Karam v ANZ Banking Group Ltd

[2001] NSWSC 709

CITATION:	Karam v ANZ Banking Group Limited & 1 Ors [2001] NSWSC 709
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 2142/97
HEARING DATE(S):	20/06/00-22/06/00, 27/06/00-30/06/00, 18/07/00-20/07/00, 02/11/00, 03/11/00, 07/11/00-10/11/00, 14/11/00, 17/11/00, 21/11/00, 01/03/01, 26/04/01, 27/04/01
JUDGMENT DATE:	21 August 2001
PARTIES :	Charles Raymond Karam (First Plaintiff; First Cross Defendant) John Raymond Karam (Second Plaintiff; Second Cross Defendant) Nada Marie Karam (Third Plaintiff; Third Cross Defendant) Diane Karam (Fourth Plaintiff; Fourth Cross Defendant) Australia & New Zealand Banking Group Limited (First Defendant; Cross Claimant) William Croker (Second Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	M L D Einfeld, QC/ D B Studdy (Plaintiffs; Cross Defendants) M Walton, SC/ P J Dowdy (First Defendant; Cross Claimant)
SOLICITORS:	Webster O'Halloran (Plaintiffs; Cross Defendants) Coudert Brothers (First Defendant; Cross Claimant)
CATCHWORDS:	EQUITY — Banking loans to an incorporated family business earlier carried on in partnership — Borrowers with limited English and technical understanding of financial and legal security matters — Special disability — Unconscionability — Application of Contracts Review Act — Distinction between recommends independent legal advice and inviting borrowers either to take away and read documents or get legal advice — Difficulty of understanding documents — Availability of house mortgages and personal guarantees to secure corporate debt — Construction of house mortgages with form S148 including all monies clause as a guarantee — Inadequate or misleading explanation given by Bank — Relevance to unconscionability — Estoppel — Illegitimate pressure amounting to economic duress in relation to subsequent acknowledgments and cross-deed of covenant — Independent legal advice does not avert that result where adviser not furnished with relevant information including security documents — Continued effect of duress negates effect of subsequent legal advice — Release, effect of and principles of construction — Relevance of fact that security sold by borrowers in these circumstances rather than the bank — Scope of equitable compensation where security sold taking into account gravity of conduct — Limitation issues — Scope for liability of bank in relation to advice or there endorsement of property purchase financed by bank — Negligent misrepresentation, breach of duty of care or breach of fiduciary duty alleged — No such liability in present circumstances — Relevance of reliance and its reasonableness — Issues of causation — Is there any fiduciary duty in particular circumstances — Limitation aspects. - WORDS AND PHRASES — meaning of "advice"
LEGISLATION CITED:	Contracts Review Act 1980 (NSW) s7 Limitation Act 1969 (NSW) s14 s23 Trade Practices Act 1974 (Cth) s82(2)
CASES CITED:	Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529 Amaca Pty Limited formerly known as James Hardie & Coy Pty Limited v CSR Limited [2001] NSWSC 324 Ankar Pty Limited v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Aquaculture Corporation v New Zealand Green Mussel Co Ltd (1990) 3 NZLR 299 Barclays Bank plc v O’Brien [1994] 1 AC 180 Barton v Armstrong [1976] AC 104 BCCL v Ali [2001] 1 All ER961 Beneficial Finance Corporation Limited v Karavas (1991) 23 NSWLR 256 Bennett v Minister for Community Welfare (1992) 176 CLR 408 Blomley v Ryan (1956), 99 CLR 362 Breen v Williams (1996) 186 CLR 71 Bridgewater v Leahy (1998) 194 CLR 457 Caffrey v Darby (1801) 6 Ves Jun 488; 31 ER 1150 Catt v Merrick Australia Limited (1986) 9 NSWLR 639 Chapman v E-Sports Club Worldwide Ltd (2000) 35 ACSR 462 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 Commonwealth v Verwayen (1990) 170 CLR 394 Commonwealth Bank of Australia v Zell (Sperling J, 19 February 1997, unreported) Contracts Review Act, S H Lock (Australia) Limited v Kennedy (1988) 12 NSWLR 482 Cornish v Midland Bank Plc [1985] 3 All ER 513 Crescendo Management Pty Limited v Westpac Banking Corporation (1988) 19 NSWLR 40 Environment Agency v Empress Car Co (Abertillery) Ltd (1998) 2 WLR 350 Fountain v Bank of America National Trust & Savings Association (1992) 5 BPR 11,817 Fry v Lane, Re Fry; Whittet v Bush (1888) 40 Ch D 312 Gipps v Gipps [1978] 1 NSWLR 454 Gould v Vaggelas (1985) 157 CLR 215 Grant v John Grant and Sons (1954) 91 CLR 112 Henjo Investments Pty Limited v Collins Marrickville Pty Limited (1988) ATPR 40-850 Holmes v Jones [1907] 4 CLR 1692 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Houghton v Immer (No. 155) Pty Limited (1997) 44 NSWLR 46 Houlahan v Australian and New Zealand Banking Group Limited (1992) 110 FLR 259 ICS v West Bromwich BS [1998] 1 All ER 98 Iletrait Pty Limited v McInnes (NSWCA, 17 April 1997, unreported) Karam v Australia and New Zealand Banking Group limited (2000) 34 ACSR 545 Kenny & Good Pty Limited v MGICA (1992) Limited (1999) 199 CLR 413 Louth v Diprose (1992) 175 CLR 621 Lowe v Lombank Ltd [1960] 1 WLR 196 McMahon v Pommeroy Pty Ltd (1991) ATPR 41-125 Mahlo v Westpac Banking Corporation (NSWSC Santow J, 6 February 1998, unreported) Micarone and others v Perpetual Trustees Australia Limited (1999) SASR 1 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 National Australian Bank v Nobile (1991) 100 ALR 227 National Bank of Australia Ltd v Mason (1976) 50 ALJR 362 Nockton v Lord Ashburton [1914] AC 932 O’Halloran v R T Thomas & Family Ltd (1998) 45 NSWLR 262 O’Rorke v Bolingbroke (1877), 2 App Cas 814 Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187(FC) Pilmer v Duke Group Ltd (2001) 75 ALJR 1067 Poseidon Limited v Adelaide Petroleum NL (1991) 105 ALR 25 Royal Bank of Scotland v Etridge (No. 2) [1998] 4 All ER 705 Salkeld v Vernon (1758) 1 Eden 64, 28 ER 608 Sherson & Associates Pty Limited v Bailey [2000] NSWCA 275 Smith v Chadwick [1884] 9 App Cas 187 Stanton v Australia and New Zealand Banking Group Limited (1987) 9 ATPR 40-755 State Bank of New South Wales v Muir and Anor (1996) BPR 15,483 Target Holdings Ltd v Redfern [1996] 1 AC 421 Teachers Health Investments Pty Limited v Wynne (1996) NSWConvR 55-785 Tepko Pty Ltd v Water Board (2001) 75 ALJR 775 Vadasz v Pioneer Concrete (SA) Pty Limited (1995) 184 CLR 102 Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 (CA)
DECISION:	See paragraphs 505 to 513.

IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 2142/97
Charles Raymond Karam
First Plaintiff
John Raymond Karam
Second Plaintiff
Nada Marie Karam
Third Plaintiff
Diane Karam
Fourth Plaintiff

Australia & New Zealand Banking Group Limited
First Defendant
William Croker
Second Defendant

Australia & New Zealand Banking Group Limited
Cross-Claimant

Charles Raymond Karam
First Cross Defendant
John Raymond Karam
Second Cross Defendant
Nada Marie Karam
Third Cross Defendant
Diane Karam
Fourth Cross Defendant

JUDGMENT

Table of Contents
Page

INTRODUCTION

OVERVIEW OF FACTS AND CONTENTIONS

PERSONS PRINCIPALLY INVOLVED — brief description

Plaintiffs and those associated

Defendant and those associated

Bank Officers

Third Parties

SALIENT FACTS

Contact with ANZ Bank

McMillan St Property Mortgage given by Charles Karam

Sir Joseph Banks Street, Bankstown — Banks Street Mortgage September 1978.

Regents Park Property

26 May 1980 combined set of security documents signed

Subsequent Events post 26 May 1980

69 Jacobs Street, Bankstown — Mortgage of 10 January 1986

1987-1988

Purchase of Ingleburn Property on 5 October 1989 and associated loan of $2,070,000 secured by mortgage of 22 December 1989

Loan of $1.65 million for Ingleburn factory completed December 1990.

1991

Mortgage Debenture of 14 July 1992

Investigations and other steps July 1992-June 1993

First Meeting with Marsden 10 June 1993 — the two acknowledgments

July — September 1993

Second Meeting with Marsden 1 October 1993 — cross-deed of covenant

Sale of Properties/Investigative Reports

Sale of Jacobs Street property for $450,000 on 15 December 1993

Holyman Dart Report — March 1994

Letter of Acknowledgment re no further claims — 1 March 1995

Arthur Anderson Report — 1 September 1995

Termination of Bank’s facilities and demands — appointment of receiver

Sale of Regents Park and Ingleburn — 12-14 March 1996

Net amount owing to Bank after realisations as of 1 July 1996

SPECIFIC ISSUES AND QUESTIONS

Issue 1: Plaintiffs’ credibility and level of understanding:

John Karam

Nada Karam

Charles Karam

Diane Karam

Issue 2: John’s 1978 house mortgage — did it secure the Company’s future debt?

Issue 3: Impugning the original securities of 1978 and 1980.

Scope of John’s Banks Street Mortgage taking into account subsequent form S148

Unconscionability and Banks Street Mortgage

Relevance of Guarantees to effect of form S148 on Banks Street Mortgage

Conclusion

The four guarantees of 1980 — should they be set aside?

Conclusion

Contracts Review Act 1980 (NSW)

Issue 4: Charles’ 1986 House Mortgage — Does it secure the Company’s debt taking into account form S148?

Contracts Review Act

Conclusion
Issue 5: Ingleburn Mortgage — impugnable? Are the two house mortgages and Regents Park available to secure Ingleburn purchase or Ingleburn factory construction?
Conclusion

Events post 22 December 1989

Conclusion
Subsequent Events leading up to Mortgage Debenture of 14 July 1992 given by the Company
Issue 6: 1993 and subsequent documentation and events; their efficacy and effect on the Bank’s security position and the Karams’ claims; Defences

Independence of Mr Marsden

Conclusion

Cross-Deed of Covenant — 1 October 1993

Conclusion

Sale of Houses

Conclusion

The “release” of 1 March 1995

Overall Conclusion

Defences

Limitations

Scope of Equitable Compensation too narrow?

Equitable Compensation and associated relief

Issue 7: Negligence and other claims in relation to the Ingleburn purchase

Conclusion re negligent misrepresentations

Breach of duty of care?

Conclusion re Breach of Duty of Care
Overall Conclusion re Negligence

Breach of fiduciary duty?

Conclusion

OVERALL CONCLUSIONS AND SUMMING UP

ORDERS AND COSTS

INTRODUCTION

1    The Karams, two brothers and their wives, together with their family company in a shoe-making business, are the Plaintiffs in these proceedings. The Defendant and Cross-Claimant is their long-time banker, Australia and New Zealand Banking Group Limited (“the Bank”).

2    Recent years have seen a number of challenges to bank securities as well as claims based on alleged bank advice, or a recommendation associated therewith. Some such claims prove to be well-founded. Others are a failed attempt ex post facto to find some equitable wrong or other deficiency in relation to the bank’s securities or the way in which obtained. Many claims involve personal guarantees as here. The critical issue in this case is whose account is to be believed, when tested against recollection of the events or a stated practice, contemporary records and in cross-examination. Is it the Karams upon whom rests the onus of proof, or the Bank? Or is neither account wholly to be believed? That factual determination is the principal key to resolving the legal issues that attend the competing claims of the parties. The legal issues pertain to legal interpretation of the securities, unconscionability, possible application of the Contracts Review Act 1980 (NSW) and whether economic duress was brought to bear on the Karams by the Bank. There are also claims based on alleged negligence or breach of fiduciary duty on the Bank’s part in relation to a particular land purchase funded by the Bank. The Bank relies on a number of defences including estoppel and whether the claims are statute barred. What is perhaps notable about this case is that it brings all these issues together.

