JNS Technologies (M) Sdn Bhd v JNS Electronic Industries (Vic) Pty Ltd
[1999] VSC 246
•2 July 1999
SUPREME COURT OF VICTORIA
CAUSES JURISDICTION
Do not Send for Reporting Not Restricted No. 8067 of 1997
| JNS TECHNOLOGIES (M) SDN BHD | Plaintiff | ||
| V | |||
| JNS ELECTRONIC INDUSTRIES (VIC) PTY LTD (ACN 073 080 412) | First Defendant | ||
| JOHN STANNARD | Second Defendant | ||
| MARY ELLEN STANNARD | Third Defendant | ||
| PAK SUN LIEW | Fourth Defendant | ||
| WAI FONG LIEW | Fifth Defendant |
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JUDGE: | Balmford, J. | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14, 17-21, 24-27 May 1999 | |
DATE OF JUDGMENT: | 2 July 1999 | |
CASE MAY BE CITED AS: | JNS Technologies v JNS Electronic Industries | |
MEDIA NEUTRAL CITATION: | [1999] VSC 246 | |
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| Loan agreements – Guarantees – Joint venture companies – Plaintiff entered into joint venture with first defendant – Plaintiff lent money to first defendant – Second, third, fourth and fifth defendants were guarantors on the loan – Whether money was received by the first defendant – Whether plaintiff had authority to issue the proceeding – Whether the third and fifth defendants could rely on the principle in Garcia v National Australia Bank Limited. Trade Practices Act 1974 (Cth); ss 51A, 52(1) Browne v Dunn (1893) 6 R 67 Garcia v National Australia Bank Limited (1998) HCA 48 |
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr WT Houghton QC with Mr C Allen | Stamfords Solicitors |
| For the Second and Third Defendants | Mr EN Magee QC with Mr DM Austin | Norton Smith & Co |
| For the Fourth and Fifth Defendants | Mr RN Cameron | DE Phillips |
HER HONOUR:
Introduction
The plaintiff (“JNST”) is a Malaysian company which was to be the vehicle for a joint venture outlined in a memorandum of understanding made on 12 February 1997 between the first defendant (“JNSV”) and Mr Kam Yee Kong (“Mr Kam”). The memorandum of understanding recites that the parties have agreed to “jointly form a new company in Malaysia . . . to manufacture under licence the . . . Modems developed by [JNSV] in conjunction with Techsearch Inc (University of South Australia) for Marketing Sales and Distribution by Motorola Australia Pty Ltd”. The second and third defendants (“Mr Stannard” and “Mrs Stannard”) are husband and wife, and were at all relevant times the sole directors and shareholders of JNSV. The fourth and fifth defendants (“Mr Liew” and “Mrs Liew”) are husband and wife, and Mr Liew was concerned in certain relevant negotiations. JNSV was not represented in this proceeding.
A third relevant company in the group of companies controlled by Mr and Mrs Stannard was JNS Electronics Pty Ltd (“JNSE”) which at one time was called JNS Electronics (Aust) Pty Ltd and appears to have carried on business as JNS Electronic Industries. The name of the company is not significant; what is significant is that it was a separate company from JNSV.
An agreement (“the shareholders’ agreement”) was entered into between JNSV and Galgo Sdn Bhd (“Galgo”), a company controlled by Mr Kam, on 2 April 1997, setting out the arrangements for the joint venture. The shareholders’ agreement recited that JNSV:
is a manufacturer and distributor of communications products and has developed, in conjunction with Techsearch Incorporated (an association formed by the University of South Australia), an advanced Spectrally Efficient Digital Microwave Modem (JNS DRFL 700 Series 2Mb data rate 1.5GHZ frequency Microwave Link System with and without “hot standby”) (hereinafter called “the Product,” ...)
It is convenient to refer to the products in question simply as “modems”. Article 2 of the shareholders’ agreement provided that the parties agreed to enter into a joint venture for the manufacture of modems in Malaysia. Article 4.1 provided that JNST would have an authorised share capital of 5 million Malaysian ringgit and an issued share capital of 2 million ringgit. Six hundred thousand ordinary shares (30%) were to be allotted to JNSV and 1 400 000 ordinary shares (70%) to Galgo. Article 8 provided that the facility for manufacture of modems in Malaysia was to be in operation within nine months, and that in the interim period JNSV would make space, equipment and staff available at its factory in Bulleen in Victoria to manufacture modems to meet orders which had been received from Motorola Australia Pty Ltd (“Motorola”). By Article 9.1.1, JNSV undertook to grant to JNST an exclusive licence to manufacture the modems in Malaysia. Article 11 provided for the affairs of JNST to be managed by a board of directors consisting of five persons, two to be appointed by JNSV and three to be appointed by Galgo.
A further document (“the management memorandum”) was signed on 3 April 1997 by Mr Stannard for JNSV and Mr Kam for Galgo, providing for a number of matters relating to policy and administration of the joint venture.
