Keam & Anor v Milne & Ors No. DCCIV-96-1570 Judgment No. D114

[1999] SADC 114

PETER ALAN KEAM & ANTANAS TOMAS LAPSYS v PETER JOHN MILNE, GEOFFREY WILLIAM REDIN, ROBERT JOHN DETTMAN and KEITH NEIGHBOUR
[1999] SADC D114

Judge Lunn
Civil

1. This is a claim by two guarantors for contribution against their four co-guarantors.  The issues can be decided upon the contents of the relevant documents and the largely undisputed background facts.

2. The Australian and New Zealand Banking Group Limited (“the ANZ”) is not a party to this action and none of its officers gave evidence at the trial.  Some of my conclusions may reflect adversely on the ANZ, but those conclusions have been reached without hearing from the ANZ and are not binding upon it.

3. The parties are all architects who were the directors of KMH Neighbour Lapsys Architects Pty Ltd (“the Practice Company”).  They jointly gave a guarantee to the ANZ over the indebtedness of the Practice Company to the ANZ (“the guaranteed debt”).  This guarantee also covered the indebtedness of other related companies to the ANZ, but it is not necessary to go into details.

4. Archdev Pty Ltd (“Archdev”) was a company of which all the parties were directors and it was involved in investments for the six directors.  It held a parcel of units in the McCracken Investors Unit Trust (“the McCracken Trust”).  That Trust had an interest in a golf course and residential development near Victor Harbour.

5. Ploughmans Inn Pty Ltd (“Ploughman”) was a company in which Keam, Redin and Milne were interested through their respective personal investment companies.  It also held units in the McCracken Trust.

6. On 9 March 1993 the Practice Company was wound up by the Supreme Court as it was insolvent.  On 17 August 1993 the ANZ sued the six guarantors in the Supreme Court for $1,063,567 as money owing under their guarantee of the Practice Company.  On 15 October 1993 all six of the guarantors gave an acknowledgment of debt to the ANZ for a total of $1,063,567 plus interest.

7. The defendant Milne had a large separate liability to the ANZ from a guarantee which he had given for his own development company, Enlim Nominees Pty Ltd (“Enlim”). A deed was entered into on 10 June 1993 (“the 10 June 1993 Deed”) whereby Milne and his wife agreed to pay to the ANZ in full and final satisfaction of the direct indebtedness of Enlim to the ANZ $340,000 within six months or greater amounts over a longer period.  This deed by its terms did not affect the liability of Milne to the ANZ on his guarantee to it of the Practice Company.  Much of the money payable was to be raised by a sale of the home of Milne and his wife, which ultimately occurred.  The payments due under this deed exhausted the financial resources of Milne.  The deed also required Property Developments Pty Ltd, another company controlled by Milne, to give security for the moneys payable by Milne under it by executing a “mortgage, charge or lien” over 100,000 units in the McCracken Trust which it owned.  Effect was apparently given to this clause by the execution of a document called a “Scrip Lien” dated 1 July 1993, but it was not tendered.

8. In November 1993 there was a meeting between the six guarantors, and representatives of the ANZ to discuss the guaranteed debt.  Milne and Redin walked out part way through that meeting and thereafter they took no part in the negotiations between the other four directors and the ANZ.  Milne continued negotiations with the ANZ without reference to the other four directors and on the basis that he could not afford to pay anything off the guaranteed debt.  On 19 January 1994 Milne entered into another deed with the ANZ (“the 10 January 1994 Deed”) whereby the Scrip Lien of 1 July 1993 was also made security for the guaranteed debt and the ANZ covenanted not to sue Milne for the guaranteed debt.  In law this deed prevented the ANZ from enforcing the guaranteed debt against Milne, but without affecting the liability of the other five guarantors to pay it because it only contained a covenant not to sue, and not a release of the guaranteed debt.  The Scrip Lien of 1 July 1993 was security for the ANZ against the repayment of the guaranteed debt by the remaining five guarantors.  The moneys due to the ANZ under the 10 June 1993 Deed were paid.