3    The first legal issue is whether the Bank acted unconscionably in obtaining various guarantees and securities from the Karams. This was so as to support obligations of their incorporated family business in a way and extent that the Karams contend was not understood. The Karams contend that they laboured under the special disability of having limited education and understanding of technical English and inadequate financial understanding. They contend that they received inadequate or misleading explanation from the Bank concerning the availability of their security for the Company’s indebtedness. The Karams say the Bank thereby took unfair advantage of their disability in seeking to obtain and then retain the advantage of that security for the Company’s bank indebtedness. Thereafter, say the Karams, the Bank applied illegitimate pressure amounting to economic duress in order to retain that benefit unconscionably obtained. This was first by having the Karams execute further documentation bolstering the Bank’s security position. Then it was to have the Karams sell that security on behalf of the Bank, paying over the proceeds in reduction of the Company’s bank debt. That realisation means that the Karams seek their relief through equitable compensation primarily, though also under the Contracts Review Act.

4    Finally there is a dispute about whether the Bank gave advice or made recommendations to the Karams which rendered it liable to them as customers for negligence, misrepresentation or breach of fiduciary duty. This was concerning the purchase of a new factory site which the Bank financed.

5    The Bank disputes all these claims. It relies, inter alia, on the Karams having received independent advice before signing the further documentation and on various defences. It cross-claims for what it says is the balance owed to it.

OVERVIEW OF FACTS AND CONTENTIONS

6    The facts and contentions in the broadest of outlines are these. For nearly thirty years, the Karams, customers of the Bank, carried on a family business starting off in partnership, making shoes. From small beginnings, as Lebanese immigrants to this country, arriving with rudimentary English and limited education, their business came to prosper, leading to its eventual incorporation in 1980. The family company which thereafter carried on that partnership business was originally called Larama Pty Limited and subsequently became Karam Bros Footwear Pty Limited (“the Company” or “KBF”). It was throughout owned equally by the four Karams and the two families. With prosperity came expansion, culminating in the acquisition of a factory site at Ingleburn whose seven hectares well exceeded the needs of the factory. It was bought with a loan provided by the Bank at the end of 1989. That however was the beginning of the heavy debt burden which, associated with declining profitability and eventual collapse of the business, led to realisation of the Bank’s securities. That realisation was effectuated by the Karams following their executing further documentation having obtained advice from Mr Marsden their solicitor. It was intended to reinforce or protect the Bank’s security position. The Karams contend and the Bank denies that illegitimate pressure amounting to economic duress was brought to bear by the Bank on the Karams in bringing about that documentation and then the subsequent realisation of the security.

7    It is following that realisation that these proceedings have been brought by the Karams. The proceedings commenced with the Plaintiffs filing a Statement of Claim against the Bank on 22 April 1997. It seeks to impugn the guarantees and securities given by the Karams personally and a mortgage given by the Company connected with the purchase of the Ingleburn site. The Bank for its part seeks to rely upon these guarantees and securities and upon the subsequent documentation including acknowledgments. It also relies upon what it contends was a general release, whose effect is disputed by the Karams. It relies on these securities and guarantees, reinforced by that further documentation, as validly securing all the corporate debt of the Company entitling it to retain the proceeds of realisation and to ground its cross-claim.

8    Their dispute starts with whether two house mortgages, given by John in 1978 and Charles Karam in 1986, were available also to secure the Company’s debt. The Plaintiffs’ attack is threefold. First that the house mortgages do not apply also to corporate debt as a matter of their proper construction. Second, that it would be unconscionable for them so to apply to corporate debt in the circumstances. Third, that if otherwise applicable to the corporate debt, they would be “unjust contracts” under the Contracts Review Act such that a remedial order would be just in the circumstances and should be made. The subsequent security documentation including a form S148, personal guarantees, two acknowledgments and a cross-deed of covenant are said by the Karams not to alter this result and to have been obtained unconscionably. The Karams contend that the acknowledgments and cross-deed of covenant were obtained by illegitimate pressure amounting to economic duress. That duress (it is said) was also brought to bear in making the Karams sell their property in reduction of the corporate debt. There is a contest as to whether a mortgage given over an earlier factory site at Regents Park by the Karams was available as security for the Company’s later post Ingleburn debt. It is also disputed whether personal guarantees given by each of the four Karmas were available to secure corporate debt. The Karams dispute that availability on a number of grounds, both equitable and legal. Apart from equitable compensation, they seek relief under the Contracts Review Act 1980 (NSW). They contend that the various securities were unjust contracts within s7 of that Act, and that it would be just in the circumstances to make various remedial orders.

9    In relation to purchase of the Ingleburn factory site, the Plaintiffs and the Company claim against the Bank in damages for negligence, misrepresentation and breach of fiduciary duty. The Bank denies any such breach. It also disputes damages, placing primary responsibility for the businesses’ declining profitability on mismanagement.

10    The Bank contends that the Karams’ claims have no credibility, attacking their credit, nor any proper legal basis. It defends them on factual and legal grounds including limitation defences. The Bank denies that the contracts upon which it relies were unjust and contends that the Court in its discretion should in any event deny relief under the Contracts Review Act. The Bank similarly denies any unconscionability, economic duress or liability to pay equitable compensation. The Bank in turn cross-claims against the Company in debt, which at 1 July 1996, with interest, stood at $1,700,541.19. The Bank’s cross-claim extends also to a claim against each of the four individual Karams pursuant to their respective guarantees, subsequent acknowledgments and under what is described as a cross-deed of covenant. The Karams resist the Bank’s cross-claim, relying upon the same grounds as are relied upon to impugn the guarantees and securities.

11    The judgment which follows deals sequentially with the following:

(a) a non-controversial description of each of the persons involved in these transactions on the side of the Plaintiffs and the Defendant;

(b) a non-controversial summation of the principal chronological events;

(c) some general observations on credit and credibility;

(d) the seven issues posed by the parties’ respective claims; and

(e) the resolution of those issues summed up in a set of overall conclusions.

12    I commence with a description of the persons principally involved, reserving for later issues of credibility.

PERSONS PRINCIPALLY INVOLVED — brief description

13    It is convenient first to list and briefly describe the persons principally involved, and others whose names appear in the evidence. The description of each is intended to be neutral and non-controversial.

Plaintiffs and those associated

KBF, Larama or
“the Company” — Denotes initially “Karam Brothers Footwear” the business name under which the shoe business was from 1972 carried on in partnership by Charles and John Karam with their respective wives Nada and Diane working in the business; also denotes Larama Pty Limited incorporated in February 1980 to take over that business and subsequently in October 1990 renamed Karam Bros Footwear Pty Limited owned equally by the four partners who were each directors.

Charles Raymond Karam — First Plaintiff, brother of John Karam (Second Plaintiff) and married to Diane Karam (Fourth Plaintiff).

John Raymond Karam — Second Plaintiff, brother of Charles Karam and married to Nada Karam (Third Plaintiff).

Nada Karam — Third Plaintiff, married to John Karam.

Diane Karam — Fourth Plaintiff, married to Charles Karam.

Defendant and those associated

Bank Officers

Kevin John Barnes — Area Lending Manager, Commercial Banking, Manager and Credit Manager at various Area offices of the Defendant from mid-1980’s until August 1992.

— First met Plaintiffs on or about 27 June 1988 when Commercial Manager at the Parramatta Region of the Bank. Responsible for the Plaintiffs’ facilities until late September 1989.

— October 1991 took over from Ian McLachlan as Commercial Manager at the Macarthur Region at Liverpool and again responsible for the Plaintiffs’ facilities.

— Retired on 28 August 1992.

Darius Bilimoria — John Spiteri’s Senior Manager Asset Management from about November 1994 to about 15 April 1995.

John V Harrison — Regional Executive of Business Banking, Western Region in 1993

Glen Harvy — John Spiteri’s Senior Manager Asset Management from about 15 April 1995 to about September 1995.

Stuart Gordon Kitching — In March 1980 became the Manager of the Chapel Road Bankstown branch.

— Subsequently held other managerial positions and retired in June 1997.

P J Lucas — Senior Manager Credit, Business Banking, Western Region (John Spiteri’s Senior Manager Asset Management) in 1993 until about November 1994.

John Mair — Manager at the Bankstown branch; predecessor of Stuart Kitching and successor of Alan Parmeter.

Peter Lawrence Malone — From about July 1988 until about September 1991 he was employed as a Commercial Accounts Officer at the Macarthur Region assisting Ian McLachlan.

Ian Leslie McLachlan — In 1989 transferred to the Western Sydney Region of the Defendant as a Business Bank Manager.

— In about July 1989 assumed control of KBF’s accounts when they were transferred to the Liverpool Business Bank. Reported to Regional Executive, Kenneth McCombe.

— In October 1991 went on sick leave and did not return to active duties and retired on or about 1 May 1992.

Kenneth John McCombe — Between 1984 and 1988 was the Area Branch Manager, Country Areas of the Defendant.

— From about February 1989 to 1993 was the Regional Executive of Business Banking at Macarthur and Western Region.

Kenneth Norman Murray — In October 1992 became the Manager of Business Banking Western Region of Liverpool, having taken over control of the Plaintiffs’ accounts and KBF in about late September 1992.

— Took over those accounts that had been controlled by a number of Relieving Managers after Kevin Barnes resigned in June 1992.

— His successor was John Spiteri.

— Left the Defendant in October 1997.

Eric Leonard Myatt — Late 1981 became the Manager of the Bankstown North Branch and had control of KBF accounts until about June 1988.

— Retired in February 1997.

Alan John Parmeter — From April 1976 to about June 1979 was the Manager of the Bankstown branch.

— Retired in November 1982.

Greg Pidcock — Kenneth Murray’s Senior Manager Credit.

Brian Saoper — Bank officer who met with Charles Karam and John Marsden in 1995.

John Peter Spiteri — From about January 1994 until April 1996 was the Manager of High Risk Accounts at Parramatta.

— From January 1994 to October 1995 had control of the accounts of the Plaintiffs and KBF; his predecessor was Ken Murray.

Terry Stapleton — Bank officer who met with Charles Karam and John Marsden in 1995.

Peter Sultana — Kenneth Murray’s Business Banking Officer.

Eric Yacoel — John Spiteri’s Senior Manager Asset Management from about September 1995.

Third Parties

Jeff Cahn — Employee of the Macarthur Development Board.

Bill Croker — KBF’s accountant up until about 1988.

Don Khoury — KBF’s accountant in 1979.

David Lamb — KBF’s accountant from about 1992, of Lamb & Barnes

John Le Miere — KBF’s Financial Controller

Michael Leon — Accountant appointed to KBF by the ANZ Bank in 1993.

John Marsden — Solicitor who witnessed execution of the 10 June 1993 Acknowledgment and the Cross-Deed of Covenant and related security documentation on 1 October 1993.

Sol Michael — Family friend of the Plaintiffs

Drew Percival — Solicitor employed by John Marsden

Ian Porter — Campbelltown Council Town Clerk

Michael Royle — Investigating Accountant from Arthur Andersen appointed by the ANZ Bank in 1995

Ron Willcocks — Investigating accountant of Star Dean Willcocks

SALIENT FACTS

14    I commence below with the salient, essentially undisputed facts to provide an uncontroversial chronological framework. Where there is dispute, I have indicated that. These are cross-referenced to the relevant source documents. Thereafter, I turn to the questions and issues posed by this case. I start with some general observations about the Plaintiffs’ English competence and credibility before turning to the specific questions and issues posed. I elaborate where necessary upon the events that happened, making necessary factual findings on disputed matters for this purpose.

15    I start with the original borrowers, the two brothers Karam and their wives. Charles Raymond Karam, the First Plaintiff ("Charles") and John Raymond Karam, the Second Plaintiff ("John") are the two brothers. For convenience I shall, without disrespect, refer to each of them, and their respective wives, by their first names. The two brothers were both born in Lebanon, Charles in 1944 and John in 1946. They both moved to Australia in 1961 when Charles was 16 and John was 14. They have resided in Australia since. Whilst in Lebanon, except for a period of one and a half years when war suspended schooling John and Charles attended school where they learnt Arabic and some French but no English. (Charles’ affidavit 13 October 1998 paras 1-5; John’s affidavit 2 October 1998 paras 1- 5.)

