McDonald, N.E. & Anor v Esanda Finance Corp Ltd & Ors Esanda Finance Corp Ltd v McDonald, N.E.
[1993] FCA 341
•27 MAY 1993
NEIL EDWARD McDONALD and JUDITH ANNE McDONALD v. ESANDA FINANCE CORPORATION
LIMITED; COMMONWEALTH BANK OF AUSTRALIA; JOHN CHARLES McAULEY; LITHGOW MOTORS
PTY LIMITED and ESANDA FINANCE CORPORATION LIMITED
No. G747 of 1991
FED No. 341
Number of pages - 24
Trade Practices
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies J(1)
CATCHWORDS
Trade Practices - guarantee, mortgage and loan agreements - whether deceit and misrepresentation - whether failure to disclose relevant information - whether failure to ensure independent legal advice - whether transactions were unconscionable.
Trade Practices Act 1974 (Cth) - ss.51, 87
Contracts Review Act 1980 (NSW)
HEARING
SYDNEY, 1-5, 8-9 and 11 March 1993
#DATE 27:5:1993
Counsel for the applicants: G.J. McVay
Solicitor for the applicants: Diana Perla and Associates
Counsel for the 1st respondent: Mr M. Cashion
Solicitor for the 1st respondent: Kemp Strang and Chippindall
Counsel for the 2nd respondent: R.G. Forster
Solicitor for the 2nd respondent: L.E. Taylor
Counsel for the 4th cross-respondent: D.R. Fredericks
Solicitor for the 4th cross-respondent: William J. Player
ORDER
The Court orders that:
Counsel bring in within 14 days minutes of the orders which they propose.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
DAVIES J The applicants, Neil Edward McDonald and Judith Anne McDonald, are graziers whose property, "Hillview", is situated at Goodforest near Lithgow in New South Wales. The third respondent, John Charles McAuley, is an accountant who carries on practice in Lithgow. Mr McAuley was for many years the tax agent for Mr and Mrs McDonald. Mr McAuley was also the Managing Director of the fourth respondent, Lithgow Motors Pty Limited ("Lithgow Motors") which was the Lithgow dealer for Holden and Mazda motor vehicles. Esanda Finance Corporation Limited ("Esanda") financed the floor plan of Lithgow Motors, that is to say, it provided finance for the stock of new and used vehicles which Lithgow Motors held from time to time. Lithgow Motors had its trading account with the second respondent, Commonwealth Bank of Australia ("the Commonwealth Bank"). Patricia Merle McAuley is the wife of Mr McAuley and she and her husband are subject to a cross-claim brought by Esanda against them. Mr McAuley and Lithgow Motors did not appear at the hearing of the proceedings.
There are claims and cross-claims arising out of a transaction with Esanda in 1990 and claims and cross-claims arising out of transactions with the Commonwealth Bank from 1990 to 1991.
The applicants' claim against Mr McAuley and Lithgow Motors
3. For some years prior to 1990, Lithgow Motors suffered financial losses. Mr McAuley became the person principally concerned with the running of the business. During 1990, Mr McAuley prepared a statement of the affairs of Lithgow Motors which disclosed the following annual deficits:-
"YEAR TURNOVER GROSS EXPENSES OTHER NET 1988 3,778,781 151,005 500,652 31,618 (318,028)
1989 4,183,365 445,009 718,385 60,938 (212,436)
1990 (9 Months) 4,173,983 454,758 568,070 65,010 ( 48,302)"
By the middle of 1990, Mr McAuley apparently thought that a turning point had been reached and that the company would trade profitably, but that never eventuated.
Counsel for the applicants has contended that Lithgow Motors was at all material times hopelessly insolvent. However, I would not draw that conclusion in the absence of full information as to debts and committed outgoings, or without the assistance of valuations of Lithgow Motors assets at the relevant times. Plainly, the business was highly geared and continued to expend more than it earned. Apparently Lithgow Motors accepted trade-ins which it could not readily dispose of, at least at the prices allowed on the trade-ins. But the question whether, in the middle of 1990, Lithgow Motors was in a position from which even under good management it could not have recovered is not a matter which I could assess.
For some years, Mercantile Credits Limited ("Mercantile Credits") was the financier of Lithgow Motors' floor scheme. In May 1989, Esanda took over Mercantile Credits and became responsible for the management of its business. Mr B.L. Smith, the Manager, Commercial Finance in Esanda's Orange office, had overall responsibility for the Lithgow Motors' account. From late 1989, he impressed upon Mr McAuley the need to obtain additional capital and informed him that, if that was obtained, the account would be taken over by Esanda with the possibility of an increased floor plan limit. He put pressure on Mr McAuley to obtain financial support. On 9 January 1990, for example, Mr Smith wrote to Mr McAuley:-
"We have now completed valuations of the various security properties and established priorities to your bankers. As it currently stands, the alternate mortgages we had intended to take are not of any worth to Esanda. We are also aware that we are unable to obtain fresh mortgage documents over the 357 Main Street Lithgow property. In view of the lack of security we have no alternative than to give notice that you are entitled to make alternative finance arrangements as soon as possible. We are prepared to allow latitude until 28/2/90."
Mr McAuley was unable to interest any businessman in investing in Lithgow Motors. However, in early 1990, he persuaded one of his clients, a Mrs Uren, to provide her personal guarantee limited to $250,000. Mr Smith was not prepared to accept that, requiring instead a bank guarantee or a mortgage. Mrs Uren then withdrew her offer of support.
Mr McAuley turned to Mr and Mrs McDonald. They were grazier receiving only a small income but possessing a reasonably valuable property. Mrs McDonald had for some years been a ledger clerk with the Commonwealth Bank at Lithgow and had, from time to time, done some bookkeeping work for a client of Mr McAuley, work which Mr McAuley had arranged. However, Mr and Mrs McDonald had only a limited understanding of the commercial world and their approach to it was naive. Mr and Mrs McDonald trusted Mr McAuley totally and relied upon his statements and assurances.
Mr McAuley persuaded Mr and Mrs McDonald to lend $100,000 to Lithgow Motors in return for obtaining 49% of the shareholding. It was understood that Mr and Mrs McDonald would be silent partners and would not take any part in the running of the business and that Mr McAuley and his son would be the directors of the company. Mr and Mrs McDonald were informed that Mrs McDonald would be given part-time work at Lithgow Motors if she so desired and that, when their sons were old enough, they could obtain an apprenticeship with the company. That last inducement was of particular importance to Mr and Mrs McDonald who looked upon the transaction not only as one recommended to them by their adviser, Mr McAuley, but as one which would benefit their children. In September 1990 Mrs McDonald did take part-time employment in the used car section of Lithgow Motors for 4 hours per week. Mr McDonald established a small tractor and mower business which he carried on in partnership with Lithgow Motors on its premises.
I do not propose to discuss the individual matters relied upon in the claim against Mr McAuley. It is clear that he abused his position as a trusted adviser and persuaded Mr and Mrs McDonald to enter into a series of transactions which were entirely inappropriate for them. Mr McAuley misrepresented the position of Lithgow Motors and failed to disclose matters about its affairs which he had a duty to disclose.
Insofar as Mr and Mrs McDonald suffered loss from the subject transactions, which were entered into on the advice or encouragement of Mr McAuley, they are entitled to recover this loss from him.
The applicants' transaction with Esanda
10. It is convenient to consider first the facts as deposed to by Mr Smith in his evidence.
Mr Smith received a telephone call from Mr McAuley in late June 1990 and was informed by Mr McAuley:-
"'I have found some people who are interested in coming into the Lithgow Motors business with me. They are Neil and Judith McDonald, clients of mine. They are going to acquire a 49% share in the company for $100,000.00 and will be silent partners. They have substantial asset backing and can provide the security required by Esanda. They will be able to take advantage of the company's tax losses and Judith will also work part-time in the business. There is also the opportunity for their children to become involved in the business at a later date.'"
Mr Smith told Mr McAuley that Esanda would be interested in providing the $100,000 if Mr and Mrs McDonald possessed the backing.
