Kasparian v Burns

[2007] NSWSC 895

CITATION:	Kasparian v Burns [2007] NSWSC 895 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	20/6/07, 21/6/07
JUDGMENT DATE :	27 August 2007
JUDGMENT OF:	Bell J at 1
DECISION:	The amended cross-claim will be dismissed with costs and there will be a verdict and judgment for the plaintiffs against Ms Kitas for the sum of $868,250.00 together with interest calculated under the loan agreement as varied with costs. The parties were agreed on the calculations set out in Ex “B”, which appear to have been made as at 19 June 2007. The parties may bring in short minutes in accordance with these reasons incorporating the agreed judgment sum at the date of judgment within 14 days of today’s date. In default of agreement the matter may be re-listed for further submissions by arrangement with my Associate.
LEGISLATION CITED:	Contracts Review Act 1980 (NSW) Corporations Act 2001 (Cth)
CASES CITED:	Garcia v National Australia Bank Ltd [1998] HCA 48; 194 CLR 395
PARTIES:	Edvart Kasparian (1st Plaintiff) Maurice Dover (2nd Plaintiff) David Wayne (3rd Plaintiff) Anthony Burns (1st Defendant) Helen Kitas (2nd Defendant)
FILE NUMBER(S):	SC 10840/06
COUNSEL:	M Young (Plaintiffs) J Ireland QC (2nd Defendant)
SOLICITORS:	Bransgroves Solicitors (Plaintiffs) Mavarkis & Associates (2nd Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

BELL J

Monday 27 August 2007

10840/06 Edvart Kasparian v Anthony Burns

JUDGMENT

BELL J :
Introduction

1 The plaintiffs, as trustees of the Leichhardt Unit Trust (the Trust), advanced the sum of $755,000 to Isabella Mode Pty Limited (Isabella Mode) pursuant to a loan agreement entered into on 24 December 2003 (the loan agreement). Anthony Burns and Helen Kitas, who are the first and second defendants respectively, were the sole shareholders and directors of Isabella Mode at all material times. Each executed a personal guarantee in favour of the plaintiffs in respect of Isabella Mode’s obligations under the loan agreement (the guarantee). The term of the loan was 12 months. Shortly before the expiry of the term a deed of variation of loan was executed increasing the principal sum to $868,250.00 (interest outstanding under the loan agreement was capitalised) and extending the term by three months.

2 The plaintiffs claim the principal and outstanding interest under the loan agreement, as varied, pursuant to the guarantee. The loan monies have not been repaid. On 27 May 2005 a court order winding up Isabella Mode was made. The parties were agreed that following the winding up the plaintiffs recovered the sum of $146,407 from the sale of properties owned by Isabella Mode over which they held registered second mortgages. Ex “B” contains agreed calculations of the amount owing under (i) the loan agreement and (ii) the loan agreement as varied as at 19 June 2007.

3 Default judgment was entered against Anthony Burns on 11 August 2006. These reasons concern the claim brought against the second defendant, Helen Kitas.

4 Ms Kitas by her further amended defence acknowledges that she signed the loan agreement and the guarantee. By amended cross-claim she claims orders setting aside the loan agreement and the guarantee on the ground that it would be unconscionable for the plaintiffs to enforce the same against her, or pursuant to the provisions of the Contracts Review Act 1980 (NSW) (the CRA).

5 Ms Kitas pleads that she did not sign the deed of variation of loan or the variation of mortgage and that they are not her deeds. She contends that the deed of variation of loan operated to discharge any liability that she had to the plaintiffs under the guarantee.

Events leading to the loan to Isabella Mode

6 Isabella Mode was registered on 26 November 2002 with Richard Ayache and Ms Kitas’ husband, Socrates (Scott) Kitas, as its directors and Anthony Burns as its secretary.

7 On 15 April 2003 Richard Ayache and Scott Kitas ceased to be directors and Anthony Burns and Ms Kitas were appointed as directors of Isabella Mode. Mr Burns and Ms Kitas became the sole shareholders of Isabella Mode, each holding 13,600 of the company’s issued shares.

8 In August 2003 the plaintiffs attended a public meeting organised by an investment broker named Garry Rudnick. Scott Kitas addressed the meeting saying that he was a property developer with 20 years’ experience in some 150 development projects. He explained that he was seeking to borrow funds for the refurbishment and expansion of a block of residential units at 188 Elswick Street, Leichhardt (the Leichhardt development). He introduced Anthony Burns as his business partner, describing him as a builder. He said that Isabella Mode was their investment vehicle and that he, his wife, Helen, and Mr Burns were its directors. Mr Kitas said that Isabella Mode had carried out a number of developments and that his wife had been involved in all of them. She was not present at the meeting. Mr Kitas explained that Ms Kitas was employed by IBM Australia. Mr Wayne recalled that Mr Kitas had described Ms Kitas as being a director of IBM. Mr Dover’s recollection was that he described her as an executive with IBM. Nothing turns on the characterisation of Ms Kitas’ association with IBM.

