Kippax,, C. v National Australia Bank Ltd

[1994] FCA 223

JUDGMENT No. . . , . ,, 223 ..,..... , ,........ .

A * I ) No. NG 355 of 1993

GENERA^ DIVISION j

BETWEEN:	COLIN KIPPAX and PAULENE GRAHAM
Applicant
AND :	NATIONAL AUSTRALIA
BANK LIMITED

CORAM :	WILCOX J
PLACE :	SYDNEY
DATE :	6 APRIL 1994

T - E

WILCOX J: I appreciate that this is a matter of some

importance to the parties, but I have reached a clear view about the matter. I think no good purpose would be served by my reserving my decision. The evidence has been within a small compass, and given yesterday and today. The basic issue is one of fact, and, in particular, whether I accept the version of critical parts of the conversation given by the two applicants, on the one hand, or the verslon given on the other hand by the respondent's manager, Mr Donaldson.

The applicants put their case in a number of
different ways. However, it seems to me that, if I accept to succeed on their claim under s.52 of the Trade Practices them on their account of the conversations, they are entitled

Act 1974 - and, perhaps, also under s.53(g) of that Act. If, on the other hand, I reject their version of the facts then it seems to me that the applicants would not be entitled to succeed on any of the various alternative ways in which they put their case. So there is no point in looking at the various ways in which they put the claim.

In considering whether I should accept the applicants' version of the matter or not, I do not think it necessary to repeat all the factual material. It is set out in the,respective affidavits. Each of the three deponents has been cross-examined. A certa~n amount of additional information was obtained in cross-examination, but the story of each witness is essentially unaffected by the cross- examination. Each witness adhered to his or her affidavit evidence.

There was a company called Mountain Marketing Pty

Limited which operated a bank account at the Cremorne Junction

Mountain Marketing was controlled by two directors, David branch of the Natlonal Australia Bank. It appears that	Eisenberg and Christopher Gardiner. The company was involved
in the sale and installation of kitchens. The first applicant, Colin Kippax, is a qualified architect. He graduated in 1975. Even before his graduation he obtained a cadetship with the Commonwealth Department of Works and he continued to be employed by that Department until February 1989 when he became a consultant to Mountain Marketing. As I understand the position, he did not work full time for Mountain Marketing, but he worked regularly for the company on several days each week. I gather he was paid on a time basis. I also gather that he was not otherwise employed, after he left the Department. It seems that Mr Klppax was impressed with the quality of the kitchens supplied by Mountain Marketing. The kitchens were imported from Germany. They were shown by Mountain Marketing in two show rooms, at Cremorne and St Leonards.
Mr Kippax and the second applicant, his wife, Pauline Graham, have been married for many years. They separated for a period of about two and a half years, but were reconciled and recommenced cohabitation in January 1990. At about that time, they sold a property in Randwick that they owned and held as an investment. They received approximately $45,000 which they had available for investment.
At about that same time, Mr Kippax travelled to Germany with Mr Gardiner. During the course of this trip, Mr
Gardiner made some comments to Mr Kippax in which he indicated his interest in Mr Kippax buying shares in the company. After
their return to Australia this comment was followed up. There were discussions, involving Mr Eisenberg as well, as a result of which it was agreed that Mr Kippax would invest $50,000 in the company. Apparently, the sum of $5,000 was owing to him for work done on behalf of the company. So it was agreed that this money would be off-set against the $50,000 investment and $45,000 would be paid in cash. According to the bank statements that are in evidence, $45,000 was deposited in the bank account on 20 February 1990. This was apparently the payment received from Mr Kippax.
Notwithstanding the payment of the money, the details of the transaction were left unsettled. Apparently, the original arrangement had been for a 10 per cent shareholding. There was discussion about a total of $100,000 being provided by Mr Kippax in return for a 10 per cent interest. But Mr Kippax indicated that he did not have that much money. So then there was talk about a bank guarantee. As matters were resolved, it was agreed that Mr Kippax and his wife would guarantee the company's bank account to the extent of $200,000 and that Mr Kippax would acquire a 20 per cent interest in the company.
According to Mr Kippax - and there is no contrary evidence - at the time he handed over his cheque for $45,000
bank up". Immediately thereafter, he had a conversation with
on 20 February, M r Gardiner said to him: "That will clear the
Mr Eisenberg in which Mr Eisenberg said:

"Thi s g e t s	rid	o f	our	d e b t s	and	c l e a r s	up
Josephson."

The reference to Josephson was a reference to a customer who had allegedly defaulted in paying a debt to the company exceeding $100,000.