16    Nada Karam, the Third Plaintiff ("Nada") was also born in Lebanon and arrived in Australia in 1962-1963 when she was 8 or 9 years old. Nada married John in 1971. (Nada’s affidavit 2 October 1998 para 3-4; 7; John’s affidavit 2 October 1998 para 18.)

17    Diane Karam, the Fourth Plaintiff ("Diane") was also born in Lebanon and moved to Australia in 1971 when she was about 18 years of age. Diane married Charles in 1976. (Diane’s affidavit 2 October 1998 para 3-5; 11; Charles’ affidavit 13 October 1998 para 39.)

18    Upon arriving in Australia in 1961, John worked as an apprentice shoemaker for five years for Sali Horner Shoes Pty Limited. Between 1966 and 1972 John worked for a number of different companies in the shoemaking industry as a shoemaker. From his arrival in Australia until 1972 Charles worked in a shoe factory, W J Grundy, and undertook an apprenticeship at Sydney Technical College. During this period Charles and John commenced to make shoes in their spare time from a garage in their family home. (Charles’ affidavit 13 October 1998 paras 6-11; John’s affidavit 2 October 1998 para 10-16). Their respective wives Diane and Nada worked only in the manufacturing side of the business, cleaning, spraying and packing the shoes and like activities.

19    In 1972 Charles and John set up a business of their own manufacturing shoes, their wives continuing to work as before. The business was known as Karam Bros Footwear (“KBF”) and operated out of leased premises at Greenacre. They manufactured children’s shoes to be sold and distributed by Bob Hanshard. The business expanded between 1974 and 1978 to include adult and youth shoes. (Charles’ affidavit 13 October 1998 para 15; John’s affidavit 2 October 1998 para 20.)

Contact with ANZ Bank

20    John first met Alan Parmeter ("Parmeter"), the then Manager of the Bankstown branch of the Australian and New Zealand Banking Group Limited ("the Bank"), on 17 February 1978. (Diary Note 17 February 1978 TB 1.013A; Parmeter affidavit, 10 March 1999 para 8-9; John’s affidavit 28 April 1999 para 7; Diary Note 17 February 1978 TB ANZ-1). Charles first met Mr Parmeter in April 1978. (Parmeter affidavit 10 March 1999 para 13; TB ANZ-2)

McMillan St Property Mortgage given by Charles Karam

21    On 13 June 1978 Charles signed a mortgage over his McMillan St Property (Parmeter affidavit 10 March 1999 para 18) being the then family home.

Sir Joseph Banks Street, Bankstown — Banks Street Mortgage September 1978.

22    On 13 July 1978 John became the registered owner of his residential property at 7 Sir Joseph Banks Street, Bankstown wholly contained in Folio Identifier 3/167981 ("the Banks Street Property"). (TB 1.022; John’s affidavit 2 October 1998 para 35) A Mortgage was given by John in favour of the Bank over the Bank Street Property being First Registered Mortgage number Q925655 to the Bank ("Banks Street Mortgage") on 28 September 1978. (Diary Note 13/6/78 TB 1.013C; TB 1.014; John’s affidavit 2 October 1998 paras 36-42; Parmeter affidavit 10 March 1999 para 4.)

23    On 12 June 1979 Mr Parmeter ceased to have control of the Plaintiffs’ accounts (Parmeter affidavit 10 March 1999 para 6) and John Mair took over the Plaintiffs’ accounts. (Kitching affidavit 4 May 1999 paras 1-3)

Regents Park Property

24    On 29 October 1979 the Plaintiffs purchased some vacant land at 23 Carlingford Street, Regents Park being wholly contained within Folio Identifier 2/2/715 ("the Regents Park Property"). The Plaintiffs’ intended to build a factory on this land. The Bank agreed to a loan to enable a factory to be built. ("the Regents Park loan"). (Charles’ affidavit 13 October 1998 para 54; John’s affidavit 2 October 1998 para 53)

25    On 14 February 1980 the partnership business of Karam Bros Footwear was transferred to a newly incorporated company called Larama Pty Limited ACN 001 844 831 subsequently renamed Karam Bros Footwear Pty Limited ("the Company" or “KBF”). Charles, John, Nada and Diane each held one share in the capital of the Company and all were listed as directors of the Company. (TB 1.026-1.044A; 1.044C; Charles’ affidavit 13 October 1998 para 62; John’s affidavit 2 October 1998 para 46; Nada’s affidavit 2 October 1998 para 31; Diane’s affidavit 2 October 1998 para 20)

26    On 18 March 1980 Stuart Gordon Kitching ("Kitching") became Manager of the Bank’s branch at Chapel Road Bankstown and took over the Plaintiffs’ accounts from John Mair. (Kitching affidavit 4 May 1999 para 3)

27    In March 1980 the Bank approved term loans in favour of the Company to construct a factory on the Regents Park land, totaling $60,000; an amount which was in addition to an existing overdraft facility of $10,000. (Diary Note 27 February 1980, TB 1.044B, 1.044C; Kitching affidavit 4 May 1999 para 5). In June 1980 the term loans were increased by a further $10,000. (Kitching affidavit 4 May 1999 paras 8, 14; Diary Note 19 June 1980; 25 June 1980 26 June 1980 TB 1.064A)

28    In 1980 the new factory was completed on the land (Charles’ affidavit 13 October 1998 para 63). This factory was approximately 6,000 to 7,000 square feet in size, including offices. The factory was capable of producing on average between 2,000 and 2,500 pairs of shoes per week. (Charles’ affidavit 13 October 1998 paras 79-81)

26 May 1980 combined set of security documents signed

29    At a meeting at the Bank on 26 May 1980 the Plaintiffs, in the presence of Mr Kitching and Mrs Maria Badolato Advance Clerk for the Bank, signed a number of documents including (Diary Note 26 May 1980; TB 1.044F; TB ANZ-12; Charles’ affidavit 13 October 1998 para 62-64; John’s affidavit 2 October 1998 para 56; Nada’s affidavit 2 October 1998 para 36-43; Diane’s affidavit 2 October 1998 para 27-34; Kitching affidavit 4 May 1999 para 10-11):

(a) each of the Karams signed an unlimited guarantee of the Company’s (Larama Pty Ltd) debts to the Bank ("the Company guarantee") (DX5 at page 51), itself unsecured by that document (but see (c), (d) and (e) below);

(b) each of the Karams personally signed a mortgage in favour of the Bank over their jointly owned Regents Park property being the First Registered Mortgage numbered R929568 ("the Regents Park Mortgage") (DX5 at page 43);

(c) each of the Karams signed a Form S148 document. This document, in terms, stated to the Bank that documents, namely the mortgage over the property at Regents Park had been deposited “in support of” the unlimited guarantee also signed on 26 May 1980 for the account of the Company trading as Karam Bros Footwear (DX5 at page 58);

(d) a Form S148 was in similar form signed by John depositing the mortgage of his Banks Street Property previously mortgaged in September 1978 to the Bank in connection with its purchase, in support of the unlimited guarantee of the Company (DX5 at page 57); and

(e) a Form s148 linking the McMillan Street Mortgage Guarantee allegedly signed by Charles. (Kitching affidavit 4 May 1999 para 10). The Bank is unable to find this document (Kitching 4 May 1999 para 12).

30    Those guarantees were in common form of which I quote the principal operative clause (clause 1:

“ 1. The Guarantor hereby guarantees the payment by the Customer to the Bank upon service upon the Guarantor of the Bank’s written request for payment under the hand of any of the Officers of the Bank or by the solicitors of the Bank delivered personally to the Guarantor or any one or more of them (if more than one) or left or sent through the Post office addressed to the Guarantor or any one or more of them (if more than one) at his or their place of abode or business or the place of abode or business of any of them last recorded in the books of the Bank (the production of the receipt of the Post Office for such request being conclusive proof of the service of any request so sent at the time when the same ought to be delivered in due course of post and although such request may be returned through the Post Office undelivered) or served in any other manner permitted by law or upon the Guarantor determining this Guarantee as to future advances as hereinafter provided of all sums of money whatsoever which shall for the time being be owing or unpaid by the Customer to the Bank (and that although the whole or some part of such sums of money be then represented and/or secured by any mortgages bonds covenants guarantees bills of exchange or promissory notes or other securities then current or under any letters of credit or other documents (whether or not similar to the above or any of them) issued by the Bank of Australia and New Zealand Bank Limited or The English Scottish and Australian Bank Limited to or for the benefit or at the request of the Customer either alone or jointly or in common with any other or others and whether or not the Customer shall for the time being be legally liable to pay the same to the Bank and whether or not default shall have been made by or demand made on the Customer in respect thereof) for or in respect of all loans advances credits or banking accommodation heretofore made created or given by the Bank or Australia and New Zealand Bank Limited or The English Scottish and Australian Bank Limited or now or which may hereafter be made created or given by the Bank to for or on account or at the request of the Customer or in respect of any indebtedness from the Customer to the Bank on any account whether now existing or which may hereafter be opened or by any means whatsoever including all sums in which the Customer is or may hereafter become liable immediately or contingently to the Bank upon or in respect of any account or accounts in which the Customer is now or may hereafter be interested or concerned either alone or jointly or in common as aforesaid or in respect of any guarantee undertaking or obligation which has been given or incurred for or at the request of the Customer by the Bank or Australia and New Zealand Bank Limited or The English Scottish and Australian Bank Limited or by the Customer to the Bank or Australia and New Zealand Bank Limited or The English Scottish and Australian Bank Limited or which may hereafter be given or incurred for or at the request of the Customer by the Bank or by the Customer to the Bank either alone or jointly or in common as aforesaid or in respect of any bills or bill of exchange or promissory notes or note heretofore purchased discounted or paid by the Bank or Australia and New Zealand Bank Limited or The English Scottish and Australian Bank Limited or hereafter purchased discounted or paid by the Bank for or at the request of the Customer either alone or jointly or in common as aforesaid or in respect of any bills or bill of exchange or promissory notes or note bearing the Customer’s name or the name of any partnership or firm of which the Customer may be a member or members and which are or is now or may hereafter be held by the Bank and whether such bills of exchange and promissory notes as aforesaid or any of them shall have arrived at maturity or not AND also all sums of money which the Bank may after the date of such request or determination pay to or for the Customer in respect of cheques drafts bills or other negotiable or other instruments drawn before such request or determination on any account in which the Customer may be interested or concerned either alone or jointly or in common as aforesaid or in respect of any other obligations incurred by the Bank of Australia and New Zealand Bank Limited or The English Scottish and Australian Bank Limited with or on behalf of or on account of the Customer either alone or jointly or in common as aforesaid prior to such request or determination AND also all sums of money received by the Bank or Australia and New Zealand Bank Limited or the English Scottish and Australian Bank Limited for credit of any account in which the Customer may be interested or concerned either alone or jointly or in common as aforesaid and for which the Bank may be obliged to account or may in its discretion account to any official receiver trustee liquidator official manager or other person in the administration or winding up of the estate or affairs of the Customer in any liquidation bankruptcy or official management of the Customer or under any assignment for the benefit of or arrangement or compromise with creditors of the Customer or otherwise AND all stamp duty payable hereon and also all Bank charges and commissions and all costs and expenses in or for which the Bank is or may become liable or may charge against the Customer including all costs and expenses (computed as between Solicitor and own client) of or incidental to obtaining or enforcing or attempting to obtain or enforce payment of all or any of such moneys as aforesaid under or by virtue of this Guarantee or otherwise together with interest on all such sums of money for the time being remaining unpaid computed until payment at the rate or rates and in the manner from time to time usually charged by the Bank to its other customers on accounts of similar nature or in the case of so much (if any) of such sums of money as to which the Bank in pursuance of any agreement between the Bank and the Customer has the right at any time or from time to time to determine the rate or rates applicable thereto (irrespective of the rate or rates charged by the Bank to its other customers on any accounts of a similar nature) at the rate or rates from time to time applicable thereto and any such interest remaining unpaid on any half-yearly balancing day of the Bank shall thereafter bear interest at the rate or rates from time to time applicable to the account or respective accounts to which such unpaid interest shall be debited by way of compound interest with half-yearly balancing days of the Bank from time to time although the relationship of Banker and Customer may have ceased and it is hereby declared that a certificate in writing signed by any of the Officers of the Bank certifying to the rate of rates from time to time or at any time charged by the Bank or applicable as aforesaid shall be conclusive proof of the rate or rates therein certified to and payable hereunder.”