9 At the initial public meeting Mr Kitas was seeking to raise $900,000 to cover the costs of the renovation of the Elswick Street units. He estimated that the development would take around eight months to complete and that the units would be sold and the sales settled over the following four months. Funds were sought for a term of 12 months with interest at 30 per cent per annum on terms which provided for 50 per cent of the interest to be paid quarterly and the balance when the loan matured.

10 Mr Wayne and Mr Dover together with other prospective investors attended a further meeting in Mr Rudnick’s office in September 2003. On this occasion investors were given copies of a feasibility study of the Leichhardt development. Mr Kitas said that the loan would be secured by registered second mortgage over the Elswick Street premises and that the directors of Isabella Mode would give personal guarantees. He represented that the net assets of the directors were worth $5,000,000 and included properties in Paddington, Vaucluse, Manly, the Central Coast and in the Hunter region.

11 At subsequent meetings Scott Kitas showed documents to David Wayne and other prospective investors evidencing a loan of $3,825,000 by the ING Bank to Isabella Mode in connection with a nine unit development of premises at 5 Abbott Street, Coogee (the Coogee development). This loan was secured by registered first mortgage over the Abbott Street premises and two other premises, each single units owned by Isabella Mode in Potts Point and Eastlakes. Mr Wayne sighted documents relating to further loans to Isabella Mode by the ING Bank and the National Australia Bank which were secured by registered first mortgage over the Elswick Street property and a property in Hillsdale.

12 Through Mr Wayne the Trust retained Nicholas Prassas, a solicitor, to act for it in relation to the proposed investment in the Leichhardt development. Mr Wayne acted on behalf of the other unit holders in instructing Mr Prassas and in attending meetings with Scott Kitas.

13 On 3 December 2003 Scott Kitas and Anthony Burns attended a meeting with Mr Wayne and Mr Prassas. At this meeting consideration was given to the adequacy of the securities offered by Isabella Mode. Mr Wayne instructed Mr Prassas to obtain a company search of Isabella Mode. He sighted copies of the valuations obtained by the ING Bank with respect to the properties owned by Isabella Mode over which it was proposed the plaintiffs would take registered second mortgages. Mr Wayne considered that there was sufficient equity to cover the advances to Isabella Mode by ING and the plaintiffs.

14 Prior to the execution of the loan agreement Mr Wayne sighted a letter, dated 1 December 2003, written by the ING Bank to the directors of Isabella Mode relating to an advance of $3,560,000 for the Leichhardt development. The guarantors of this facility were Scott Kitas, Anthony Burns and Helen Kitas. The estimated cost of the Leichhardt development was $4,485,000. The sum that the plaintiffs proposed advancing to Isabella Mode for the Leichhardt development was $755,000. It was apparent to Mr Wayne that there was a shortfall of around $150,000 between the project costs and the funds being raised from the ING Bank and the Trust. Mr Wayne understood that Isabella Mode was in a position to meet the shortfall.

15 Scott Kitas was also promoting a development in Randwick at this time. Some of the unit holders in the Trust were interested in investing in the Randwick development. The return that Mr Kitas was offering on this development was 25 per cent per annum. Mr Wayne was aware that the Leichhardt development was being offered at a higher rate of return to investors than the Randwick development. He did not know the reason for the differing rates. He understood that a rate of 30 per cent per annum was consistent with rates in the market for second mortgage finance.

16 Mr Prassas wrote to Mr Wayne and Mr Kasparian as trustees of the Trust on 18 December 2003 noting that registered second mortgages would be available as security over properties owned by Isabella Mode; the Elswick Street premises; the Coogee premises; and the units in Potts Point Eastlakes. Mr Prassas noted that the ING Bank would have registered first mortgages over each property. Mr Prassas continued:

The securities for the loans by ING Bank are cross-collateralised. This means that a default on one loan is a default on any other loan in that portfolio jointly or severally enabling ING to exercise its rights on any or all the securities. A discharge of the loan on a particular security property is not the occasion for your subordinated loan to have priority of payment until all the loans of the ING portfolio are fully discharged. In other words, your subordinated moves to the status of a first registered charge when the portfolio of loans by ING are fully discharged. This is imposed upon you by a Deed of Priority with ING Bank as parties contractually. Other disconcerting features of that Deed of Priority for you are as follows:
(a) The prevention by you to enforce your own security over the security property on an “event of default” – fully set out in the Loan Agreement and Mortgage Instrument – without the prior written consent of ING Bank. For example, if interest is not paid on time or principal is not paid on maturity date then you could not force the sale of a property without ING Bank’s consent otherwise available to you by law pursuant to the Conveyancing Act and Real Property Act. Nor without the prior written consent of the ING Bank are you allowed to sue the company in a claim for debt without the prior written consent of ING Bank.
(b) Payments of any interest on your principal requiring the consent of the ING Bank.
(c) That any proceeds from the security property are paid firstly to the ING Bank up to the priority amount (yet to be settled) and the balance of the proceeds then afforded to your account.
The only redeeming feature is that the company will agree to a contractual provision in the Loan Agreement that it will not borrow any more loans from the ING Bank as at the date of drawdown of your loan and that an act contrary to this provision would be deeded an “act of default” providing possibly an action for equitable relief by way of injunction to restrain the company breaching this provision. Also of course is that you have rights beyond that of an unsecured creditor in the event of a compulsory or a voluntary winding up of the company attaching your loan specifically to the security property albeit that your rights for enforcement could be deferred.
(d) Prevention by you of personally of guarantees and indemnities from the company directors without consent of the ING Bank. Of course any personal guarantees are diminished by the fact that ING Bank would have preference for its secured monies over the directors.