I do not know the situation about other debts, but the evidence shows that the deposit of Mr Kippax's cheque reduced the company's overdraft with the National Australia Bank almost to nil. The opening balance on the day on which the cheque was credited was $45,807.38. There were some debits made that day, but at close of business that day the account was overdrawn only to the extent of $1,809.43. Thereafter the overdraft balance increased gradually. By 16 March 1990, the date of the conversations critical to this case, the opening debit balance was $47,061.09. The closing debit balance on that day was $49,586.09.

As I say, it was agreed between Mr Kippax, Mr Eisenberg and Mr Gardiner that Mr Kippax and MS Graham would guarantee the company's indebtedness to the bank up to a limit of $200,000 and that they would mortgage their house at Bondi Junction to the bank by way of security for the guarantee.

There was an existing mortgage over the house in favour of the Commonwealth Bank. So it was necessary for the National Australia Bank to check the amount of indebtedness under that

mortgage and to obtain the consent of the Commonwealth Bank.	This was done and the necessary documents were prepared for
signature.
MS Graham was employed at the University of Technology. In order to suit her working hours, it was arranged that Mr Kippax and MS Graham would call at the bank at 8.30am on 16 March. They were met by Mr Donaldson. During
a period of some 20 or 25 minutes, they signed the mortgage and the guarantee. As events turned out, the limit shown in the guarantee document was higher than that previously agreed, namely $206,768. The reason for this change was that the bank had supplied a bank guarantee worth $6768 to the lessor of premises occupied by Mountain Marketing. The bank wished to ensure that the guarantee it was taking from Mr Kippax and MS Graham - and also, I should add, from Mr and Mrs Eisenberg and Mr and Mrs Gardiner - extended to this additional payment. Nothing turns on the change. The reason for the change was explained to Mr Kippax and MS Graham. They accepted it at the time. They make no complaint about it now. The issue in the case involves other elements of the conversation that occurred during the visit.
It is common ground that MS Graham, in particular, was concerned about the applicants' liability under the guarantee and the mortgage. She asked a number of questions. She was shown a draft letter of approval of the loan that had been prepared by Mr Donaldson on behalf of the bank but was
not ready to be sent out, apparently because of some typographical errors. MS Graham also attempted to read the
guarantee and mortgage documents but I am not sure that she succeeded in understanding them during the course of the interview.

According to Mr Kippax, after MS Graham read the

draft letter, she said:

"The $200,000 is to be split up as $130,000 -

$70,000. How is it to be applied?"

Mr Donaldson said:

"$130,000 for day to day running costs and

$70,000 is to be used for letters of credit."

According to M r Kippax, his wife then said:

'*The $200,000 applies from t h ~ s point on?"

Mr Donaldson replied:

"Yes, it is whole new ball game."

MS Graham then asked:

"So the $200,000 can only be used for new

things?"

And Mr Donaldson replied:

"It is a clean slate, we are starting from

scratch . "

MS Graham gave evidence of the conversation to substantially

similar effect.

Mr Donaldson put the matter quite differently. In his affidavit of 28 March, he expanded upon evidence that he gave in his original affidavit, dealing in detall with the

conversation regarding the effect of the documents. According to him, MS Graham said:

"Is this a new facility?"

and he replied:

"The guarantee secures present debts as well as future debts. The present debt is covered by the registered mortgage debenture. But we will not allow any further drawings until further documentation is complete. Another

account could be opened in respect of future debts but if it were the company could just transfer money over from the new account to clear the old debt. Any money coming in from the sale of stock and outstanding debtors will be used first to clear existing debt."

M r DonaLdson agreed that, during the conversation, MS Graham

appeared to be concerned about the company's position. He said that he clearly remembers referring to the company's present debt to the bank, but he does not recall mentioning a money figure.

As I say, in cross-examination all the witnesses substantially adhered to their affidavit evidence. At the request of counsel for the respondent, MS Graham left the court whilst her husband was cross-examined. When her turn came she was asked in cross-examination about many of the same matters as her husband had been.