Subsequent Events post 26 May 1980

31    Kitching’s last Diary Note in relation to the Plaintiffs’ accounts was on 6 November 1981 (Kitching affidavit 4 May 1999 para 6; TB 1.064P) Eric Myatt ("Myatt") then took over as manager of the Chapel Road, Bankstown branch of the Bank. Myatt first met the Karams on 17 December 1981 and took over the Plaintiffs’ accounts. (Myatt affidavit 3 May 1999 para 3-4; Diary Note 17 December 1981 TB 1.064Q)

69 Jacobs Street, Bankstown — Mortgage of 10 January 1986

32    On 11 June 1985 Charles purchased a property at 69 Jacobs Street, Bankstown being Volume 6635, Folio 197. ("the Jacobs Street property"). (Charles’ affidavit 13 October 1998 para 86) (That replaced his previous family home, the McMillan Street Property, which Charles had bought in 1978, signing a mortgage in favour of the Bank on 13 June 1978; Parmeter affidavit 10 March 1999 para 18.) In August Charles took out a loan for approximately $90,000 from the Bank to build a house on the Jacobs Street property. (Myatt affidavit 3 May 1999 para 6-7)

33    On 10 January 1986 Charles signed a mortgage over the Jacobs Street property in favour of the Bank being the First Registered Mortgage number W172955 to the Bank ("the Jacobs Street Mortgage"). (DX5 at page 59) This was signed at the Silverwater branch of the Bank; present were Charles, Mr Myatt and Mr Myatt’s assistant Trevor Robinson. (Myatt affidavit 3 May 1999 para 8)

1987-1988

34    During 1987 Charles and John started looking to move from the Regents Park factory to larger premises. (John’s affidavit 2 October 1998 para 78; Nada’s affidavit 2 October 1998 para 58; T, 567; T, 424) Myatt affidavit 3 May 1999 para 11) They were looking to build a factory somewhere between 20,000 and 30,000 square feet. (T, 425-426 T, 569)

35    In 1988 the Plaintiffs changed their accountant to Bill Croker. Previously the Plaintiffs accountant was Don Khoury. (Charles’ affidavit 13 October 1998 para 101)

36    On 27 June 1988 Kevin Barnes ("Barnes") commenced managing the Plaintiffs accounts at the Bank taking over from Eric Myatt. (Charles’ affidavit 13 October 1998 para 113; John’s affidavit 2 October 1998 para 88; Myatt affidavit 3 May 1999 para 4; Barnes affidavit 27 May 1999 para 3) Mr Barnes met Charles and John at a meeting on 27 June 1988 (Diary Note 27 June 1988 TB 1.100); also present were Mr Myatt and Mr Barnes’ assistant Felicity Fairley ("Fairley"). (Barnes affidavit 27 May 1999 para 6; Charles’ affidavit 13 October 1998 para 114)

37    In July 1988 Peter Lawrence Malone ("Malone") was appointed as a Commercial Accounts Officer. (Malone 12 March 1999 para 2)

Purchase of Ingleburn Property on 5 October 1989 and associated loan of $2,070,000 secured by mortgage of 22 December 1989

38    In February 1989 Kenneth John McCombe ("McCombe") was appointed Regional Executive of Business Banking at Macarthur and Western Region. (McCombe affidavit 2 March 1999 para 2)

39    On 8 February 1989 negotiations commenced between Charles and a company known as Macarthur Development Corporation ("Macarthur") for the purchase of either 7.109 hectares of land at Brooks Road, Ingleburn at a price of $2.3 million or 2.35 hectares for $1.78 million. (Charles’ affidavit 13 October 1998 para 125-127; John’s affidavit 2 October 1998 para 94; Diary Note 19 May 1989 TB 1.137; DX28)

40    On 3 March 1989 Macarthur had received a holding deposit of approximately $10,000 from Charles. (Charles’ affidavit 13 October 1998 para 132) A file note of 3 March 1989 produced by Macarthur on subpoena (DX28) records that this deposit was for a parcel of land of size 2.35 hectares "at a rate of $440,000 per ha.". A file note dated 22 March 1989 notes that Charles requested that the holding deposit be accepted as a deposit over the entire 7.109 hectares. A further file note records that a meeting took place on 23 March 1989 between Charles and representatives of Macarthur to discuss this arrangement. (DX28)

41    In early May 1989 Mr Barnes states he became aware that the Plaintiffs were interested in purchasing land from the Macarthur Development Board (Barnes affidavit 27 May 1999 para 9). Mr Barnes visited the Ingleburn land and had conversations with Charles in relation to Charles’ plans for the land. (Charles’ affidavit 13 October 1998 paras 137-138; Barnes affidavit 27 May 1999 para 11) Mr Barnes informed the Karams that the Bank was not interested in funding the acquisition of the entire parcel of land at Ingleburn (Barnes affidavit 27 May 1999 para 10-14; Charles’ affidavit 13 October 1998 para 139; Diary Note 19 May 1989 TB 1.137) And on 19 May 1989 the Bank resolved not to support the Plaintiffs’ purchase of the Ingleburn property. Mr Croker advised Charles and recommended that Charles talk to Ian McLachlan ("McLachlan") of the Bank. (Charles’ affidavit 13 October 1998 paras 139-141) (Barnes affidavit 27 May 1999 para 12)

42    On 31 May 1989 Mr Croker invoiced the Company for preparation of a five year profit and loss forecast and a cash flow forecast analysing the impact on the Company if it proceeded with purchase of the Ingleburn property (DX36).

43    On 30 June 1989 Charles phoned Ms Felicity Fairley at the Bank informing the Bank about the course he was to take in relation to the proposed purchase. (Barnes affidavit 27 May 1999 para 13; Diary Note 30/6/89 TB 1.154)

44    On 6 July 1989 Macarthur wrote to Charles regarding Ministerial approval for the sale of the Ingleburn land and confirming that a holding deposit of $10,000 was held as part of the agreed sale price of $2,300,000. (DX28)

45    On 7 July 1989 Mr Barnes telephoned Charles to inform him that the Bank would not accept the proposal in relation to Macarthur Development. (Charles’ affidavit 13 October 1998 para 144)

46    On 14 July 1989 Charles met for the first time Ian McLachlan, who was then business manager with the Bank’s Western Sydney Region. (McLachlan 6 May 1999 para 7; Malone affidavit 12 March 1999 para 4 and Diary Note) Charles states a meeting was held at Mr Croker’s offices; (Charles’ affidavit 13 October 1998 para 156) whilst Mr McLachlan agrees he met Charles in early July 1989; he states this was at a cocktail party not at a meeting. (McLachlan affidavit 6 May 1999 para 10; Diary Note 14 July 1989 TB 1.156) Charles requested on behalf of the Company a loan from the Bank to enable it to fund the purchase of the whole of Lot 701 for the agreed price of $2.3 million. (Charles’ affidavit 13 October 1998 para 156) The Bank was to fund $2,070,000 with the deposit of $230,000 to be paid out of the Company’s funds.

47    Around this time Mr McLachlan assumed control of the Plaintiffs’ accounts when the accounts were transferred to the Liverpool Business Bank. Mr McLachlan’s assistant was Peter Malone. (McLachlan affidavit 6 May 1999 para 3; Malone affidavit 12 March 1999 para 2)

48    On 21 July 1989 Mr McLachlan visited the factory premises and informed the Plaintiffs that he would take over control of their accounts to the Liverpool branch of the Bank. In Charles’ affidavit, 13 October 1998 para 161-163 the conversation there recounted was said to have been to the effect that he would take their account away from Mr Barnes (who had rejected the loan application) and take the Company to the Liverpool branch of the Bank. Mr Malone acknowledges the visit but denies such a conversation took place (Malone affidavit 12 March 1999, para 9) though the account was thereafter so moved. Shortly after Mr McLachlan and Mr McCombe inspected the property and had lunch with Charles during which they discussed the proposal. (Charles’ affidavit 13 October 1998, para 170-173; McLachlan affidavit 6 May 1999, para 16) Mr McCombe has no recollection of the conversation which took place. (McCombe affidavit 2 March 1999, para 9)

49    Mr McLachlan then submitted an application to Mr McCombe, the Bank’s regional executive, for approval recommending that the application be approved. The loan application for $2.070 million was approved on 24 July. (McLachlan affidavit 6 May 1999, para 8)

50    Mr McLachlan and Mr McCombe inspected Ingleburn and Mr McLachlan and Charles had a number of conversations at this time. (McLachlan affidavit 6 May 1999, para 14-16; McCombe affidavit 2 March 1999, para 9) In September Charles had a telephone conversation with Mr McLachlan about the purchase. (Charles’ affidavit 13 October 1998, para 174; McLachlan affidavit 6 May 1999, para 19; Diary Note 15 September 1989; TB 1.157)

51    By agreement for sale of land dated 5 October 1989 the Company contracted with Macarthur to purchase 7.109 hectares of land at 4 Brooks Road, Ingleburn, being the whole of Lot 701 in DP 78865. The price stipulated in the contract for sale of the land was $2,300,000. (DX18)

52    [What follows is disputed by the Bank, but I am satisfied should be included having noted where the parties differ.] At some stage during October 1989 the Company received an offer from Walker Development Corporation to buy the contract for the sale of land and to pay the Company $400,000 or give the Company 6.5 acres. According to the Karams, but denied by the Bank (see below), Mr McLachlan and Mr Croker advised the Company not to take up the offer. (Charles’ affidavit 13 October 1998, para 190-195) Mr McLachlan denies speaking to Mr Croker or Charles about an alleged offer. (McLachlan affidavit 6 May 1999, para 28-29)

53    At about lunch time on 22 December 1989 Mr McLachlan and Mr Malone attend the Regents Park factory, to have the mortgage executed and the settlement authority signed for the Ingleburn property securing (in the first instance) $2,070,000 (cost of land $2,300,000 less deposit paid of $230,000 by Karams). (McLachlan 6 May 1999, para 31) The seal of the Company was affixed to the mortgage and it was attested by Charles and John. This event occurred during the Company’s Christmas Party. (Charles’ affidavit 13 October 1998, para 196-203; John’s affidavit 2 October 1998, para 122-128; Diane’s affidavit 2 October 1998, para 57; Malone affidavit 12 March 1999, para 8; Diary Note 22 December 1989; TB 1.159) This was the First Registered Mortgage number Y850567 to the Bank ("the Ingleburn Mortgage") (TB 1.171; DX5 at 67). Nada was present for a short period. (Nada’s affidavit 2 October 1998, para 76) This is disputed. (Malone affidavit 12 March 1999, para 22) Prior to this time Mr McLachlan and Charles had had conversations in relation to the interest rate which was to apply. (McLachlan affidavit 6 May 1999, para 25; Charles’ affidavit 13 October 1998, para 181). Mr Malone is said to have discussed the interest rate during the meeting and had shown Charles and John relevant documents. This, however, is denied by the Plaintiffs. (Malone affidavit 12 March 1999, paras 14-15; Charles’ affidavit 22 April 1999, paras 24-26; John’s affidavit 28 April 1999, paras 24-25)

54    The loan approval for the Ingleburn property was given orally by Mr McCombe (T, 845; T, 929) and a formal loan application was only subsequently prepared. (McCombe affidavit 2 March 1999, para 12) The loan application for the Ingleburn property is dated 17 February 1990. (TB 1.189) Mr McLachlan had sent Mr McCombe a Credit Memorandum dated 7 February 1990 which was approved and signed by Mr McCombe on 9 March (McCombe 2 March 1999, para 12; McLachlan 6 May 1999, para 8) Mr McLachlan explains that this delay was due to work pressure. (McLachlan affidavit 6 May 1999, para 8)

55    On 8 March 1990 Marks, Croker and Cheetham, the Plaintiffs accountants, prepared a detailed review of the Plaintiffs trading results to 28 February 1990. (DX20)

Loan of $1.65 million for Ingleburn factory completed December 1990.