17 Mr Wayne understood that each of Isabella Mode’s directors would give a personal guarantee in support of the loan. Before the loan agreement was executed Mr Wayne knew that Scott Kitas was not a director of Isabella Mode.

The loan agreement

18 The loan agreement was executed by Isabella Mode on 24 December 2003. The lenders were David Wayne and Edvart Kasparian as trustees for the Trust (subsequently Maurice Dover was appointed as a trustee of the Trust). The borrower was Isabella Mode and the guarantors were Anthony Burns and Helen Kitas. The principal sum was $755,000. The maturity date was 12 months from the date of drawdown of the principal. Helen Kitas signed the loan agreement as a director of Isabella Mode and as a guarantor of the loan. She executed the guarantee on the same date. She also signed a handwritten authority for the funds to be deposited to the account of Isabella Mode.

19 The deed of guarantee executed by Ms Kitas guaranteed repayment of the advance and indemnified Mr Wayne and Mr Kasparian, as trustees for the Trust, against all loss or damage by reason of any failure of liability on the part of the borrower. Clause 6(a) of the guarantee provides:

Without affecting the liability of the Guarantor or the Borrower to the lender, the lender may postpone for any time or from time to time the exercise of the powers of sale or other rights and remedies conferred upon the Lender or implied by the said Mortgage and may exercise the same and enforce the covenants for payment of the principal sum or interest or other moneys or other covenants, agreements, conditions or stipulations contained in or implied in the said Securities or the Loan Agreement or any other remedies or securities available to the Lender at any time and in any manner and the Guarantor shall not be released by any exercise or enforcement or attempted exercise or enforcement by the Lender of its rights and remedies with regard to the matters aforesaid or any of them or by time or any indulgence being given to the Borrower or the Guarantor or any of them or by any variation in the provisions of the said securities or the Loan Agreement or by any other thing whatsoever which under any law would but for this provision have the effect of so releasing the Guarantor or any of them .
The variation to the loan agreement

20 In late 2004, as the date on which the loan was to mature approached, Isabella Mode sought to vary the loan agreement so as to capitalise outstanding interest and to extend the term by three months. At this time the trustees had retained Mr Noonan, a solicitor, to act on their behalf. The trustees were willing to vary the loan agreement subject to interest being paid at 42 per cent per annum (40 per cent in the event of payment within seven days of the due date). Mr Noonan was instructed to prepare the deed of variation of loan and the variation of mortgage.

21 Mr Wayne did not recall the circumstances in which he signed the deed of variation of loan. He believed that the signatures of the persons executing it on behalf of Isabella Mode and as guarantors were on the deed. He did not pay attention to the signatures. He did not compare the signatures on the deed with the signatures of Mr Burns and Ms Kitas on the loan agreement and guarantee.

22 The deed of variation of loan is expressed to be between David Wayne and Edvart Kasparian as trustees of the Trust and Isabella Mode and Anthony Burns and Helen Kitas. The principal sum under the loan agreement as varied is $868,250 and the maturity date is 23 March 2005. The deed does not bear the company seal of Isabella Mode. It purports to be signed on behalf of Isabella Mode in accordance with s 127 of the Corporations Act 2001 (Cth). The signatures of the persons signing on behalf of Isabella Mode purport to have been witnessed by Richard Ayache.

Helen Kitas

23 Helen Kitas met Scott Kitas around 1991. They married in 1997 and they remain together. They have two children. Throughout her marriage Ms Kitas has been employed by IBM Australia. Scott Kitas has at all times been a property developer. Both Mr Kitas and Ms Kitas have contributed to the family’s finances including the repayments on the family home. Her contributions came from her earnings and his from his property development activities.

24 Ms Kitas completed Year 12 studies at the Dulwich Hill High School in 1982. After leaving school she obtained a Diploma in Computer Programming. She has worked with a number of major firms in information technology services. She commenced employment as a computer programmer with IBM in 1994. Currently she works in software sales. It is her job to match the needs of companies for specialised programs with the software products marketed by IBM.