9. The four guarantors apart from Milne and Redin continued their negotiations with the ANZ without reference to the other two.  These negotiations culminated in a deed dated 2 March 1994 (“the 2 March 1994 Deed”) made between the ANZ, the four guarantors, Ploughman and Maek Nominees Pty Ltd (“Maek”), a family company of Keam.  The relevant parts of this deed provided:

   “WHEREAS; ...........

   H...... The Guarantors have requested the Bank to accept an amount less than the full amount now due and certain other securities in settlement of its claims against them.

   I.The Bank has agreed to accept the amount and the securities hereinafter referred to on the terms and conditions hereinafter contained.

   NOW THIS DEED WITNESSES .............

   2.The Guarantors jointly shall on or before the 15th day of March 1994 pay to the Bank the sum of ($360,000.00) ...........

   3...... The Guarantors shall, .................procure Archdev immediately to execute and deliver to the Bank a Mortgage, charge or lien in such form as the Bank shall reasonably require over 100,000 units in the McCracken Investors Unit Trust ................

   4...... (a)     Maek shall execute and deliver to the Bank a Mortgage, charge or lien ............ over 50,000 units in the McCracken Investors Unit Trust .....................

   5.     (a)     The trustees of The R & R Dettman Family Trust shall execute and deliver to the Bank a Mortgage, charge or lien ............... over 5,000 units in the McCracken Investors Unit Trust ....................

   6...... (a)     Ploughmans shall execute and deliver to the Bank a Mortgage, charge or lien .............. over 35,000 units in the McCracken Investors Unit Trust ................

   7...... The parties EXPRESSLY ACKNOWLEDGE AND AGREE that immediately upon execution of the Mortgages, charges or liens referred to in clauses 3, 4, 5 and 6 respectively, the Bank shall have an immediate and unconditional right to exercise (or refrain from exercising) all powers and authorities thereby created, including a power of sale, without the necessity for any further demands and at such time or times as the Bank shall in its absolute discretion think fit, and for the benefit of the Bank alone.

   8.In consideration of the performance and observance in full by:

   (a).... the Guarantors of the obligations on their part to be performed and observed ................ the Bank covenants with the Guarantors and each of them that the Bank will not futher prosecute the Supreme Court proceedings presently extant or sue or issue any other legal proceedings against them or any of them in respect of the KMH Guarantee in full and final satisfaction and discharge of their obligations thereunder.

   9...... In the event that any one or more of the parties hereto (other than the Bank) defaults in the performance of his or its or their obligations hereunder and that default continues unremedied for a period of seven (7) days:

   (a).... this Deed shall be void and of no effect so far as it relates to that defaulting party or those defaulting parties only; and

   (b)    the Bank shall be at liberty forthwith to proceed against that defaulting party or those defaulting parties (as the case may be) only for the whole of the indebtedness and liability then remaining and outstanding in respect of the KMH Guarantee ..............” (Underlining added)

(“The Guarantors” in this deed mean only Keam, Lapsys, Dettman and Neighbour.  Milne and Redin were not parties to it.)

1. As the correct interpretation of this deed is crucial to the issues in this case I interrupt the narrative to deal with it.  There is no doubt that it limited the joint liability of the four guarantors who signed it to $360,000.  The initial question is whether it also affected the liability of Milne and Redin for the guaranteed debt.  If it was only a covenant not to sue the four directors, it would not have, but, if it was a release of the guaranteed debt to the four guarantors, in law it released the liability for the whole of the guaranteed debt of all six guarantors: Nicholson v Revell (1836) 111 ER 941; Deanplan Ltd v Mahmoud [1993] Ch 151; Cashmere v Morris [1993] 3 NZLR 587; Mercantile Bank of Sydney v Taylor (1891) 12 NSWR (L) 252.  Unfortunately, the draftsperson of this deed used terminology which was appropriate both for a covenant not to sue and for a release.  From recital H and the passage underlined above in clause 7 I consider that the deed operated as a release and therefore the whole of the guaranteed debt was extinguished against all six guarantors.  (Even though the 10 June 1993 Deed contained a covenant not to sue Milne, it was still possible in law for the 2 March 1994 Deed to extinguish his debt.)  The $360,000 was paid on the due date of 15 March 1994 and thus made the release effectual.  Of this sum $142,000 was paid by each of Keam and Lapsys and $75,000 by Dettman.  Thereafter, nothing was owed by any of the six guarantors to the ANZ in relation to the guaranteed debt.