Mr Stannard told Mr Kam that JNSV would need about $300,000 to fund the manufacture of the modems at Bulleen as agreed. By an agreement (“the loan agreement”) dated 26 May 1997 between JNSV and JNST, it was agreed that JNST would lend certain moneys to JNSV, the initial loan to be $300,000, to be repayable as there set out. Recital B to the loan agreement read, so far as relevant:
The Borrower in conjunction with an entity known as Techsearch Incorporated (an association formed by the University of South Australia) has developed [a Modem] and exclusively holds all intellectual property rights of any nature whatsoever in the Modem and, to the extent that any registration of any or all such rights is necessary, is the registered holder of such intellectual property rights.
Clause 12 of the loan agreement provided that the borrower would pay to the lender the lender’s costs and expenses of preparation, execution, stamping and enforcement of the agreement.
On or about 14 May 1997, Mr and Mrs Stannard executed a Deed of Guarantee and Indemnity later dated 26 May 1997 (“the Stannard guarantee”) to guarantee the performance by JNSV of its obligations under the loan agreement. Mr and Mrs Liew executed a similar document, also dated 26 May 1997 (“the Liew guarantee”).
It is claimed by JNST that the sum of $300,000 (“the initial loan”) was lent to JNSV pursuant to the terms of the loan agreement and not repaid in accordance with those terms. The making of the loan pursuant to those terms is not admitted by any of the defendants in their pleadings. Letters of demand claiming repayment of the loan together with interest at 13% per annum were served on JNSV under the loan agreement on 27 November 1997, and on Mr and Mrs Stannard and Mr and Mrs Liew under the respective guarantees on 1 December 1997. No moneys were paid in response to the letters of demand, and the writ initiating this proceeding was issued on 4 December 1997. A counterclaim by JNSV and Mr and Mrs Stannard was abandoned in running, but that of Mr and Mrs Liew was maintained.
Evidence was given by Mr Kam, Mr Martin of Motorola and Miss Yek of the plaintiff’s solicitors, Messrs Stamfords, all of whom were called by the plaintiff, and by Mr and Mrs Stannard and Mr and Mrs Liew.
The submissions of the second and third defendants
Was the $300,000 advanced to JNSV pursuant to the loan agreement?
The first submission put on behalf of Mr and Mrs Stannard (and adopted on behalf of Mr and Mrs Liew) was that none of the initial loan was advanced to JNSV pursuant to the loan agreement. Mr Stannard said in evidence that he had always believed that JNSV never received any part of the loan. However, at paragraphs 6 and 8 of his affidavit sworn on 23 April 1998 in response to an application by the plaintiff for summary judgment in this proceeding, he swore that he believed “that funds were advanced and that these were used for the interim funding purposes of the First Defendant” and that the funds provided to the First Defendant were provided for the purposes of the joint venture and to enable the continuation of the First Defendant’s business while the joint venture objectives were fulfilled”.
Clause 3.2.1 of the loan agreement provided for the initial loan to be advanced “to the Borrower by telegraphic transfer or an equivalent means of funds transfer to the Borrower’s bank account on 30 April 1997 or such later date as the parties may agree in writing.” “The Borrower” was defined in clause 1.1 as including JNSV and its permitted transferees and assigns. In a letter of 2 May 1997, Mr Stannard, who agreed in cross-examination that he was the managing director of JNSV, directed Stamfords, who were acting for JNST, to pay the amount of the initial loan to two bank accounts operated by JNSV, as to $126,000 to an account at the National Australia Bank and as to $174,000 to an account at the ANZ Bank.
The evidence is clear that the first instalment of the initial loan, being $75,279, was paid to JNSV by Stamfords under cover of a letter of 5 May 1997 from Stamfords to JNSV. That letter is expressed to be written “In accordance with the discussion this morning with your Mr Glen Wall and our Cecilia Yek”, and contains the words: “As discussed, the balance of the drawdown of the loan will be paid directly to [JNSV’s] creditors. Please forward us a list in due course.” Miss Yek said that letter was collected from her office by someone from “Spectra”, a company with which Mr Glen Wall was associated. A bank statement relating to the JNSV account at the National Bank referred to in Mr Stannard’s letter of 2 May 1997 shows that the amount of $75,279 was paid into that account in May 1997. Nevertheless, Mr Stannard said in evidence in chief that he had inspected the bank statements of JNSV for May 1997 and had not found any record of that payment, and maintained this assertion until the statement was shown to him in cross-examination.
Payment of the balance of the initial loan was delayed because it transpired that JNSV did not hold the intellectual property rights in the modem, contrary to the assertion made by it in Recital B to the loan agreement set out in paragraph 5 above, and to a similar assertion in a formal certificate signed by Mr Stannard on 2 May 1997. The exclusive licence was in fact held by JNSE, which had the power to issue sublicences, not necessarily exclusive, with the prior consent of Techsearch Incorporated (“Techsearch”). A sub-licence was issued by JNSE to JNSV on 7 May 1997 in consideration of a royalty payment to Techsearch of $20,000.
