Kensington Trust Singapore Limited v Cotton
[2023] VCC 845
•29 May 2023
| IN THE COUNTY COURT OF VICTORIA AT Melbourne COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
General List
Case No. CI-21-03422
| KENSINGTON TRUST SINGAPORE LIMITED (UEN 201541575G) | Plaintiff |
| v | |
| LISA COTTON | Defendant |
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JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10, 11, 12, 15, 16 and 18 May 2023 | |
DATE OF JUDGMENT: | 29 May 2023 | |
CASE MAY BE CITED AS: | Kensington Trust Singapore Limited v Cotton | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 845 | |
REASONS FOR JUDGMENT
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Subject:Guarantee by wife of husband’s liability under loan agreement
Catchwords: Judgment debt owing to plaintiff pursuant to earlier proceeding – Defendant signing guarantee of judgment debt as part of arrangement for repayment of judgment by instalments – Defendant guarantor the wife of judgment debtor/principal debtor – Whether guarantee procured by undue influence – Whether plaintiff guilty of unconscionable conduct – Whether guarantee unenforceable by reason of the principles found in Yerkey v Jones (1939) 63 CLR 649
Legislation Cited: Family Law Act1975 (Cth); Marriage Act 1961 (Cth); National Consumer Credit Protection Act 2009 – National Credit Code (Cth); Trade Practices Act 1974 (Cth)
Cases Cited:Yerkey v Jones (1939) 63 CLR 649; Agripay Pty Ltd v Byrne [2011] QCA 85; State Bank of NSW v Chia (2000) 50 NSWLR 587; Commonwealth Bank of Australia v Khouri [1998] VSC 128; Garcia v National Australia Bank Ltd (1998) 194 CLR 395; Wenczel v Commonwealth Bank of Australia [2006] VSC 324; Lin v Lin (No 2) [2022] VSC 542; Johnson v Buttress (1936) 56 CLR 113; Thorne v Kennedy (2017) 263 CLR 85; UCB Corporate Services Limited v Williams [2002] EWCA Civ 555; Stubbings v Jams 2 Pty Ltd [2022] HCA 6; Blomley v Ryan (1956) 99 CLR 362; TheCommercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Australian Competition & Consumer Commission v C G Berbatis Holdings Pty Limited (2003) 214 CLR 51
Judgment: (1) Within 14 days of this date, the parties must bring in short minutes to give effect to these reasons.
(2) Costs reserved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P D Corbett KC | Gadens |
| For the Defendant | Mr M C Hines | Bastian Hancock Stynes Lawyers |
HIS HONOUR:
Background
1Mr Tim Russell describes himself as “an investor”. Previously he has been a chartered accountant and investment banker (Transcript (“T”) 60, Lines (“L”) 2−6).
2In 2012−13 Mr Russell and his wife Marlo relocated to Singapore where they lived “for a number of years” (Ibid, L16−18). The Russells had become acquainted with Mr Russell Cotton and his wife, the defendant, Mrs Lisa Cotton, when their daughters had both been pupils at Brighton Beach Primary School (Ibid, L13−14). Whilst the Russells lived as expatriates in Singapore, the Cottons were living a similar life in Malaysia, and Mrs Lisa Cotton and Mrs Marlo Russell kept up their acquaintance, and the Cottons hosted the Russells as their guests in Malaysia for the Russells’ holiday. The Cottons lived in a “compound” or gated community in a town about 45 minutes from the capital, Kuala Lumpur, with the advantage of having servants in the form of a Filipino maid and a driver (Ibid, L20−23; T278, L19−31). The two wives remained in contact over the years. Mr Russell said that he met Mr Cotton in 2016 or 2017 when the Russells were holidaying at a beach house in Blairgowrie, Victoria (T60, L25−28).
3Mr Russell’s career in Singapore involved work in the fund management and private equity business and developing renewable energy projects such as solar and wind farms to provide renewable energy in Asia (T61, L1−5). The plaintiff company, Kensington Trust Singapore Limited (“Kensington”), is the trustee of a superannuation fund of which Mr Russell is the prime or sole beneficiary (Ibid, L6−15). As the name of the trustee suggests, it would seem that this trust fund is domiciled in Singapore.
4The Cottons returned to Australia in 2017 when the eldest of their four children, their daughter Lola, was commencing Year 7 of her schooling (T283, L6−9). Meanwhile, the Russells sold their business in Asia and relocated back to Australia in 2019 (T60, L30−31). According to Mr Russell, Mrs Lisa Cotton:
“helped Marlo settle ... back into Australia. We had been away for many years and lost track of a lot of our friends, and we would dinner [sic] together. We had a place down at Portsea, they had a place down at Portsea ... the kids played together. We spent quite a bit of time together ...” (T61, L23−29)
5Mr Russell said:
“I got to know Russ [Cotton] as part of any two parents with friends that were hanging out together and their wives that were corresponding together.” (T62, L1−4)
6Mr Russell said he also became acquainted with Mr Gary and Mrs Joanna Trollope, Mrs Cotton’s parents. Mr Russell said he thought “Gary [Trollope] ... offered to referee me into the Sorrento Golf Club” (T62, L6−11).
7Mr Russell said that Mr Cotton:
“used to explain what he was doing. He worked in property and real estate. He said that he had a development at 227 Orrong Road ... there were three units.” (Ibid, L14−17)
8Mr Russell was told “they’d bought the land and got approval to build three townhouses.” He and Mr Cotton used to play golf together:
“so we sort of got to know each other as well, after we’d met each other, and he said that they’d sold one of the apartments or one of the townhouses already and he had an interest in the second one but he was having trouble raising debt finance to build them. He said that he owned a place in Portsea and he owned a place in Hampton, a block of land in Hampton that he wanted to build [on]. He ... went through what each of those properties were worth and he had a significant amount of assets versus what he told me was a relatively low amount of debt and he said that would I be able to lend him the money to help him until he sold the apartments, because he said that he wanted to build Hampton and he wanted to build Orrong but until he had actually pre-sold the apartments or the townhouses, the banks wouldn’t lend him the money.” (T62, L22–T63, L7)
9Mr Russell said he was:
“not exactly sure exactly what the stage of the construction [of the Orrong Road development] was but predominantly the that construction hadn’t occurred on all of the properties.” (T63, L12−15)
10According to Mr Russell, Mr Cotton told him:
“that he was living in a rental in Hampton, he had the property but he couldn’t build that. He was building Hampton and/or wrong [scil Orrong] with the same builder, a builder called David Norton, and that he couldn’t start building his home until he’d actually pre-sold the other properties. So he said that if I lent him the money, it would allow him to start building his home to get him into his home a year earlier, otherwise he was going to have to wait another year.” (T63, L21−30)
11Mr Russell said that Mr Cotton told him he had assets valued at:
“roughly $14 million. He told me that Portsea was worth $4-$4.5 [million]. He said that Orrong was worth $6 [million] and then he talked about $4 million or so for the Hampton property that he owned.” (T64, L11−15)
12As to liabilities, Mr Russell said Mr Cotton told him that there was a $4−$5 million debt to the National Australia Bank “across everything”:
“I think it was $2.5 or $2.4 million against Orrong and the rest of it was against Hampton and also Portsea.” (Ibid, L16−20)
13This left a net value for Mr Cotton of $9−$10 million (Ibid, L26−29).
14Mr Russell said that Mr Cotton’s “pitch” was:
“ ‘If you could lend me the money, I’ve got people interested for the second apartment. It would allow me to build my home a year earlier’.” (T64, L31–T65, L3)
15Mr Cotton told Mr Russell that he had some loans from National Australia Bank relative to the Orrong Road development (T64, L4−7). Nevertheless, it did not occur to him to wonder if the request for finance from an alternative source suggested that something had gone wrong (T65, L14−29). Mr Russell said Mr Cotton told him:
“that the banks would not provide lending for construction unless the apartments had already been pre-sold.” (Ibid, L27−29)
16Mr Russell proceeded on the footing that the money which, in response to Mr Cotton’s request, his superannuation fund advanced, funded the erection of the Orrong Road development (T118, L4−8). According to Mr Cotton, however, the finance for this development was from “NAB private banking” (T455, L18−20), with the bank taking a registered first mortgage and advancing funds progressively against certificates as to the value of building work provided by a quantity surveyor (Ibid, L21−24). Mr Cotton said that the funds advanced by the superannuation fund were not used for the Orrong Road development (Ibid, L25−31).
17Mr Russell determined to have his superannuation fund advance the moneys which Mr Cotton was seeking. Mr Russell said:
“Russell [Cotton] initially offered me security over apartment 2 and the land and that was agreed. When it came to the point of documenting the loan – so his lawyer put together the documents, I sent them up to Singapore. It became apparent that the Singaporean fund couldn’t take security over two – all the land because it wasn’t a domestic Australian entity. ... Because the fund is a Singaporean offshore fund, Russell actually wasn’t able to give an actual registered charge over the land and the property and so what it was instead, we took a – we just relied on the personal guarantee.” (T66, L5−18)
18Mr Russell continued:
“I was told by the Singaporean fund’s lawyer that because it was offshore, you couldn’t provide security over property. You could only provide security over property with a domestic – either domestic company or a domestic person.” (Ibid, L26−30)
19The loan agreement was prepared by law firm DWF (Australia) of Bourke Street, Melbourne, apparently instructed by Mr Cotton (Court Book (“CB”) 86−123). The agreement provided for an advance of $2,500,000 with the borrower nominated as Cotton Developments Pty Ltd and Mr Russell Mark Cotton and 227 Orrong Road Pty Ltd as guarantors. The interest rate was fixed at 15 per cent, with a default rate of 18 per cent. Repayment was required 12 months from drawdown, with interest payable in full at maturity (CB 137). The loan was drawn down “in the first week of May” 2019 (T68, L25−26).
20Mr Cotton sent a letter to Kensington dated 12 May 2020 requesting “an extension of loan repayment date for another three months from 29 April 2020 to 29 July 2020 under the same terms”, which was apparently acceded to. He sent a similar letter dated 28 July 2020 seeking an extension of the repayment date to 29 October 2020, and a further letter dated 28 October 2020 seeking an extension of time for repayment until 29 January 2021 (CB 141−143). These requests were apparently acceded to. Because interest was payable upon maturity, the result was that as at the end of January 2021 no principal and no interest had been repaid.
