Liberty Funding Pty Ltd v Properties Australia Pty Ltd
[2004] VSC 44
•10 February 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
PRACTICE COURT
No. 5086 of 2003
| LIBERTY FUNDING PTY LTD | Plaintiff |
| v | |
| PROPERTIES AUSTRALIA PTY LTD & ANOR | Defendant |
---
JUDGE: | HANSEN J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10 February 2004 | |
DATE OF JUDGMENT: | 10 February 2004 | |
CASE MAY BE CITED AS: | Liberty Funding Pty Ltd v Properties Australia Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 44 | |
---
Practice – judgment in default of defence – Appeal from Master – Guarantee – Construction – Whether creditor required to first realise its security against primary debtor – Suspension of right of surety to set-off a counter-claim in reduction of liability until debt paid.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. T. Schlicht | Middletons |
| For the Defendant | Mr G. J. Parncutt | Acquaro & Co |
HIS HONOUR:
This is an appeal from an order of Master Evans, who on 17 December 2003 dismissed with costs an application by the second defendant to set aside a judgment entered in default of defence against the first and second defendants on 19 May 2003. The writ in the proceeding was filed on 26 March 2003.
The plaintiff, as lender to the first defendant in respect of several units, being real estate, sued the first defendant pursuant to mortgages for possession and for amounts owing under the mortgages, there being a mortgage in respect of each unit. The second defendant was sued as guarantor of the liabilities of the first defendant under the mortgages.
The second defendant explains, in an affidavit sworn in support of the application, that he has taken the action which he has in seeking to set aside the judgment, in these terms:
"19. I did not defend this proceeding based on my understanding that the mortgaged property would be sold first before I could be called upon to pay any shortfall. This view was reinforced by the wording of the guarantee and my former solicitor's view of my understanding of the order of liability, that is, that the company property would be sold first and I would pay for any shortfall."
The position is that the writ was served on 7 April 2003. An appearance was filed by the defendants on 15 April 2003 and that no defence was filed. The plaintiff entered judgment when it was entitled to. The first defendant is insolvent and was wound up on 20 June 2003. The second defendant was a little later, on 23 October 2003, served with a bankruptcy notice. The second defendant goes on in his affidavit to state that he is facing financial ruin if he is made bankrupt and that he has been advised, and believes, that he has a prima facie defence based on the grounds: "(a) unilateral mistake ... induced by the written terms of the guarantee which by speaking of my paying any amount the debtor did not pay induced a belief that the plaintiff would have to realise the principal security first; and (b) the contractual uncertainty of the meaning of the guarantee and indemnity." He states that, if he had understood that the plaintiff would be seeking to recover from him prior to recovering from the first defendant, he would have filed a defence.
It is clear that on an application such as the present the applicant is required to show, in order to obtain an exercise of discretion in his favour, some merits as to a defence, an explanation for the delay, or such other matter as might, in the circumstances of the particular case, indicate that the justice of the situation required that the judgment be set aside. So much has been established for a long time by a number of authorities, including in this Court, and I was referred, as a matter of convenience, to a recent decision of the Court of Appeal in Lau v. Citic Australia Commodity Trading Pty Ltd[1], where the well known principles are referred to.
[1][1999] VSCA 34.
As far as merits are concerned, the guarantee, which is in writing, is relatively clear, in my view. It is unnecessary to set out by quoting them the several terms contained in the guarantee. Clause 2 provides that the guarantor guaranteed that the debtor will pay all amounts payable under the guaranteed agreement when they are due, and that the guarantee continued until all these amounts have been paid in full. It is further provided (in Clause 2.2) that if the plaintiff asks, the guarantor must pay any amount which the debtor did not pay when it is due under the agreement, and that the debtor need not be first asked to pay. There is also a provision by way of indemnity in Clause 3. There is a provision in Clause 9 which suspends the right of the guarantor to reduce his liability by claiming a set-off or counter-claim against the plaintiff, as long as any amount payable under the guarantee agreement remains unpaid. Clause 14.2 provides that the plaintiff may claim against the guarantor under the guarantee and indemnity before enforcing any of its rights or remedies against the debtor or under any document, such as a mortgage or other security.