On 29 June 1990, Mr Smith and Mr McAuley went to the home of Mr and Mrs McDonald at their property at Goodforest. A conversation was held in which the substance of the arrangement was repeated and it was arranged that Esanda would lend the $100,000. Mr Smith took financial details from Mr and Mrs McDonald. There was then the following conversation, as Mr Smith has deposed to it:-
"I: 'Now, you're going to take 49% of the Lithgow Motors' business. You've been through all that with John, I understand.' Neil McDonald: 'Yes, John has advised me that the business made a loss of about $200,000.00 last year but that he has turned it around this year and that losses have been reduced to only about $30,000.00. We can take advantage of these tax losses. It's also an opportunity to go into something different where I can involve my family. One of my sons will be coming into the workforce soon and I would like to see him do an apprenticeship at the dealership. Judith can start work straight away. The way things are heading at the moment we should also get something back out of the business" McAuley: 'Yes, things are already improving. With the new floor plan limits profitability will increase. We will use the $100,000.00 in the business to clear sales tax of about $70,000.00 and the rest is for working capital.'
I: 'Do you know about the new limits. I'll explain them to you. The old Mercantile Credits limit on the floor plan was $125,000 for new cars and $200,000.00 for used cars. As you know Esanda has taken over Mercantile Credits. These things happen. Mercantile Credits never had a big involvement in the motor industry. Esanda does and we are well regarded in the industry. Esanda is prepared to increase the new car limit to $270,000.00, the used car limit to $250,000.00 and also establish a demonstrator facility for $30,000.00.' McAuley: 'With the new limits we can have a much larger number of cars on the show room floor. This solves a lot of our past problems. You need to have more cars on display in order to increase sales, and without increased sales you can't make the profits. More cars means a bigger floor plan.'
Neil McDonald: 'I understand.'
I: 'John's right. It's difficult to sell cars off a brochure. You need to be able to show a customer the car, or else he'll go elsewhere. The limit the business has had in the past is completely out-of-date. It must be increased to achieve improved sales levels. Now Esanda will require fresh security for the floor plan from yourselves. You and John will be the only people with an interest in the business, and John's assets are already fully encumbered to the bank. We'll have his personal guarantee, but no mortgage. There is an Esanda policy on assessing risk for security purposes. For a limit of $270,000.00 on new cars, a minimum of 10% security is required, which is $27,000.00. For a limit of $250,000.00 on used cars, a minimum of 30% cover is required, which is $75,000.00. For a demonstrator facility of $30,000.00, a minimum of 10% cover is required, which is $3,000.00. Therefore the minimum total security required by Esanda for the new floor plan is $105,000.00. In addition, security is required for the $100,000.00 commercial loan to buy into the business. This makes a total minimum security requirement of $205,000.00. What security do you have available to cover this'
Neil McDonald: 'Judy, which one do you think? Not the house property, but one of the others?' Judith McDonald: 'Yes, I agree one of the other two blocks should do.'
Neil McDonald: 'This property is worth over a million dollars. It is split into three lots all about the same size. We could give Esanda security over one of the three lots worth about $330,000.00, but not the lot that contains the house. We are not prepared to give all three title deeds as security to Esanda for only $200,000.00 odd borrowings.'
I: 'That seems reasonable to me. What I would like to do, if I could, is inspect the property that you're prepared to put up.'"
There followed an inspection of the land that was proposed to be the subject of security to Esanda. Mr Smith then said:-
"That's all I need for the moment. Everything appears in order. I'll go back to my office now and prepare the formal Loan Application when all the rest of the information has arrived. If everything there's okay, I can indicate that I will recommend approval to Head Office."
On 17 July 1990, a transfer of shares occurred in Mr McAuley's office. In consideration of the payment of $1.00, 147,000 shares held by Mr and Mrs McAuley were transferred to Mr and Mrs McDonald and Mrs McAuley's remaining interest in Lithgow Motors was transferred to Mr McAuley. The result was that Mr McAuley then held 51% and Mr and Mrs McDonald held 49% of the issued shares.
On the following day, 18 July 1990, Mr Smith, Mr McAuley and Mr and Mrs McDonald met in Mr McAuley's office to sign documents. Mr Smith brought with him a sheath of documents. He had with him documents which transferred the floor plan from Mercantile Credits to Esanda, as well as documents which were to be signed by Mr and Mrs McDonald.
Mr and Mrs McDonald were handed a three page letter from Esanda Finance dated 17 July 1990 which commenced as follows:-
"Dear Mr and Mrs McDonald,
RE: COMMERCIAL/BUSINESS LOAN FOR $100,000.00 We have pleasure in advising that your application for finance has been approved subject to the terms and conditions listed below:-
GENERAL TERMS AND CONDITIONS:
BORROWER: The advance will be to Neil Edward and Judith Ann McDonald.
AMOUNT OF LOAN: $100,000.00
PURPOSE: To assist with
purchase of an
interest in Lithgow
Motors Pty Ltd."
Mr and Mrs McDonald read this letter, which they would have understood to be a formal letter setting out the terms of a loan of $100,000. A mortgage was produced. The amount secured was described in these terms:-
"The Mortgagor will pay to the Mortgagee all amounts for which the Mortgagor or the Borrower is indebted or otherwise liable to the Mortgagee and/or any Associated Company of the Mortgagee on any account ..."
In another clause "the Borrower" was defined as Lithgow Motors. However, these provisions were not specifically drawn to the attention of Mr and Mrs McDonald and nothing was said to them during the meeting which would have conveyed to them that they were executing a mortgage to secure the payment not only of the $100,000 which was to be lent to them, but also of the sum which Lithgow Motors owed to Esanda.
Mr McDonald signed the mortgage and the loan agreement at the meeting; but in accordance with the then practice of Esanda, Mr Smith asked Mrs McDonald to execute these documents in the presence of an independent solicitor. Mrs McDonald went to Le Fevre, Gilchrist and Pike, who were acting for her in a worker's compensation claim, and signed the mortgage and the loan agreement in the presence of Mr Parubotchy, a solicitor. Mr Parubotchy signed the usual certificate.
Signed also in Mr McAuley's office before Mrs McDonald went to Le Fevre, Gilchrist and Pike, were joint guarantees by Mr and Mrs McDonald in respect of "all obligations which may as from the date of this guarantee arise out of any contract transaction or arrangement so entered into (whether before or after the date here of) by any Guaranteed Person in the course of his business ...". The Guaranteed Persons were a company, Comserve No. 1 (774) Pty Limited, which was involved in the floor plan agreement and Lithgow Motors. The guarantees supported the secured amount as described in the mortgage.
An issue in these proceedings is whether Mr and Mrs McDonald understood that they were signing the guarantee, an understanding that both have denied. Mr McDonald gave evidence that, as papers were signed, only the foot of a page was turned over so as to disclose a place for signature. In view of the position of initials fairly high on the second page of each guarantee, I am not disposed to place weight on this evidence as to the manner in which the guarantees were signed. And as Mr Smith had the guarantees at the meeting, I am content to assume that he made some reference to the word "guarantee". However, I am satisfied that it was never explained to Mr and Mrs McDonald that they were signing a document which guaranteed the total floor plan liability of Lithgow Motors to Esanda, which was agreed between Mr Smith and Mr McAuley to be $270,000 for new cars, $250,000 for used cars and $30,000 for demonstration vehicles, a total potential liability of $550,000 plus interest.
It should be recalled that, at the conversation on the property at Goodforest, there was no mention of a guarantee. Moreover, although the conversation, on Mr Smith's evidence, extended the $100,000 to $205,000, there was no discussion of a liability such as that to which Mr and Mrs McDonald were asked to commit themselves by signing the guarantees on 18 July.
On 9 July 1990, Mr Smith wrote to his acting Regional Manager:-
"Additionally, we expect to have the personal guarantees of Mr and Mrs McDonald although at this point they may not be available."
However, Mr Smith did not speak to Mr and Mrs McAuley about this.