21The rationale for these extensions seemed to be that no sale or sales of the Orrong Road properties had been achieved by January 2021 (T74, L9−19). Mr Russell’s view was “you needed to reduce the price to a point where the market will accept them, but that didn’t happen.” (Ibid, L17−19) I pause to note that neither Mr Russell nor Mr Cotton was able to give me any specifics, or for that matter even the vaguest idea, as to when construction on the Orrong Road units commenced and when they were completed. Mr Cotton said:
“this was all during COVID so the properties were completed for quite a period of time but because of the severe lockdowns, we had to put the sales campaign on hold for two or three different periods of time because there would be a lockdown and then there would be a slight ease of lockdown and then went back into a full lockdown.” (T456, L4−10)
22The loan agreement contained a clause 10.1.15 headed “Negative pledge” providing:
“An Obligor or Third Party Obligor creates or agrees to create or permit to subsist any Security Interest over any part of its assets, other than a Permitted Security Interest.” (CB 121)
23Such an event was identified by the introductory words of the paragraph as an Event of Default (CB 119), entitling the lender to enforce the loan agreement and by notice demand immediate repayment of all moneys payable under the agreement (Clause 10.2, CB 123−124). The phrase “Permitted Security Interest” was elaborately defined so as to include those security interests consented to by the lender Kensington and securities in favour of National Australia Bank Ltd (CB 110).
24Whilst these events were playing out, there were other transactions or proposed transactions involving the two families. They had been cooperating on a proposal to redevelop the Coogee Bay Hotel in New South Wales, which entailed Mr Cotton’s relocating to New South Wales to work full-time on this project. Ultimately, however, no development approval was obtained, and Mr Russell and his interests sought to exit the project. Mr Russell said that he funded Mr Cotton’s salary in this role. Ultimately another investor was found to buy out Mr Russell, who recouped $3 million of his $4 million outlay (T74−76). The other transaction entailed a proposed listing of a company known as Care A2 Milk. Mr Russell said that he was invited to read the “business case” for the company and its proposed listing, and, based on his experience as an investment banker, concluded that the “business case” was:
“an amateur-ish document. It hadn’t had all of the compliance done, it hadn’t had the due diligence done. They hadn’t considered having it approved by ASIC, which you have to do before you then go to have it approved by the ASX. So there was a whole lot of just procedural things that weren’t done, yet they were saying they were going to list in less than a year.” (T77, L8−14)
25As a result, Mr Russell declined to participate.
26With Kensington’s loan to Cotton Developments overdue and unpaid, Mr Russell turned his attention to the assets which might be looked to for recovery. As to the property which he said Mr Cotton had given him to understand was owned by him and his wife Lisa in Portsea, investigation disclosed that Mr and Mrs Trollope – Lisa’s parents – owned 98 per cent of the house, with Mr Russell Cotton and Mrs Lisa Cotton being registered as owners of 1 per cent each (T78, L27−28). Mr Russell complained:
“When Orrong was eventually sold, the consideration of that and also when Hampton was sold, all went to the repayment of NAB. I don’t know, I’m not aware of the full banking relationships with them but I didn’t get anything from that Portsea property.” (T79, L10−14)
27By May 2021, Mr Russell was pressing for repayment of the Kensington loan, but was unable to make contact with Mr Cotton. At 5.27am on 26 May 2021, he sent a WhatsApp message to Mrs Cotton stating:
“I’ve tried to call and message Russ a number of times but you have not responded or even acknowledged me trying. I received notices from the Pension Funds lawyers (Gadens) that because Cotton Developments and Russell Cotton (as personal Guarantor) have refused to pay the $3.25m loan owed to it (which is now more than 12 months late) and because there has been no communication as to when it will be repaid in full, that the court will be issued with demand summons and which will then be served on CD and Russell personally. I have tried everything I can to avoid all of this as I know the financial and reputational damage such a process and default will cause. The only thing I can suggest is that if you are not prepared to communicate directly with me or the fund, that your lawyer responds to the Gadens lawyers before 10am tomorrow.” (Plaintiff’s Supplementary Court Book (“PSCB”) 3)
28Mr Russell added a postscript to this relatively lengthy message:
“I am not sure if you have both taken the time to think about the financial and emotional stress this has caused my Pension Fund (and therefore my family’s future), myself and Marlo. But if you do, I would please ask you to reconsider not repaying the loan in full, or at least the accepting the compromise the Gadens lawyer offered your lawyer. Please remember I introduced you to my Pension fund to lend you the money so you could build your home and also complete the construction of the Orrong units. I did this to help you personally and I am quite simply devastated that I have been treated this way. But the way it looks now is that my family’s future has been severely compromised by this default.” (PSCB 3)
29Mr Russell said that he was under particular financial stress at this time because in 2019−2020 he:
“signed a contract to buy the Bridge Hotel in Mordialloc with my partner, we were in it 50/50 together, for $28.5 million and I personally guaranteed that contract. It was very difficult because COVID had shut the pubs down and the banks weren’t providing funding at the time and there was a real risk ... I was personally liable ... I would have been wiped out.” (T82, L20–T83, L1)
30By an email dated 2 June 2021 at 1.53pm, Mr Cotton sent Mr Russell a security document described as “General Security Agreement” granted by 227 Orrong Road Pty Ltd as grantor in favour of Mrs Miriam Tatarka and Universal Sand Supplies Pty Ltd with guarantees by Mr Cotton and the defendant Mrs Cotton (PSCB 10−30). Also included was a loan facility agreement apparently executed by Mr Cotton and the defendant Mrs Cotton as well as 227 Orrong Road Pty Ltd and Cotton Developments Pty Ltd (PSCB 31−50). The loan facility agreement provided for an interest rate of 20 per cent per annum (PSCB 49) and an advance of $2 million “but only $1,500,000.00 in the event the Borrowers do not comply with clause 2.2.” (PSCB 50)
31Clause 2.1 provided for the advance of $1,500,000 as a first advance, and a second advance of $500,000 within six months after the giving of a personal guarantee and a charge over the Portsea property and an executed deed of variation of general security agreement. Clause 2.2 made provision for repayment of the principal sum. It may be that the true intent of the agreement was to provide for an advance of $1,500,000 only unless a further personal guarantee and charge over the Portsea property was granted (PSCB 35−36). As will be recalled, 98 per cent of the registered ownership of the Portsea property was vested in Mr and Mrs Trollope, the defendant’s parents and Mr Cotton’s parents-in‑law. When the security documents relative to this proposed guarantee security over the Portsea property were produced to Mr Trollope, he indignantly refused to sign. He said that Mr Cotton had not secured his approval for this arrangement, remarking:
“I read this and thought, I cannot believe that this is in the document. ... even if he had have spoken to me about it, I would have rejected it out of hand but the fact that he had the audacity to turn around and incorporate that in the document without speaking to me first, I found that appalling.” (T503, L25−31)
32Mr Trollope said:
“I then immediately referred the matter to Charles Brett and he wrote a very, very strong letter to Sam Tatarka [a member of counsel and the person behind the lender company and presumably the spouse of Miriam Tatarka] and said there’s no way in the world that Mrs [Trollope is] doing this and Sam came back with an email immediately and apologised ...” (T504, L12−17)
33Mr Brett was a former partner of Mr Trollope in the old firm of Blake and Riggall.
34Whilst the details of the Cottons’ dealings with Mr Tatarka were not canvassed in evidence, no advance of any moneys was made pursuant to these security documents in June 2021 or thereafter.
35Solicitors acting for Kensington issued a Writ out of this court dated 4 June 2021 seeking relief against Cotton Developments Pty Ltd, Mr Cotton, and 227 Orrong Road Pty Ltd. The Statement of Claim alleged a liability on the part of Cotton Developments as borrower, and against the other defendants as guarantors. The Writ sought payment of $3,329,066.35 said to be the amount owing under the loan agreement and guarantees as at 3 June 2021, together with interest and costs (CB 386−397).
36Mr Millington of Pointon Partners, solicitors for Mr Cotton, made a proposal for payment of a number of instalments against the debt in an email transmitted late in the evening of 3 June 2021 (CB 398). This entailed Kensington’s refraining from commencing proceedings. On 4 June 2021, Mr Burge of Gadens, solicitors for Kensington, stated that the parties were in direct discussion but that Kensington had not agreed to refrain from commencing proceedings. That evening Mrs Cotton sent an email to her husband, complaining:
“You have controlled everything and everyone. Now me... Your kids and my parents collateral damage because you have been the deals man... It’s up to you how you handle things from your end but Joh [scil you] can’t blame my mum and dad by getting advice...” (CB 414)
37Presumably this was responsive to Mr Trollope’s rejection of he and/or his wife signing a personal guarantee and charging the Portsea property in favour of Mr Tatarka’s company (CB 414). In a WhatsApp message, Mr Cotton texted his wife:
“Your Dad’s lawyer just killed my deal with Sam.”
He followed up with:
“Blood is on their hands now.” (CB 415)
38Kensington entered default judgment against each of the defendants in the proceeding, including in particular Mr Russell Cotton on 19 July 2021 for the sum of $3,404,760.14 inclusive of interest and costs (CB 84).
39Discussions continued between the parties. Mr Russell sent Mr Cotton a set of security documents providing for repayment of the judgment debt (CB 519). These documents were also sent to Mr Millington of Pointon Partners, the solicitors for Mr Cotton. They included some fifteen documents (CB 520−522), with instructions as to the mode of execution. A deed of settlement between Kensington, Cotton Developments Pty Ltd, Mr Cotton, and 227 Orrong Road Pty Ltd provided for payment of the judgment debt by a lump sum of $1,500,000 on or before 28 July 2021, a further $1,000,000 “as soon as possible but in any event, on or before 30 September 2021” and the balance outstanding “as soon as possible but in any event, on or before 30 November 2021” (CB 596−619; Clause 3.1 CB 601). Also included in the package of documents for execution was the “deed of guarantee” for execution by the defendant, Mrs Lisa Cotton (CB 620−635). Ms Cotton’s signature, witnessed by Mr Russell, appears at CB 635. I will turn to the circumstances in which she signed this guarantee in due course.
40The documents were, it seems, also forwarded to Pointon Partners, solicitors for Mr Cotton.
41Mr Russell sent a text to Mr Cotton on 26 July 2021 stating:
“Russ, I need to come and see you and Lisa today. I need you to sign those documents that were sent to you. This is the best way to give you time to get other sources of funding. But given what you’ve done recently with subordinating the fund with the caveats over your properties and money other second charges they won’t wait any longer. I also need you to sign these becisse [scil because] without then [scil them] it’s likely that my pension fund will not get all its money back. I really need you and Lisa to do the right thing for me here.
Please let me know when I can pop around and we can discuss it all.” (PSCB 56)
42Mr Cotton responded that Pointon Partners “want to charge me $20K to review the docs which is ridiculous”. He said that “Lisa has been down at Portsea and I have the 4 kids. I’ll get her to come back this afternoon” (Ibid).