2. Unfortunately, the understandings of the parties and their advisers about the effect of the 2 March 1994 Deed differed from what I have found it to be.  It is a mystery why provisions were put into that deed for various parties to give securities over units in the McCracken Trust.  The time allowed for the payment of the $360,000 was only thirteen days from the execution of the deed.  There was no requirement that the mortgages over the units had to be given in that thirteen day period, and in fact they were not.  The intention of the ANZ may have been that it would have security over the units for the guaranteed debt if the $360,000 had not been paid and the deed had been cancelled under clause 9(a).  However, once the $360,000 was duly paid on 15 March there was no debt remaining over which such mortgages could operate.  Nevertheless, for some unexplained reason Ploughman and Dettman, and possibly Maek, each gave mortgages to the ANZ over their respective units in the McCracken Trust either wholly or in part to secure the money payable under the 2 March 1994 Deed.  Most of these mortgages were undated, but I infer that they were only executed after 15 March 1994.  There are also undated deeds, one supplementary to the 2 March 1994 Deed and the other between Archdev and the ANZ, whereby Archdev also mortgaged its units in the McCracken Trust to the ANZ as security for the guaranteed debt and the performance of the 2 March 1994 Deed.  I infer these deeds were executed after 15 March 1994, but, if so, they were of no effect in law.

3. Shortly before 11 May 1994 Keam approached the ANZ on behalf of Maek and requested that Maek be released from its obligation under the 2 March 1994 Deed to mortgage its units in the McCracken Trust.  The ANZ agreed to do so in consideration of Keam and Maek paying $10,000 to it.  A deed was entered into on 11 May 1994 between the ANZ, Keam and Maek whereby upon payment of $10,000 the ANZ released Keam and Maek from their obligations to mortgage Maek’s units in the McCracken Trust.  However, in law there was no obligation on Keam or Maek to give that mortgage as there was no debt outstanding over which it could have operated.  Keam duly paid the $10,000 to the ANZ on 10 May.  However, as the guaranteed debt had already been fully released before this payment of $10,000 was made it cannot be treated as a payment by Keam in reduction of it.

4. After 15 March 1994 negotiations continued between Redin and the ANZ in the mistaken belief that he still had a liability for the guaranteed debt.  This culminated in a deed dated 27 June 1994 between the ANZ, Redin and Glenbrook Constructions Pty Ltd (“Glenbrook”), a company controlled by Redin, whereby Redin agreed to pay $10,000 to the ANZ within six months and it covenanted not to sue him for the guaranteed debt.  In addition Glenbrook agreed to mortgage units which it held in the McCracken Trust as security for Redin’s performance of this deed, which it did.  Redin paid the $10,000 to the ANZ.  While on what I have decided this was not a payment in reduction of the guaranteed debt, the plaintiffs’ counsel conceded that it should be treated in these proceedings as if it was.

5. Part of the contentions of Milne and Redin was that the McCracken units which were delivered to the ANZ as related above were in reality transferred to the ANZ in reduction of the guaranteed debt and should be treated at their proper value as contributions in reduction of the guaranteed debt by the various guarantors who controlled them.  I cannot agree.  All of the documents executed by the ANZ are patently clear that it was only taking the various units by way of security and it was not at that stage taking any beneficial interest in them.  It is only possible to resort to extrinsic evidence about what was intended in the transactions with the ANZ if there is some ambiguity on the face of the deeds about what they meant in this regard.  There is none.  The transactions relating to the units are clearly designated as being by way of “mortgage, charge or lien” which has a clear and definite legal meaning.  No transfer of the units to the ANZ was ever effected in the records of the McCracken Trust.  The fact that it may have been nonsensical to have mortgaged the units after 15 March 1994 does not assist Milne and Redin: it was equally nonsensical to have transferred the units after 15 March 1994 as it was to have mortgaged them.  While there was probably some discussion with the ANZ about the transfer of units in the McCracken Trust that was never translated into the terms of the executed deeds.  No one has sought to rectify the terms of the deeds on the grounds that they did not properly reflect the intention of the parties.