25 Scott Kitas has procured his wife’s consent to act as a director of a number of companies which have been used by him in connection with development or other business projects or which have been acquired as vehicles for the arrangement of the couple’s financial affairs. Ms Kitas has not been involved in the affairs of any of the companies of which she has been a director. She has a general appreciation of the fact that directors of companies are subject to legal duties. She has relied on her husband to conduct the affairs of the companies of which she has been a director.

26 In 2003 Ms Kitas became aware that her husband was involved in a business venture with Anthony Burns. She met Mr Burns at this time. Around April 2003 her husband told her that he wanted her to become a joint director of a company that was to be set up as the vehicle for property investment. In her affidavit, which was sworn on 2 November 2006, Ms Kitas said that she agreed to the proposal saying, “As long as it doesn’t require any effort or any time of me. You know I don’t know anything about what a director is supposed to do though don’t you?”. Mr Kitas reassured her saying, “Don’t worry we will make sure everything is ok” (paragraph 9).

27 Ms Kitas recalled signing a document shortly after this discussion by which she consented to act as a director of Isabella Mode. She said that she recalled signing the document in a rushed atmosphere without anyone explaining the meaning of it to her.

28 Ms Kitas became a director of Isabella Mode shortly before it entered into arrangements with the ING Bank for the loan of $3,825,00 to assist with the purchase of the premises at 5 Abbott Street, Coogee. She signed the ING Bank letter of offer dated 14 April 2003, a mortgage and a fixed and floating charge both of which were dated 16 April 2003 in connection with this advance. In her affidavit she describes the circumstances in which she signed each of the documents. Mr Burns asked her to sign some documents in connection with a loan for the business. She queried whether everything was “OK” and he told her that she did not have to worry about a thing. She understood that the document to be signed related to a loan for Isabella Mode. Following this discussion Ms Kitas signed the letter of offer without reading it. Shortly afterwards attended a meeting with her husband and Mr Burns at which she was asked to sign further documents in connection with the loan. Mr Kitas said to her, “Everything will be fine. We need your signature” (paragraph 19). Ms Kitas signed the documents without reading them. She did not know what a fixed and floating charge was at the time she signed the documents.

29 Ms Kitas had no involvement in Isabella Mode’s day to day affairs. She did not have a detailed knowledge or understanding of property investment. She knew in April 2003 that money was to be advanced by the ING Bank to Isabella Mode for the Coogee development. She understood that she was to provide a personal guarantee of Isabella Mode’s obligations under the loan from the ING Bank and that she would be responsible for repayment of the loan if Isabella Mode failed to do so. She knew that the advance was of the order of $3.8 million.

30 Ms Kitas is an intelligent and capable individual. She considered her husband to be a competent property developer. She knew that she was a director of Isabella Mode and that she held half of its issued shares. She understood that on the winding up of the company she and Mr Burns would be entitled to share equally in the net assets of the company.

31 By further amended defence, which was verified on 18 June 2007, Ms Kitas admitted signing the loan agreement and guarantee. She pleads that the deed of variation of loan and the variation of mortgage are not signed by her and are not her deeds.

32 In her affidavit Ms Kitas said that she signed the guarantee and the loan agreement and the authority to transfer funds on 24 December 2003. She gave a detailed account of the circumstances in which she had done so. On 23 December 2003 her husband had told her that it might be necessary for her to come to the city to sign some documents and that she responded, “You’ve got to be joking. Can’t it wait until after Christmas? Scott, I am really busy with work and it is hard to leave work to come into the city”. She was quite upset because of the pressures of work and because she was in the third trimester of her pregnancy. The next day her husband telephoned and asked her to come to the city to sign some documents. He said that it would be a short meeting at Gadens, the solicitors who acted for Isabella Mode. Again, she asked if the matter could wait and he said it was necessary to have the documents executed on that day.

33 In oral evidence Ms Kitas recalled that her husband picked her up from her work and drove her to the offices of Gadens. She had asked him for some explanation of the documents that she was to sign and she was told, “it’s for funds for Isabella Mode” (T 134.41). He had not responded to further questioning on the topic. In the course of cross-examination Ms Kitas said that, “I signed a piece of document forced by my husband” (T 132.33-34). She explained her reference to having been “forced” to sign the document as being her husband’s statement that she needed to sign the documents and that “everything would be fine”.

34 The documents were signed in a conference room at Gadens. There were a number of people present, including Mr Burns and a solicitor from Gadens whom Ms Kitas had met on previous occasions. She understood that she could ask questions of the solicitor about the documents but she did not because the occasion was rushed (T 136. 33). Mr Burns handed her a document saying, “They need us to sign these documents. Can you sign here please?” It was Christmas Eve and everyone appeared to be in a happy mood. She recalled her husband and Mr Burns saying words to the effect, “Don’t worry. This is just normal. There is nothing for you to worry about – just sign it – you don’t have to read them”. She needed to get back to work. She signed the documents assuming that the transaction was a “safe transaction” (affidavit paragraphs 26-27).

35 Ms Kitas was not offered, and did not seek, legal advice concerning the liability that she was assuming under the guarantee.