In his submissions, counsel for the respondent took

me to two matters, in relation to which he suggests that there

Graham that I should treat their evidence with scepticism. I	is such a discrepancy between the evidence of Mr Kippax and MS
am not impressed by either of these matters. It seems to me that there is very little difference between the two witnesses' evidence on these matters, particularly bearing in mind that MS Graham said that she did not pay attention to all the conversation because she was endeavouring to read the documents.
I observed all the witnesses carefully as they gave their evidence. I thought that both Mr Kippax and MS Graham were honest witnesses who were endeavouring to recall the matter as best as they could, given the fact that four years has elapsed since the events under consideration. Without any disrespect to Mr Kippax, I record that I was particularly impressed with MS Graham as a witness. I thought she was very careful in her evidence and in her consideration of what was being asked, and that she did her best to recall what happened at the time and to state this truthfully. I did not have the same degree of confidence in Mr Donaldson's reliability. In fairness to Mr Donaldson, it should be said that this interview was not such an unusual event for him as it was for Mr Kippax and MS Graham.
The execution of the documents proved to be also a significant event in the life of Mx Kippax and MS Graham. Following the execution of the documents, the company's overdraft quickly increased. The company got into financial
bank exercised its rights under a floating charge over the difficulties and went into liquidation in September 1990. The company's assets which it already held in March 1990. But
there was a shortfall and the bank now claims from Mr Kippax and MS Graham a balance of indebtedness amounting, with interest, to some $160,000. To recover this money the bank claims to exercise its rights as mortgagee.
Apart from any matter of demeanour, it seems to me that the probabilities favour the applicants' account of the conversation. I find it inconceivable that, if Mr Donaldson had referred to the company having present debts, nobody asked him about the amount of such debts. Mr Kippax had been told only a few weeks earlier that his payment of $45,000 cleared the company's present indebtedness. It would have been a shock to him to learn that there was money owing to the bank, so I cannot imagine that he would have failed to ask Mr Donaldson what debts he was talking about.
Even more so, I think that MS Graham would have made an inquiry. The evidence makes apparent that she was the more cautious of the two partners in relation to this transaction. During the course of cross-examination she revealed that she was not keen on the idea of a guarantee at all. But she thought this offered an opportunity of full-time employment for her husband. Nonetheless, MS Graham asked questions of Mr Donaldson, and she attempted to master the documents that were presented to them for execution. Having seen her in the
witness box, with some opportunity to evaluate the sort of person she is, I cannot conceive that MS Graham would have remained silent if Mr Donaldson had said there were moneys
owing to the bank.
If MS Graham had ascertained that the proposed guarantees covered moneys already owing to the bank, I think that she would have declined to sign any documents on that day and have required her husband to confront Mr Eisenberg and Mr
Gardiner in relation to the matter. In effect, she would have required re-negotiation of the arrangements. Thls would have led to a full disclosure of the company's financial position with the likelihood that Mr Kippax and MS Graham would never have committed themselves in relatlon to the company's bank account.
Counsel for the respondent place some reliance on the fact that MS Graham did not put a specific question as to whether there were existing debts to the bank. It is correct to say that, on nobody's account of the matter, was that question put; but, if MS Graham's version of the matter, supported by her husband, is to be accepted, she was specifically told that the $200,000 guarantee applied only from this point on, that is, it applied only in respect of liabilities thereafter incurred. According to MS Graham, Mr Donaldson used cliches such as "whole new ball game", "clean slate" and "starting from scratch". These would have conveyed the message that the $200,000 had nothing to do with anything
existing liability. a quarter of the $200,000 was immediately to be applied to an that had occurred in the past. Thls was untrue because almost
Even if one takes the question alleged by Mr Donaldson, "Is this a new facility?", it seems to me that a frank answer would have disclosed the fact that, although the guarantee itself was new, it was a facility that covered existing debts. It is fair to Mr Donaldson to say that he
accepted the logic of that position in giving the reply that he set out in his recent affidavit.
As I say, the matter comes down to the question whether or not Mr Donaldson did reveal that there were substantial existing debts. In relation to that matter I have no hesitation in accepting the evidence of the two applicants.
It was submitted by counsel for the respondent that Mr Donaldson had no motive to mislead the applicants. I do not wish to impute more to Mr Donaldson than is fair, but it is accurate to say that there was a degree of embarrassment over this account as at 16 March. The then overdraft was unauthorised. Apparently Mr Donaldson took up the matter with
Mr Eisenberg. Mr Eisenberg explained the company's pos~tlon
by referring to the default made by M r Josephson. He promised that the overdraft would be reduced to nil by the end of January, but this did not happen. He then promised that it would be cleared up by the middle of February. This did not
February substantially cleared the deficiency. However, the
quite happen, although as I have said the $45,000 paid on 20
account then again blew out. It is clear from the bank's internal memoranda that Mr Donaldson recognised that he had to obtain additional security if the overdraft was to be maintained. It seems also clear from hls evidence that he was aware that the company wished to pay numerous creditors but was precluded from doing so until such time as he, Mr Donaldson, was in a position to authorise an overdraft above $47,000. The bank statements show the situation. As I have
said, the balance at close of business on 16 March was $49,586.09. By close of business on 19 March it was $74,965.56; by close of business on 20 March, $103,971.67. By 22 March it had reached $156,765.75; an amount which, when added to the outstanding letters of credit, exceeded the total approved amount of $200,000, with the result that cheques had to be dishonoured on 23 March in order to get back to the $200,000 limit. In other words, within a week of this security being given, the total indebtedness to the bank quadrupled. Mr Donaldson said in evidence that he was aware of the fact that Mr Eisenberg and Mr Gardiner wished to make a lot of payments. He may not have known the exact extent of the payments but it was obvious to him that, unless he could obtain security, he would be forced to refuse any further credit and would be under pressure from his head office to have the company eliminate its existing unauthorised overdraft. The result, to put the matter at its lowest, would have been seriously to undermine Mr Donaldson's business relationship with Mountain Marketing, and very likely to put
the company into insolvency.
It is obvious that a bank manager in this situation would be anxious to obtain additional security. It would be not unnatural for him to seize with some enthusiasm an offer by guarantors able to put up security worth $200,000. In saying this, I do not wish to suggest that Mr Donaldson took a course which he knew would lead to the financial desolation of