56    During 1990 a factory was built on the Ingleburn property ("the Ingleburn Factory"). It was estimated that the new factory would cost $700,000. The factory actually cost $1.65 million. The further $1.65 million needed to construct the factory was borrowed from the Bank. (Charles’ affidavit 13 October 1998, para 223-224) As of 4 June 1990 costing for the new factory was $1,612,000 (Diary Note 4 June 1990; TB 1.236)

57    On 26 October 1990 the Company changed its name from Larama Pty Limited to Karam Bros Footwear Pty Limited. (TB 1.328 DX5 at 79)

1991

58    As of 2 January 1991 the factory was completed and came in on the then budget (now $1.65 million). (Diary Note 2 January 1991; TB 1.334) By the end of January 1991 the move to the new factory was completed (Charles’ affidavit 13 October 1998, para 226).

59    On 24 April 1991 Minutes of a Meeting of KBF at which Mr Croker and Mr Le Miere were also present. The minutes record that Charles suggested they sell “some of the remaining land” at Ingleburn “to offset our existing loan”. (DX21)

60    On 6 May 1991 another meeting of the Board of Directors was held. (DX24)

61    On 5 September 1991 Mr Malone met with Charles who informed the Bank that the Plaintiffs had decided to sell the surplus land at Ingleburn as well as the Regents Park property. (Diary Note 5 September 1991; TB 1.416)

62    In September 1991 Mr Malone ceased assisting Mr McLachlan (Malone affidavit 12 March 1999, para 2; last Diary Note 27 September 1991; TB 1.447)

63    In early to mid October 1991 Mr McLachlan took sudden sick leave and Mr Barnes was appointed to replace him as Commercial Account Manager at the Western Region and again took over the Plaintiffs’ facilities. (McLachlan affidavit 6 May 1999, para 2; Barnes affidavit 27 May 1999, para 20)

64    On 10 October 1991 the Bank wrote to Charles requesting that he sign and return to the Bank a Form S148 linking his registered mortgage over the Jacobs Street property to the unlimited guarantee of 26 May 1980 (TB 1.450; Charles’ affidavit 13 October 1998, paras 229, 232).

65    On 4 December 1991 both Charles and John signed on Company letterhead a declaration agreeing, amongst other things, to sell the factory at Regents Park as well as the additional acreage at Ingleburn. (TB 1.468). This is said to have been at the request of the Bank. (TB 1.417) Prior to this time Charles had expressed concern about selling the additional acreage. (Charles’ affidavit 13 October 1998, paras 230-232)

66    On 14 February 1992 Charles signed a Form S148 in respect of the Jacobs Street Property mortgage (Barnes 27 May 1999, para 34) in support of his guarantee of 26 May 1980 and forwarded it to the Bank. (DX5 at page 90; TB 2.068)

67    As of 26 February 1992 the Company’s Business Strategy Plan formulated at the request of the Bank, was produced. The Bank agreed to extend the overdraft limit to $750,000 until 30 June 1992. (TB 2.007; Diary Note 26 February 1992; TB 2.075)

68    There was an attempt to sell the excess land at Ingleburn by public auction on 15 April 1992. However, the land was withdrawn from sale on 14 April as it was discovered that it had not been subdivided. (Diary Note 14 April 1992; TB 2.193 T688)

69    On 30 June 1992 a meeting was held to discuss the appointment of an independent accountant. (Barnes affidavit 27 May 1999, paras 46 and 56) Present were Charles, John, Mr Le Miere, Mr Sultana, Mr Barnes and Allan Hyatt. (Diary Note 30 June 1992; TB 2.239)

70    On the same day following lodgment of Development and Subdivision Application (into three industrial lots) for the Ingleburn land approved subject to various conditions including submission of a final survey plan (which, it appears had not been filed until 17 March 1999 when relevant subdivision was actually effected — see communication from solicitors for Defendants to my Associate dated 11 July 2001).

71    At this time there were a number of discussions between the Plaintiffs and the Bank in relation to the Company’s overdraft limit. (e.g. Barnes 27 May 1999, para 54; Charles’ affidavit 13 October 1998, para 248-249

72    During July 1992 the Company changed its external accountants to Lamb and Barnes, using David Lamb. (Charles’ affidavit 13 October 1998, para 264)

73    On 7 July 1992 a meeting was held at Ingleburn between John, Mr Le Miere, Rick Harvey, and Mr Sultana. Confirmed that the Plaintiffs agreed to execute a mortgage debenture and appoint Star Dean-Willcocks as Investigative Accountants. (Diary Note 7 July 1992; TB 3.025; Charles’ affidavit 13 October 1998, para 254, 265; Barnes affidavit 27 May 1999, para 58)

Mortgage Debenture of 14 July 1992

74    On 14 July 1992 a mortgage debenture was executed under seal over the assets of the Company, attested by Charles and Nada as directors in favour of the Bank. (DX5 at page 80) On this date a meeting was held at the Bank; present were Charles, Mr Barnes, Mr Harvey and Mr Sultana during which they discussed land sale. The meeting was adjourned to Ingleburn where Nada, John, Charles, Mr Le Miere, Mr Sultana, Mr Barnes, and Mr Harvey were present. It was at Ingleburn that the mortgage debenture was signed. (Nada’s affidavit 2 October 1998, para 101-105; Barnes affidavit 27 May 1999, para 51) (Diary Note 14 July 1992; TB 3.025; TB 3.025A) On this day the Plaintiffs also requested that the Bank instruct on their behalf Star Dean-Willcocks to undertake an Investigative Accountants Report. (DX7; TB 3.026A; ANZ-61)

Note: There are no proceedings to set aside this mortgage debenture.

75    Some time prior to signing the mortgage debenture Nada had taken it to her solicitor John Mylott. (Nada’s affidavit 2 October 1998, para 89-92)

Investigations and other steps July 1992-June 1993

76    16 July 1992 was the day of Mr Barnes last dealing with the Plaintiffs’ account. (Barnes affidavit 27 May 1999, para 53)

77    As of 22 July 1992 an Interim Report was prepared by Star Dean-Willcocks (TB 3.032) and on 30 July 1992 a final report was received by the Company. (TB 3.074; Diary Note 30 July 1992; TB 3.072; Charles’ affidavit 13 October 1998, para 268; Murray affidavit 16 May 1999, para 5)

78    On 17 August 1992 John Le Miere resigned. (Diary Note 17 August 1992; TB 3.184)

79    Kenneth Murray first became involved in the Plaintiffs’ accounts on 28 September 1992. (Murray affidavit 16 May 1999, para 82)

80    In October 1992 Mr Barnes was replaced by Richard Harvey as the manager of the Liverpool branch of the Bank. (Charles’ affidavit 13 October 1998, para 269)

81    On 19 October 1992 the Bank wrote to the Plaintiffs seeking further security from the Plaintiffs. (TB 3.369) The Bank also requested the Karams’ Insurance policies. (DX26; TB ANZ-65)

82    Letter of Offer dated 19 October 1992 was forwarded to the Plaintiffs. (Murray affidavit 16 May 1999, paras 9-10; TB 3.369; TB 3.389; DX5 at 168)

83    Mr Murray first met Charles and John at the Ingleburn Property on 27 October 1992. It is likely that there would have been some telephone contact prior to this date. (Murray 16 May 1999, para 9)

84    On 1 December 1992 a meeting was held at Ingleburn between John, Charles, Mr Lamb, Mr Murray and Mr Sultana. They discussed the fixed rate facility; review of facilities and reporting procedures. The Letter of Offer dated 19 October 1992 was executed and returned and the Book of General Conditions was to be forwarded to Plaintiffs for execution. (Murray 16 May 1999, para 11; TB 3.369; TB 3.377; Diary Note 1/12/92; TB 3.516) A meeting of the Directors of the Company was also held and the Minutes were signed resolving that the Letter of Offer of 12 October 1992, and the Special Conditions for Fixed Rate Advance and for Lease Finance be approved for execution. (TB 3.379) (General Conditions Credit facilities are at TB 3.395; the General Conditions were forwarded on 3 December 1992. TB 3.518)

85    On 22 February 1993 Diane and Nada purported to resign as directors of the company. (Murray 16 May 1999, para 72; TB 5.498)

86    On 5 April 1993 discussions took place between Murray and Charles in relation to the Company’s overdraft and an offer received by the Company for the Ingleburn property. (Murray 16 May 1999, para 14; Diary Note 5 April 1993; TB 4.096). An offer to buy the Ingleburn factory and an adjoining two acre parcel of land was received by the Company but was rejected as being unacceptable. (Diary Note 5 May 1993; TB 4.137; Diary Note 14 March 1993; TB 4.124)

87    On 12 May 1993 a meeting was held between Charles, John, Mr Murray, Mr Lamb and Mr Sultana. (Murray 16 May 1999, para 15) During this meeting they discussed the Plaintiffs’ funding request for $500,000. It was noted that a precondition to any consideration for additional funding was for Star Dean-Willcocks to complete a comprehensive review; a marketing strategy for the sale of the vacant land at Ingleburn as well as for Regents Park and the two residential properties and a timetable be prepared for the sale of Ingleburn and Regents Park and additional security. (Diary Note 12 May 1993; TB 4.181; 4.185; DX5 at 182; Charles’ affidavit 13 October 1998, para 279; Murray affidavit 16 May 1999, para 84)

88    At this time Charles approached John Marsden ("Marsden"), a partner with the firms Marsdens, Solicitors ("Marsdens"), on behalf of the Company. (Charles’ affidavit 13 October 1998, para 281)

89    Star Dean-Willcocks commenced a review of the Company on 17 May 1993. (TB 4.202; Charles’ affidavit 13 October 1998, para 283)

90    On 24 May 1993 a report from Colliers Jardine was furnished in relation to a marketing strategy for the sale of property. (Murray 16 May 1999, para 17; TB 4.219A; TB ANZ-66) Marketing reports were also prepared by Richardson & Wrench and Pacbest. (Diary Note 2 June 1993; TB 4.231)

91    On 2 June 1993 the Report was received from Star Dean-Willcocks. (TB 4.245; Diary Note 2 June 1993; TB 4.232)

92    On 4 June 1993 Marsden informed the Bank by telephone that he had received instructions from the Plaintiffs to act on their behalf in relation to their arrangements with the Bank (Diary Note 7 June 1993 TB 4.287; Murray affidavit 16 May 1999, para 85). This was confirmed by letter dated 7 June 1993. (TB 4.288)

93    On 7 June 1993 a meeting was held between Phillip Lucas, the assistant regional manager, Mr Murray, Ron Dean-Willcocks of Star Dean Willcocks, Mr Lamb, John and Charles. Charles asked for further assistance. (Murray 16 May 1999, para 86) The Bank informed Charles and John that more security documents would have to be signed. (Charles’ affidavit 13 October 1998, para 283-285) This is denied by Mr Murray. (Murray 16 May 1999, para 86). (Diary Note 7 June 1993; TB 4.287) The Baillieu Knight Frank report on marketing proposals (TB 4.291) arrived during this meeting. (Murray 16 May 1999, para 24)

94    On 9 June 1993 the Bank received legal advice from Minter Ellison Morris Fletcher that the Bank has possible exposure to risk and requested that the Bank produce an interim document to protect the Bank’s position pending total re-documentation of facilities/securities. (Diary Note 9 June 1993; TB 4.311) The Bank decided to extend funding to the Company subject to re-documentation and execution of an Acknowledgment. (Diary Note 9 June 1993 and Diary Note 11 June 1993; TB 4.315) The Bank faxed to the Plaintiffs pro-forma acknowledgments; a solicitors certificate and certificate of independent financial advice. (TB ANZ-72 Charles’ affidavit 13 October 1998, para 289)

[Note: The Bank asks the above be not included as uncontroversial, though not specifically disputing its diary notes quoted above. This was on the basis that the Plaintiffs did not subpoena the files of Minter Ellison Morris Fletcher nor sought to cross-examine any bank officer as to the terms of the legal advice. However I consider that this is a fair inference or paraphrase to be drawn from the available evidence; see Defendant’s solicitor’s letter to my Associate of 11 July 2001 retained in the file. I deal in more detail with the evidence on this later under issue 6.]