43Mr Russell continued to press for execution of the new documentation, stating:
“Unfortunately time is up and if you don’t sign these docs thst [scil that] we’re [scil were] prepared and approved by SG, they will enforce and make you bankrupt in 21 days.” (PSCB 57)
44Mr Cotton agreed to sign the documents and made an appointment for Mr Russell to call on him at his office in Hampton Street, Hampton (T93, L24−31). According to Mr Russell, when Mr Cotton signed copies of the documents which he, Mr Russell, brought to the meeting, Mrs Cotton was not there (T94, L5−6). According to Mr Russell:
“We talked about how scared he [viz Mr Cotton] was, about how it would impact him. The first thing I said was, ‘Why isn’t Lisa here to sign the documents’ and I said that ‘she has to be here to sign the documents.’ ” (Ibid, L13−16)
45Mr Cotton said that he would give her a call (Ibid, L17−18).
46Mr Russell said he was nervous (T95, L3). When Mrs Cotton arrived, Mr Russell said he was “quite surprised that she was actually very relaxed” (Ibid, L5−6). He said “She gave me a hug” (Ibid, L14), stating “she does yoga and she likes good vibes and things like that and she doesn’t like this sort of thing to happen between family – families.” She said that she was embarrassed, and did not like bad karma (Ibid, L15−19). According to Mr Russell, she assured him that it was “going to be okay” (Ibid, L21). Mr Russell said he was:
“so worried because I had this $28.5 [million] guarantee that I’d signed. I didn’t have any debt, I had a home and all of that basically could go up in smoke if I got taken to court by the Doyle’s family who I was buying the pub off” (T95, L22−27)
47Mr Russell said he complained about being upset:
“that the caveats had been put on Hampton because I’d always thought, regardless of whether the Orrong properties were going to be sold, I always thought that I had that security in the guarantee and I was worried that there was not going to be enough capital to fully pay back the fund.” (T96, L26−31)
48According to Mr Russell, Mrs Cotton sought an assurance from her husband that “we have got the $1.5 million from Sam Tatarka”, with Mr Cotton assuring her “it’s ready to go”. Mr Russell said “Well, if you can get that money this week, we can non-enforce.” (T97, L25−31) They also discussed, according to Mr Russell, a real estate commission which would be available to meet Kensington’s claim (T98). Mr Russell said “You both have to sign these documents to stop the enforcement process on the judgment.” (T101, L5−7) Mr Russell said:
“We talked about the whole package being a settlement agreement to give them more time to pay their debts. We talked about when the money was going to be paid in relation to the debts and that that would be enough time for them to repay their debts.” (T101, L27−31)
49Mr Russell said Mrs Cotton assured him that his company was going to get “every cent back”, “even if she had to sell the house” (T102, L18−23). Mr Russell, Mr Cotton and Mrs Cotton “signed all the documents together” (T103, L1).
50Mrs Cotton’s account of these events gives a distinctly different tone. She said that she was at home in the property at The Avenue, Hampton, “busy preparing ... bolognaise sauce” (T298, L26−27). Her husband had told her “You just need to come and sign some documents. ... you need to – this is to stop me going bankrupt.” ... “It’s gonna give me more time, because I’ve got the commission.” (T298, L7−11) Mrs Cotton had arrived at the Hampton residence from Portsea “at about 2.30” (T297, L28).
51Mrs Cotton said she delayed leaving her home, despite being pressed to go to the office for the meeting with Mr Russell, telling her husband “You go ahead ... I’ll meet you there.” She thought “he’s not going to rush me.” (T299, L5−10) She then said she received a phone call from Mr Cotton, “you’ve got to come down and sign” (Ibid, L17). It was a 5‑minute walk. When she arrived, she found the atmosphere awkward and tense (Ibid, L19−23). She said she gave Mr Russell a hug and engaged in some small talk (T300, L2−5). She said Mr Russell told her she needed to sign these documents “so the fund do not send Russell bankrupt” (Ibid, L27−28). She said Mr Cotton remained quiet (T301, L16−17). She said that nothing was explained to her (Ibid, L26). The places where she had to sign were identified by tabs (T302, L6). Mr Russell identified which documents she had to sign (Ibid, L22). She said that having left the house in a rush, she had to return to look after her children (Ibid, L25−31). Mr Russell remained after she departed.
52Mrs Cotton agreed with Mr Russell’s account that she gave him a hug (T335, L21). She also agreed that she professed herself embarrassed and one who did not like bad karma, practised yoga, and liked good vibes (Ibid, L24−27). She could not remember whether she said “It’s going to be okay.” (Ibid, L28−29) Mrs Cotton agreed that she knew what a guarantee was (T337, L15−18).
53In re‑examination, her counsel, Mr Hines, asked her “Did you believe that one of the documents you were signing was a guarantee?”, and she replied “Well, yes.” (T446, L26−27) Mrs Cotton said, “I felt like I was under duress.” (T323, L17) I asked her how it was, in those circumstances, that Mr Russell could have got the impression that she was, on the evening of 26 July 2021, very relaxed. She replied:
“I could put ... on a facade because I’d been conditioned to that kind of behaviour for many, many years, having gone through what I’d been through with Russell’s putting me down all my life, but I definitely was very stressed that day, that night.” (Ibid, L25−30)
54Mrs Cotton had given extensive evidence as to her married life with Mr Cotton up to 2021, which, she said, whilst including some good days, was also characterised by some physical but also a lot of emotional abuse. She said that her husband was accustomed to “put her down”, deride her intelligence, and exclude her from any involvement in his business affairs. It will be necessary to return to these matters in some detail hereafter.
55The following day, 27 July 2021, Mr Russell sent a text by way of “follow up” relative to some four documents that still required completion, as follows:
“- investor to sign payment direction
- springy to sign vantage payment direction
- 2x legal advice confirmations. Get Gary or Pointon to sign- FMCG doc. Maybe get incoming FMCG person to sign.” (PSCB 58)
56Mr Russell said that the two payment directions were the most important (PSCB 58).
57One of the transactions which Mr Cotton hoped would provide early cashflow to meet the obligations which he had undertaken via the documents executed on 26 July 2021 was a payment due to Cotton Property Group Pty Ltd, being a commission on the sale of a property at 446 Collins Street, Melbourne (CB 19, paragraph 27−28). The fourteenth of the package of documents submitted for execution by Mr Russell on 26 July was a “Deed of Irrevocable Payment Direction” relative to this commission.
58A third party claim was brought against Cotton Property Group Pty Ltd in the Supreme Court of Victoria, proceeding S ECI 2021 03981, with a third-party claim being brought against Cotton Property Group (CB 57−66). The effect of this proceeding was to “tie up” any entitlement to the commission pending the outcome of the proceeding in the Supreme Court. In so far as Mr Cotton or Mrs Cotton or anybody else might have hoped that this commission would provide the funds to pay all or any of Kensington’s claim, such hope has been disappointed up until now.
59The certificates as to legal advice which were part of the package of documents unsigned as at 26 July were never signed (T112, L6−8).
60The first instalment provided for by the settlement documents was due 28 July 2020.
61Despite no funds being generated by the 26 July documents, Mr Russell was able to raise sufficient money to avoid his being called on under his guarantee relative to the Mordialloc hotel venture (T163−4).
62Solicitors acting for Kensington filed a Writ commencing the present proceeding dated 16 August 2021, with the sole defendant being Mrs Lisa Cotton, seeking the sum of $3,404,760.14 “as at 13 August 2021” as being moneys owed under a deed of guarantee together with interest and costs (CB 5−15).
63On 26 August 2021, according to Mr Russell, she began by saying that “Russell doesn’t know that she’s here and she just wanted to get things sorted out” (T109, L6−8. He said she told him about single-handedly negotiating a dispute relative to the milk industry with a Mr Dominic Galati, thereby showing herself to be a good negotiator (Ibid, L10−15). He said she told him that “Sam Tatarka wanted me [Mr Russell] to write off the interest”. He (Mr Russell) refused (Ibid, L25−26). Mr Russell said Mrs Cotton told him “She was considering selling Hampton.” (T110, L3) He said she remarked “I have to be strategic with what I do with everything that needs to get paid.” (Ibid, L14−16) Mr Russell said he felt he was being given the run around (Ibid, L22−23). He said Mrs Cotton proposed that he, Mr Russell, “do a deal on the interest and I will help you get some money back from Dominic and Coogee Bay.” (T111, L7−9) Mr Russell said he replied “Just sell assets. I need the money back.” (Ibid, L10−11).
64Mr Russell said “We talked a lot about where the money was coming from and what would be raised to pay the debts. We talked through what her options were for the Vantage people ...” (T114, L31–T115, L3). He said Mrs Cotton also expressed hope that money would be generated from the listing of the company known as Care A2 Milk, which she said “would also raise many more millions” (T115, L9−11). It will be recalled that Mr Russell had rejected this proposal as being “amateurish”. He said that he responded “Stop waiting for those things to happen and just start selling assets.” (Ibid, L20−21) Mr Russell said that Mrs Cotton told him “she was taking over selling the Orrong properties and that there would be proceeds from that.” (T116, L3−5)
65Mrs Cotton was served with the Writ personally on 18 August 2021 (T390). She said that as to the meeting on 26 August, she believed that Mr Cotton was aware that it was taking place, and she was undertaking this duty “because he was not good and I just needed to help.” (T393, L13−15) She denied referring to Mr Tatarka at the meeting “because I never spoke to Sam Tatarka about anything.” (T396, L26−27) She agreed that she was now involved in seeking to sell the Orrong Road units (T397, L2−4). She said she did not recall discussing selling the Hampton property (Ibid, L14−15). She said, however, that she was unaware of the size of the debt charged on these units in favour of National Australia Bank (T398−9). Mrs Cotton agreed that Mr Russell pressed her to “sell assets” and “that’s when I focused on Orrong Road” (T411, L20−22).
66Mrs Cotton said she became aware that a default judgment in this proceeding had been entered against her when she was served with a bankruptcy notice on or about 27 January 2022 (CB 20, paragraph 30). She swore an affidavit on 17 February 2022 seeking to have that default judgment set aside, which Kensington’s solicitor consented to do based on the terms of the affidavit.
67Mr Cotton went bankrupt on 18 March 2022 (T193, L31–T194, L1). Whilst Mr and Mrs Cotton have been separated for the last 18 months, they are not divorced at this stage (T309, L6−12).
This proceeding
Statement of Claim
68The plaintiff’s Statement of Claim pleads a straightforward debt claim based upon the judgment debt owed to the plaintiff by Mr Cotton in proceeding CI-21-02303 and the deed of guarantee executed by Mrs Cotton on 26 July 2021.
Defence
69By her Amended Defence filed pursuant to an order pronounced by me 10 May 2023 at the outset of the trial, Mrs Cotton recited key events in her professional and personal life and her separation from Mr Cotton on 23 November 2021.