Mr Smith deposed to the following conversation, inter alia, at the meeting of 18 July 1990:-
"I: 'Neil and Judith, it's your turn now. Firstly, I have two Guarantees for you to sign. The first is a Guarantee and Indemnity by both of you of Lithgow Motors Pty Limited, and the second is a Guarantee and Indemnity of Comserve No. 1 (774) Pty Limited. As you are now shareholders, Esanda requires your guarantee.' Neil McDonald: 'Why do we need to guarantee this Comserve company? What's its purpose in the organisation?' I: 'This company is used by Lithgow Motors for sales tax purposes. It accounts for sales tax on new vehicles sold. As I understand it, it is likely to be disbanded at the end of July or shortly afterwards, when Lithgow Motors will use Esanda's wholesale company for purchasing new vehicles.'
McAuley: 'That's right, Neil. It's nothing to worry about because the company will cease operating at the end of the month and we can use Esanda's wholesale company after that.' Neil McDonald: 'OK.'
I: 'As before, I am required to give you the opportunity to take these documents away and seek independent legal advice on them. If you choose not to do that then I ask you to read them. If you don't do that then you are considered to understand them. But I should explain that in these guarantees you are pledging your personal assets in support of the liability of Lithgow Motors and Comserve to Esanda.' Neil McDonald: 'That's fine. Where do we sign?' I: 'Here, and here."
It will be noted, even on Mr Smith's evidence, that it was Mr Smith who pressured Mr McAuley to find someone with assets which would provide Esanda with security. Mr Smith was apparently content that the persons chosen were clients of Mr McAuley whose income was small. Mr Smith obtained full details of their income and assets during the conversation at Hillview on 29 June 1993. Mr Smith ensured that Mr and Mrs McDonald should not obtain independent advice about the transaction, for he offered to lend the $100,000 to Mr and Mrs McDonald. What he did not explain to Mr and Mrs McDonald was that Lithgow Motors had not been meeting its liabilities to Mercantile Credits and that the $100,000 lent to Mr and Mrs McDonald would pass immediately back to Esanda.
The $100,000 was to be lent by Esanda to Mr and Mrs McDonald and by them to Lithgow Motors. Mr and Mrs McDonald were informed that Lithgow Motors would meet all the payments due to Esanda. They were not informed that, on 18 July 1990, Lithgow Motors would draw a cheque for $171,036.5 in payment of moneys due to Mercantile Credits, a cheque which was met on 19 July 1990. Mr Smith said nothing about this, whilst Mr McAuley untruthfully informed Mr and Mrs McDonald that the $100,000 would be used in part to pay sales tax and in part for working capital.
Moreover, it was Mr Smith who, at Hillview, initiated the discussion about a new floor plan, a discussion which must have been largely incomprehensible to Mr and Mrs McDonald, but which, if Mr Smith's evidence were accepted, they would have understood to have raised the total commitment to $205,000. On Mr Smith's evidence, they agreed to this without having asked any perceptive question and without being told the true state of the floor plan or that Lithgow Motors continued to have problems in disposing of the vehicles traded in.
In my opinion, it is improbable that Mr and Mrs McDonald, gullible though they were, would have entered into the transaction at all had they understood that they were being required by Esanda to provide security not only for the $100,000 borrowed on 18 July 1990 but also for the floor plan with a commitment of up to $550,000 plus interest. Mr and Mr and Mrs McDonald were not wealthy persons who could afford any such liability. Nor did the transaction promise any benefit which would have justified such a commitment.
Mr and Mrs McDonald were handed a formal three page letter from Esanda which described the terms of the borrowing of $100,000 and which referred to a security. Mr McDonald signed the mortgage and the loan agreement. Mrs McDonald was then asked to take the agreement and the mortgage to an independent solicitor to ensure that she understood the nature of what she was signing. What Mrs McDonald was not given to take to the solicitor and what were not explained to her were the guarantees which she and Mr McDonald signed. Those guarantees were the most important documents, for they provided the personal liability which extended the operation of the mortgage beyond the loan of $100,000. Mr Smith ensured that independent advice would not be obtained in respect thereof by withholding the guarantees from the documents which Mrs McDonald took to the solicitors.
Mrs McDonald's understanding of the transaction is shown in the following evidence which she gave in cross-examinations:-
"Well, certainly, before you - some time prior to attending the meeting on 18 July, you and Mr McAuley had had some discussions about what was happening in relation to Esanda?- --Yes.
And what Esanda was providing?---Yes. And that was clear to you that it was a credit facility to Lithgow Motors?---Yes.
And he, I suggest to you, told you that part of the deal, whereby you and your husband bought into Lithgow Motors, was that you and he would both be required to secure the floor plan?---For $100,000.
Well, nevertheless, it is true to say, is it not, that prior to attending the meeting of 18 July, 1990, Mr McAuley told you that part of the deal, if I can use that expression, whereby you and your husband bought into Lithgow Motors, was that you and your husband would be required to secure in favour of Esanda the floor plan?---No, not the whole floor plan. Well, some of it?---New car section. At the time you attended the meeting on 18 July, 1990, you expected to sign on that occasion documents whereby you secured the financial obligations, or some financial obligations, of Lithgow Motors to Esanda?---Yes. And I suggest to you that when you attended the meeting your expectation was that the documentation to achieve that result may include a guarantee?---No. That would certainly have been one way of doing it would it not?---Yes.
Yes. I again suggest to you that when you attended the meeting it occurred to you that one of the documents you may be asked to sign at that meeting to secure the obligation of Lithgow Motors to Esanda might include a guarantee?---There was no mention of guarantee.
...
MR CASHION: And, Mrs McDonald at the time you signed this document you saw, did not you, the bold printed word, guarantor appearing on the reverse side about three or four inches down from the top of the page?---No, I cannot remember it.
Are you suggesting that you may have seen it, but now do not recall whether you did or not?---I have signed it, but I do not remember where I signed it, when I signed it."
I also accept Mr McDonald's evidence when he said:-
"When you went to the meeting you understood that you would be asked to sign a mortgage which would secure Esanda's loans to the company, Lithgow Motors, that is what your understanding was, was not it?---No, the understanding was that we loaned Lithgow Motors $100,000 for the floor plan on a simple mortgage and that's what was explained to us. ...
Well, you were aware at the time you signed that document that it was a document which was relevant to your financial dealings with Esanda, your financial relationship with Esanda?---Related to the $100,000. What do you understand a guarantee to be?---I know what a guarantee is now but I didn't at the stage."
No purpose would be served by considering individually the many representations relied upon in the statement of claim. The position of Lithgow Motors and its financial position vis-a-vis Esanda was misrepresented to Mr and Mrs McDonald to the knowledge of Mr Smith. Mr Smith encouraged and assisted Mr McAuley in the deception of Mr and Mrs McDonald and, indeed, went further than Mr McAuley had proposed to go by obtaining the signatures on the two guarantees when Mr and Mrs McDonald understood themselves to be entering into a transaction of much less magnitude. The transaction was totally inappropriate for Mr and Mrs McDonald, as Mr Smith would have understood, for he took from them full particulars of their income and assets. He and Mr McAuley acted together to deceive Mr and Mrs McDonald.
In my opinion, the conduct of Mr Smith in relation to the whole transaction was such as to amount to a breach of s.52 of the Trade Practices Act 1974 (Cth) and the transaction was so unjust that the guarantee, the mortgage, the loan agreement and the loan should be declared void and set aside both under s.87 of the Trade Practices Act and the Contracts Review Act 1980 (NSW).
The cross-claim by Esanda against Mr and Mrs McDonald should be dismissed.
In this event, there being no danger, the claim made by Mr and Mrs McDonald against Mr McAuley and Lithgow Motors in respect of this transaction fails.
The transaction between Esanda and Mrs McAuley
32. There is a cross-claim by Esanda against Mr and Mrs McAuley based upon guarantees given by them to Esanda in respect of moneys due by Lithgow Motors and Comserve No 1 (774) Pty Ltd to Esanda. Mrs McAuley relies upon the Contracts Review Act 1980 (NSW) and seeks to have the guarantees set aside so far as she is concerned on the ground that they were unjust in all the circumstances.