the applicants. It seems that he was genuinely enthusiastic about the kitchens supplied by Mountain Marketing. He probably believed that the company had a rosy commercial future and that it would never be necessary for the bank to call on its guarantees. The fact is, however, that the obtaining of the guarantees was the only way in which he could expect to continue his association with this customer.

It seems to me, on any view of the matter, that Mr Donaldson was reticent wlth the facts. It would have been very easy for him to have expressly disclosed to the applicants, with or without any question from them, the amount of the existing balance and to have made sure that they understood that their guarantees extended to that balance. It is plain from his evidence that he took a deliberate decision not to do this. In my view, the allegation that the conduct engaged in by Mr Donaldson was misleading conduct withln the meanlng of s.52 of the Trade Practices Act is made out.

given. The Application seeks a number of orders. The first The question arises as to what relief should be of them is that the contract of guarantee dated 16 March 1990, and the real property mortgage registered number Y943304, be declared void ab initio. Orders are also sought that the respondent execute a discharge of the mortgage and deliver this to the applicants' solicitors. Counsel for the respondent submits that, if the applicants are entitled to relief, the orders made should not go as far as they seek. He says that the appropriate course is for the Court to make an order varying their documents so as to exclude any liability for the moneys already owing to the bank at the time of execution of the documents.

Counsel discussed this issue with the applicants during the course of his cross-examination. In particular, he had an exchange with MS Graham upon the matter, suggesting to her that it was inappropriate for her to seek to have the whole transaction set aside since a significant proportion of the debt arose after 16 March, being debts which, on any view, she and her husband would have been prepared to guarantee. Her answer to that was that, if she had known the situation, they never would have executed the documents at all. Notwithstanding what counsel has put to me, I think that this is a correct analysis of the position.

It is obvious that the applicants were altogether

too trusting about this whole transaction. They seemed to

Gardiner without inquiry. They accepted that the company had have accepted what they were told by Mr Eisenberg and Mr	no debts. Had they been told by Mr Donaldson on 16 March that
the company had debts to the bank alone, leaving aside anybody else, of the order of $47,000, then in my view the applicants would have declined to go ahead with the transaction, at least on the terms already negotiated. In particular, I think MS Graham would have taken a strong view about mortgaging her home as surety for debts of the company.
It is conceivable that, if the matter had gone back to negotiation and further inquiries made, some different arrangement would have eventually emerged under which the applicants exposed themselves to some risk and that, with the company's subsequent financial decline, they would have ended up losing something. I would not wish to say what might have happened, but I am left with the firm view that they would not have executed these documents in the form they took on 16 March. As the whole of the liability under which they are now sued by the bank arose pursuant to these documents, it seems to me that what MS Graham said in response to counsel is correct, and that any relief to which they are entitled should extend to their whole liability.

I propose to make the following orders:

1.         I order under s.87(2) of the Trade Practices Act

1974 that the contract of guarantee dated 16 March 1990, insofar as it affects the applicants, and the

Real Property Act mortgage registered number Y943304

be declared void ab initio.

2.        I order that the respondent within 28 days execute in registrable form a discharge of Real Property Act mortgage registered number Y943304 and deliver the same to the applicants' solicitors, and do all things and execute all documents necessary to effect the discharge of the mortgage.

3.          I order that the respondent pay the applicants' cost

of the proceedings.

4.        I order that the cross-claim be dismissed.

I certify that this and the preceding sixteen (16) pages

are a true copy of the Reasons for Judgment

of the Honourable Justice Wilcox.

Associate:

Dated:  6 April 1994

APPEARANCES

Counsel for the Applicant:	J E Armfield
Solicitors for the Applicant:	Patterson Houen & Commins
Counsel for the Respondent:	M Walton
Solicitors for the Respondent:	Dibbs Crowther Osborne
Date of hearing:	6 April 1994

9 May 1994

Please replace Judgment 224-94 with the attached Judgment of 224-94.

Thank you.

Sonla Cornale