70In so far as the Statement of Claim alleged the making of a compromise by Mr Cotton and the other defendants in the first proceeding, CI-21-02303, she said that she:
“had no contemporaneous knowledge of the matters raised therein and only became aware of those matters on receipt of documents from the Plaintiffs solicitor to her solicitor by email on 8 February 2022, following a request from her solicitor for same on 28 January 2022.” (paragraph 3)
71Mrs Cotton admitted signing the guarantee which is the subject of the claim against her, together with another document styled “General Security Agreement”, but she “impugned” the validity of these documents and the guarantee in particular on the following bases:
“(a) the Defendant was a volunteer to the Impugned Transaction, and would obtain no benefit herself from entering into it;
(b) The Defendant, whilst knowing of Timothy Russell, had no knowledge of the Plaintiff nor of any monies owed by Mr Cotton to the Plaintiff;
(c) Mr Cotton exerted an undue influence over the Defendant’s exercise of her independent free will, of which the Plaintiff was, or ought to have been aware, and took no steps to prevent;
(d) further, and in the alternative, the Plaintiff’s agent, Mr Timothy Russell (“Mr Russell”), and a person with an interest in the Trust, exerted an undue influence over the Defendant’s exercise of her independent free will;
(e) further, and in the alternative, Mr Cotton and Mr Russell, in combination, exerted an undue influence over the Defendant’s exercise of her independent free will;
(f) further, and in the alternative, Mr Cotton and/or Mr Russell, on behalf of the Plaintiff, failed to explain, or failed to adequately explain the nature, import and relevant background to the Impugned Transaction, such that the Defendant was not appropriately informed of the risk to her personally if she proceeded to execute the Deed of Guarantee and the General Security Agreement;
(g) further, and in the alternative, the Plaintiff failed to ensure that the Defendant received independent legal advice in respect of the nature, import and risks of the Impugned Transaction, in circumstances where it knew, through its agent Mr Russell, or ought to have known, that independent legal advice should have been obtained by the Defendant; and
(h) In the premises, the Defendant was placed into a position of special disadvantage or disability by Mr Cotton and/or Mr Russell on behalf of the Plaintiff, and the Impugned Transaction was unconscientious and/or unconscionable, cannot be relied upon by the Plaintiff, and ought to be set aside entirely.
Particulars
i) the Defendant is not, and has never been a director or a shareholder of either Cotton Developments or 227 Orrong;
ii) the Defendant refers to and repeats paragraph 2 herein;
iii) At or about 2.30pm on Monday, 26 July 2021, Mr Cotton told the Defendant that she needed to sign documents for Mr Russell, that would give him a further few months to pay the Plaintiff.
iv) at or about 6.00pm on Monday, 26 July 2021, the Defendant was at her home at 19 The Avenue in Hampton, with the Children making dinner for them, when she received a telephone call from Mr Cotton advising her that Mr Russell, a person with an interest in the Trust, was with him at his office at 595A Hampton Street, Hampton, and that she was required to come there to “sign some documents”;
v) the Defendant left the Children at home, and the food she was cooking in the oven, and drove to Mr Cotton’s office, approximately three hundred (300) metres away;
vi) on arrival at the office of Mr Cotton, Mr Cotton and Mr Russell informed the Defendant that she was required to sign a guarantee to “buy more time” and to stop Mr Cotton from becoming bankrupt;
vii) prior to entering into the Impugned Transaction, Mr Russell and Mr Cotton did not provide any further explanation to the Defendant nor did either of them emphasise that she was under no obligation to sign; to the contrary, their words to the Defendant and demeanour gave the Defendant the impression that she had no option but to sign the Deed of Guarantee;
viii) prior to entering into the Impugned Transaction, Mr Cotton and Mr Russell did not disclose to the Defendant the three (3) prior extensions to the repayment date of the Loan Agreement requested by Mr Cotton, presumably in circumstances where Cotton Developments was unable to meet its payment obligation on time. This was information material to the risk to the Defendant of entering into the Impugned Transaction, and should have been expressly brought to her attention by Mr Cotton or by Mr Russell;
ix) prior to entering into the Impugned Transaction, Mr Cotton and Mr Russell did not disclose to the Defendant the subsequent breach of the Loan Agreement, the Proceedings and the Judgment Debt, or the terms alleged in paragraph 10 of the Statement of Claim (‘the payment terms’) or the terms contained in clause 3.3 and clause 4 (read together) of the Payment Agreement as defined in the Statement of Claim. This was information material to the risk to the Defendant of entering into the Impugned Transaction, and should have been expressly brought to her attention by Mr Cotton or by Mr Russell;
x) at no time prior to entering into the Impugned Transaction did Mr Cotton or Mr Russell direct the Defendant to the warning appearing on the first page of the Deed of Guarantee;
xi) the Defendant was not given an opportunity to read the Deed of Guarantee or the General Security Agreement prior to signing it, and even if she had, the Defendant was not capable of determining and informing herself of the nature, import and associated risks of entering into the Impugned Transaction without an explanation from an independent legal advisor;
xii) when entering into the Impugned Transaction, the Defendant understood that some money was owed to Mr Russell. The Defendant did not appreciate that a debt was not then owed by her. The Defendant was not able to distinguish the difference between a debt that she owed and a debt that Mr Cotton owed, such that she did not understand the consequence to her of entering into the Impugned Transaction in the absence of a proper explanation;
xiii) the Impugned Transaction was entered into by the Defendant in circumstances where she was afraid of abuse that she would receive at the hands of Mr Cotton later, if she refused to enter into the Impugned Transaction immediately;
xiv) the Impugned Transaction was entered into by the Defendant in circumstances where Mr Cotton and Mr Russell were imposing their will over her and ‘standing over’ her, to the extent that the Defendant felt that she could not refuse to enter into the Impugned Transaction immediately;
xv) the Impugned Transaction was entered into in circumstances where the Defendant was in an obviously flustered state and in which she needed to return home in a hurry to continue with making the Children’s dinner and to look after the Children, which was disclosed to Mr Cotton and Mr Russell at the time;
xvi) Mr Russell, a person with a vested interest in the Impugned Transaction by virtue of his interest in the Trust, was the witness to the Defendant’s execution of the Deed of Guarantee and the General Security Agreement;
xvii) the Defendant was at the office of Mr Cotton for a total time of between ten (10) and fifteen (15) minutes. An adequate explanation of the Impugned Transaction could not have been given by Mr Cotton or by Mr Russell in that amount of time, nor was that amount of time sufficient to read the Deed of Guarantee and the General Security Agreement, which runs to a combined total of thirty-five (35) pages, excluding cover pages, contents, execution pages and schedules;
xviii) the Deed of Guarantee and Security Agreement executed by the Defendant were left with Mr Cotton and Mr Russell at Mr Cotton’s office, and the Defendant was not subsequently provided with a copy of the Deed of Guarantee or General Security Agreement that she had executed by Mr Russell or Mr Cotton;
xix) by email on 23 July 2021, the Plaintiff’s solicitor provided Mr Russell with a suite of documents for execution by Mr Cotton and the Defendant, which included a document entitled “Independent Legal Advice Certificate – Lisa Cotton”. A copy of that email was sent to Russell Cotton on 23 July 2021, thereby waiving any privilege that could otherwise be claimed. The email was forwarded to the Defendant by Mr Cotton on 8 February 2022, without attachments. The email chain is available for inspection by prior appointment at the office of the Defendant’s solicitor;
xx) by reason of the payment terms and clause 3.3 and clause 4 (read together) of the Payment Agreement, the Impugned Transaction was manifestly disadvantageous to the Defendant and fraught with risk to her.”
72The defence further alleged that Mrs Cotton was, to the knowledge of Mr Russell when she signed the documents, under extreme pressure, but Kensington “failed to take any or any adequate steps to ensure that she got independent advice ...”. Further, it was said the settlement arrangements for the first or earlier proceeding “were unusual features of the transaction that should have been but were not disclosed” to Mrs Cotton. It said she was induced to sign the documents “by the undue influence and the pressure upon her to sign them, and by the non-disclosure of the payment terms”. Consequently, because of these matters, she was “not alive to the nature or effect of the obligations she was undertaking by executing the documents and did not understand the effect of the documents or the nature of the transaction of suretyship.” Consequently, she denied being indebted as alleged.
Conclusions
Mrs Cotton’s level of knowledge
73Mrs Cotton’s evidence-in-chief and her Amended Defence give the general impression that when she received a text to return to her Hampton home from her parents’ home in Portsea on 26 July 2021 to sign some documents, and when she eventually arrived at Mr Cotton’s office in Hampton that evening to sign the documents, she was coming to matters entirely “cold” without any preparatory explanation. The evidence shows that this view of matters is inaccurate.
74Paragraph 7 of the Amended Defence, responding to the allegation in the Statement of Claim as to the commencement of proceeding CI-21-02303, the proceeding against Mr Cotton which led to a default judgment against her, said, by reference to an earlier paragraph (paragraph 3) in the Amended Defence, that she:
“had no contemporaneous knowledge of the matters raised therein and only became aware of those matters on receipt of documents from [Kensington’s] solicitor to her solicitor by email on 8 February 2022 ...”
75That is, she did not become aware that her husband had been sued and suffered a default judgment against him in the first proceeding until February 2022.
76On 4 June 2021, Mr Millington of Pointon Partners, Mr Cotton’s solicitors, sent him a copy of the Writ in that proceeding by email which they said had been “served on us this afternoon”, presumably on the basis that that firm had instructions to accept service on Mr Cotton’s behalf. Later that evening Mr Cotton emailed the Writ and associated material to Mrs Cotton with the comment “Will be an interesting week Lisa” (CB 374).
77At 9.35am on 23 July 2021, Mr Cotton forwarded an email chain which he had received from Pointon Partners setting out the proposed arrangement for Kensington to recover the amount of the judgment which it had obtained against him (CB 673). This included the proposal which was accepted by Mr Cotton and his solicitors as to the proposed compromise documentation required by Gadens on behalf of Kensington. The salient terms of this arrangement were set out in paragraphs numbered 1−7, which included the following:
“1. $1.5m be paid on or before 4pm, 28 July 2021 in reduction of the Judgement Debt. The Fund requires a payment direction be signed by 227 Orrong Rd and the New Lender whereby 227 Orrong directs the $1.5m be paid directly by the New Lender to the Fund’s nominated bank account. For the avoidance of doubt, no amount would be paid directly to 227 Orrong;”.
78A further payment was to be made by 4.00pm, 30 September 2021, in the amount of $1,000,000, with the balance of the debt to be paid by 4pm, 30 November 2021. Paragraph 4 stated:
“4. Lisa Cotton provide a personal guarantee and indemnity for repayment of the Judgement Debt;”.