6. The fact that the four guarantors compromised the guaranteed debt for $360,000 without the approval of Milne and Redin does not release them from having in law to make proper contributions towards the compromise sum: Walker v Bowry (1924) 35 CLR 48. It was not pleaded or shown that it was an improper compromise or that any better terms could have been agreed with the ANZ. There was no binding agreement between the four directors and the two directors that the two directors, or either of them, would not ultimately have to contribute to the four directors a proper amount towards what they had to pay to the ANZ to satisfy the guaranteed debt. There was no more than an understanding among the six directors between the November 1993 meeting and 2 March 1994 that the two directors would not be contributing anything at that stage to whatever amount the four directors, or some of them, had then to pay to the ANZ to satisfy the guaranteed debt.

7. There was a good deal of argument at the trial about the true value, if any, of the units in the McCracken Trust.  As the guaranteed debt was satisfied without the ANZ taking a beneficial interest in any of those units I need not go into the question of their worth.  The value of the units was an issue clearly raised on the pleadings.  It should have been proved by evidence from qualified valuers, but none was adduced.  Apparently this was because Rule 38.01 had not been complied with about reports from such valuers.  It is not for the trial Judge to resolve what was potentially a difficult issue of value without proper valuation evidence being adduced by some party.

8. The law is that all of the guarantors are required to contribute proportionately to the sum which was paid to discharge the guaranteed debt: Mahoney v McManus (1981) 180 CLR 370, which here I find to have been $360,000. The plaintiffs did not contend that a contribution from any of the other guarantors should be excluded because of their insolvency or the like. Each of the six guarantors is liable for $60,000 of the $360,000. The amounts to be payable by Milne and Redin to each plaintiff are calculated as follows:

Amount paid to ANZ  $      360,000
Less paid by Dettman   75,000
Less share of Neighbour   60,000
Less proportionate shares of plaintiffs  120,000

$      105,000

Milne and Redin are each liable for half of this sum, but Redin is entitled to a credit of $10,000.  Thus Milne is to contribute $26,250 to each of the plaintiffs and Redin $21,250.  A lump sum in lieu of interest at a commercial rate is to be allowed from 15 March 1994 until judgment.

1. Dettman has paid more than his proportionate share, but he has not issued any counterclaim or contribution notice against any other defendant seeking contribution from them as was required by Rule 37.07.  If he seeks any judgment against any other defendant for contribution, I will hear any application which he may make for leave now to issue a contribution notice.

2. Neighbour has always taken the position that he is liable for his 1/6th share but he has not been, and is still not, in a financial position to be able to pay any of it.  At trial the plaintiffs only sought a declaration as to his liability, but no monetary judgment against him.  I reject his defence that the plaintiffs had bound themselves not to pursue any legal claim against him for contribution.  All they had done was to acknowledge that his contribution was to be left in abeyance unless and until he was able to afford to pay it.  If that comes to pass, and his share is not paid, then the plaintiffs may seek a judgment against him for it.  Neighbour was required to be a defendant in this action so that a binding declaration could be made as to the amounts to be contributed by all six guarantors.

3. There will be judgment as follows:

1...... A declaration that the plaintiffs and the defendants are collectively to share equally the burden of the $360,000 paid to discharge their joint debt to the ANZ.

1. For Keam against Milne for $37,430 (including $11,189 interest).

2. For Lapsys against Milne for $37,430 (including $11,189 interest).

3. For Keam against Redin for $30,300 (including $9,057 interest).

4. For Lapsys against Redin for $30,300 (including $9,057 interest).

5. I will hear the parties on costs.  There will be liberty to speak to the minutes and liberty to apply generally.  Dettman is to be at liberty to seek leave to file a contribution notice.  The plaintiffs are at liberty to apply for judgment against Neighbour.