An argument was made by Mr Parncutt, as I understood it, that the provisions of the guarantee, in particular of Clause 2 - and in this respect he referred also to the indemnity in Clause 3 - operated on their proper construction so as to require that the mortgagee first realise against the secured property before it could exercise its personal right against the guarantor. In my view the contention is quite without substance. The well known position is, of course, that a mortgagee can determine for itself the order in which it will pursue its rights under its securities. It is not for the guarantor to tell the mortgagee in which order and against whom, or in respect of which property, it is to proceed. I see no qualification on that in the terms of the guarantee and indemnity, as Mr Parncutt submitted. The position is that the debtor was in default, the plaintiff demanded payment from the guarantor, the default was not remedied, mortgagee then sued, the default subsisted, and ultimately judgment has been entered in default of defence. In my view the guarantee entitled the plaintiff to proceed as it has.
In his affidavit in support, the second defendant said that on receiving the writ he consulted his solicitor, who he named, who advised him to file a notice of appearance, which he did. He said that his solicitor agreed with him "that the principal security would be sold and if there were any shortfall I would be liable". It is a little unclear as to what the significance of this statement was or how it was to be relied upon. One thing is clear and that is that the solicitor concerned has not deposed to anything; there is no affidavit from him. However, I think that Mr Parncutt did not rely on that evidence as being the foundation for the alleged unilateral mistake. In any event, the mere statement that the principal security would be sold and if there was a shortfall he would be liable would be quite insufficient for that purpose, and, if it was meant to mean that there was considered advice that the guarantee on its proper construction required that the security constituted by the real estate be sold before he could be liable, it was plainly wrong. The failure of the second defendant to obtain an affidavit from the solicitor is telling in that regard, in my opinion, that is to say, in regard to whether advice to that effect was given.
Mr Parncutt referred, and he did so by saying that this was the basis for the unilateral mistake, as I understood it, to paragraph 13 of the second defendant's affidavit, in which he stated that he believed, on the basis of a part of Clause 2.2 to which he refers, that he was required to pay any amount the debtor did not pay; that is, he believed that the plaintiff must first seek to recover from the debtor and then he would pay whatever the debtor did not pay or could not pay. I have regard to the preceding part of the affidavit but think that the words referred to do not carry that meaning at all. All they are saying is that, "If we ask you, the guarantor, to pay something the debtor has not paid, then you pay." Such a request was made.
In my view there is no basis, in these circumstances, either for the contention that the guarantee operates in the way contended for by the second defendant or for a plea of unilateral mistake. The guarantee is clear in its terms. Moreover, there is nothing alleged in the conduct of the plaintiff which could in any way be described as conduct which relevantly in equity might aid in a contention of unilateral mistake.
In any event, the provision in the guarantee which suspends the right of the guarantor to reduce liability by a set-off or counter-claim so long as any amount payable under the guarantee remains unpaid stands in the path of the second defendant. Such clauses, or clauses to like effect, have been referred to in other cases and their propriety recognised. I have been referred to some of those cases in the course of argument. The question is one of the proper construction of the document. It is clear in my mind that, even if there is substance in the allegation that the units or any of them have been sold by the plaintiff as mortgagee at an undervalue to market, the right of the second defendant as guarantor to raise any set-off or counter-claim in that regard stands suspended until the amount owing by the debtor is repaid. The consequence of that is that the loan amount is required to be paid according to the terms of the mortgages, and then, and only then, in accordance with Clause 9, and as stated in the authority of GE Capital Australia v. Davis[2], as an example, is the guarantor able to raise the alleged set-off or counter-claim. That is the result of the terms of the guarantee.
[2][2002] NSWSC 1146.
I am satisfied, therefore, that there are no merits in the second defendant's position; not that there are some that are arguable, but that there are none. Furthermore, I do not consider that the explanation for delay is such as would warrant the setting aside of the defence. The failure to lodge a defence was deliberate, it was advised, and it is explained only on the false view of the operation of the guarantee.
For these reasons, which I think deal with the matters which have been argued, the appeal will be dismissed with costs.
---
0