A letter of 14 May 1997 from Stamfords to JNSV reads, omitting formal parts:
Pursuant to the Loan Agreement between yourself and [JNST], we are instructed to release the Initial Loan advance as follows:
1. $100,374 in favour of [JNSV]
2. $35,000 in favour of Deputy Commissioner of Taxation
3. $25,830 in favour of Gateway 2000
4. $44,170 in favour of Hart Laser Computers
5.$15,533 (payment of Stamfords’ memorandum of costs no. 0811)
6. $75,279 (previous payment to [JNSV] )
7. $3,814 (reserved for estimated stamp duty and expenses)
Total $300,000
Please acknowledge receipt of the above payments by signing the duplicate of this letter.
Receipt was endorsed on the duplicate of that letter by Mr Howgate of Spectra Business Solutions Pty Ltd. Miss Yek’s evidence was that Mr Howgate collected the letter and the cheques payable to the first four payees listed. The cheque butts were in evidence, as were paid cheques drawn on Stamfords’ trust account in favour of Gateway 2000, Hart Laser Computers and JNSV (for the amounts set out in the letter of 14 May 1997), and JNSE (for $100,374, as to which see the following paragraph).
As to the amount of $100,374, Mrs Stannard said in examination in chief that she attended the premises of JNSV in Bulleen four days a week for several hours and attended to the invoices, and added in cross-examination that she attended to the banking of cheques which she received. However, she claimed not to have found any evidence in the accounts of JNSV of the receipt of the sum of $100,374. She then almost immediately said that that sum had been paid in error, not by her but by Mr Wall, to an account of JNSE at the ANZ Bank on 15 May 1997, and that she herself had arranged with that bank to have it transferred to the correct account of JNSV on 16 May 1997. Evidence from bank statements showed that an amount of $100,339, being $100,374 less the bank’s fee of $35 for a special clearance, was paid on 15 May to the account of JNSE and transferred on 16 May to the account of JNSV. (It is to be presumed that the special clearance was effected at the request of the payee.) When that evidence was put to them, both Mr Stannard and Mrs Stannard accepted that the payment had been made. However, each denied knowing that that payment was part of the advance of the initial loan. Mr Stannard said:
It may have found its way in there [to the JNSV account], but we didn't know where it came from.
Mrs Stannard said:
I don’t know where [Mr Wall] got that hundred thousand dollars from.
I cannot accept this apparent naïveté in two people who have been directors of companies since 1973, and whose companies had bank facilities which Mr Stannard conceded extended to several million dollars in 1997. This proceeding has been on foot since the issue of the writ on 4 December 1997, and Mrs Stannard agreed that she had been aware since January 1998 that the plaintiff proposed to rely on the letter of 14 May 1997 as setting out the drawdown of the initial loan. While it may be that Mr Stannard was concerned with the technical rather than the financial side of the business, by the time he came to give evidence he had had ample time since the initiation of the proceeding to satisfy himself as to the true position with regard to the payment of the $100,374.
Gateway 2000 and Hart Laser computers were trade creditors of JNSE for the amounts shown respectively in the letter of 14 May. Mr Stannard agreed in cross-examination that JNSE was at the relevant time doing the actual work of manufacturing modems (as to which see paragraph 3 above). JNSE owned the factory at Bulleen, and was employing staff and purchasing supplies. Mr Stannard said that it was proposed that JNSV would take over the manufacture from 1 July 1997. Mr Stannard agreed that a receiver was appointed to JNSE by the National Bank in early 1997, and that the company was subsequently wound up following non-payment of workers compensation premiums.
In February 1997, the Deputy Commissioner of Taxation had issued proceedings against JNSE to recover unpaid group tax amounting to some $34,000, and also against Mr and Mrs Stannard personally as directors of that company as well as a winding-up application against JNSE.
The amount of Stamfords’ costs had been notified to JNSV by a letter of 8 May 1997 with advice that they would be transferred from the money held in Stamfords’ trust account for the purpose of the loan. No reply was received to that letter, and the amount of the costs was not queried. The costs, stamp duty and other expenses were payable by JNSV pursuant to clause 12 of the loan agreement (see paragraph 5 above). The amounts of $100,374 and $75,279 were, as has been said, paid directly to JNSV (after the initial erroneous payment of the larger amount to an account of JNSE, as to which see paragraph 14 above). The payment of the other three amounts to the two trade creditors and the Deputy Commissioner of Taxation, all to reduce the indebtedness of JNSE, benefited JNSV only in that it was another member of the group of companies controlled by Mr and Mrs Stannard. However, the question arises as to whether the payment of those amounts to parties other than JNSV (possibly pursuant to the authority given by the definition of “Borrower” in the loan agreement set out in paragraph 10 above) was directly authorised by any person on behalf of JNSV, so as to vary clause 3.2.1 of the loan agreement providing for the manner of payment of the advance or to countermand the direction given by Mr Stannard in his letter of 2 May 1997.