First Meeting with Marsden 10 June 1993 — the two acknowledgments

95    Early on the morning (6 am) of 10 June 1993 the Karams attended a short meeting which lasted for around 15 minutes at the offices of Marsdens, Solicitors at Campbelltown. Present were the Karams, Mr Marsden and Mr Seaton, a solicitor with Marsdens. Two acknowledgments in favour of the Bank were signed by the Karams. They acknowledged by these documents that the guarantee of 26 May 1980 had been given by them to the Bank to secure payment of all the liabilities of the Company. They further acknowledged that the Bank was relying on their acknowledgment in continuing to provide accommodation to the Company. The first acknowledgment was witnessed by Mr Marsden (DX5 at 93A) and the second was witnessed by the Company’s external accountant David Lamb (DX5 at 93C). Mr Lamb also signed a certificate of independent financial advice dated 10 June 1993. (DX5 at 93E) Marsden signed a solicitor’s certificate also dated 10 June 1993 (DX5 at 93G). These documents were forwarded to the Bank. (Charles’ affidavit 13 October 1998, paras 290-298; John’s affidavit 2 October 1998, paras 183-188; Nada’s affidavit 2 October 1998, para 119-129; Diane’s affidavit 2 October 1998, para 83-102)

96    The above can be taken to be uncontroversial. What the Plaintiffs say occurred as to the advice they received and the circumstances of the meeting are dealt with later.

July — September 1993

97    In July 1993 McCombe retired from the Bank. (McCombe affidavit 2 March 1999, para 5)

98    On 31 August 1993 Mike Leon ("Leon") was offered a position of Financial Controller of the Company. (TB 5.158)

99    By letter dated 13 September 1993 Marsden informed John and Charles that further security documents had been provided to him by the Bank for their signature. A copy of the letter was also sent to Mr Lamb. (DX10)

100    On 17 September 1993 Star Dean-Willcocks’ interim report was forwarded to the Bank. (TB 5.177)

101    On 24 September 1993 a meeting of the shareholders of the Company was held during which the articles of the Company were amended. (Murray 16 May 1999, para 48; TB 5.185) Also on this date Mr Murray spoke to the directors of the Company who advised him that documents were to be executed on 1 October as confirmed by Marsden. (Diary Note 24 September 1993; TB 5.188; ANZ-80; Murray affidavit 16 May 1999, para 49)

102    On 30 September 1993 Marsden informed Charles that he had received some documents from the Bank and that he needed to see the Karams. (Charles’ affidavit 13 October 1998, para 299)

Second Meeting with Marsden 1 October 1993 — cross-deed of covenant

103    On the afternoon of 1 October 1993 the Karams attended Marsden’s home to sign further documents referred to in Marsden’s letter of 13 September 1993. The meeting lasted for about an hour and a half. Present at the meeting were John, Charles, Nada, Diane, Mr Marsden, Mr Percival and Mr Lamb (John’s affidavit 2 October 1998, para 194-204; Charles’ affidavit 13 October 1998, para 300-311; Nada’s affidavit 2 October 1998 para 134-143; Diane’s affidavit 2 October 1998, para 106-113). The following documents were signed:

(a) the Karams signed a cross-deed of covenant dated 1 October 1993 (DX5 at 94);

(b) the Bank, the Company, the Karams and Galella Pty Limited signed cross-deed of covenant;

(c) the Karams also signed a Form S148 linking the cross-deed of covenant to the mortgage over the Regents Park factory (DX5 at 99);

(d) Charles signed a Form S148 over the Jacobs Street Property (DX5 at 99A);

(e) John signed a Form S148 over the Sir Joseph Banks Street Property (DX5 at 99B);

(f) the Company, which was itself a party to the cross-deed of covenant, also executed a Form S148, attested by John and Charles (DX5 at 98);

(g) certificates of independent financial advice were provided by Mr Lamb in respect of each of the four individuals (DX5 at 100, 107, 114 and 122);

(h) Mr Percival, a solicitor from Marsdens, provided a solicitor’s certificate in respect of each of the Karams (DX5 at 130; 138; 146 and 153);

(i) a statutory declaration of Charles in respect of Galella Pty Limited (TB 5.213);

(j) a deed of Defeasance signed over the Life Policy of Charles between the Bank and the Company;

(k) a deed of Defeasance over the Life Policy of John between the Bank and the Company; and

(l) a statutory declaration of Charles as director of the Company. (TB 5.209).

104    On 5 October 1993 Marsdens wrote to the Bank outlining a number of issues; for example, a conversation held between Mr Marsden and the Bank, the meeting of 1 October; the fact that documentation is being held in escrow and what is necessary to enable the Company to continue trading. (TB 5.280) Mr Marsden also wrote to the Plaintiffs confirming the decisions to sell the residential homes and Regents Park and to rewrite the loans at a lower interest rate as well as informing them that Mr Marsden would not release the documents signed on 1 October until he had instructions to do so; DX8.

105    On 8 October 1993 a meeting was held between Mr Murray, Mr Harrison, Charles and John. (Charles’ affidavit 13 October 1998, para 317-319) Mr Lamb and Mr Lucas also present. The meeting was held to discuss, inter alia, the present and future position of the company and security documents. (Diary Note 8 October 1993; TB 5.289) A second meeting was held on the same day between Mr Marsden, John, Charles and Mr Murray where they discussed the earlier meeting and Mr Marsden handed over the security documents to the Bank and confirmed the Company’s commitment to sell property. (Murray 16 May 1999, para 52; Diary Note 8 October 1993; TB 5.292)

Sale of Properties/Investigative Reports

106    On 11 October 1993 the Plaintiffs instructed Marsdens to act in relation to the sale of the Sir Joseph Banks property (TB 5.292B) and the Jacobs Street property. (TB 5.293) (Murray affidavit 16 May 1999, para 53)

107    On 18 October 1993 Tony Eskett ("Eskett") was employed as an accountant assisting Leon at the Company. (TB 5.315)

108    On 20 October 1993 John and Nada entered into an Exclusive Agency Agreement with Real Estate World Pty Limited to sell the Sir Joseph Banks property. (DX19)

109    In late October to 29 November 1993 Murray was on holidays. (Murray 16 May 1999, para 66) Andrew McLaren ("McLaren") was the relieving manager. (TB 5.454)

110    On 1 November 1993 Mr Marsden sent a note to Drew Percival with whom he worked attaching the Plaintiffs’ file and outlining issues concerning the Plaintiffs. (PX15)

111    On 3 November 1993 John entered into arrangements for the sale of the property at 7 Sir Joseph Banks Street for $245,000 to Mr Sol Michael (the sale was settled on 19 January 1994) (TB 6.006). On 24 January 1994 the proceeds of the sale, $235,365 were received by the Bank. (Murray 16 May 1999, para 79; Diary Note 24 January 1994; TB 6.009; TB 5.395-5.433)

112    On 4 November 1993 a meeting was held at Ingleburn. Present were Mr Harrison, Mr Lucas, John, Charles, Diane, Nada, Sol Michael and Mr Leon. They discussed, inter alia, the sale of property, Mr Marsden’s involvement, the interest rate and the Company’s management structure. (Diary Note 4 November 1993; TB 5.434; Charles’ affidavit 13 October 1998, para 324)

113    A Letter of Offer also dated 4 November 1993 was prepared and forwarded to the Plaintiffs (DX5 at 186) for fully drawn advance facility of $2,070,000 whose purpose was expressed to be “Assist with purchase of vacant land at 4 Brooks Road, Ingleburn”.

114    On 8 November 1993 Nada wrote to Mr Marsden in relation to the interest being paid by the Company. (DX9) On this same date Mr Marsden wrote to Charles in relation to Mr Marsden’s position and the relationship between Mr Marsden and the Plaintiffs. (DX11)

115    On 12 November 1993 Mr Marsden wrote to Nada addressing concerns Nada had had with the security documentation. (DX12)

116    In November 1993 Mr Leon was made the General Manager of the Company.

117    On 17 November 1993 a meeting was held at the Bank’s offices at Parramatta. Present were Charles, Nada, Sol Michael, Mr Harrison, Mr Lucas and Mr McLaren (John and Diane were also possibly present). They discussed, inter alia, the fixed rate facility for $2,070,000. (Diary Note 17 November 1993 TB 5.470; Charles’ affidavit 13 October 1998, para 325)

118    On 18 November 1993 the Bank received a facsimile from David Lamb indicating the resignation of Nada and Diane as directors of the Company as of 22 February 1993. (Murray 16 May 1999, para 72) On the same day, a letter of offer was sent by the Bank to the Directors of the Company stating that following review, the interest rate was 8.07% fixed from the date of formal acceptance of the offer until maturity date, i.e. 22 December 1994; DX5 at 203.

119    On 29 November 1993 the Company accepted the Bank Letter of Offer dated 4 November 1993 and advice of 18 November 1993. (TB 5.496; Murray affidavit 16 May 1999, para 76)

Sale of Jacobs Street property for $450,000 on 15 December 1993

120    On 15 December 1993 Charles sold the Jacobs Street property for $450,000. (TB 5.550) The sale was settled on 10 February 1994 and $402,697.18 was forwarded to a term deposit account. Diary Note 10 February 1994; TB 6.013). An attempt to sell the Regents Park factory was unsuccessful. (TB 5.549)

121    In mid January 1994 Mr Murray ceased to have control of the Plaintiffs’ accounts and Peter John Spiteri was his successor. (Murray 16 May 1999, para 80) Mr Spiteri was Manager of High Risk accounts at Parramatta. (Spiteri affidavit 13 April 1999, paras 1-2) The Senior Manager Asset Management was Lucas ("Lucas"). (Spiteri affidavit 13 April 1999, para 19)

122    On 9 February 1994 the Company received a Business Plan (TB 5.514). The Business Plan was discussed at a meeting at the Bank between Charles, John, Nada, Mr Leon and Mr Spiteri. (Spiteri 13 April 1999, para 6)

123    On 4 March 1994 Leon and Eskett informed the Bank of their resignation from the Company. (Diary Note 4 March 1994 TB 6.062) Mr Leon outlined a list of critical issues. (TB 6.064; 6.067)

124    In March 1994 the firm of Mulvaney Coulton Isaac were hired by the Company as external accountants. That firm supplied an employee to act as the Company’s internal accountant. (TB 6.069)

125    On 3 May 1994 a valuation report was prepared for the Ingleburn factory. (Diary Note 3 May 1994 TB 6/106; Diary Note 13 May 1994 TB 6.108)

126    On 13 May 1994 life insurance policies for John and Charles were delivered to the Bank. (Diary Note 13 May 1994; TB 6.110)

127    On 16 May 1994 Rod Blayney was appointed as the new Financial Controller for the Company. (Diary Note 27 April 1994; TB 6.101)

128    On 14 November 1994 Amy Harvey replaced Mr Bourke as Mr Spiteri’s assistant (TB 7.171) and Darius Bilimoria took over from Mr Lucas as Senior Manager Asset Management (Spiteri affidavit 13 April 1999, para 19)

Holyman Dart Report — March 1994

129    Towards the end of 1994 Holyman Dart and Partners were approached to prepare a Diagnostic Business Plan for the Company (TB 7.207) and in March 1995 a report into the Company’s business was received. (TB 8.108; 8.130; 8.211). ("the Holyman Dart report")

Letter of Acknowledgment re no further claims — 1 March 1995

130    By letter dated 1 March 1995 the Plaintiffs acknowledged to the Bank that they would have no further claims on the Bank in respect of past or then present facilities. (DX5 at 244)

131    On 15 April 1995 Glen Harvy took over from Bilimoria as Senior Manager Asset Management. (Spiteri affidavit 13 April 1999, para 19)

On 26 April 1995, interest rate on the $2.070 million FDA facility (fixed rate fully drawn advance facility) was locked in at 8.07% by letter of offer dated that day (DX5 at 203-4 TB, 5.538).