Mr Smith had been concerned to obtain guarantees from Mrs McAuley, because she was a part owner of the McAuley's matrimonial home. Presumably, when he had first planned to have guarantees executed by Mrs McAuley, Mr Smith had in mind that Mrs McAuley was a shareholder in Lithgow Motors. But in fact she ceased to be a shareholder on 17 July 1990 when her shareholding was transferred to Mr and Mrs McDonald and to Mr McAuley.
There is no evidence that, prior to the meeting on 18 July 1990, Mr Smith had mentioned the guarantees to any person, though Mr McAuley would have understood that, as he had given a guarantee to Mercantile Credits, he would be asked to provide a guarantee to Esanda. The meeting on 18 July 1990 was attended by Mr and Mrs McDonald and by Mr McAuley. Mrs McAuley was not present.
Mr Smith deposed in his first affidavit that Mrs McAuley was present and signed the guarantee at that time. Having read the affidavits of Mr and Mrs McDonald and the affidavit of Mrs McAuley in which she denied that she was present, Mr Smith conceded in a further affidavit that Mrs McAuley may not then have been present.
I accept the evidence of Mrs McAuley as to how the signing of the guarantee came about. Her evidence seems to me to be consistent with the evidence of Mr and Mrs McDonald and consistent with the view which I have formed that the guarantees were not documents which earlier had been discussed and agreed upon. They were produced unexpectedly on 18 July 1990.
Mrs McAuley deposed that, on 18 July 1990, she was telephoned by her husband when she returned home from shopping and was told that Mr Smith wanted her to sign some papers. She said she did not wish to sign any document and was not involved in the business of Lithgow Motors. Her husband said "Yes, I've told him, but he's insisting on your signing". Later that day, Mr and Mrs McAuley drove to Orange to Esanda's office. Mrs McAuley deposed that:-
"4. When we arrived at Orange, it was quite late. There were two or three people in the Office of Bruce Smith at ESANDA, Orange.
I said to Bruce:-
'Hello, you've got hard workers there' He said:-
'Oh, we had some important papers to get finished' He began writing on papers. I was sitting waiting to see what he was going to do. When he had finished writing he said:-
'I want you to sign this Guarantee' I said:-
'Why do you want me to sign this. I am not anything to do with the business. I am telling you very straight. I do not want to sign this'
He became quite agitated, jerking the papers up and down, and moving around in his chair. I could see he was getting upset.
He said:-
'Well, if you don't sign, John will not get the contract' I said:-
'Does that mean I have to sign?'
He nodded affirmatively without smiling and pushed the papers towards me.
I took the pen he handed me. He said:- 'Sign here, here and here'
I said:-
'I don't like doing this. It seems like signing under false pretences to me'
He just looked at me.
I said:-
'Alright, I suppose I have no choice but to sign, but I want you to know I cannot pay you if anything goes wrong. Everything I have is owned by the National Bank, you understand that?
He nodded.
...
5. I did not read the documents, nor were they explained to me, nor was I informed I should get independent legal advice. I know one of the documents was a Guarantee of some sort, but I had no idea what the other documents were."
Mr Smith's evidence of the substance of the conversation had many similarities. He conceded that Mrs McAuley had not provided a guarantee to Mercantile Credits and that he required that she provide the guarantees to Esanda. Mr Smith gave this evidence:-
"Forgive me. As I have jotted down my notes of what you said to Mr Cashion, you said to her, did you not, that Esanda required her signature - to sign this guarantee?--- Yes.
So, you did not ask, did you? You told her it was required?---Well, depends how you want to term it. I said we required it.
That is not a subtle distinction, is it?---What I am asking is could you please sign it. I mean, I did say that. Could you answer that question? That is not a subtle distinction, is it?---No, it's not. So you did not ask her, did you?---Not in that context. No, you required her to sign it?---That's what I told her. And you did want her to sign, did you not?---We required her to sign the guarantee."
In the light of these facts, it seems to me that the guarantees should be declared void and set aside under the Contracts Review Act. Mrs McAuley did not wish to sign the guarantee and made that known to both her husband and Mr Smith. She was put under pressure by her husband and by Mr Smith to sign the document. The nature of the obligation was not explained to her and she did not obtain independent legal advice. Mrs McAuley no longer had any connection with the business of Lithgow Motors and it was not appropriate to place her in the situation where her interest in the matrimonial home and her personal assets were at risk, unless she fully understood the nature of the obligation she was undertaking and obtained or was encouraged to obtain independent advice with regard to it. The transaction was unconscionable and unjust so far as she was concerned.
After Mrs McAuley had given evidence, I was informed by her counsel that Mrs McAuley desired to give further evidence to the effect that she did not understand what a guarantee was. As counsel insisted on recalling Mrs McAuley on the point, her further evidence was heard on a subsequent day. Mrs McAuley's evidence on that occasion appeared to be that of a witness who had made up a story and was attempting to mislead the Court as to the truth. Mrs McAuley did not appear to give evidence from her recollection but rather to put forward a prepared version of the facts. Understandably, she was evasive in answering questions.
I do not believe the evidence which Mrs McAuley gave on the second occasion. However, I think that Mrs McAuley's evidence, when first given, was probable and that her evidence in that respect was given from her memory of the facts as they occurred. Although her subsequent evidence raises doubts as to her credibility, I am of the view that her evidence as to the circumstances in which the guarantees were signed should be accepted.
Esanda is, however, entitled to judgment against Mr McAuley resulting from the guarantees given.
The claims transactions with the Commonwealth Bank
43. The Commonwealth Bank did not initiate Mr and Mrs McDonald's problems and, when the relevant transactions commenced with the Commonwealth Bank, the position, so far as the Acting Manager of the Lithgow Branch, Mr B.L. McGuigan, and later the Manager of the Lithgow Branch, Mr N.C. Dunbar, were concerned, was that Mr and Mrs McDonald were persons who held almost one-half of the shareholding in Lithgow Motors. Accordingly, as it is a common practice of banks to look to the shareholders of a company to provide security should the security offered by the company itself be inadequate, so Mr McGuigan and Mr Dunbar naturally looked to the shareholders, Mr McAuley and Mr and Mrs McDonald, when security was required for the overdraft of Lithgow Motors. Mr McGuigan and Mr Dunbar were not made aware that Mr and Mrs McDonald were merely silent partners who had been enticed to take the shareholding for $1.00 and to lend the company $100,000 with a view to providing their sons and Mrs McDonald with remunerative employment. A feature of the transactions with the Commonwealth Bank was that the Bank always kept Mr and Mrs McDonald advised in writing of the current state of the liability and of the extent of any liability which they were asked to undertake.
In the case of the claims against the Commonwealth Bank, I prefer to rely principally upon the evidence of Mr McGuigan and of Mr Dunbar rather than that of Mr and Mrs McDonald. In particular, I thought that Mr Dunbar was an impressive witness. I do not think that Mr and Mrs McDonald were attempting to mislead the Court. But it seems to me that their evidence reflects the point that they became involved in affairs which were to some extent beyond their understanding. They had agreed to be silent partners and they trusted Mr McAuley and so they failed to ask questions which they ought to have asked. But the Commonwealth Bank did not aid Mr McAuley in deceiving Mr and Mrs McDonald, nor were Mr McGuigan or Mr Dunbar aware of his deceptions.
Clearly, Mr McAuley continued to mislead Mr and Mrs McDonald by giving them false expectations as to the financial position of Lithgow Motors. And clearly, Mr and Mrs McDonald are entitled to relief against him in relation to the events which occurred. But the present issue is whether Mr and Mrs McDonald should obtain relief against the Commonwealth Bank.