As to clause 3.2.1 of the loan agreement, Mr Houghton, for the plaintiff, submitted that in the absence of any specific provision that the loan was to be advanced in that way and in no other, the lender was not required to make the advance specifically by that means if another means was found to be more appropriate and agreed to. By implication, the parties must be taken to have agreed to payment being made other than by that means. I accept that submission. Mr Stannard’s letter of 2 May, referred to in paragraph 10 above, is a sufficient indication that JNSV did not insist on payment in the manner provided in clause 3.2.1. Having signed that letter, he is in no position to maintain that because the payment was not made in accordance with clause 3.2.1, it was not made pursuant to the loan agreement, and accordingly is not repayable. In any case, the evidence of Miss Yek was that the loan agreement was prepared on 1 May and returned to her office, after execution by the borrower, on 2 May, so the advance could not have been made on 30 April, as required by clause 3.2.1.
As to the amounts paid to the three creditors of JNSE, Miss Yek said that in drawing cheques from the loan moneys for payments to those three entities she was relying on the financial statements of JNSV showing those amounts as owing by it. She said that Mr Wall had informed her that JNSV was to take over the liabilities of JNSE. A letter of 7 May from Mr Wall to Miss Yek on the letterhead of Spectra Business International Pty Ltd encloses invoices relating to the two trade creditors and other creditors, and is clearly a component of a continuing discussion as to how the advance was to be disbursed. The evidence of Miss Yek was that she had been discussing that matter with Mr Wall.
Mr Wall was not called by any party to this proceeding. However, in cross-examination Mr Stannard agreed that Mr Wall gave financial advice on the setting up of the joint venture; that in 1996 Mr Wall had instructions to deal with Motorola in the negotiation of the distribution agreement; that in 1997 Mr Wall’s company (which Mrs Stannard said was Spectra Business Solutions [Pty Ltd]) received 700,000 out of 2.4 million shares in JNSV; that Mr Wall was a partner “under the shareholders” in JNSV; that he was a signatory to some of JNSV’s bank accounts; that he had a management role in JNSV in 1997; that he dealt with financiers on behalf of JNSV; that he had access to financial information of JNSV and was authorised to disclose that information to potential financiers; that he had the letterhead of JNSV in his office and was authorised to write letters on that letterhead; that he had attended meetings with Mr Kam and others about the transactions which led to this proceeding and indeed had travelled to Malaysia for such meetings; and that Mr Stannard was not surprised to receive correspondence from other persons, such as Miss Yek’s letter of 7 May 1997, referring to “your Mr Wall”. Mrs Stannard clearly resented Mr Wall’s involvement in the financial management of the company and what she described as Spectra’s “male chauvinistic attitude to my input at all times”.
Miss Yek said that at the first meeting which she attended in relation to the joint venture, at which the heads of agreement were drafted, Mr Wall was negotiating with Mr Kam on behalf of JNSV. At the time when she was preparing the loan agreement on instructions from Mr Kam and JNST, her dealings throughout the transaction were with Mr Wall and Mr Liew rather than with Mr Stannard (I note in this context that it appears that JNSV was, for the greater part of the time, not legally represented). Mr Stannard spoke to Stamfords only once in that context. The documents were collected from Stamfords’ office by someone from Spectra. When difficulties arose about the ownership of the intellectual property in the modems, Miss Yek dealt with Mr Wall as representing JNSV. She was never told by Mr Stannard that Mr Wall did not act on behalf of JNSV.
On the basis of the totality of the evidence set out in the preceding two paragraphs, I am satisfied that Mr Wall had at least ostensible authority from JNSV to instruct Miss Yek as to the manner of disbursement of the initial loan.
The only possible inference which can be drawn from the evidence is that Mr Wall, on behalf of JNSV, gave instructions to Miss Yek for the balance of the initial loan of $300,000 to be disbursed in the manner set out in Stamfords’ letter of 14 May 1997. As to the creditors of JNSE, those instructions were presumably on the basis that JNSV, which was taking over the manufacturing business previously conducted by JNSE (see paragraph 16 above), had taken over the liabilities of that company, as Mr Wall informed Miss Yek. As to the retention of the costs and expenses, those instructions were in any case in accordance with what Miss Yek described as the normal practice. Given that Mr Wall had authority to give those instructions, they superseded the instructions contained in Mr Stannard’s letter of 2 May 1997.
For the reasons given, I am satisfied that the full amount of the initial loan was advanced to JNSV either by direct payments or by disbursement according to instructions validly given by JNSV in accordance with the loan agreement. Accordingly the submission that this was not the case fails.