79Finally, paragraph 7 stated:
“7. Any default of any of the terms will allow the Fund to immediately commence enforcement action and enforce any and all of its rights under any security documents (including exercising rights under power of attorney).”
80This document set out in the clearest and most summary terms the salient features of the “deal” which was to be done and the role which Mrs Cotton was required to play, as well as the key document which she was required to sign. The stipulations for payment and the “acceleration” provision in paragraph 7 showed how fraught with risk the arrangement could be regarded as being. The email could be regarded as an epitome of the proposed arrangement in which Mrs Cotton was being asked to join.
81In re‑examination, her counsel, Mr Hines, asked Mrs Cotton whether the documents she was asked to sign at her husband’s office on the evening of 26 July 2021 “were a fulfilment of the without prejudice offer of Matthew to Carl contained in this email of 22 July ...” She replied “No.” (T445, L16−20) In her evidence-in-chief, Mrs Cotton said that as at 26 July she did not know that a judgment had been entered against Mr Cotton and that therefore he owed a “judgment debt”. She confirmed this answer in cross-examination (T305, L5−9; T339, L11−17).
82The letter from Kensington’s solicitor which was copied to Mrs Cotton on 23 July referred to a judgment debt of $3,404,760. The entire lengthy email chain sent to Mrs Cotton by Mr Cotton had the heading “Judgment debt”. Mrs Cotton’s denial of knowledge of a “judgment debt” owing by her husband when she signed the documents on 26 July is difficult to credit, as is her denial that she perceived a connection between a guarantee to be signed by her required by Kensington’s solicitor to delay enforcement of the judgment debt with the guarantee which she was asked to sign a couple of days later. I reject Mrs Cotton’s denials on these points as being inherently implausible. Likewise, I reject paragraph 3 of the Amended Defence which denies that Mrs Cotton had any knowledge of the arrangements agreed relative to a delay in enforcement of Kensington’s judgment against Mr Cotton until she was provided with documents via her solicitor in February 2022.
83More generally, whatever may have been the case early in the Cottons’ marriage, I accept that from and after May 2020 the reality of the family’s dire financial position obtruded itself into Mrs Cotton’s consciousness. That reality required her to interest herself and inform herself on these matters. Thereafter, the evidence shows that she did take an interest and did involve herself in these matters. In a WhatsApp exchange on 25 January 2021, Mrs Cotton texted her husband:
“I want to know everything... Like what we owr [sic] etc... You have time tomorrow... On paper... Debts..mortgages etc... I feel sick I don’t know what we have borrowed and owed... And I don’t want my dads best friend involved until you tell me the truth... I don’t like owing all these people money”.
84After a few further message exchanges (CB 311), Mr Cotton texted:
“Lisa you know every deal”.
85After a few more texts, Mrs Cotton said:
“I’m just saying we have no cash and I want to know what a shit we are in... You only you have been in control of our finances. I don’t want all this insecurity of you leaving today saying we have no cash.. What have you down [scil done] with milk [viz Care A2] and everything”.
86Mr Cotton replied:
“Lisa I had a second mortgage with Jan [Minet] which I switched to David [Urpani] simple” (CB 311).
87I heard extensive evidence from a Dr Urpani and Mr Minet, whose private companies were engaged in business ventures with Mr Cotton’s interests which began going sour contemporaneously with Kensington’s loans going into default. Their evidence and documents such as emails and texts show a significant involvement by Mrs Cotton in the negotiation and argumentation which played out. She became involved not least because when the going got tough Mr Cotton failed to respond to their communications or “blocked” them, and the creditors approached Mrs Cotton as a means to re‑establish lines of communication. Mrs Cotton signed documents relative to refinancing of the Urpani and Minet agreements as well as a guarantee relative to the abortive loan from Mr Tatarka and/or his company.
88Mrs Cotton received by email of 31 May 2021 a proposal from Gadens on behalf of Kensington, marked “Without prejudice, save as to costs”, to resolve its claim against Cotton Developments and Mr Cotton, including a number of detailed provisions extending over some three pages. She obviously read this proposal with some care, noting one of many bullet points which required the giving of security by her company Cotton Property Group relative to the commission earned on the sale of the property at 446 Collins Street, commenting “is matt [the Cottons’ friend Mr Matthew Spring] aware that he [is] included in this agreement?????” Her email ended with the exclamation “Jesus Russell” (CB 334−347).
89She negotiated the terms of a settlement between Care A2 Milk on the one hand and Mr Seers, a Mr Bingeman and Mr Minet relative to unreturned stock (CB 431). This was embodied in a professionally-drawn deed dated 20 July 2021 (CB 433−437). For the purposes of resolving the issue, Mrs Cotton created a WhatsApp group known as “Legal agreement” (CB 546) on 23 June 2021. She agreed that she had read the deed and satisfied herself that it “reflected the agreement that [she] had negotiated” (T420, L17−18).
90In June 2021, she sought and obtained exact “payouts” of amounts owing on two accounts to National Australia Bank, being respectively $4,941,000 and $4.29m (Defendant’s Court Book (“DCB”) 117−118). This was apparently in connection with a consideration of what moneys could be raised from the sale of the Orrong units to meet the Cotton family’s pressing obligations. This seems to be in the teeth of Mrs Cotton’s statement that when she was seeking to negotiate with Mr Russell in his study on 26 August 2021 she did not “know what was owed to the bank. I didn’t have an understanding of the finances.” (T398, L17−19)
91One could multiply examples of this sort of detailed knowledge based on the evidence which I heard. All in all, an image of Mrs Cotton as naive and uninformed as to the finances of her husband and his companies as at 26 July 2021 will not wash.
Mrs Cotton’s commercial expertise
92Mrs Cotton cannot boast the qualifications and experience which being a chartered accountant, as Mr Russell was, would necessarily entail. Nor has she had the same experience as he has had in investment banking. She has not had the experience that her estranged husband has had with a lifetime of “deal making”. Nevertheless, it would be wrong to regard her, as her case in this proceeding would have it, as being a commercially-naive homemaker. I have already commented upon her involvement in her family’s financial crisis in the period 2020 to 2021.
93In her evidence-in-chief she reviewed her career before her marriage to Mr Cotton. She attended Firbank Grammar but did not go on to university. She did, however, undertake what she described as “a gap year” after finishing school in 1989 where she “backpacked with some girlfriends around Europe”. She undertook a beauty therapy course with an organisation known as Ella Baché, worked in Mordialloc, and then worked during a ski season in Canada (T265, L24−31). Next she completed a real estate course at the Swinburne College of TAFE in Prahran, obtaining a full real estate licence (T266, L1−4). She said she worked at the estate agency Hocking Stuart as personal assistant to Mr Stuart, with a similar role for one of the other principals. Then she worked for an agency Lustig & Moar involved in the marketing of a project known as “Concept Blue”, a residential redevelopment of the former Russell Street police headquarters (Ibid, L7–T267, L1). It was during this period that she made the acquaintance of Mr Cotton, whom she eventually married (T267, L5−12). At Lustig & Moar she said she was “predominantly selling to Filipino clients” (Ibid, L12).
94This resume of Mrs Cotton’s career as a young woman suggests that she acquired considerable commercial expertise as a result of her various employment roles. Her “gap year” backpacking in Europe and her work presumably in the tourism industry in a ski season in Canada would have bred substantial practical experience, self-reliance and a resiliency in dealing with a variety of problems and issues. Her early career could not be described as “sheltered”. Her wide-ranging commercial experience indicated why she readily admitted knowing what a guarantee was, and implicitly admitted knowledge of the nature of a guarantor’s liability. It is no surprise therefore that she displayed the ability to step into the commercial sphere as she was compelled to do in the financial crisis year for her family of 2021.
95Mrs Cotton gave a sad account of some physical abuse which she alleged against her husband (and which he denied in his evidence), and emotional abuse by reason of his having adopted a “controlling” attitude (which he was inclined to admit in his evidence). Whatever may have been the case in early years, the evidence shows that in 2020−21 she was able to throw off the role of “downtrodden wife” if this was the reality of her marriage till then. For instance, when the elements of the proposal to pay off Mr Cotton’s judgment debt by instalments were shared with her by email on 23 July 2021, far from displaying a submissive attitude, she responded:
“I want my name removed from everything ... I don’t want to be attached to anything because why should I be at risk when I have not negotiated any of these deals ...
ALL men/husbands of trust and honour would not put their wives through this” (CB 673)
96After Mrs Cotton received the summary of the “deal” proposed by Kensington, she responded in an email dated 23 July 2021:
“These agreements are all complex and you expect me to just sign off???
I don’t have any proof carea2 is going to list ... you don’t communicate with me
You drip feed me money and I have to beg to pay bills ??
Grow up”
97Mr Trollope, still practising as a solicitor at the age of eighty-one and a veteran partner of one of the state’s leading commercial firms, when taken to this email, said that he would have absolutely encouraged his daughter “to not take any more nonsense from Russell [Cotton].” (T497, L23−25) Mr Trollope continued, however, “all of the decisions were made by Russell, … she was kept out of it and all Russell did, in 15 years of marriage, was get her into trouble.” (T497, L30–T498, L1) Mr Trollope denied that his daughter “could understand the sort of documentation we are talking about now.” (T498, L3−5) He agreed, however, that she was capable of asserting herself (Ibid, L14−16). Mr Trollope gave these answers in cross-examination.
98In re‑examination, Mr Hines asked Mr Trollope what he had to say about his daughter’s being able to assert herself against her husband, and Mr Trollope said:
“I found it difficult to assert myself against Russell. He was supremely confident in his own ability to do things and was smarter than everybody else and that’s how I think he treated – he certainly treated me that way and I think that’s exactly how he treated Lisa.” (T502, L24−31)
99Mr Trollope continued:
“I could see through Russell and his attitude extremely disappointed me but I had the ability, I think, to see through Russell but I was concerned that Lisa may well have seen through him but did not want to do anything radical like divorcing him, because she the paramount concern for her was to keep the marriage alive because of the kids.” (T503, L4−10)
100Mr Hines asked whether his daughter was accustomed to do Mr Cotton’s bidding. Instead of answering that question directly, Mr Trollope turned to a description of the first abortive attempt to raise money from Mr Tatarka, his family and companies which entailed a proposal to obtain a mortgage and guarantee from his wife and his trustee company (Ibid, L18−31). He described this incident as “appalling”. I said, “could we just turn back to the matter that Mr Hines raised with you. He was asking about whether you perceived your daughter as having the capacity, the gumption if you like, to say no to her husband?” Mr Trollope said, presumably with respect to the security proposals from the Tatarka interests, that his daughter was appalled and embarrassed (T504, L1−9). Mr Trollope was pressed to return to the question by Mr Hines. He continued the narrative relative to the abortive security documents, explaining that his former law partner, Mr Charles Brett, had written a strong letter on his behalf (Ibid, L10−20). Mr Trollope said he thought Mr Cotton was a bully (Ibid, L21). Mr Trollope said that “It’s not only Lisa, he bullied me.” (Ibid, L25) Eventually Mr Hines asked the question again, “from your observation was Lisa able to resist his bullying?” and Mr Trollope replied “I doubt it.”