In about September 1990, the Manager of the Lithgow Branch left for another position. Mr McGuigan, who was the Accountant at the Branch, became the Acting Manager until Mr Dunbar became Manager on about 14 November 1990. Prior to the time when Mr McGuigan was Acting Manager, there had been no formal overdraft arrangements between Lithgow Motors and the Bank. But an overdraft had been allowed to develop and by 8-12 November 1990, the overdraft was about $45-50,000, which whilst possibly not a great sum for a company which was the authorised Holden and Mazda dealer in Lithgow, was nevertheless unsecured. Moreover, it appears from an examination of the bank's statements and from the evidence of Mr McGuigan that the overdraft had been kept within reasonable bounds only because the previous Manager had personally reviewed, at the end of each day, the moneys likely to be paid into the account and the cheques which had been presented for payment. The Manager had adopted the practice of holding over until the following day a number of cheques which ought to have been debited to the account on the day on which they were presented. The Manager in addition, occasionally dishonoured some cheques.
Mr McGuigan continued this practice when he became Acting Manager but he formed the view that something should be done about it. Mr McGuigan decided that Lithgow Motors required additional working capital of $50,000 to $60,000 and that, if that amount were provided, the account could be regularised. Mr McGuigan informed Mr McAuley on or about 8 November 1990 that the state of affairs could not be allowed to continue and that he would have to refrain from issuing cheques until Lithgow Motors had sufficient funds deposited. In the alternative, Mr McAuley would have to lodge security acceptable to the Bank to establish an overdraft facility limit of $50,000 to $60,000 as carry-on working capital. Mr McGuigan's view was that the problem was caused at least in part because of the electronic speed with which cheques were debited and the slow manual way in which the collection of deposits was effected.
On 12 November 1990, Mr McAuley called to see Mr McGuigan and was accompanied by Mrs McDonald, whom he introduced as a shareholder in Lithgow Motors. Mrs McDonald offered to provide security. Mr McGuigan proposed that Mrs McDonald lodge a term deposit as security for the overdraft.
In the course of the conversation, Mrs McDonald made an enquiry as to Lithgow Motors' affairs. The following evidence given by Mr McGuigan probably represents the substance of the conversation:-
"Mrs McDonald said words to the effect of: 'How is Lithgow Motors going?'
I said:
'John, you're the director and its chartered accountant - is it trading profitably?'
Mr McAuley said:
'Yes, we are trading profitably at the moment but require temporary working capital because we are a day or two behind with our banking to cover our cheques issues.' I said to Mrs McDonald:
'This is due to the high speed with which all cheques are cleared and debited to all customers' bank accounts electronically the same day as they are banked by the payees. ..."
Counsel for the applicants submitted that this conversation amounted to a misrepresentation to Mrs McDonald by the Commonwealth Bank as to the financial position of Lithgow Motors. However, I am satisfied that there was no misrepresentation of which Mr McGuigan was aware or any failure on his part to disclose the true position to Mrs McDonald. The practice of delaying the payment of cheques and of dishonouring the occasional cheque had been going on for a substantial period of time. Mr McGuigan considered that the account could be regularised if an overdraft of $50,000 was established and security provided. In the light of the turnover, which exceeded $4m per annum, and of the fact that the account fluctuated and was occasionally in credit or close thereto, Mr McGuigan had grounds for thinking that the past history had been satisfactory.
I am of the view that Mr McGuigan was not aware of circumstances which he had a duty to bring to Mrs McDonald's notice and did not himself say anything which was misleading or deceptive. Even on the evidence of Mrs McDonald, it was Mr McAuley who made the misleading statement. On her evidence, she asked "How is Lithgow Motors going?" and Mr McAuley replied "Everything is fine".
The arrangement having been agreed to on 12 November, Mr McGuigan established an overdraft limit of $50,000 and informed Mr McAuley that Lithgow Motors should stay within it. Mrs McDonald borrowed $50,000 from her own bank, Westpac, and lodged the sum in a term deposit in the name of herself and her husband. Mr and Mrs McDonald signed guarantees limited to $50,000 and a security document dated 13 November 1990 which read:-
"IN CONSIDERATION of Commonwealth Bank of Australia (the Bank) granting certain advances of accommodation to Lithgow Motors Pty Ltd (the Debtor) I/We, I/We Neil Edward McDonald and Judith Anne McDonald hereby agree with the Bank that:
1. So long as any moneys remain or may become owing or payable to the Bank by the Debtor on any account whatsoever whether as principal or surety (all of which moneys are hereinafter called the money owing)
(a) the Bank shall be under no obligation to repay and may from time to time renew for such period and at such rate of interest as the Bank may determine the Deposit(s) described in the Schedule hereto (the said Term Deposit(s) and any renewal thereof is hereinafter called the Deposit);
(b) the Bank may without prior notice to me/us prepay and apply the whole or any part of the Deposit and interest accrued thereon in or towards payment of the moneys owing or any part thereof.
2. This agreement shall not be considered as wholly or partially satisfied by payment by the Debtor at any time hereafter of any of the moneys owing or by any settlement of account or by the granting to the Debtor of any time or indulgence or by any other matter or thing whatsoever. DATED this 13th day of November 1990. THE SCHEDULE HEREINBEFORE REFERRED TO Number Amount Interest Rate Maturity Date 2566500337786 $50,000- 10.75% 11/12/90"
Mr and Mrs McDonald were given documents, called a form S33, which stated that their present maximum liability was $50,000.
It was contended that Mrs McDonald understood the 30 day maturity periods to mean that she could withdraw her $50,000 at the end of any 30 day period and that in this respect Mr McGuigan had misled her. However, I am satisfied that it was explained to Mrs McDonald that the money was deposited as security. Therefore, the deposit could not be withdrawn whilst there was an overdraft which it was securing. Mrs McDonald herself gave this evidence:-
"And you understood, did you not, that it was your $50,000 that was going to constitute the security against which a formal overdraft limit could be established?---Yes.
And you also understood, did you not, that the $50,000 that you were depositing with the bank in your own name would have to remain there so long as the company needed an overdraft?---Yes.
Subject to this qualification, I suggest to you, that if at any particular rollover stage if, for example, the company only wanted an overdraft limit of, say, $40,000, then you would have been at liberty to withdraw $10,000?---That's correct. And so on until such time as the company no longer required an overdraft?---Yes.
That was your understanding at the time you deposited the funds with the Commonwealth Bank?---Yes."
Mrs McDonald, according to her evidence, looked upon the $50,000 deposit as a loan to Lithgow Motors for two years. The principal significance of the 30 day periods is that Mr McGuigan did not understand that there would be a long term or escalating problem.
Mr McDonald also understood the nature of the transaction. He gave this evidence:-
"... you understood that you and your wife had deposited $50,000 by way of security with the Commonwealth Bank against which the bank would provide an overdraft facility for Lithgow Motors?---That is correct."
On 15 November 1990, Mr McGuigan made a note on the Bank's records "Documentation completed to our satisfaction ... Lithgow Motors Pty Ltd must now conduct accounts strictly within approved limit and have been advised accordingly". Mr Dunbar took up his position as Manager on 14 November 1990. Although the account was thereafter at times within the overdraft limit, for example, $30,712.43 on 22 January 1991, Mr McGuigan's hope that the overdraft would be maintained within the $50,000 limit was not realised.
On 1 February 1991, an officer at the Bank posted letters to both Mr and Mrs McDonald which read:-
"LITHGOW MOTORS PTY LTD ACN 002795557 The abovenamed have had excesses against the security provided by yourself.
We therefore require your consent to these excesses and now enclose letter of Acknowledgement to be signed by yourself and returned to this office as soon as possible. Prior to signing the Acknowledgment you should satisfy yourself that you understand the full nature and effect of your liabilities to the Bank under your guarantee/mortgage and obtain appropriate advice, legal or otherwise, if you are at all uncertain of your position. Your signature to the Acknowledgement should be witnessed by an adult person who is not the borrower/debtor or a co- guarantor/mortgagor (if any) under your guarantee/mortgage."
Accompanying each letter was a letter of acknowledgment which read:-
"I hereby acknowledge that the Bank has granted or may be granting from time to time to Lithgow Motors Pty Ltd ACN 002795557 (the Debtor) accommodation and otherwise permitting the Debtor to incur liabilities to the Bank not exceeding an aggregate amount at any one time and from time to time of $102000 against the security of my mortgage(s)/guarantee(s) to the Bank referred to in the schedule below.