Mrs Stannard and the Garcia Principle
It was submitted that, on the principle enunciated by the High Court in Garcia v National Australia Bank Limited (1998) HCA 48, it would be unconscionable to enforce the Stannard guarantee against Mrs Stannard. At paragraph 31 of the majority judgment of Gaudron, McHugh, Gummow and Hayne JJ, their Honours said that what made it unconscionable to enforce a guarantee in a case such as that and the earlier case of Yerkey v Jones (1939) 63 CLR 649 was the combination of circumstances that:
(a)in fact the surety did not understand the purport and effect of the transaction;
(b)the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);
(c)the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet
(d)the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.
Clearly, for the principle to operate, all of those circumstances must be present.
As to item (a), Mrs Stannard was asked in examination in chief what she understood, when she attested the affixation of the seal of JNSV to the loan agreement and signed the Stannard guarantee personally, about the purport and effect of those documents. She replied that she understood that these documents would begin the flow of money into the joint venture operation and that they had to be signed in order to commence that joint venture operation. That was, no doubt, correct so far as it went.
Mrs Stannard agreed in cross-examination that she was a director with her husband of five companies, all but one associated with the group which had included JNSE and JNSV. She agreed that she had “a fairly intimate knowledge of how the companies in the group operated”. She had looked after the invoicing and the cheques, and her husband had talked to her about the direction in which he wished to take the companies. When relevant documents were put to her, she agreed that she had in the past executed some five or six guarantees to the National Bank and one other financial organisation to secure advances to the companies. She initially said that she had never had any legal advice before signing any of those documents. However, when it was put to her in detail that on three occasions she had seen solicitors in that context, she agreed, but said that she did not remember what they had told her. Several of the guarantee documents in evidence included statements by bank officers or solicitors to the effect that the nature or implications of the document had been explained to her. She said, however, that her understanding was that under any of those guarantees she would be liable only to the extent of $2, because the advance being secured was being made to a limited liability company (presumably she was referring to JNSE) with only two $1 issued shares. She did not explain why she considered that the bank would require the execution of formal documents to secure the repayment of $2.
Throughout her lengthy cross-examination, it was clear that Mrs Stannard was an intelligent woman who took some pride in her knowledge of the affairs of the companies of which she was a director and her knowledge of business matters generally. It was only in answer to some (although not all) of the questions which touched on the effect of the execution of a guarantee by her that she appeared other than knowledgeable and competent. I am unable to find that, in terms of item (a) of paragraph 33 of Garcia, she did not understand the purport and effect of the Stannard guarantee.
As to item (b), she obtained an immediate personal gain from the making of the initial loan which she guaranteed, in that $35,000 of the money advanced went directly to the Deputy Commissioner of Taxation to clear a debt for which proceedings had been issued against her personally. She agreed in cross-examination that she was aware of those proceedings, and that she was aware that some of the funds to be received from JNST were to be used to make that payment. She also agreed that, as a shareholder and director of the companies in the group, she obtained an indirect benefit from the funds advanced being used to pay debts of those companies. I am thus unable to find that she was a volunteer in terms of item (b).
As to item (c) of paragraph 33 of Garcia, when Mrs Stannard’s evidence is compared with that of her husband, she indicated a better understanding of business matters than he. When asked questions about invoices and bank accounts, he was inclined to answer that the question should be put to her.
It is not in issue that, in terms of item (d), no steps were taken by the lender, JNST, to explain the transaction to Mrs Stannard or to find out that a stranger had explained it to her. However, given the requirement that all four sets of circumstances be present, I am unable, for the reasons set out, to find that it would be unconscionable to enforce the guarantee against her.
Authority to issue the proceeding
The final submission put on behalf of Mr and Mrs Stannard (and adopted on behalf of Mr and Mrs Liew) was that the proceeding was a nullity, not having been issued with any or any proper authority of the plaintiff. This submission relied on the evidence of Mr Kam that a Board of five directors had not been appointed to JNST, as required by article 11.1 of the shareholders’ agreement referred to in paragraph3 above, and as a consequence there had never been any meeting of the board and it had never passed any resolutions. However, asked if that meant that the company had no directors, Mr Kam said “All companies have board of directors”. The point of that evidence was that the five member board required by the shareholders’ agreement as representing the two parties to that agreement had not been appointed, not that no directors had been appointed.
It was not put to Mr Kam that the proceeding had been initiated without the authority of the plaintiff. That being so, Mr Houghton, relying on breach of the rule in Browne v Dunn (1893) 6 R 67, sought to tender an affidavit of Mr Kam sworn on 1 April 1998 in the context of the application for summary judgment, and permission was given for that tender. In that affidavit Mr Kam swears that he is a director of the plaintiff. The exhibits to that affidavit indicate that JNST was incorporated on 31 July 1981 under the name of Sedaria Sdn Bhd, changing its name on 4 March 1997 to the name of JNST. Also before the Court were the Articles of Association of Sedaria Sdn Bhd, providing that the number of directors of that company shall be not less than two nor more than ten, and naming the first two directors. There is no evidence to support the submission that JNST had no authority to issue the proceeding.