101Mr Trollope is a very experienced legal practitioner and, despite his years, retains all the astuteness which no doubt was the basis of the success of his legal career. It would have been obvious to him what her counsel was seeking to achieve in re‑examination. He would have wished to give evidence as favourable as he could to his daughter’s case, consistent with the oath he had taken. Had he been of the view that his daughter was accustomed to “do the bidding” of her husband in mid-2021, no doubt he would have said it directly and immediately.
Defendant’s case
102In closing, Mr Hines, on behalf of Mrs Cotton, placed his contention that the guarantee which she executed should be regarded as void or otherwise ineffective on three bases. He said two of them were embodied in the High Court’s decision in Yerkey v Jones (1939) 63 CLR 649 (“Yerkey v Jones”). He said that this case demonstrated that a wife undertaking her husband’s liability as by executing the guarantee may be relieved of such liability for at least two reasons: first, by a finding that she executed the guarantee under her husband’s undue influence, and secondly, by reason of not being informed of the purport and effect of the guarantee or other document or documents. Speaking to the first such ground, Mr Hines said “Your Honour, in the present case the defendant was Mr Cotton’s puppet …” He referred to T289, L5−8.
103In addition, he said Mrs Cotton relied on the general doctrine of unconscionability in its residual form to the extent that the first two defences did not form part of the larger concept.
104In this area of the law, perhaps even more than most, the statements of principle to be found in the authorities can only be fully understood by reference to the factual scenarios which generated them. I turn first to Yerkey v Jones, upon which Mr Hines placed primary reliance.
105The headnote of Yerkey v Jones states as follows:
“The relation of husband and wife is not one of influence, and the fact that a wife confers a voluntary benefit upon her husband by a gift or by becoming surety or otherwise raises no presumption in equity against the transaction: But, if a husband procures his wife to become surety for his debt and it appears that circumstances existed which, if they alone had been the parties to the transaction, would make it liable to be set aside as against the husband, then the guarantee or security may be invalidated also against the creditor if he relied upon the husband to obtain it from his wife and had no independent ground for reasonably believing that she fully comprehended the transaction and freely entered into it.” ((1939) 63 CLR 649)
106Mr and Mrs Yerkey sued Mr and Mrs Jones for principal and interest said to be owing under registered mortgage. Mr Jones, who was employed at a small salary, sought to purchase a poultry farm including a residence and three acres of land near Adelaide for a price of £3,500. Only a nominal deposit was required. £2,000 was to be paid at the end of two years, and £3,300 at the end of three years. Mr and Mrs Yerkey required that security be given for £1,000, being part of the final instalment secured by a second mortgage over Mrs Jones’ property. This was Mrs Jones’ second marriage, and the house where she and Mr Jones lived was her sole property, presumably inherited from her first deceased husband. Dixon J, as he then was, said:
“Although the relation of husband to wife is not one of influence, yet the opportunities it gives are such that if the husband procures his wife to become surety for his debt a creditor who accepts her suretyship obtained through her husband has been treated as taking it subject to any invalidating conduct on the part of her husband even if the creditor be not actually privy to such conduct. It is evident, however, that in many cases, though it is the husband who obtains his wife’s consent to act as guarantor or surety, yet the creditor or his agents will deal directly with the wife personally. It must then be a question how far an apparent or real comprehension on the part of the wife or advice or explanation received by her will prevent any earlier improper conduct on the part of the husband from operating to make the transaction voidable. …
In the older authorities many references occur to the necessity of showing, in cases where an important benefit has been voluntarily conferred by a wife, that she fully understood the transaction. There are early traces of a wider doctrine applying to all persons, that is, persons of full capacity, a doctrine to the effect that, when anyone has made a large voluntary gift or the like and it is impeached, the burden is thrown upon the donee or party benefiting of justifying it as fairly and honestly obtained from a party understanding the nature and consequences of the transaction.” ((1939) 63 CLR 649, 678)
107A few pages later in his judgment, his Honour continued:
“But it is clearly necessary to distinguish between, on the one hand, cases in which a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband’s surety by the exertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. In the former case the fact that the creditor, on the occasion, for example, of the actual execution of the instrument, deals directly with the wife and explains the effect of the document to her will not protect him. Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice. If the creditor has left it to the husband to obtain his wife’s consent to become surety and no more is done independently of the husband than to ascertain that she understands what she is doing, then, if it turns out that she is in fact acting under the undue influence of her husband, it seems that the transaction will be voidable at her instance as against the creditor. It is not clear how far the same principle is to be applied to a case where the wife is induced to become surety by the husband making some fraudulent or even innocent misrepresentation of fact which, though material, does not go to the nature and effect of the instrument or transaction. It may be said that the making of such a representation is no more to be anticipated by a creditor when a husband procures his wife’s guarantee than when any other principal debtor procures a surety. On the other hand, the basal reason for binding the creditor with equities arising from the conduct of the husband is that in substance, if not technically, the wife is a volunteer conferring an important advantage upon her husband who in virtue of his position has an opportunity of abusing the confidence she may be expected to place in him and the creditor relies upon the person in that position to obtain her agreement to become his surety. Misrepresentation as well as undue influence is a means of abusing the confidence that may be expected to arise out of the relation.
In the second case, that where the wife agrees to become surety at the instance of her husband though she does not understand the effect of the document or the nature of the transaction, her failure to do so may be the result of the husband’s actually misleading her, but in any case it could hardly occur without some impropriety on his part even if that impropriety consisted only in his neglect to inform her of the exact nature of that to which she is willing blindly, ignorantly or mistakenly to assent. But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance.
If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing, cannot, I think, in itself give her an equity to set it aside, notwithstanding that at an earlier stage the creditor relied upon her husband to obtain her consent to enter into the obligation of surety. The creditor may have done enough by superintending himself the execution of the document and by attempting to assure himself by means of questions or explanation that she knows to what she is committing herself. The sufficiency of this must depend on circumstances, as, for example, the ramifications and complexities of the transaction, the amount of deception practised by the husband upon his wife and the intelligence and business understanding of the woman. But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable grounds to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound by any equity which otherwise might arise from the husband’s conduct and his wife’s actual failure to understand the transaction.” ((1939) 63 CLR 649, 684–686)
108The trial judge in the Supreme Court of South Australia, Napier J (as he then was), held that the transaction as regards Mrs Jones was invalid. The High Court reversed him, finding that Mrs Jones received an adequate explanation of the transaction. The solicitor acting for the Yerkeys provided that explanation. According to Sir Owen:
“His explanation of the mortgage appears to me to have been simple enough and complete enough to ensure that any woman of average intelligence would understand that she was making herself liable for interest on the £1,000 and that, if it was not paid, the principal might be called up and that she bound herself to pay it so that she might be sued and her property sold. As to the effect of the clauses directed to the exclusion of the principles of law by which a surety may be discharged from his obligations though the debt is not paid, probably the explanation was incomplete, and, if complete, it doubtless would have failed to produce any impression except a confused idea that some possibility of the mortgagee escaping was excluded. But, if the general nature and effect of an instrument such as a mortgage executed by a married woman is understood or on reasonable grounds the creditor or other party or his agents believes it to have been understood, it is no ground for setting it aside that some of its details or its possible consequences or applications are not comprehended, notwithstanding that the husband is the person who has obtained her consent to the transaction.” ((1939) 63 CLR 649, 689)
109It will be seen that despite the terms of the headnote and the manner in which Yerkey v Jones is customarily referred to, this was an example of a wife’s effectively undertaking a liability as surety for her husband.
110The High Court approached this proceeding upon the footing that the giving of the guarantee by the wife was entirely voluntary, in the sense that she was bestowing a benefit upon her husband without recompense. The application of the principles stated in the case must be seen as subject to this requirement.
111Mr Hines contended that Mrs Cotton should be seen in the same light as Mrs Jones in this respect.
112Mr Corbett KC, on behalf of the plaintiff, however, contended that Mrs Cotton’s execution of the guarantee ought not to be regarded as “voluntary” in the relevant sense; that she received or achieved a benefit from the transaction in at least two respects.
113First, he said that according to the evidence the moneys advanced by Kensington had been devoted solely or principally to the construction of the Hampton property which was Mrs Cotton’s matrimonial home and something which she greatly prized. Mr Cotton said that the advance by Kensington was used “to fund the construction of [his] home in Hampton” and not at all for the Orrong Road development as Mr Russell had believed (T456, L30–T457, L4). He agreed, therefore, that the Kensington advance was “entirely for the benefit of you, your wife and your family to build the home” (T457, L5−6). The importance of the property at The Avenue, Hampton, was testified by a WhatsApp message sent by Mrs Cotton to her husband on 15 May 2021: “I will never ever let anyone sell Hampton. That is our home and the kids need stability ... I don’t want Jan [Minet] having an interest over that.”
114Secondly, Mr Corbett said that there was a benefit in Mrs Cotton’s signing the guarantee because failure to do so would lead to her husband’s being bankrupted. It was part of Mrs Cotton’s case that this was what motivated her to sign the guarantee. Mr Cotton’s bankruptcy would have led his trustee to seek to sell up the Hampton property to obtain Mr Cotton’s share in the house for the benefit of creditors.
115As to the first matter, Mr Hines said that “past consideration is no consideration”, a well-established legal maxim. Whatever might be said about a benefit to be derived from a guarantee given by Mrs Cotton relative to the initial loan, after the loan had already been advanced and was the subject of legal proceedings with a judgment recovered there was no prospective benefit to be derived by Mrs Cotton’s giving a guarantee at that late stage.
116As to the “past consideration” issue, I was referred to no authority directly dealing with that principle in a context such as the present. I am inclined to think that for the purposes of the principles exemplified in Yerkey v Jones, the fact that the guaranteed loan had previously been applied to a purpose beneficial to the wife would not in itself render a guarantee given ex post facto by her other than voluntary.