36 Ms Kitas had no role in the negotiations which led to the execution of the loan agreement and guarantee. I am satisfied that Ms Kitas knew that she was signing a loan agreement on behalf of Isabella Mode as a director and as guarantor of its indebtedness. She said that she did not know that one of the documents that she signed on 24 December 2003 was a guarantee. I accept that she did not read the document in full but I am satisfied that she knew that she was signing a guarantee. The deed is headed in bold capitals GUARANTEE AND INDEMNITY. The opening words appear again in bold capitals, “THIS GUARANTEE AND INDEMNITY”. Ms Kitas initialled this page. She has no difficulty in reading. I am satisfied that Ms Kitas knew that she was signing a personal guarantee of Isabella Mode’s obligations under the loan agreement and that she had a general understanding of the legal effect of a guarantee.

The execution of the deed of variation of the loan

37 Ms Kitas has consistently maintained that she did not sign the deed of variation of loan or the variation mortgage. In cross-examination her attention was directed to the earlier loan agreement (Ex “A” pp 118-135) and she acknowledged that the signatures above the name “Helen Kitas” are hers (Ex “A” pp 134 and 135). She acknowledged that the initials on the loan agreement are her initials. She agreed that there was no doubt in her mind that the initials and the signatures were hers. She said that she had never disputed that she had signed the loan agreement. She was shown a copy of the guarantee (Ex “A” at pp 154 – 159). She agreed that the initials and the signature were hers.

38 The assertions made in Ms Kitas’ affidavit, which was sworn after her further amended defence was filed, and her oral evidence - that the signatures on the deed of variation of loan and the variation of mortgage are not hers - need to be assessed against the pleading of her earlier defence, which was verified on 21 April 2006. At that time in answer to the entire claim Ms Kitas pleaded:

7(a) that the signature on the Agreement and Guarantee do not appear to be of the second defendant;
(b) that the signature on the Variation of Loan is not of the second defendant.

39 The pleading in the earlier defence that the signature on the Agreement and Guarantee do not appear to be hers does not stand with Ms Kitas’ recall of the circumstances in which she signed both documents and her evidence that there is no doubt in her mind that the signatures on the documents are hers. Ms Kitas’ evidence on this issue was not satisfactory. It was put to her that she had no explanation for the assertion made in the defence that the signatures on the agreement and guarantee did not appear to be hers. She responded:

I think it’s – I don’t know if it is a mistake or a typo but that is my signature. I’m not denying that (T 130.56-57).
The answer understood in context was that Ms Kitas did not know whether the defence contained a mistake or typographical error but that she had at no time failed to acknowledge that the signatures on the loan agreement and guarantee were hers. The suggestion that the pleading of paragraph 7(a) in the defence may have been a typographical error is untenable. Ms Kitas said that the pleading of the defence [that the signatures on the loan agreement and guarantee did not appear to be her signatures] was “probably a misunderstanding” (T 130.15). It is difficult to see how such a misunderstanding could have come about given Ms Kitas’ confidence that she had always recognised her signatures on the loan agreement and guarantee and that she had read the defence before she swore the affidavit verifying it.

40 I did not accept Ms Kitas’ evidence that the signatures on the deed of variation of loan and the variation of the mortgage were not hers. It remains that it is for the plaintiffs to establish that Ms Kitas executed the deed of variation of loan. The original is not in evidence. None of the original documents are in evidence. Copies of various documents bearing Ms Kitas’ admitted signature form part of Ex “A”. The signatures purporting to be those of Ms Kitas on the deed of variation of loan (Ex “A” p 175) and the variation of mortgage (Ex “A” p 177) differ in a number of respects from her admitted signatures on the loan agreement and the guarantee.

41 No expert evidence was led concerning the appearance of the signatures on the deed of variation of loan and the variation of mortgage in comparison with the admitted signatures. Mr Young, who appeared on the plaintiffs’ behalf, submitted that some people do not always execute their signature in the same way. In this respect it is to be observed that there appear to be differences between Ms Kitas’ signature on the fixed and floating charge dated 16 April 2003, (Ex “A” p 87) and her signature on the loan agreement (Ex “A” p 134). The signature on Ms Kitas’ affidavit sworn on 2 November 2006 differs in some respects from her signature on the loan agreement. I accept that Ms Kitas does not always sign her name in exactly the same way.

42 Ms Kitas recalled the occasions on which she had signed the consent to act as a director of Isabella Mode, the letter of offer by the ING Bank, the fixed and floating charge dated 16 April and the loan agreement and guarantee. She had no recall of an occasion on which she signed further documents on Isabella Mode’s behalf relating to the loan. Taking into account Ms Kitas’ unsatisfactory evidence concerning the earlier defence and her poor recall of the circumstances in which she had signed documents on behalf of companies, I did not accept Ms Kitas’ evidence in this respect as reliable.