The fourth and fifth defendants
Mr Liew is an economics graduate of Monash University. He is known as “Richard Liew”. When asked his occupation in examination in chief, Mr Liew replied that he ran two takeaway food shops. However, in cross-examination he said that one of the takeaway food shops only operated for nine months in 1989 and that the other closed two years ago, and that he was also self-employed in business consultancy and marketing services. He said that his and his wife’s combined income in the last five years had been only $15-20,000, plus a little from baby sitting their granddaughter who is now 14 months old, and $100 a week that their children gave to his wife. He had not put in a tax return since 1994/5 because his accountant had told him that he did not need to. The matters set out below, evidenced by bank statements and other material, as to advances and the receipt of interest are relevant to the accuracy of that evidence. He originally said that his overdraft limit in 1996 was $20,000, but when asked where he obtained $100,000 to lend to JNSV he said that he had arranged a bank overdraft of $180,000. There were a number of inconsistencies and improbabilities in the evidence of Mr Liew as it developed under cross-examination, and I would have difficulty in accepting any statement of his without corroboration.
Mr Liew was authorised in writing by Mr Stannard to seek investors in JNSV, on the basis that he would receive ten per cent commission on all funds which he obtained for JNSV. It was he who introduced Mr Kam to Mr Wall and Mr Stannard in February 1997. He was present at a number of meetings between the parties, both in Melbourne and in Malaysia. Clause 10 of the management memorandum described in paragraph 4 above provided that Mr Liew was to be appointed the Malaysian Project Liaison and Coordinator and paid a suitable remuneration plus approved expenses agreed to by the Board of Directors. Correspondence between Mr Liew and Mr Kam in February 1997 shows that Mr Liew had some expectation of receiving at least a 2.5 per cent share in the joint venture from JNSV, and another 2.5 per cent share from Galgo.
The management memorandum provided for JNST to advance $450,000 to JNSV to finance the acquisition of what was described as “buffer stocks”, which had already been acquired by JNSV for the manufacture of modems, and which was to be owned by the joint venture. An order for nine modems had already been received from Motorola. Mr Kam said that he came to Melbourne on 17 April 1997 and visited the factory at Bulleen, where he formed the view that the material which had been acquired, and which was shown to him, was not buffer stock, but old stock, and he informed Mr Liew, Mr Wall and possibly Mr Stannard that he would not proceed with the advance of $450,000. He said that at that stage he wanted to call off the deal. There were more meetings and he was persuaded that the technology was good and all that was needed was a loan. This was the background to the making of the loan agreement, the arrangements for an initial loan of $300,000, and the events already described above in the context of the claim of JNST and the defences raised by Mr and Mrs Stannard. Mr Kam returned to Malaysia in late April 1997, and he said that at that stage the only guarantors of the $300,000 initial loan were to be Mr and Mrs Stannard.
An amount of $100,000 had been lent to JNSV on 20 December 1996 from a joint bank account of Mr and Mrs Liew with the National Australia Bank, and a second instalment, discussed in the next paragraph, was advanced on 11 March 1997. Mr Liew agreed that it could be said that that loan (“the Liew loan”) was a joint loan from himself and his wife. He said that the Liew loan was a short term loan to assist JNSV in the financing of the production of the nine modems which had been ordered by Motorola and were to be delivered by 1 June 1997. The deed of loan in respect of the Liew loan stated that the price to be paid for the products ordered by Motorola was $321,600. The Liew loan was to be repaid on delivery of the modems and payment for them to JNSV by Motorola. The Schedule to the deed of loan provided for interest of $7,500, being at a rate of 30 per cent per annum, on funds for which Mr Liew was paying 9.25 per cent interest to the bank on the overdraft referred to in paragraph 35 above. He resisted the suggestion that that was an indication that he regarded the Liew loan as a risky investment.
A further $16,280 out of the joint account was advanced to JNSV on 11 March 1997. Mr Liew said that this was an advance of $20,000 but that he had withheld $3720 which was owing to him by Mr Wall. He said that the third instalment of the Liew loan, an amount of $75,000, making a total advance of $195,000, was lent by a friend of his called Mr Pong, on the basis that Mr Liew would be responsible for ensuring that it was repaid. However, there was no acceptable documentary evidence of this payment, and Mr Liew’s account of it was not satisfactory.