117Mr Hines referred to a number of authorities which he said stood for the proposition that a “speculative” benefit to a wife would not render a guarantee of her husband’s debt other than voluntary. In Agripay Pty Ltd v Byrne [2011] QCA 85, the Queensland Court of Appeal considered the validity of a guarantee given by the wife of the liabilities of her deceased husband under a loan agreement. Both the husband and wife seem to have been medical practitioners with the title “Dr”. The husband had borrowed funds from Agripay “to invest in a tax avoidance agricultural managed investment scheme.” ([2] per Margaret McMurdo P) The Court concluded that for the purposes of the Yerkey v Jones principles the guarantee should be regarded as voluntary, given without countervailing benefit to the wife. The learned President of the Court, Margaret McMurdo P, said:
“The evidence before the primary judge was sparse, both as to the likelihood and extent of any profit to the joint superannuation fund or generally from the agricultural managed investment scheme. At best, it was that there was some prospect of an eventual profit which may have benefited the family unit if it remained functional; and some small portion of any eventual profit may have found its way to the joint superannuation fund. But the short term benefit of a lower tax bill and any profit received in the long term was essentially for Dr Murray Byrne. There was no clear evidence that the respondent [the wife, Dr Joan Byrne] would actually profit from the scheme. To exclude the respondent, a wife, from the category of volunteer in the sense discussed in Garcia because she would benefit from the transaction she was guaranteeing, her gain must be direct or immediate ... The evidence favoured the conclusion that the prospect of any profit to the respondent was speculative. Even if she did receive some eventual modest benefit, it was likely to be neither direct nor immediate.” [11]
118Mr Corbett took me to a decision of Einstein J in State Bank of NSW v Chia (2000) 50 NSWLR 587 (“Chia’s case”). He did not suggest that the facts considered by his Honour in that proceeding bore a close resemblance to those now under consideration. He relied, however, upon a statement of principle on the issue of what constituted a “voluntary” guarantee in this context, where his Honour said:
“(2) The second requirement is that the wife is a volunteer. It is not sufficient that the wife has received consideration as would be recognised in the law of contract: Bank of Victoria Ltd v Mueller (at 649). The consideration for the guarantee must be of ‘real benefit’ to the wife: Garcia (at 412). Incidental benefit which accrues generally to the family of which the wife is a member is not sufficient benefit to render a transaction which does not otherwise contain a ‘real benefit’, non-voluntary: Armstrong v Commonwealth Bank of Australia (1999) 9 BPR 17,035; [2000] ANZ ConvR 470; Cranfield Pty Ltd v Commonwealth Bank of Australia (Supreme Court of Victoria, Mandie J, 20 November 1998, unreported). Where the wife expects to reap direct profit from the transaction, the transaction cannot be said to be voluntary: State Bank of New South Wales Ltd v Vecchio (Kirby J, 10 November 1998, unreported). Neither can it be said to be voluntary where the moneys secured by the guarantee are used to purchase an asset in which the wife is equally interested with her husband: Commonwealth Bank of Australia v Khouri (Supreme Court of Victoria, Harper J, 4 November 1998, unreported). However, where the interest of the wife is a shareholding in the company through which her husband conducted his business and in which she has no real involvement, then a guarantee given by the wife over that company's debts will be voluntary: Commonwealth Bank of Australia v Khouri. But where the wife has an active and substantial interest in the conduct of, and the fortunes of, the business run by her husband, she will not be a volunteer in relation to any guarantee over the debts of that business: Radin v Commonwealth Bank of Australia (Federal Court of Australia, Lindgren J, 23 October 1998, unreported). Where the transaction is not ex facie for the benefit of the wife, then the onus will lie on the party seeking to enforce the security to show that the wife was not, relevantly, a volunteer: Warburton v Whiteley [1989] NSW ConvR 55-453 at 58,288; (1989) 5 BPR 11,628 at 11,634, per McHugh JA.” ((2000) 50 NSWLR 587, 601)
145Secondly, and perhaps far more significantly, the threat which faced Mrs Cotton when she signed the guarantee was not as disempowering as the one which Ms Thorne faced. Ms Thorne’s family members had been invited and had committed to travel from the other side of the world to attend the marriage service. Without marriage to Mr Kennedy she would be left without any standing and without any visa to remain in Australia, with limited English in an English-speaking society. The threat before Mrs Cotton ultimately materialised: her husband was bankrupted, and the matrimonial home was sold. No doubt this has been a tragic upheaval for her. However, she remains resident in her home country with the support of her parents, both of whom attended the trial at various times, with her father giving evidence in support of her case.
146Allowing for the fact that the threats which might constitute undue influence need not be unlawful, what Mr Kennedy was seeking to do, and what he managed to achieve, was plainly unfair. According to independent legal advice, the regime to which Ms Thorne signed up was manifestly unfair to her in the event of a marriage breakdown. From Mr Russell’s point of view, were his superannuation fund ultimately to be unable to recover its advance to Cotton Developments Pty Ltd, which the evidence showed was used principally or solely to construct the Cottons’ matrimonial home, it would seem unfair were Mrs Cotton able to escape all liability for the outlay.
147Next, as I have sought to explain, in the last 12 months of her marriage Mrs Cotton was able to inform herself as to the state of her family’s finances and make critical judgments. She did not receive independent legal advice. Mr Russell, by seeking to have certificates on this subject signed, effectively urged her to have that independent advice. Kensington was not in the position of most lenders seeking guarantees, able to decline to advance funds unless and until the independent advice was obtained by the guarantor and certified to the lender. The moneys were already outstanding. Mrs Cotton was, as I have sought to explain, possessed of commercial experience; the daughter of a veteran and highly-experienced solicitor who could have furnished her with advice or referred her to a colleague. She showed herself able to avail of independent legal advice by instructing solicitors to draw up an agreement to give effect to the arrangement she had negotiated relative to the dispute about stock with Care A2 Milk and Mr Dominic Galati.
148With the wisdom of hindsight, signing the guarantee was a very bad bargain for Mrs Cotton. However, seeking to view things with foresight, there were reasons why it was not unreasonable; and therefore seeking to prevail on Mrs Cotton to sign ought not be regarded as undue or unfair influence. No one seems to have anticipated that the commission relative to the sale of 446 Collins Street would be tied up in Supreme Court proceedings. This commission could have “saved the day” for the Cottons or at least substantially mitigated their difficulty.
149Further, the very short deadline for repayment of the first instalment could have been expected to be funded by borrowings from the Tatarka interests. According to Mr Russell, Mrs Cotton specifically discussed this with her husband prior to signing the guarantee. The evidence did not disclose why the Tatarka loan, which presumably was restructured following the rebuff of the proposal to include the security over Portsea, did not proceed (T146). Plainly, Mrs Cotton was aware of the proposal to borrow money from Mr Tatarka’s company via his wife. She signed documents relative to this. She did not, as I recollect it, admit distinctly that she referred to a proposed drawdown before signing the guarantee.
150Mrs Cotton’s evidence was replete with statements that she “couldn’t remember” events, leaving open invariably the question whether that amounted to the possibility that the event did occur and she could not remember one way or the other, or, on the other hand, that she was saying she did not remember the event because she was sure it did not happen. The overall effect was to leave her evidence quite uncertain. I cannot say whether that uncertainty was created by a lack of candour on her part or a failure of memory as to events which were stressful.
151Mr Russell gave his evidence in a straightforward manner, and I accept him as a witness of truth. I therefore accept that at the time of signing the guarantee, Mrs Cotton was buoyed by the consideration that an immediate default would be avoided by a drawdown of funds from the Tatarka interests. Mr Russell would likewise have been reassured.
152Mr Hines relied on a decision of the English Court of Appeal in UCB Corporate Services Limited v Williams [2002] EWCA Civ 555 (“UCB case”). He said this case supported the proposition that a lack of knowledge and understanding of the transaction on Mrs Cotton’s part in itself constituted a ground for regarding the guarantee as having been procured by undue influence. In the UCB case, a wife, Mrs Williams, was co-owner of the matrimonial home with her husband. Her husband was a partner in a motor vehicle dealership with a Toyota franchise. Security was granted to UCB over the matrimonial home to secure inter alia the partnership’s indebtedness to UCB. The wife was not a partner in that firm. The trial judge had found that Mrs Williams executed the charge in favour of UCB, which replaced earlier security given over the matrimonial home to NatWest Bank, having been led to believe that this merely represented a change in bank without any increase of risk or liability for Mrs Williams [81]. Jonathan Parker LJ gave the principal judgment which was concurred in by Kay and Peter Gibson LJJ. His Lordship found:
“Mrs Williams was never told the truth; she was told lies in order to induce her to execute the UCB Charge. The lies were ‘material and successful’ in that they induced Mrs Williams to act to her detriment in executing the UCB Charge.” [88]
153His Lordship said:
“Undue influence is exerted when improper means of persuasion are used to procure the complainant’s consent to participate in a transaction, such that ‘the consent thus procured ought not fairly to be treated as the expression of [the complainant’s] free will’.” [86]
154His Lordship continued:
“That being so, I cannot see any reason in principle why (for example) a husband who has fraudulently procured the consent of his wife to participate in a transaction should be able, in effect, to escape the consequences of his wrongdoing by establishing that had he not acted fraudulently, and had his wife had the opportunity to make a free and informed choice, she would have acted in the same way. The fact is that the husband’s fraud deprived the wife of the opportunity to make such a choice, and, as I see it, it is that fact which founds the wife’s equity (as against her husband) to set aside the transaction.” [86]
155In the present case, for reasons already given, Mrs Cotton was fully informed as to the effect of the transaction which she was entering. There is no evidence that either Mr Cotton or Mr Russell misled or misinformed her. The UCB case does not support Mrs Cotton’s defence.
156For all these reasons, I reject the contention that Mrs Cotton’s signature on the guarantee was procured by undue influence exercised either by Mr Cotton, Mr Russell, or the two in combination.
Unconscionable conduct
157The most recent consideration by the High Court of the operation of the doctrine of unconscionability as a ground to set aside financial transactions is Stubbings v Jams 2 Pty Ltd [2022] HCA 6. Mr Stubbings owned two houses which were mortgaged to the Commonwealth Bank of Australia, but was unemployed and had no regular income. An application by him for a home loan from ANZ Bank was rejected because he lacked a financial record, having had no regular income for some years and not having filed tax returns.
158He was referred to a law firm for assistance in raising funds to purchase a property on the Mornington Peninsula at a place known as “Fingal”. He was told by a Mr Zourkas of that law firm that he, Mr Stubbings, could borrow enough to pay out the Commonwealth Bank mortgages on his two existing properties, purchase the property at Fingal, and have $53,000 available to meet the first three months of interest on the loan. He was told that Narre Warren properties could be sold to reduce the loan to approximately $400,000 which could be refinanced at a lower rate. The lender required that the loan be made via a company with Mr Stubbings as guarantor, with the evident purpose of avoiding its regulation by the National Credit Code [23].