132    On 28 July 1995 Rod Blayney resigned as Financial Controller of the Company. (Diary Note 10 July 1995; TB 10.090) and on 9 August 1995 Denis Scarabello was appointed the new financial controller. (Diary Note 9/8/95; TB 10.195)

133    On 11 August 1995 a meeting was held at Ingleburn between Charles, John, Glen Harvy, and Mr Spiteri. Glen Harvy met the Karams; there was a tour of the factory and discussions were held. The Plaintiffs were told that the Bank would like Arthur Anderson to be appointed as business consultants to evaluate the medium to long term validity of the Company. (Spiteri 13 April 1999, para 24; Diary Note 11 August 1995 TB 10.204)

134    Over the period from July 1992 to August 1995 the Plaintiffs were required to, and did, sign a number of letters acknowledging the terms on which further Bank facilities were being provided to the Company. (DX5)

Arthur Anderson Report — 1 September 1995

135    On 1 September 1995 a draft report from Arthur Andersen was received by the Bank (Diary Note 1 September 1995 TB 10.303, 10.309)

136    In September 1995 Eric Yacoel succeeded Mr Harvy as Senior Manager Asset Management. (Spiteri affidavit 13 April 1999, para 26)

137    On 19 September 1995 a meeting was held at Ingleburn to discuss the Arthur Andersen report. This was the first time Mr Spiteri introduced Eric Yacoel to the Karams. Present were Charles, John, Mr Isaac, Mr Royal, Mr Yacoel, Spiteri and Ms Harvey. (Spiteri 13 April 1999, para 32; TB 10.397; Charles’ affidavit 13 October 1998, para 342)

138    In October 1995 the Arthur Andersen Reports were produced. (TB 11.001; 11.127; 11.156) ("the Arthur Andersen report").

139    Charles notes that another meeting was held shortly after the 19 September meeting. (Charles’ affidavit 13 October 1998, para 345-350) These and other meetings held at this time involved, inter alia, discussions as to whether or not an administrator should be appointed. Mr Spiteri notes that the only meeting at which Mr Yacoel and he were present with Mr Isaac, Mr Royale and Karams is the meeting recorded at pages 453-454 of the Diary Notes. Mr Spiteri denies the conversation in para 342 of Charles’ affidavit and notes that Royale and Arthur Anderson never recommended the appointment of an Administrator. (Spiteri 13 April 1999, para 33)

140    On 4 October 1995 a meeting was held at the Bank; present were Charles, Mr Yacoel, David Williams, Susan Ghafari and Mr Harrison. Discussions were held in relation to the Bank’s decision not to advance the Company further funds and advising the Company to appoint a Voluntary Administrator. The Arthur Andersen findings were also discussed with Royal from Arthur Andersen. (TB 12.009)

141    A letter was sent by Arthur Andersen to Company on 9 October 1995 outlining the benefits of an voluntary administrator. (TB 12.031) Another meeting was held between Charles, Mr Yacoel, Mr Williams and Ms Ghafari. Charles suggested a buy out of the Company and they had discussions about the appointment of a voluntary administrator. (Diary Note 9 October 1995; TB 12.035; Charles’ affidavit 13 October 1998, para 355)

Termination of Bank’s facilities and demands — appointment of receiver

142    Before the appointment of the Bank’s Receiver, control of the Company’s accounts went to Group Credit Management (NSW) and Mr Spiteri had nothing further to do with the Plaintiffs. (Spiteri 13 April 1999, para 35) Glen Harvy had ceased having any relationship with the Plaintiffs some months earlier. Mr Spiteri ceased to have control of the Plaintiffs’ accounts on 12 October 1995. (Spiteri affidavit 13 April 1995, paras 1-2)

143    On 23 October 1995 the Bank issued to the Plaintiffs a Notice of Termination of Facilities and Declaration that all monies owing to the Bank are due and payable. (TB 10.039; TB 12.081) In addition the Bank issued a Letter of Demand for $498,287.30 (TB 12.082); a Letter of Demand for $2,079,201.14 (TB 12.084) and a Letter of Demand for $2,082,252.38 (TB 12.085) On 24 October 1995 the Bank made demand upon the Company in the sum of $4,659,740.82. (Charles 13 October 1998, para 360; Spiteri 13 April 1999, para 34)

144    On 2 November 1995 the Bank informed the Plaintiffs that they were unable to agree to Marsden’s request on behalf of the Plaintiffs to a two week extension of time to the letter of demand. (TB 12.127) The Bank also rejected the Plaintiffs offer to repay $2,700,000 via a repayment programme. (PX16; TB 12.128; Charles’ affidavit 13 October 1998, para 364; TB 12.134)

489    There is a possible further question. On the assumption that the Bank had provided sufficient advice to give rise to the assumption of a duty of care, contrary to my conclusion earlier, would the Karams and the Company have entered into the transaction if the Bank had advised against it? In other words, though there was no reliance upon recommendations made, was there in some sense a reliance on recommendations not made; that the Karams relied on the Bank to advise against the transaction if in fact the transaction were imprudent but failed to do so? So in the hypothetical circumstance that it gave the advice it should have done (against entering into the transaction) would the Karams have relied upon that advice and not proceeded with the transaction?

490    This is a difficult question, posing as it does the issue grappled with by Jane Stapleton in an illuminating article “Legal Cause: Cause-in-fact and the Scope of Liability for Consequences” 2001 Vanderbilt Law Review 941 at 963-4 from which I quote (omitting footnotes).

“The content of the hypothetical is dependent on what is identified as the tortious conduct — what it is that the plaintiff claims the defendant ought to have done. A plaintiff may be unable to show that she would have used a safety device if it had been supplied by the defendant, but she may have sufficient evidence to show that she would have done so had he supplied it and exhorted her to wear it. In other words, she would lose if the allegation of tortious conduct is merely the allegation of failure to supply the device, but she would win if the allegation were that of failure to supply it and to exhort its use. Put generally, in omission cases we cannot answer the question of fact of historical relevance of tortious conduct until we have chosen the norm of what the defendant was legally obligated to do, if anything.”

491    In those terms and in the present context, what is the norm for what the Bank was legally obligated to do? Suppose the answer to that question were that the Bank was legally obliged to advise against the transaction, once any advice were given, if the transaction were clearly imprudent. This would be on the basis that, though not expert on property, the Bank was sufficiently expert on prudential borrowing. Therefore it may be said, the Bank would then be legally obliged to explain any readily apparent risk that the Company may be unable to service the loan, or not unless the borrowing were reduced by early sale of the Regents Park factory and or the surplus Ingleburn land.

492    But the short answer to all this is to be found in two propositions. First it is by no means apparent that the transaction need have been imprudent. There always was the possibility of selling the surplus land. Second, that was sufficiently apparent to the Karams, without need of Bank advice of that. And there is sufficient indication that while the Bank left this to the Karams early on, the Bank was reasonably enough expecting the Karams to act responsibly, meaning selling surplus assets if need be. After all, the Karams could see for themselves what the debt burden had become, when they had failed to subdivide and sell. I have earlier indicated my conclusions regarding the feasibility of earlier subdivision. So even if one accepts that a legal obligation fell on the Bank (as to advising against imprudent transactions) this need not have been such a transaction if the Karams had subsequently acted prudently.

493    That takes me to the second basis of claim against the Bank, namely failure to advise about a readily apparent risk in deferring selling the surplus to reduce debt. Here, I do not consider that it would be reasonable to expect the Bank to advise the Karams as to whether they should, or should not, have a strategy for selling the surplus Ingleburn land. The Bank knew that the borrowers had that in mind selling as an available option. The Bank was, as I have said, entitled to assume sufficient financial acumen on the part of the Karams, assisted as they were by Mr Croker, for the Karams to make their own decision as to timing, familiar as they should have been with their cash flows and increased debt and interest burden.

494    The only indication to the contrary is a diary note of 27 April 1991 (TB, 1.374). But this was some year and a quarter after the original purchase during which time there is no suggestion that the Bank put any pressure against, or otherwise advised against selling the surplus land. At that meeting Mr McLachlan attended with Charles and John. The second paragraph of the diary note reads as follows,

“In view of the current climate it has been decided to sit and consolidate it for two years. At that time they would look at cutting up the surplus land or selling it in one lump and reducing their borrowings to a figure of around $2 m. They can service present borrowings and in view of that it would seem pointless to unload assets at the bottom of the market.
They are having tenant problems at Regents Park, but expect this to be resolved in early course. Once again there is no need to sell this property in this market."

495    The final paragraph is:

“They have ample freehold assets and should any problem arise correction could be achieved quickly.”

496    Clearly enough, the effect of the diary note is that if a problem did arise, the earlier inhibition of selling in a market that had dipped was not to prevail over the prudential course then of selling those “ample freehold assets”.

497    It is true that the diary note concludes,

“Bill Croker has results to 31/12[1990] and these will be forwarded to us. The business is extremely well run and the Karam Bros are capable and experienced footwear manufacturers Charlie has a bit of a flair for the unusual which makes it imperative that we lock debt away for a period to remove the temptation to subdivide the balance of the land and keep his mind on making shoes.”

498    The latter is strongly relied upon by the Plaintiffs. It was put to Mr McLachlan in cross-examination (T, 881/3.94 to 884.36) as indicating that the Bank was actively preventing or advising against the sale of the surplus land. However, that last quoted part of the diary note does not to my mind detract from my earlier conclusion, namely that if a problem would arise, the Bank expected that correction could and should be achieved via the Karams’ available options. The Bank would not be expected in any way to suggest that if a problem were to arise of a cash flow kind when meeting the overall debt, that subdivision should not proceed because it might distract Charles from the business. I do not consider the statement quoted contradicts that common sense expectation. It was more directed against Charles getting distracted by land speculation.

Conclusion re Breach of Duty of Care

499    Accordingly, I conclude that it has not been established firstly that there was any inhibition placed by the Bank at the time the monies were advanced and the property acquired at Ingleburn to discourage selling the surplus land. Further, I conclude that it would be unreasonable for the Karams to rely upon the absence of advice to sell as implicit advice not to sell. Furthermore, I conclude that even as at April 1991, some fourteen months later, if any advice about selling were given, it was still subject to the paramount consideration that if difficulties were experienced, then surplus freehold land should be sold. That might not necessarily be Ingleburn, insofar as subdivision might distract the Karams, but certainly this was not to preclude sale of Ingleburn if that were the only available land capable of reducing the greatly expanded debt sufficiently.

Overall Conclusion re Negligence

500    The claim based upon negligence fails.

Breach of fiduciary duty?

501    I consider that no fiduciary duty existed as between the Bank and the Karams or the Company in relation to Ingleburn. The relationship of banker and customer is not one of the accepted fiduciary relationships nor does it arise in the particular circumstances operating here. Thus I do not accept that the Bank occupied a position as the Karams’ “investment adviser” in relation to the Ingleburn purchase; compare Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 391 where the Full Court said:

“A bank may be expected to act in its own interests in ensuring the security of its possession as lender to its customer, but it may have created in the customer, but it may have created in the customer the expectation that nevertheless it will advise in the customer’s interests as to the wisdom of a proposed investment. This may be the case where the customer may fairly take it that to a significant extent his interest is consistent with that of the bank in financing the customer for a prudent business venture. In such a way the bank may became a fiduciary and occupy the position of what Brennan J has called ‘an investment adviser’: Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371 at 384-385.”

502    The Bank did not undertake or agree to advise the Karams in their interests as to the wisdom of the transaction, even if the Karams may have assumed otherwise. That negates any fiduciary duty owed to the Karams or the Company. As Mason J observed in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-7 the critical feature of the well-recognised categories of fiduciary relationship is the undertaking or agreement by the fiduciary to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect in a legal or practical sense the interests of that other person. Nor had the Bank come under an obligation to act in “another’s interests”, viz the Karams’; compare Breen v Williams (1996) 186 CLR 71 at 113 per Gaudron and McHugh JJ.

503    But even if it be accepted that there were such a fiduciary duty owed by the Bank to the Karams or the Company, the misrepresentations relied upon as constituting a breach of that duty have not been made out for the reasons earlier set out. Nor have they been shown to have been relied upon to the knowledge of the Bank in circumstances where it was reasonable to do so. But there is a more fundamental reason, encapsulated in the observation in Pilmer v Duke Group Ltd (2001) 75 ALJR 1067 at 1082-3, “that fiduciary obligations are proscriptive rather than prescriptive in nature”; see the majority judgment of McHugh, Gummow, Hayne and Callinan JJ. It would be to impose without justification a positive legal obligation, beyond mere proscription, if the Bank were obliged to advise the Karams as to the desirability or prudence of a prospective purchase. Thus in Breen v Williams (supra):

“In this country, fiduciary obligations arise because a person has come under an obligation to act in another’s interests. As a result, equity imposes on the fiduciary proscriptive obligations — not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.”
Conclusion

504    Accordingly any claim based on breach of fiduciary duty must fail as giving rise to any damages or equitable compensation. In light of that and earlier conclusions, I therefore do not need to consider questions of quantification of damages for negligence or related claims.