When the difficulty relating to the intellectual property rights in the modem, described in paragraph 12 above, was discovered in early May 1997, Mr Kam had serious concerns about whether to proceed with the joint venture. Mr Liew sent a number of faxes to Mr Kam on 11 and 12 May, urging him to proceed with the loan. It is clear that by 11 May 1997, Mr Liew was aware, as he reluctantly conceded in cross-examination, that JNSV was in a difficult financial position, and that if it did not receive the initial loan and thus was unable to complete and deliver the nine modems to Motorola, the Liew loan was unlikely to be repaid. A fax of 11 May to Mr Kam begins:
To confirm the ‘steps’ you want in place for the loan to be made available as soon as practicable:-
1. Richard [Mr Liew] to guarantee the $300,000 loan.
This fax, following a conversation earlier in the day between Mr Kam and Mr Liew, appears to be the first documented mention of any proposal for the Liew guarantee.
In a fax in reply of the same date, Mr Kam said “Your goodwill to stand guarantee will help tremendously”. In another fax to Mr Kam of 11 May, Mr Liew refers to a conversation with Mr Stannard in the late afternoon of that day, and says:
. . . he stressed to me that to-morrow will be his very last chance to get fund for his components etc in time for his production and delivery of the 9 units to Motorola as scheduled in the Loan Agree.
If your fund is not available to him for use to-morrow, he has absolutely no choice but to get his fund from other sources as he has to meet his obligation to me and especially to Motorola.
He agreed in cross-examination that by “his obligation to me” he must have meant the repayment of the Liew loan. The Liew guarantee was duly executed on a date which Mr Liew said was earlier than 26 May 1997, the date which it bears.
The amount of $142,794.53, being $120,000 plus interest, was repaid on 7 July 1997 into a joint account of Mr and Mrs Liew with the National Australia Bank, that payment being recorded in the bank statement as being paid in “B/O JNS Electronis “[sic]. Mr Liew indicated that the money was paid in by Mr Wall, and it can be assumed that the payment was made on behalf of JNSV. The rate of interest was thus some 35 per cent over the six and a half month period of the loan.
Mrs Liew and the Garcia principle
It was submitted for Mrs Liew that, on the Garcia principle, it would be unconscionable to enforce the Liew guarantee against her. The summary by the majority of the High Court in Garcia v National Australia Bank Limited (1998) HCA 48 of the relevant circumstances when it would be unconscionable to enforce a guarantee is set out in paragraph 26 above and need not be repeated here. It is not in issue that, in terms of item (d) of that summary, no steps were taken by the lender, JNST, to explain the transaction to Mrs Liew or to find out that a stranger had explained it to her.
As to items (a) and (c), Mrs Liew said that her husband brought the guarantee to her at home, and explained the financial benefits which he expected to flow to him from the joint venture. She was not aware of the legal effect of a guarantee, and he did not explain that to her. She had never signed a guarantee before. He did not explain to her anything about his business dealings. In cross-examination, she said that she was aware of the Liew loan of at least $100,000, but that she did not appreciate that the signing of the guarantee might mean that that loan would be repaid. She had worked as a cook in the takeaway food shop, but had not been involved in the business side of it. She had been married for thirty years. On the basis of that evidence, I would have difficulty in finding that Mrs Liew understood the purport and effect of the transaction effected by her signing the guarantee. I would accept that she had trust and confidence in her husband in matters of business, and that he did not fully explain the transaction to her.
However, as to paragraph (b), on the basis of the evidence set out in paragraphs 35 to 42 above, I am unable to find that Mrs Liew, in respect of the Liew guarantee, was a volunteer in the relevant sense. The proposal for the Liew guarantee, whether it originated with Mr Kam or Mr Liew, was one of the elements in Mr Liew’s persuading Mr Kam to proceed with the initial loan, despite his concerns about the licence. One reason for Mr Liew’s anxiety that the initial loan should proceed was the prospect that if it did not proceed, JNSV would be unable to repay the amount of $120,000 lent to it by Mr and Mrs Liew jointly. That amount was repaid to Mr and Mrs Liew jointly after the advance of the initial loan. In that way, Mrs Liew benefited from the loan agreement which she guaranteed. Accordingly, I cannot find that it would be unconscionable to enforce the Liew guarantee against her.
The construction of the loan agreement
Mr Cameron submitted that clause 5 of the loan agreement entitled the borrower, JNSV, to convert its obligation to repay the initial loan to an obligation to issue shares in the capital of JNSV, and if the loan was not repaid the option was automatically triggered in satisfaction of the amount of the initial loan. A reading of clause 5 makes clear that any conversion of that kind is solely in the control of the lender. That submission accordingly fails.
The counterclaim
Misleading and deceptive conduct
Mr Cameron, for Mr and Mrs Liew, submitted that Mr Kam, on behalf of JNST, had made certain representations to Mr Liew as to the benefits Mr Liew would receive from the execution of the guarantee, had done so in order to induce Mr Liew to execute the guarantee, and that at the time of making those representations Mr Kam did not have reasonable grounds for making them.