159The Court noted that since Mr Stubbings was without regular income, the only mode of repayment of the loan was not by means of any repayment schedule or payment in the ordinary course at maturity, but by virtue of enforcement and sale of security properties. The Court found that this was a system of “asset lending” and that the lender engaged in a process of wilful blindness and the use of intermediaries to avoid, or attempt to avoid, being afflicted with knowledge of Mr Stubbings’ lack of income. According to Steward J:
“The economic result for the appellant is that, in substance, his equity in the Narre Warren properties has ultimately been used to fund the fees paid to AJ Lawyers, Mr Zourkas, Mr Kiatos and Mr Topalides and to pay some interest to the respondents. He is no longer the owner of the Narre Warren properties and, by reason of the orders of the Court of Appeal, stands to lose his home.” [140]
160The Court reversed a determination by the Victorian Court of Appeal in favour of the lender. His Honour adopted the test for unconscionable conduct enunciated in the joint judgment in Thorne v Kennedy:
“A conclusion of unconscionable conduct requires the innocent party to be subject to a special disadvantage ‘which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests’. The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring ‘victimisation’, ‘unconscientious conduct’, or ‘exploitation’. Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage.” (2017) 263 CLR 85, 103 [38]
161The trial judge had found that Mr Stubbings suffered special disadvantages which “included his lack of education and business experience, his lack of understanding of the transactions, and his relative impecuniosity.” [157] His Honour also referred to statements by Fullagar J in Blomley v Ryan (1956) 99 CLR 362 at 405 that, apart from age, infirmity, illiteracy, lack of education and so forth, a lack of assistance or explanation where assistance or explanation is necessary could constitute a special disadvantage.
162Mr Hines contended that his client’s lack of knowledge and understanding, as described in her evidence-in-chief, constituted a special disadvantage which would engage the doctrines relative to unconscionable conduct.
163In Thorne v Kennedy, aside from finding the property agreements invalid as having been procured by undue influence, the Court also found them to be invalid or void by reason of unconscionable conduct on the part of Mr Kennedy. Nettle J said:
“Mr Kennedy [had] taken unconscientious advantage of Ms Thorne’s position of special disadvantage. In effect, it was a position of special disadvantage which he created by bringing her to this country, keeping her here for many months in a state of belief that he would marry her, allowing preparations for the wedding to proceed, and only then, when she had ceased for all practical purposes to have any other option, subjecting her to the pressure of refusing to marry her unless she agreed to the terms of the first agreement. It was thus also a position of special disadvantage of which Mr Kennedy was aware, or at least of which a reasonable person in his position would have conceived as a real possibility.” (2017) 263 CLR 85, 116 [74]
164I have already explained why, in my view, Mrs Cotton well understood the effect and purport of the transaction to which she was committing herself. There is no analogy with Thorne v Kennedy in this respect, and no special disadvantage of the type found in these cases.
165As to the unconscientious or unconscionable exploitation of that disadvantage, the analogy which Mr Hines understandably appealed to was the threat of almost immediate default. For reasons already explained, that threat was not lost on Mrs Cotton. She believed that a drawdown from Mr Tatarka would obviate this problem. This deal fell through. This is not a case where, as in Stubbings, the lender knew, or abstained from informing itself by wilful blindness, of the hopeless position the borrower and guarantor were in as to the ability to repay. Mrs Cotton’s remarks about Mr Tatarka’s proposed loan would have led him to the opposite conclusion. Moreover, there was still reason to think that funds would flow from the real estate commission which was subject to an assignment by way of security in the suite of documents submitted for execution.
166A decision of the High Court which might be regarded as bearing a superficial resemblance to the present case is The Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 (“Amadio’s case”). In that case, a guarantee and mortgage were executed by two elderly migrants, Mr and Mrs Amadio, aged 76 and 71 at the relevant time, who had been born in Italy but had lived in Australia for over 40 years. They had limited education. Mr Amadio had a limited grasp of written English but spoke it reasonably well. His wife had some understanding of spoken English, but gave her evidence via an interpreter. Neither had business experience, though they had engaged in some land transactions.
167Their son, Mr Vincenzo Amadio, had carried on business as a land developer and builder inter alia by a company V Amadio Builders Pty Ltd. That company had fallen into default in its obligations to the bank. According to Gibbs CJ, the elder Amadios “had every reason to believe that [Mr Amadio junior] was a wealthy and successful man.” In fact, the affairs of his company were such that the bank had to adopt a daily review of its overdraft account and adopt a policy of selective dishonour of cheques ((1983) 151 CLR 447, 451).
168Mr Amadio junior told his parents that he was asking them to give a guarantee “for around $50,000 and said that it would be for about six months.” ((1983) 151 CLR 447, 453) On the same day, the bank manager went to the residence of Mr and Mrs Amadio senior and obtained their signature on a guarantee mortgage which contained no limit either as to time or amount. The High Court found that the elder Amadios were under a special disadvantage because of their age, lack of knowledge of the English language, and education, and there had been a failure on the part of the bank to disclose the unusual features of the transaction: specifically, that the account they were being asked to guarantee was already in default.
169The pre-existing default is an obvious resemblance between Amadio’s case and the present. I have already explained, however, how the dire nature of the Cotton family’s circumstances was already well known to Mrs Cotton. The purpose of signing the documents was to stave off Mr Cotton’s bankruptcy. The material shared with Mrs Cotton some four days previously on 23 July 2021 indicated that there was already a judgment debt, and summarised the transactions which by their nature were intended to provide no more than a brief stay of execution followed by a rigorous schedule for repayment of the amount of the judgment debt. Accordingly, Mrs Cotton was not labouring under the sort of ignorance or misunderstanding which the Amadios were. Nor did she suffer any linguistic impairment.
170In summary, Mrs Cotton has not been shown to have been labouring under any special disadvantage such as would engage the doctrines of unconscionable conduct; nor has it been demonstrated in the particular circumstances of this case that Kensington and Mr Russell had made unconscionable use of Kensington’s advantageous position. There was no sinister system of “asset lending”. Much less was there any evidence that, to the knowledge of Mr Russell and Kensington, Mr Cotton and his companies had no income.
171In Australian Competition & Consumer Commission v C G Berbatis Holdings Pty Limited (2003) 214 CLR 51 (”Berbatis”), the High Court considered a proceeding brought by the ACCC against lessors of retail premises in a shopping centre in Western Australia. Tenants at the centre had brought proceedings against the lessors, seeking relief relative to a number of alleged wrongs by the lessors. While the proceedings were pending, the lessees sold their business subject to lessor consent to assignment of the lease. The lessors’ agents insisted upon inclusion in the assignment document of a release of the lessors from liability for the matters the subject of the proceeding by both the lessees and the proposed assignee, with consent to dismissal of the proceeding. The ACCC contended that these stipulations constituted unconscionable conduct contrary to s51AA of the now-repealed Trade Practices Act 1974 (Cth) which prohibited unconscionable conduct “within the meaning of the unwritten law of the states or territories”.
172The High Court by majority held that there had been no unconscionable conduct. Gleeson CJ said:
“Unconscientious exploitation of another’s inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence. It is neither the purpose nor the effect of s 51AA to treat people generally, when they deal with others in a stronger position, as though they were all expectant heirs in the nineteenth century, dealing with a usurer.” ((2003) 214 CLR 51, 64 [14])
173His Honour continued:
“In the present case, there was neither a special disadvantage on the part of the lessees, nor unconscientious conduct on the part of the lessors. All the people involved in the transaction were business people, concerned to advance or protect their own financial interests. The critical disadvantage from which the lessees suffered was that they had no legal entitlement to a renewal or extension of their lease; and they depended upon the lessors’ willingness to grant such an extension or renewal for their capacity to sell the goodwill of their business for a substantial price. They were thus compelled to approach the lessors, seeking their agreement to such an extension or renewal, against a background of current claims and litigation in which they were involved. They were at a distinct disadvantage, but there was nothing ‘special’ about it. They had two forms of financial interest at stake: their claims, and the sale of their business. The second was large; as things turned out, the first was shown to be relatively small. They had the benefit of legal advice. They made a rational decision, and took the course of preferring the second interest. They suffered from no lack of ability to judge or protect their financial interests. What they lacked was the commercial ability to pursue them both at the same time.” ((2003) 214 CLR 51, 64−65 [15])
174Gummow and Hayne JJ said:
“There were three apparent resolutions to the impasse between the parties. First, the lease might be renewed without the inclusion of cl 14. This was unacceptable to the owners; they were not obliged to grant any renewal at all and so were at liberty to prevent that outcome and thereby deprive the Roberts of their sale proceeds. The second and third possibilities were both acceptable to the owners but, given the evidence of Mr Sullivan referred to above, the second probably was preferable. The second was renewal of the lease and inclusion of cl 14; the third was no renewal and no release of the owners by cl 14. To the Roberts, the renewal of the lease (albeit giving up the other claim later shown to be worth apparently only some $3,000) was vital to the sale of the business, making the second outcome preferable to the third. Against that background, it may not be surprising that the bargain struck reflected the second outcome.
It was never the case of the ACCC that the owners were obliged to deal with the Roberts by producing the first outcome, so that the owners, consistently with s 51AA, might deal with the Roberts only to the disadvantage of the owners. To conclude that the owners ‘extract[ed]’ the agreement by the Roberts to include cl 14, as did the primary judge, mistakes the significance of the available outcomes. The owners would not agree to renew the lease without cl 14 and were at liberty to achieve that result, as his Honour accepted. To stigmatise the second (and actual) outcome appears to favour as the preferable result the third outcome whereby the owners would have had no further dealing with the Roberts, the lease would have expired and the sale lost, but the Roberts would have later received some $3,000 at the settlement.” ((2003) 214 CLR 51, 78−79 [60]−[61])
175It was open to Kensington simply to proceed to enforcement by bankrupting Mr Cotton. It saw its interest as better served by entering into an arrangement which gave him some time and enabled him and his companies to pay off or reduce their liability to Kensington by resort to the various matters under consideration such as the real estate commission, borrowings from the Tatarka interests, and so forth. By analogy with Berbatis, in proceeding as they did, Mr Russell and Kensington did not engage in unconscionable conduct.
176Mrs Cotton also executed a document styled “General Charge”, which charged in favour of Kensington all her assets including real estate. The charging clause granted, by its nature, a caveatable interest over Mrs Cotton’s interest in the matrimonial home at Hampton. That home has been sold, and a fund of approximately $1.4m has been paid into court. It appears, however, that there are a number of claimants to that fund whose interests rank in priority to any entitlement which the plaintiff might have; hence, the plaintiff places no reliance, for the purposes of this proceeding, on the general charge. It is unnecessary, therefore, to consider whether there might have been any ground for avoiding that charge based on the matters urged in that regard relative to the guarantee (T534).
Disposition
177For these reasons, the defendant’s defence in its various aspects fails. The plaintiff’s claim succeeds. I will direct the parties to bring in short minutes to give effect to these reasons within 14 days.
Costs
178I have heard no argument as to costs, and so I will reserve them.
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14
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