I clearly understand that my mortgage(s)/guarantee(s) which also secure the payment to the Bank of interest and any costs, charges and expenses with which the Bank shall be at liberty to debit and charge the account of the Debtor or for which I am liable under my mortgage(s)/guarantee(s). Schedule
GUARANTEE DATED 13 NOVEMBER 1990 BY NEIL EDWARD McDONALD AND JUDITH ANNE McDONALD THE LIABILITIES UNDER WHICH ARE SECURED BY LETTER OF ACKNOWLEDGEMENT OVER TERM DEPOSIT NUMBER 256650033786"
Both Mr and Mrs McDonald subsequently signed the letters of acknowledgment in Mr McAuley's presence. They were dated 27 February 1991 and were left with the Bank.
On 27 February 1991, Mr McAuley brought Mr and Mrs McDonald to see Mr Dunbar. There was a discussion as to the fact that Lithgow Motors account was operating outside the agreed limits. Mr McAuley said that the account would reduce to $50,000 by 8 March. Mr Dunbar asked for details of any security offered should the account continue to exceed the overdraft limit. Mr Dunbar could not recall any conversation with respect to the letters of acknowledgment. He deposed to the following conversation, inter alia:-
"To the best of my recollection I had asked Mr McAuley to call for a discussion regarding clearance of limit excesses. He said he would bring Mr and Mrs McDonald in to see me. Mr McAuley said words to this effect: 'Meet Neil and Judith McDonald, company shareholders. They have a grazing property on the Jenolan Caves Road but are silent partners in Lithgow Motors.' ...
To the best of my recollections I also said words to the effect:
'The company's account is continuing to operate outside limit arrangements. What can you do to fix it?' Mr McAuley said words to this effect: 'I have a short term cash flow budget for you which shows the account will reduce to about the $50000 limit by the 8th of March so you have no worries.' I said words to this effect:
'Alright, John, I'll go along with that until the 8th of March. However, if the account continues to exceed overdraft limit, can any of you provide security as support for an increase in limit which seems to be needed?' ...
Mr McDonald said words to this effect: 'We bank at Westpac and have recently negotiated a pretty good rate of interest on our loans but if you can better the rates we will be happy to talk to you about taking us over. John McAuley is our accountant and he knows our financial position and he can give you details of our assets and liabilities to work out what you can do for us.'
I said words to this effect:
'If you transfer your banking to us it would be a simple procedure to link your security to Lithgow Motors by guarantee if the company does require a permanent increase in overdraft limit.'"
Mr Dunbar also deposed:-
"There had been some general discussion during the course of the meeting in the course of which Mr or Mrs McDonald said words to the effect of: 'We have a grazing property of 600 acres worth about $600,000 and a house on a separate block worth $450,000"
Mrs McDonald gave evidence that the conversation was in these terms:-
"He took us into his office and I said to him words to this effect:-
'What is all this about?'
referring to the letters of 27 February 1991. He said:- 'A letter of acknowledgement is to let us know that John has overdrawn to that amount. John has produced to me particulars of your assets. As John has no assets to give us, and as you are the other shareholders in the company we will have to get the assets off you. John has given us a list of all the assets that you have. Is it right that you own 600 acres and it's worth about $600,000 and that you own a house that's worth about $450,000 plus cattle plus etc. John has given us all this'. I said to him:-
'What right has John to give you all that'. He said:
'John said that you may be prepared to transfer your business to the Commonwealth Bank. I can give you a better rate of interest. It is in your interest in the long run to stand by John to back him because everything seems to be OK. You've got the assets, why don't you put them into helping run the business'. I said to him:-
'You've only got our $50,000, that's all we're prepared to put in at this stage'."
I do not accept Mr and Mrs McDonald's evidence to the effect that Mr Dunbar had misled them. Mr and Mrs McDonald had received the letters of acknowledgment and the accompanying letters which were explicit. It is improbable that Mr Dunbar would have sought to mislead Mr and Mrs McDonald as to their effect. I have formed the view that Mr Dunbar is accurate in his language and honest in his dealings. Mrs McDonald's evidence is inconsistent with the impression I have formed of Mr Dunbar.
On 28 February 1991, Mr McAuley sent to Mr Dunbar a typed list of the assets and liabilities of himself and of Mr and Mrs McDonald. Mr Dunbar was away from the Lithgow Branch on Friday, 22 March 1991. On his return on Monday, 25 March 1991, he was presented with a note from Mr McGuigan which read inter alia:-
"John Maculey (sic) (called today and he) has arranged for Judith Neil McDonald to see you sometime Monday 25/3 (will be phoning for a suitable appointment) regarding the acceptability of providing us with an unencumbered Title Deed (believe their farm property Cox's River Rd (Little Hartley) as a naked lodgement for/on temporary basis as additional security for Lithgow Motors (hopefully) temporary limit excesses.
...
I advised him that Lithgow Motors will/may have to 'bite the bullit" (sic) now and correct the current debt escalation before its too late ie/otherwise end up 'in liquidation' or similar fate."
Counsel for Mr and Mrs McDonald has placed much weight on Mr McGuigan's comment as to the possibility of liquidation. However, I accept his evidence that "I didn't honestly believe that that was going to be the case, no, at that time." It is to be noted that Mr McGuigan and Mr Dunbar were also influenced by Mr McAuley. Mr McGuigan gave this evidence:-
"And you understood at the end of March 1991 that these excesses on the Lithgow Motors account were to be temporary excesses only?---I believe they were, yes. And for what reason did you consider that these limits - or these excesses were temporary only?---John McAuley told me so."
Mr Dunbar said in cross-examination:-
"And you wanted the account back in order quick smart, did you?---I did.
And he told you that the account - he told you generally not to worry because the account would come back into order?--- Yes, possibly gave me a cash flow projection at that time. You accepted what he told you at that time, did not you, in early January late December?---Yes, I did. You knew Mr McAuley was a man of substance in the town?--- Yes.
A public accountant as well as managing director of a prominent company?---Yes.
And in addition, you found him to be a charming man, did not you?---I don't know about a charming man but the other two I - yes, I'd say he was well respected and very well known in the town."
Of course, Mr McGuigan and Mr Dunbar were misled, an illustration of which appears in this evidence of Mr Dunbar:-
"As at 26 March 1991 you had nothing upon which you could base a view that this account would come back into order, did you?---Well, I had a balance sheet which was given to me by Mr McAuley which showed they had used cars with equity of about $200 - 250,000 value in them and this money hopefully would come to the bank in due course."
Lithgow Motors had no such equity in the used cars for they were subject to obligations to Esanda, but Mr McGuigan and Mr Dunbar were not informed of that.
On 26 March 1991, Mr and Mrs McDonald called to see Mr Dunbar. Mr McAuley was away on that day. There was this conversation as deposed to by Mr Dunbar:-
"On 26 March 1991 I met with Mr and Mrs McDonald in my office at the branch. To the best of my recollection Mr McDonald said words to this effect: 'John told us to call on you to talk about lodging additional security for Lithgow Motors.'
I said words to this effect:
'The Bank is looking for extra security as the account balance has not reduced back to within the $50000 limit as John told us it would. John mentioned you may help out with a simple lodgement of deeds to your farm.' To the best of my recollection we discussed the balance of the account which was then at DR $155,639. Mrs McDonald said words to this effect: 'Today's banking will reduce the balance to under $150000. I said words to this effect:
'My assistance to the company to date has been on the basis that limit excesses were short term with clearance expected from income for confirmed new car sales and used car stock. My Regional Manager is not happy about the continued limit excesses and he wants me to do something about it.' Mr McDonald said words to this effect: 'We have some land which is not mortgaged to anyone. It is worth a minimum of $1000 per acre. A neighbour would give $1000 per acre tomorrow if we offered it to him. We have three blocks with a total area of 160 acres. Will that be enough security for the Bank?'
I said words to this effect.
'It will make me feel a lot better.'"