OVERALL CONCLUSIONS AND SUMMING UP

505    The Karams fail in their claims against the Bank arising out of the Ingleburn purchase, whether based on negligence, misrepresentation or breach of fiduciary duty and whether framed in damages or for equitable compensation, for the reasons stated above.

506    However, the Karams succeed against the Bank as regards the guarantees and securities they have given, in the following respects and to the following extent:

(a) Both John and Charles and their wives were in a position of special disability vis a vis the Bank of which the Bank took unfair advantage, when it came to taking and subsequently retaining guarantees and mortgage security from them. That special disability derives from their limited education and understanding of technical English and their inadequate understanding of financial matters. Unfair advantage was taken by the Bank, when it gave inadequate or misleading explanation as to the availability of those guarantees and mortgage security to meet the debt of their Company and failed to urge or recommend the seeking of independent legal advice, when without it these securities were so convoluted and unnecessarily complex in their expression as to be quite incomprehensible even to lay-people lacking the disability suffered by the Karams and most certainly for them.

(b) John’s and Charles’ respective house mortgages did not secure any part of the Company’s indebtedness, as a matter of their proper construction;

(c) Such explanation as John and Charles did receive from the Bank at the time of their grant would have led them to conclude that they were security only for monies advanced for the purpose of acquiring such residences and not for the purpose of securing future loans to the Company;

(d) The way the Bank sought to secure and extend the benefit of such mortgage security so it extended to the Company’s indebtedness was, in the circumstances, unconscionable;

(e) These conclusions are not altered by any of the documentation later entered into by John and Charles to reinforce and extend the Bank’s securities, including the forms S148, the acknowledgments and the cross-deed of covenant signed on 10 June 1993 and 1 October 1993, given

(i) the Karams’ special disability;
(ii) the circumstances in which that documentation was obtained;
(iii) the Bank’s purpose in seeking to retain a benefit earlier unconscionably obtained; and
(iv) the Bank’s illegitimate pressure on the Karams, constituting a species of equitable fraud amounting to economic duress, first to sign further documentation in June 1993 and then again in October 1993 and thereafter to sell their houses and Regents Park in order to reduce the corporate debt owed to the Bank when those proceeds were not properly available for that purpose (save in the case of Regents Park to meet Ingleburn factory construction debt and in relation to their guarantees for non-Ingleburn related indebtedness of the Company);

(f) These conclusions are not altered by the advice provided to the Karams by their solicitor Mr Marsden or his firm (accepting that he was sufficiently independent of the Bank), given

(i) that the Bank were aware that Mr Marsden at the meeting of 10 June 1993 did not have the Bank’s security documentation so could not adequately or properly advise,
(ii) that Mr Marsden was not aware in June 1993 nor fully in October 1993 of the full circumstances of the originally executed Bank’s securities particularly as regards the Bank’s earlier inadequate and misleading explanations of them, and
(iii) the illegitimate pressure amounting to economic duress earlier applied by the Bank against the Karams to sign that June 1993 documentation continued to operate when, constrained by it, that duress remained at least a reason to sign the further documentation in October 1993;


(g) It was unconscionable in the circumstances and the outcome of economic duress for the Bank to have recourse to, or retain the benefit of, any of the proceeds of sale of the houses to the extent they have been applied to satisfy the Company’s debts and the Karams are therefore entitled to payment of an amount equal thereto by way of equitable compensation to the extent so applied, with interest thereon at Supreme Court rates (but not to be paid to-day’s value);

(h) Given the Karams’ special disability, the explanations given by the Bank and subsequent events, it was also unconscionable for the Bank to have recourse to, or retain the benefit of, any of the proceeds of selling the Regents Park factory to satisfy any indebtedness of the Company save for the Ingleburn factory construction debt;

(i) Accordingly, to the extent the proceeds of sale of Regents Park were applied to satisfy any indebtedness of the Company other than the Ingleburn factory construction debt, the Karams are entitled to equitable compensation with interest thereon at Supreme Court rates;

(j) Insofar as the two house mortgages, contrary to my conclusion as to their proper construction, did apply to secure any corporate indebtedness, they would operate as “unjust contracts” under the Contracts Review Act being unjust in the circumstances relating to them at the time they were made within s7(1) and s9 of that Act, and it would be just that John and Charles be granted relief (under s14 of that Act and to orders pursuant to s7(1)(c) and (d)) so that each mortgage is limited to securing the amount of borrowing (and interest thereon) to purchase the relevant property alone and to an order under s7(1)(b) declaring void the “all monies” clause;

(k) Likewise the Regents Park mortgage would operate as an “unjust contract” under the Contracts Review Act being unjust as aforesaid ((j) above), and it would be just that orders by way of relief should be made pursuant to that Act so that the mortgage is limited to securing the amount of borrowing (and interest thereon) constituting the original debt (since repaid) to acquire and construct Regents Park and constituting the later Ingleburn factory construction debt;

(l) Likewise the June 1993 documentation (to the extent not supplanted) and October 1993 documentation would operate as an “unjust” contract under the Contracts Review Act as aforesaid ((j) above) and it would be just that relief should be granted setting aside and declaring void that documentation pursuant to that Act; equivalent relief would be available in equity by reason of it having been entered into under economic duress;

(m) Given the Karams’ special disability, the less than adequate explanations given by the Bank, the failure by the Bank to recommend seeking independent legal advice and taking account also of subsequent events, it was unconscionable for the Bank to have recourse to, or retain the benefit of, the personal guarantees given by the Karams, save insofar as the guarantees were applied to meet non-Ingleburn related indebtedness of the Company;

(n) Insofar as the personal guarantees were capable of securing Ingleburn related indebtedness, being non-trading indebtedness secured directly by the Company and not in contemplation at the time of the guarantee, they would operate as an “unjust contract” under the Contracts Review Act as aforesaid ((j) above). It would be just that orders should be made pursuant to that Act whereby the guarantees were varied so as to apply only in respect of non-Ingleburn related indebtedness of the Company;

(o) To the extent that the Karams sold property and made any payments to the Bank in respect of Ingleburn related indebtedness of the Company pursuant to the guarantees, whether out of the proceeds of the sale of their houses or otherwise, the Karams are entitled to equitable compensation;

(p) The foregoing result in relation to the guarantees and Regents Park is not therefore to be altered, nor does any estoppel arise, by reason of any of the documentation later entered into by the Karams, including the documentation subsequently entered into by the Karams on 10 June and 1 October 1993, nor by the fact that the Karams effected the relevant sales and payments to the Bank having regard to the matters in (e) above nor by any estoppel defence raised by the Bank;

(q) There is no basis for impugning the mortgage given on 22 December 1989 by the Company over the Ingleburn property; and

(r) The release of 1 March 1995 does not alter the conclusions above because, properly construed, it does not apply as a release to the security position nor does it operate as a release or waiver in respect of the Plaintiffs’ rights to relief in respect of these securities and in any event is for past consideration;

(s) Those claims for equitable compensation which are earlier upheld are not defeated by any limitations defence.

507    To the extent that equitable compensation is payable it is not to be treated as increasing the Karams’ liabilities as guarantors or otherwise in respect of the Company; see paras 510-11 below. Subject to that, the Karams are only ever liable:

(a) under their guarantees for the Company’s non-Ingleburn related indebtedness; and

(b) in relation to Regents Park, for the Ingleburn factory construction debt (there being no indebtedness outstanding for the purchase or construction of Regents Park itself).

508    The Bank’s cross-claim against the Karams cannot succeed against the Karams personally, save as limited to the Company’s non-Ingleburn related indebtedness which is alone to be taken to be secured by the personal guarantees of the Karams. The Cross-claim should therefore only be allowed against the Karams so limited.

509    Payment of the Karams’ house sale proceeds in reduction of the Company’s Bank debt was the result of the Bank’s unconscionable insistence on a supposed security right the Bank did not properly have, but unconscionably sought to retain or procure, bringing to bear in doing so illegitimate pressure constituting economic duress. The consequences below should follow:

(a) an amount equal to those house sale proceeds is fully recoverable by the Karams, with interest, by way of equitable compensation;

(b) such equitable compensation is not to be taken to increase the amount of the Bank’s cross-claim against the Karams personally but only against the Company, and

(c) “practical justice” does not require any other result such as compelling the Karams, as a condition of relief, to apply those house sale proceeds to reducing any part of the Company’s indebtedness, they never having been so secured in favour of the Bank or available to it without unconscionable conduct or economic duress (contrast Vadasz v Pioneer Concrete (SA) Pty Limited (1995) 184 CLR 102 at 115 and, under the Contracts Review Act , S H Lock (Australia) Limited v Kennedy (1988) 12 NSWLR 482).

510    The Regents Park proceeds were likewise applied unconscionably and as a result of economic duress in reduction of the Company’s total Bank debt. This was when they were only properly available to satisfy the Ingleburn factory construction debt. Subject to what follows, an amount equal to those proceeds of sale of Regents Park so applied must be returned by way of equitable compensation to the Karams, with interest thereon at Supreme Court rates. But practical justice here must recognise that those proceeds were properly agreed to be applied to repay the Ingleburn factory construction debt and actually secured it. Hence to the extent that any amount referrable to the Ingleburn factory construction debt is still outstanding, that should be paid to the Bank from that portion of the equitable compensation, as a condition of the relief. This would be in reduction of any outstanding Ingleburn factory construction debt.

511    However, it would not be appropriate, in awarding equitable compensation for what was unconscionable conduct exacerbated by illegitimate pressure amounting to economic duress, to calculate the Company’s Ingleburn factory construction debt so it is increased to take account of any equitable compensation paid. Nor would it be appropriate to increase the Company’s non-Ingleburn related indebtedness to take account of any equitable compensation paid in respect of the house mortgages. This is on several bases. First, the equitable compensation to be paid is only referable to amounts paid under economic duress, it is not a refund of such amounts. Second, denying such increase moulds the remedy and relief to achieve practical justice as Vadasz dictates. Third it takes into account the essentially unquantifiable loss suffered by the Karams from the Bank’s unconscionable insistence on security rights it did not properly have. But for that insistence, the Karams might well have used the negotiating position it had to secure better terms or other concession. Finally, that result accords with the approach in Aquaculture Corporation v New Zealand Green Mussel Co Ltd (supra) at 301-2. There a majority of the court (Cooke P, Richardson, Bisson and Hardie Boys JJ, Somers J dissenting) could see no reason in principle why exemplary damages by way of equitable compensation should not be awarded, in that case for breach of confidence, where a merely compensatory award would not adequately reflect the gravity of the defendant’s conduct.

512    It will be necessary or useful in formulating orders to quantify inter alia the following:

(i) the amount of the proceeds from sale of the relevant properties paid to the Bank in reduction of the Company’s indebtedness ($250,000 from John’s Banks Street property, $433,197.18 from Charles’ Jacobs Street property and $324,029.43 from Regents Park, all paid to the Bank in 1996);

(ii) the amount of indebtedness owed by the Company to the Bank consisting of non-Ingleburn related indebtedness at the time of payment in 1996 and the amount of all other indebtedness of the Company owed to the Bank;

(iii) any indebtedness owing by Charles in respect of his house mortgage at the time it was repaid;

(iv) the Ingleburn factory construction debt owed by the Company at the time of payment in 1996; and

(v) how the proceeds of sale of the two houses, Regents Park, Ingleburn and the rest of the Company’s assets were actually apportioned and applied by the Bank in repayment of the Company’s bank debt; presumably this was pro rata with any other recoveries from the Company.

ORDERS AND COSTS

513    The parties are directed to attempt to agree the calculations to give effect to the foregoing, and in any event to submit orders, agreed if possible, giving effect to the foregoing conclusions within twenty-one days. When the matter returns, I invite the parties to address me on costs.

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Last Modified: 08/22/2001