43 Ms Kitas was shown a document which she said appeared to have been signed by her (an ASIC Form 902, Ex “A” p 32). She had no recall of previously seeing it. She did not recall whether she had signed documents on behalf of other companies of which she was a director. She was asked this question and she gave this answer:

Q. You have got a very good recollection, have you, of what documents you have signed and what you haven’t signed in relation to Isabella Mode?

A. I don’t know until I see them, so I can’t, I can’t give you an answer. You know I need to see what the documents are and I can tell you whether I have signed it, if it is my signature or not (T 126.39 –45).

44 There was no evidence concerning the circumstances in which the deed of variation of loan and the variation of mortgage were executed by Isabella Mode. Mr Ireland QC, who appeared for Ms Kitas, submitted that a Jones v Dunkel inference should be drawn against the plaintiffs arising from their unexplained failure to call Mr Noonan, the solicitor who acted for them in relation to the variation of the loan agreement and who appears to have been instructed to prepare the deed of variation and the variation of mortgage. Mr Young submitted that a Jones v Dunkel inference should be drawn against Ms Kitas, arising from her unexplained failure to call Richard Ayache, who witnessed the execution of the deed of variation of loan and the variation of mortgage on behalf of Isabella Mode. Ms Kitas was cross-examined about Mr Ayache whom she described as an associate of Anthony Burns. She had met him on several occasions through her association with Mr Burns. She had not seen Mr Ayache for two or three years prior to giving evidence.

45 I do not draw any inferences adverse to either party on the principles explained in Jones v Dunkel in determining this issue, which was the central factual issue in the case. There is no reason to infer that Mr Noonan would have relevant evidence to give in relation to the execution of the deed of variation of loan or the variation of mortgage by Isabella Mode and hence no reason to draw an inference arising from the failure to call him.

46 Neither party sought to lead evidence from Mr Ayache. Mr Ayache was an associate of Mr Burns and it may be inferred that he had some association with Mr Kitas. It was not submitted that an inference adverse to the plaintiffs should be drawn from their failure to call him. It is Ms Kitas’ case that the signature witnessed by Mr Ayache which purports to be hers is a forgery. Given that she was acquainted with Mr Ayache in December 2004 it is to be expected that he would know if some other person signed the documents in her name. In these circumstances I am not persuaded that I should draw an inference adverse to Ms Kitas arising from the failure to lead evidence from Mr Ayache in her case.

47 By early December 2004 the original loan was about to mature and Isabella Mode wished to have it extended for a further three months and to capitalise the interest which would otherwise have been due on 24 December 2004. This is what happened. If Ms Kitas did not sign the deed of variation the probability is that either her husband or Mr Burns forged her signature, since these are the two other persons who had an interest in seeing Isabella Mode obtain the benefit of the variation to the loan agreement.

48 Ms Kitas acted on her husband’s advice in relation to signing documents on behalf of Isabella Mode. She had accepted his and Mr Burns’s assurances with respect to signing the consent to act as director; the ING Bank letter of offer; the fixed and floating charge dated 16 April; and the loan agreement and guarantee. Her evidence is silent on the proposal in late 2004 that Isabella Mode procure a short extension of the term of the loan agreement. She gave no evidence of any discussion with her husband or Mr Burns about the matter. There is nothing to suggest that Mr Burns or Mr Kitas had any reason for concern that Ms Kitas would not act on their advice and execute the deed of variation of loan. The suggestion that the signatures purporting to be those of Ms Kitas on the deed of variation of loan and the variation of mortgage are forgeries is to my mind unlikely.

49 I am satisfied on the balance of probability that in late December 2004 Isabella Mode required a short extension of the loan from the plaintiffs and that Ms Kitas signed the deed of variation of loan and the variation of mortgage on the advice of her husband just as she had signed other documents on his advice.

50 The plaintiffs submitted that even if Ms Kitas did not sign the deed of variation of loan, and accordingly did not consent to the variation, Isabella Mode was nonetheless bound by the deed because the plaintiffs were entitled to rely on the assumptions contained in sections 128 and 129 of the Corporations Act 2001 (Cth) in dealing with Isabella Mode.

51 Relevantly, s 128 provides:

(1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
…
(3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document in connection with the dealings.
(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

52 Mr Ireland did not submit that the plaintiffs were not entitled to make an assumption under s 129 because at the time of the dealings they knew or suspected that the assumption was incorrect for the purposes of s 128(4).

53 Section 129(5) provides:

A person may assume that a document has been duly executed by a company if the document appears to have been signed in accordance with subsection 127(1). For the purpose of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary occupies both offices.

54 Section 127(1) provides:

(1) A company may execute a document without using a common seal if the document is signed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary—that director.