Later that day, Mr and Mrs McDonald returned with two certificates of title. They signed a document which read inter alia:-
"IN CONSIDERATION of advance and accommodation granted to Lithgow Motors Pty Ltd (herein after called the Debtor) by the Bank at our request but only during the pleasure of the Bank, We, Neil Edward and Judith Anne McDonald do for the purpose of securing to the bank the payment on demand of all such advances and accommodation and all the debts and liabilities thence to arise with interest thereon and all other charges and expenses in accordance with the usage and course of the business of the Bank as now and from time to time hereafter existing HEREBY DEPOSIT with the Bank the documents of title mentioned in the Schedule hereunder to the intent that the property to which they relate may be security for the payment of all such advances accommodation interest and other moneys as aforesaid. ...
SCHEDULE OF DOCUMENTS
Certificate of Title, Volume 2141, Folio 161 Certificate of Title, Volume 5241. Folio 79."
Mr and Mrs McDonald were each handed forms S33 which stated inter alia:-
"Your present maximum liability to the Bank under the document(s) is $1500000 plus interest, costs, charges and expenses as provided in the document(s)."
In the course of the conversation, Mr McDonald said, according to Mr Dunbar, words to this effect:-
"We will make sure the company account is sorted out as I will be spending more time at the car yard and we will have a round table conference with John upon his return from Lismore at the weekend. The company's problem is too much stock of used cars. A car wholesaler is calling later this week and we hope he buys a few of the better cars which will help the cash flow."
As can be seen from this statement, from Mrs McDonald's statement to Mr Dunbar that the day's banking would reduce the balance to under $150,000 and from the fact that Mr and Mrs McDonald attended on their own without Mr McAuley, Mr and Mrs McDonald did not appear as persons who knew nothing about the business of Lithgow Motors. Rather they presented themselves as persons who were shareholders in Lithgow Motors and were taking an active interest in its affairs.
Mr and Mrs McDonald understood the nature of the transaction. Mr McDonald gave this evidence:-
"And you were prepared on that day to lodge two title deeds with the bank?---Yes.
Which you understood was going to be held by the bank as security?---Not as such, not like a mortgage over it. The deeds were to be held by the bank. To your understanding, for what purpose was the bank going to hold those deeds?---Until John brought the account back into order.
...
Purely for your benefit in safe custody?---Not my benefit, to the account was in order and two things were in place to bring that back into order.
And until then those deeds would have to remain with the bank?---Yes.
And at least to that extent you understood that those documents were lodged as security until that time?---Yes."
The case put for Mr and Mrs McDonald was that this transaction was induced by Mr Dunbar who, it was alleged, misrepresented that it was in their interests to use their assets to help run the business of Lithgow Motors and that the company's affairs seemed to be in order. I accept Mr Dunbar's evidence on these matters and think it probable that Mr Dunbar made it clear that the Commonwealth Bank was not satisfied with the way the account was being managed. It was Mr and Mrs McDonald who sought to assure Mr Dunbar that steps were being taken to rectify the position.
Counsel for Mr and Mrs McDonald submitted that the transaction was unjust in that it was primarily and substantially for the benefit of the Commonwealth Bank and that the Commonwealth Bank knew that the transaction represented a considerable risk to Mr and Mrs McDonald. Counsel submitted that, in the circumstances of the case, Mr Dunbar should have ensured that Mr and Mrs McDonald received independent advice about the matter.
However, the transaction was a normal one from the Bank's point of view. The Commonwealth Bank was not looking to obtaining a benefit primarily for itself. Lithgow Motors' account was outside the agreed limit of its overdraft and the position expressed by Mr Dunbar was that, if the Commonwealth Bank was to permit Lithgow Motors to continue to trade, security must be provided. Mr and Mrs McDonald presented themselves as shareholders in Lithgow Motors who had an understanding of its problems and who were prepared to provide that security. I see no cause why Mr Dunbar should, at that stage, have thought it necessary that Mr and Mrs McDonald should receive independent advice. The nature of the transaction, the provision of security for an overdraft up to a limit of $150,000, was clear. Mr and Mrs McDonald could not have been in doubt that they were being asked to lodge the certificate of title as security or as to what was the monetary limit of their obligation. It is to be noted that Mr and Mrs McDonald had been involved with the affairs of Lithgow Motors longer than had Mr Dunbar, and that Mr Dunbar himself had few details as to the financial position of Lithgow Motors. It was not during Mr Dunbar's time that there was any significant dishonouring of cheques. On 13 March 1991, three cheques of $5,000, $6,480.59 and $15,000 were dishonoured, or at least their debiting was reversed on 14 March 1991, though a cheque for $15,000 was debited on 15 March 1991. But this circumstance appears to have been exceptional. Mr and Mrs McDonald were equally aware of the problems. Of course, Mr and Mrs McDonald had been assured by Mr McAuley, as had Mr Dunbar, that steps were being taken to overcome the problems of Lithgow Motors.
Mr Dunbar had failed to complete the required documentation for he had failed to have a guarantee signed by Mr and Mrs McDonald guaranteeing Lithgow Motors up to $150,000.
On 10 April 1991, an officer of the Bank sent form S33 documents to Mr and Mrs McDonald which read inter alia:-
"Your present maximum liability to the Bank under the document(s) is $244,000 plus interest, costs, charges and expenses as provided in the document(s)."
These forms do not seem to have correctly stated the position but no point has been made of this.
Mr Dunbar, on 16 April 1991, sent to Mr and Mrs McDonald a letter enclosing an unlimited guarantee of the liability of Lithgow Motors and in the letter sought their signatures to that document. The letter read:-
"We refer to your Bank Guarantee (limited to $50,000.00) dated 13th November 1990 executed and held as security to support debts to Lithgow Motors.
As this guarantee is in a limited form, a new limited guarantee would have to be executed each time the debt was increased. Accordingly the forms recently executed by yourselves consenting to increases in facilities to $150,000.00 are not enforceable security documents. Alternatively an unlimited guarantee could be taken which would solve this problem. Each time an increase in facilities is sought, a simple letter of acknowledgement to that increase would be all that is required. We have enclosed an unlimited guarantee for your execution and return. Should you not be agreeable to this, please advise this office so that an additional limited guarantee may be prepared."
Mr and Mrs McDonald sensibly refused to sign the guarantee so we are not further concerned with it.
On 17 April 1991, when Lithgow Motors' account stood in debit at $233,682.08, Mr Dunbar asked Mr McAuley to see him and Mr McAuley called with Mr McDonald. There was then a discussion in or to the following effect, according to Mr Dunbar:-
"I said words to this effect:
'What equity does the company have in the building and other assets?'
Mr McAuley said words to this effect: 'I will give you a list of our assets and liabilities if you would like to take them down.'
I listed on a separate sheet of paper that I subsequently destroyed the assets and liabilities of Lithgow Motors as dictated by Mr McAuley. This showed a balance sheet surplus of $760,000. In fact I realised after they left the office that the overdraft debt had not been included as a liability and I added it in, which reduced the surplus to $526,318. Mr McAuley said words to this effect:
'Lithgow Motors was awarded the "Master Dealer" for country dealerships last year. We also received a top award for spare parts sales. We average sales of twelve new cars per month and twenty used cars per month. Turnover average is $7 million per annum. A loss was made for year to 30/6/90 but we are showing a small profit for three months to 30/9/90. I'm confident we will ride out the current downturn.'
I said words to this effect:
'The Bank will now need to take the second mortgages from the company but wee would also now like a mortgage over the deeds held on simple deposit from Mr and Mrs McDonald. This would at least give us more formal security for the company's overdraft. Would you agree to this Neil?'
Mr McDonald said words to this effect: 'Would the mortgage be required permanently or only until the second mortgage from the company is fixed up and then released to us?' I said word to this effect:
'That may be possible but it would depend on the overdraft debt at the time the second mortgage is in place and valuation of the company's building and assets. Depending on the amount of the overdraft, the release of any security would possibly need to be referred to my Regional Manager for a decision.'
Mr McDonald said words to this effect: 'John and I will get the sales staff together for an urgent meeting to discuss the holding of a marathon sale to move the excess used cars."
A diary note made by Mr Dunbar at the time is consistent with this evidence.
