for the court not to apply clauses 9(b) and 9(c) of the guarantee.
80 Cheung is therefore not entitled to claim indemnity against ALG unless and until he has made payment to Hu of the full amount for which he is liable to make contribution.
81 I note that ALG does not oppose a declaration of indemnity being made against it and in favour of Cheung on a contingent basis. Accordingly, this means that once Cheung has satisfied the judgment against him in the primary proceeding (including any order as to interest and costs), Cheung will be entitled to indemnity from ALG.
Conclusion
82 For the reasons set out above, I have concluded that:
(a) there be judgment for Hu against Cheung in the sum of $2,343,541.11; and
(b) upon Cheung fully satisfying the judgment against him in the primary proceeding (including any order as to interest and costs), Cheung is entitled to indemnity from ALG.
83 I direct that the parties confer about the form of final order and costs in an effort to agree upon orders giving effect to this judgment. If they cannot agree, then by 4.00pm on 27 September 2022, each party is to file with my chambers and serve a written submission setting out the orders sought and the reasons therefor. The submissions are not to exceed five A4 pages, a minimum 12 point typeface, and 40mm margins on both sides of the page. By 4.00pm on 29 September 2022, each party may file a reply submission limited to no more than three A4 pages.
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