55 Mr Ireland submitted that the deed of variation of loan did not appear to have been executed in accordance with s 127(1) in that the signature next to the name “Helen” did not purport to be that of a director of Isabella Mode. Prior to entering into the loan agreement the plaintiffs had obtained a company search of Isabella Mode. They were aware that Anthony Burns and Helen Kitas were its directors. The deed is expressed to be “EXECUTED BY ISABELLA MODE PTY LIMITED as Borrower in accordance with Section 127 of the Corporations Act”. In the right hand column the names “Anthony” and “Helen” are handwritten with an “x” beside each, signifying that the persons Anthony and Helen should append their signatures in the marked space. A signature appears adjacent to the name “Helen”. This signature appears to be the same as the signature on the following page in the space provided for the signature of “Helen Kitas”. I consider that the plaintiffs were entitled to assume that the deed of variation of mortgage had been duly executed under s 127 (1) of the Corporations Act by being signed by two directors of Isabella Mode. It appeared to have been signed on Isabella Mode’s behalf by the two persons who were known to be its directors.

56 If I am wrong in concluding that Ms Kitas signed the deed of variation of loan on behalf of Isabella Mode and as guarantor, I accept Mr Young’s submission that the deed was nonetheless binding on Isabella Mode. Ms Kitas contends that the loan agreement and guarantee were varied without her knowledge or consent and that the variation in the obligations under the loan agreement operates to discharge the guarantee. Mr Young relied on the provision of clause 6(a) of the guarantee: the guarantor would not be released by any other thing whatsoever including by any variation in the provisions of the securities or the loan agreement. I accept that the variation in the obligation under the loan agreement did not operate to discharge the guarantee.

57 Subject to consideration of Ms Kitas’ cross-claim I am satisfied that the plaintiffs have established that Ms Kitas is liable to them on her guarantee for the principal sum advanced to Isabella Mode, as varied by the deed dated 10 December 2004, together with outstanding interest calculated in accordance with the loan agreement, as varied.

The amended cross-claim

58 In oral submissions Mr Ireland placed principal focus on the contention that enforcement of the guarantee against Ms Kitas would be unconscionable for reasons analogous to those explained by the High Court in Garcia v National Australia Bank Ltd [1998] HCA 48; 194 CLR 395.

59 In the joint judgment in Garcia at 408 [31] Gaudron, McHugh, Gummow and Hayne JJ said:

The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that:

(a) in fact the surety did not understand the purport and effect of the transaction;

(b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);

(c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet

(d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.

60 Mr Ireland’s starting point was that Mr Burns and Mr Kitas operated the business of Isabella Mode and that Ms Kitas had no active role in the conduct of it. None of the plaintiffs had met Ms Kitas and they took no steps to enquire whether she had obtained independent advice concerning her position as guarantor of the proposed advance. He submitted that the plaintiffs had not sought to evaluate Isabella Mode’s true financial position despite Mr Prassas’ advice in his letter of 18 December 2003. In Mr Ireland’s submission, Mr Prassas’ advice, combined with the information concerning the project costs against borrowings served to make clear to the plaintiffs that the project was attended by significant risk. Given that the plaintiffs’ dealings had been with Scott Kitas and their knowledge that he had provided a personal guarantee to support the ING Bank facility, it was submitted to be extraordinary that a personal guarantee was taken from Ms Kitas without inquiry as why none was being offered by her husband.

61 Mr Ireland submitted that the financial fragility of the Leichhardt project was made known to the lender (the project costs against the loan advances), but not to Ms Kitas. In his submission this was an apparently high risk high interest transaction in which there was an obligation on the plaintiffs to ensure that Ms Kitas had been given the opportunity to obtain independent financial and legal advice concerning her potential liability as guarantor.

62 Mr Ireland submitted that the Court should look behind the Isabella Mode share register to the reality of the transaction which was that her “technical interest” was not such as to disqualify her from invoking the principles in Garcia. In this respect Mr Ireland submitted that there was, “no great value in underwriting the obligation of an insolvent company” (T 160.39-40).

63 Although the amended cross-claim pleads that Ms Kitas acted subject to the undue influence of her husband, Mr Ireland did not submit that the case came within the first kind of case to which Dixon J referred in Yerkey v Jones. I do not find that Ms Kitas was subject to the actual undue influence of her husband (or Anthony Burns) in executing the loan agreement or guarantee or the deed of variation of loan. To the extent that Mr Ireland relied on the principles in Yerkey v Jones and Garcia, it was in relation to the second category of case, namely on the basis that Ms Kitas did not understand the purport and effect of the documents that she signed on 24 December 2003.

64 Ms Kitas had no day-to-day involvement in the business of Isabella Mode. Nonetheless, it is not correct to characterise Ms Kitas as having a technical interest only in the loan agreement. She had a 50 per cent shareholding in Isabella Mode and stood to obtain the benefit of any profit made by it in connection with the Leichhardt project. The loan was taken out in December 2003. Contrary to the submissions put on her behalf, the evidence did not establish that at that date Isabella Mode was insolvent or was on the verge of insolvency.