On 26 April 1991, Mr McAuley and Mr McDonald saw Mr Dunbar and presented a letter of that date which was a formal application for increased finance, seeking facilities of $370,000. Mr Dunbar requested a valuation by a registered valuer of the premises of Lithgow Motors so that he could assess the significance of a second mortgage over those premises and indicated that he would require a mortgage over the land which was described in the certificates of title of Mr and Mrs McDonald which had been lodged with the Bank. A mortgage over the land was prepared and was signed by Mr and Mrs McDonald and bears the date 30 April 1991. The mortgage was by then in the presence of Mr Pike of Le Fevre, Gilchrist and Pike. Accompanying that mortgage were form S33 documents specifying the maximum liability as $300,000. On 26 April 1991, further form S33 documents were forwarded to Mr and Mrs McDonald specifying the maximum liability as $300,000 and describing the documents as:-
"Guarantee by you (Mr McDonald) and Judith Anne McDonald, in respect of the indebtedness to the Bank of Lithgow Motors Pty Ltd, liabilities under which are secured by: . a letter of acknowledgment over Term Deposit No. 256650033786
. mortgage by you and Judith Anne McDonald over property at Hillview Goodforest."
On 23 May 1991, there was forwarded to Mr and Mrs McDonald a form of guarantee limited to $370,000. At the same time, two form S33 documents were forwarded to Mr and Mrs McDonald setting out that the maximum liability to the Bank was $370,000. Mr Dunbar asked that the guarantee be executed in the presence of a solicitor. Subsequently, on 24 May 1991, Mr Mallard, of Le Fevre, Gilchrist and Pike, asked that a specific clause, clause 53 of the guarantee, be deleted. The guarantee was subsequently executed in the presence of Mr Mallard. Mr and Mrs McDonald called upon Mr Dunbar later that day and gave him the guarantee executed by them. Mr McDonald asked that the registration of the mortgage be held over until Lithgow Motors' second mortgage was in place. However, Mr Dunbar said that was a matter for the Regional Office. Mrs McDonald asked that Mr McAuley be asked to produce financial figures up to 30 April 1991 and asked Mr Dunbar not to allow the company's overdraft to exceed $370,000. On 6 September 1991, Lithgow Motors ceased trading when a creditor, holding a floating charge over the assets and undertaking of the company, entered into possession.
The explanation for the provision of security by Mr and Mrs McDonald in May 1991 appears to be that they were influenced by Mr McAuley, that they expected that the problems of Lithgow Motors would be overcome and that they also expected that the real estate owned by Lithgow Motors, when valued, would provide sufficient security for the Commonwealth Bank so that their own security would be released. That expectation is a dominant feature of their evidence.
It was alleged in the Statement of Claim that the mortgage as executed was to be a temporary measure until the second mortgage was obtained from Lithgow Motors and that the property owned by Lithgow Motors was of sufficient value to secure the overdraft allowed by the Bank. These allegations are inconsistent with Mr Dunbar's requirement that a valuation be obtained from a registered valuer. Mr Dunbar did not know what security the second mortgage would be likely to provide until he received the valuation. That valuation was not received until 21 June 1991 when the value was given as $750,000, which was substantially less than the $1.2m which Mr McAuley and Mr and Mrs McDonald had anticipated.
It was alleged by Mr and Mrs McDonald in their evidence that Mr Dunbar had agreed to release their security as soon as a second mortgage to the Commonwealth Bank could be arranged. But their allegation was, in this respect, improbable, as Mr McDonald conceded in the following cross-examination:-
"All I am putting to you just for your comments is, does it not seem as though Mr Dunbar was waiting on a valuation?--- Yes, on the proper valuation, yes. That was important to him, because he would not know what the---?---Know what the value was worth. He did not know what the value was and therefore he did not know how useful the second mortgage would be?---That's right.
Well, if Mr Dunbar was waiting on the valuation does it not seem as though he did not have a final view about the worth of the second mortgage on 24 May when you signed the guarantee because he was still waiting for the valuation?--- Yes.
You have been putting the case that the only thing holding up the return of your mortgage and the dispensing of the valuation was the formal step?---Of the final valuation. Well, you said the formal step of registration?---Yes. But, in fact it was one of the things, I am putting to you, it was one of the things that was needed was the valuation and the bank needing to be satisfied that there was sufficient value there to secure it?---Yes, that took some quite time to come through, to be done."
The Statement of Claim also alleges that Mr Dunbar represented that things were looking pretty good in the company's business, that the cars were selling and the business seemed alright, that the Commonwealth Bank was familiar with the business of Lithgow Motors and with its financial status and that a second mortgage would be obtained. I reject these allegations and accept Mr Dunbar's evidence that these representations were not made. I think it probable that events occurred as described by Mr Dunbar and that he had clearly explained to Mr and Mrs McDonald that, if the overdraft was to be allowed to continue, security up to $370,000 was essential. Mr Dunbar took the step of ensuring that independent legal advice was obtained with respect to the guarantee secured by the mortgage as well as with respect to the mortgage itself.
It was submitted that there was no consideration for the guarantee as the overdraft already exceeded $370,000, but that is not so. The guarantee was given as part of an arrangement with respect to the terms on which Lithgow Motors would be allowed to continue to operate its account.
I see nothing unjust to Mr and Mrs McDonald in the arrangement that was made, the terms of which they understood. Mr Dunbar did not fail to disclose to them matters that he ought to have disclosed to them and did not misrepresent to Mr and Mrs McDonald any matters of which he was aware. Nor did he exercise undue influence upon Mr and Mrs McDonald. The only pressure put upon Mr and Mrs McDonald by Mr Dunbar was Mr Dunbar's insistence that the liability of Lithgow Motors would not be allowed to continue without the provision of security. There was nothing unfair or improper in that insistence, which accords with ordinary commercial practice.
Counsel for Mr and Mrs McDonald placed emphasis upon a note written by Mrs J.C. Thompson, a loans officer in the Lithgow Branch, to the effect that the Bank had been lucky to obtain the guarantee from Mr and Mrs McDonald. However, this was a note by an officer of the Bank who did not have direct dealings with Mr and Mrs McDonald. I have taken the note into consideration but I have not given it great weight. The main significance of Mrs Thompson's evidence as a whole is that, by the letters and forms which were sent to Mr and Mrs McDonald, they were kept informed as to the state of Lithgow Motors' account with the Bank.
Counsel for Mr and Mrs McDonald relied upon the Trade Practices Act, the Contracts Review Act and principles of common law and equity with respect to negligent and fraudulent misrepresentation, negligent advice, estoppel and unconscionable conduct. I have taken all these matters into account but think that no purpose would be served by discussing the many individual allegations made. On the view of the facts which I take, the allegations are not substantiated.
Counsel for Mr and Mrs McDonald put a view of the facts which I do not accept. He submitted, for example:-
"It is clear that the situation developed because of Mr Dunbar's poor management of the Account. It was in his control at any time to stop the overdraft increasing. He did nothing to stop it.
...
The inferences clearly open to be drawn that Mr Dunbar was hoping and expecting to get assets from the McDonalds to help himself and the Bank out of the problem that bad management had caused."
I have not drawn the conclusion that there was bad management on Mr Dunbar's part. On the contrary, he dealt with the account of Lithgow Motors sensibly and flexibly. He permitted Lithgow Motors to draw beyond the agreed limits of the overdraft and beyond the liability of the security provided, but he sought security when he thought it expedient to do so. This course seems to me to illustrate good management on Mr Dunbar's part. Of course, if he had been aware of the true financial situation of Lithgow Motors, he would have acted differently. But he, together with Mr and Mrs McDonald, was misled by Mr McAuley.
In my opinion, the claims brought by Mr and Mrs McDonald against the Commonwealth Bank should be dismissed and the Commonwealth Bank should have judgment on its cross-claim. There will be judgment for the Commonwealth Bank against Mr and Mrs McDonald on the cross-claim. There should be judgment for Mr and Mrs McDonald against Mr McAuley and Lithgow Motors for an equivalent sum.
Counsel should bring in within 14 days minutes of the orders which they propose in accordance with these reasons for judgment.
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