He relied on sections 51A and 52(1) of the Trade Practices Act 1974 (Cth), which are mirrored by sections 10A and 11(1) of the Fair Trading Act 1985 (Vic), and which read:
51A(1). For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2). For the purposes of the application of sub-section (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3) Sub-section (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.
52. (1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
The evidence of Mr Liew was that after Mr Kam’s visit to the Bulleen factory on 17 April 1997, described in paragraph 37 above, there was a meeting on the same day at the office of Spectra, after which Mr Liew drove Mr Kam back to Mr Kam’s daughter’s flat, where he was staying. At the daughter’s flat, they had a further conversation about the project. Mr Kam assured Mr Liew that he would receive his two and a half per cent share, and would be appointed to assist with the production facility as provided in the management memorandum. He said that when JNST was floated on the Malaysian Stock Exchange, the two and a half per cent share would be worth seven million ringgit. Mr Kam then said that he would be happier about the transaction if Mr Liew were to guarantee the repayment by JNSV of the initial loan. Mr Liew was not happy about that.
The evidence of Mr Kam was that the issue of Mr and Mrs Liew giving a guarantee did not arise until the exchange of faxes and telephone calls after his return to Malaysia in late April. He was clear about this both in examination in chief and in cross-examination. He agreed that in April he had believed that there was the potential to float JNST on the Malaysian Stock Exchange. He had not said at that meeting on 17 April that he would give Mr Liew an option to acquire a two and a half per cent interest in the joint venture, although that had been said on other occasions. Nor had he said that that share would be worth 7 million ringgit.
For the reasons set out in paragraph 35 above, I prefer the evidence of Mr Kam to that of Mr Liew. Therefore, I must find that the matter of the Liew guarantee was not discussed at all on 17 April, but was first raised in the conversations and faxes which were exchanged on 11 May, and which are described in paragraphs 40 and 41 above. Further, I must accept the evidence of Mr Kam as to what was said on that occasion. In any case, I am satisfied that if on that occasion Mr Kam made any representations of the kind described by Mr Liew, he had reasonable grounds for believing them. At that stage, the evidence generally shows that there was every expectation that the joint venture would go ahead as planned, and would be extremely successful. Accordingly, this claim fails.
The reimbursement claim
Mr Kam expected the initial loan to be repaid out of the proceeds of the nine modems which were being manufactured for Motorola. On 2 July 1997, he received a fax from Mr Wall to the effect that those nine modems had been delivered to Motorola on 30 June as agreed, and arrangements for settlement were being made. By September the proceeds had not been received and Mr Kam came to Melbourne. He went to Motorola and saw Mr Martin. He then discovered that the nine modems which had been delivered were incomplete and unusable. This was a huge shock to him. He described himself as being very unhappy. At a meeting of Mr Kam, Mr Martin, Mr Liew, and Dr Gurr of Techsearch on 12 September 1997, it was agreed that Motorola would return the nine modems to JNSV and would issue a new order for two modems to give Mr Stannard a final opportunity to see if he could produce them. In a letter of 12 September 1997 from Mr Martin to JNST, and acknowledged by Mr Kam’s signature, it was confirmed that neither party would have any liability to each other after the nine modems were returned, and Motorola would issue the new order for one system, which Mr Liew said incorporated two modems, at a cost of $39,000. Mr Kam agreed in cross-examination that he had said at a meeting on 10 September that Mr Liew was to finance the production of those two modems, and to attend at the factory at Bulleen “to ensure there are no more stuff-ups and to ensure delivery is on time of good quality modems”. Mr Stannard said at that meeting that he would have no problem with producing those two modems if someone would finance them. Mr Liew duly attended at the factory and financed the production of the two modems.
Mr Liew’s claim is that at that meeting on 10 September, Mr Kam told him that JNST would reimburse him for the costs of financing those two modems including his expenses, and that those costs totalled $25,578.28; and that Mr Kam also told him that JNST would pay him a fee of $3,000 for his attendance at the factory while the modems were produced. Mr Kam denies this. Minutes were taken of the meeting on 10 September and signed by all persons present, namely Mr Stannard, Mr Kam, Mr Liew and Mr Wall. Those minutes refer to the production of the two modems, and to Mr Liew attending the factory and paying for the necessary components. There is no reference to any undertaking as to the reimbursement of Mr Liew or the payment of a fee for his attendance. Again, I have no alternative but to prefer the evidence of Mr Kam to that of Mr Liew.
Conclusion
I have dealt with all of the matters raised by the defendants on the pleadings which were maintained at the trial of this proceeding. I must assume that, where this has not been specifically indicated, the other matters raised on the pleadings have been abandoned. For the reasons given, there will be judgment for the plaintiff on the claim against all four defendants, and the counterclaims of all four defendants will be dismissed. Counsel may wish to make submissions as to the terms of the orders to be made.
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