65 In December 2003 Isabella Mode was involved in the Coogee development and was about to embark on the Leichhardt development. Ms Kitas understood that her husband had a successful background in property development. The evidence does not establish that the Leichhardt development was an inherently financially fragile project. The memorandum prepared by Mr Prassas on or about 10 December 2003, which is addressed to Mr Wayne (Ex “1”, p 7) provides some explanation for the suggested shortfall between the loan advances and the project costs. It appears that premises in Wiley Park were due to settle in December 2003 yielding net proceeds of $700,000, of which approximately $300,000 was to be held by the ING Bank and the balance of which was to be appropriated to the purchase of the Leichhardt property.

66 The plaintiffs did not meet Ms Kitas and they did not seek any assurance that she had received independent advice relating to her proposed role as guarantor of the obligations of Isabella Mode. The inquiries that the plaintiffs made established that Ms Kitas was a director of Isabella Mode. Ms Kitas beneficially owned half the company. The lenders’ failure to inquire whether Ms Kitas had been independently advised about her role as guarantor of the loan does not to my mind give rise to an entitlement to have the guarantee set aside by reference to the principles explained in Yerkey v Jones and Garcia since while Scott Kitas was the prime mover behind the Leichhardt development, it does not seem to me to be apt to categorise Ms Kitas as a volunteer.

67 In the alternative Ms Kitas claims an order setting aside the agreement and guarantee pursuant to the CRA. In paragraph 4 sub paras (a) – (f) of her amended statement of cross-claim she pleads circumstances relating to the loan agreement and guarantee insofar as they impose obligations on her as being unjust at the time they were made. Section 7 of the CRA provides:

7 Principal relief

(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
…

9 Matters to be considered by Court

(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or contravention of, any or all of the provisions of the contract.
(2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following:
(a) whether or not there was any material inequality in bargaining power between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,
(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
…
(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,
(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:
(i) by any other party to the contract,
(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or
(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,
…
(4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
…

68 The second defendant pleaded the following circumstances relating to the agreement and guarantee insofar as they impose obligations on her as being unjust at the time they were made:

(a) The material inequality and bargaining power between the cross-claimant and the other parties to the Agreement and Guarantee;
(b) the fact that prior to the execution of the Agreement and Guarantee the terms of those documents were not the subject of negotiation;
(c) the fact that it was not reasonably practicable for the cross-claimant to negotiate for the alteration of or reject any provision of the Agreement and Guarantee;
(d) the fact that the cross-claimant was not able to and did not obtain independent legal or financial advice with respect to the Agreement or Guarantee;
(e) the fact that the legal and practical effect of the Agreement and Guarantee were not explained to the cross-claimant;
(f) the unfair pressure and undue influence exerted by Burns and Scott Kitas on the cross-claimant to the knowledge of the first and second cross-defendants.

69 In West v AGC (Advances) Ltd (1986) 5 NSWLR 610 McHugh JA said at 621:

If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice.

70 In Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA Beazley JA (with whose judgment the other members of the Court concurred) said at [78]:

It would appear that the trend of authority since West is that the Contracts Review Act permits a court not only to look at the terms of the contract per se , to see its terms are unjust, (sic) but to look at the circumstances in which the contract was made and its effect, having regard to those circumstances. It is not sufficient, however, for a claimant for relief under the Act merely to point to a loss or inopportune transaction. This approach, in my view, is not inconsistent with what McHugh JA said in West . Rather, as Mahoney P pointed out in Elders v Smith , it gives full effect to what McHugh JA said.

71 Mr Ireland did not address submissions in support of the claim that the loan agreement (or any provision of it) was unjust in the circumstances relating to the agreement at the time it was made for the purposes of s 7 of the CRA beyond the submissions going to unconscionability that I have referred to above. He referred to the very high rate of interest under the loan agreement, but he did not submit that this provision, by itself, grounded relief under the CRA.

72 No submissions were developed by Mr Ireland as to the asserted material inequality and bargaining power between Ms Kitas and the plaintiffs. Prior to the execution of the agreement and guarantee, Mr Blundell, of Gadens, was in communication with Mr Prassas on behalf of the plaintiffs in relation to the negotiation of various terms of the loan agreement (Ex “C”). Mr Blundell appears to have negotiated for certain variations in the terms that were proposed.

73 I am not persuaded that Ms Kitas has established that the loan agreement or guarantee insofar as they impose obligations on her were unjust at the time they were made for the purposes of s 9 of the CRA. Accordingly, no question of the discretion to grant relief under s 7 of the CRA arises.

74 For these reasons the amended cross-claim will be dismissed with costs and there will be a verdict and judgment for the plaintiffs against Ms Kitas for the sum of $868,250.00 together with interest calculated under the loan agreement as varied with costs. The parties were agreed on the calculations set out in Ex “B”, which appear to have been made as at 19 June 2007. The parties may bring in short minutes in accordance with these reasons incorporating the agreed judgment sum at the date of judgment within 14 days of today’s date. In default of agreement the matter may be re-listed for further submissions by arrangement with my Associate.

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27/08/2007	-	File number correction - Paragraph(s) [Coversheet]
16/11/2007	-	Typographical error - Paragraph(s) [64]