MGICA Ltd v Mid-West Finance (ACT) Pty Ltd

Re: MGICA LTD and PERMANENT TRUSTEE AUSTRALIA LIMITED
And: MID-WEST FINANCE (ACT) PTY LTD; GROWTH INDUSTRIES PTY LIMITED (IN
PROVISIONAL LIQUIDATION); PERMANENT TRUSTEE AUSTRALIA LIMITED; HAMBROS
AUSTRALIA LIMITED and MGICA LIMITED
No. WA G134 of 1990
FED No. 315
Trade Practices - Contract

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

Trade Practices - misleading or deceptive conduct - materiality - viticultural investment project - loan guarantees - financier - whether loan guarantee agreement induced by misrepresentation as to timing of loans and other matters - whether breach of duty of disclosure.

Contract - privity - loan guarantee agreement - viticultural investment scheme - trustee of scheme - whether able to enforce terms of multi-party loan guarantee agreement against guarantor - construction - consideration - enforceability of contract - dependency upon enforceability of primary obligation - whether primary obligation enforceable - effect of default judgment in favour of borrower declaring primary obligation unenforceable.

Trade Practices Act 1974 s.52

HEARING

PERTH

#DATE 22:5:1992

Counsel for the Applicant: C.R. Einstein QC and J.T. Gleeson

Solicitors for the Applicant: Northmore Hale Davy and Leake

Counsel for the Third Respondent: J.D. Heydon QC and J.L.B. Allsop

Solicitors for the Third Respondent: Mallesons Stephen Jaques

ORDER

The Court orders that:

1. It is hereby declared that MGICA Ltd is not obliged under the Guarantee Agreement between itself and Growth Industries Pty Limited, Permanent Trustee Australia Limited and Hambros Australia Limited dated 30 June 1989 to pay to Permanent Trustee Australia Limited any amount in relation to loans agreements entered into between Mid-West Finance (ACT) Pty Ltd and certain borrowers, full particulars of which loan agreements are contained in the schedule to the amended statement of claim.

2. It is hereby declared that MGICA Ltd is liable to pay to Permanent Trustee Australia Limited such sum of money as is equivalent to all outstanding interest owed to Mid-West Finance (ACT) Pty Ltd by borrowers from Mid-West Finance (ACT) Pty Ltd in a scheme known as The Australian Viticultural Project No. 2.

3. There be liberty to all parties to apply within 28 days by written submission if desired on the question of such further or other relief as should be ordered including interest, if any, payable on any money judgment and costs. There will also be liberty to apply in relation to the wording of the declaratory orders in paragraphs 1 and 2 of this order.

4. The costs of the application and cross-claim be reserved.
Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

Introduction

In mid 1989 a group of companies, under a holding company Growth Industries Pty Ltd, set up a project under which investors could participate in the cultivation of high quality wine grapes. The project known as "The Australian Viticultural Project No. 2" included arrangements under which persons taking up interests could be provided with finance for that purpose by a subsidiary of Growth Industries Pty Ltd called Mid-West Finance (ACT) Pty Ltd. The money for such finance originated from institutional investors secured by promissory notes and whose interests were to be protected, inter alia, by Permanent Trustee Australia Ltd, which occupied an important position as a trustee in the scheme. There was an elaborate arrangement of interlocking securities and deeds. MGICA Limited provided Mid-West (ACT) with guarantees of interest payments due on individual investor borrowings. It did so under a Guarantee Agreement to which Permanent was also a party.

In 1990, elements of the Growth Industries Group encountered serious financial difficulties. Interest payments due from certain investors, including some involved in the Growth Industries Group itself were not met. Permanent appointed a partner in Moores, a firm of chartered accountants to pursue recovery of amounts owing by defaulting borrowers and to make appropriate claims against MGICA under the Guarantee Agreement. MGICA instituted these proceedings on 22 November 1990 alleging misleading or deceptive conduct and breach of fiduciary duty on the part of Growth Industries Pty Ltd and Mid-West Finance (ACT) Pty Ltd which it said induced it to accept certain specified investor loans, known as the Relevant Loans, for the purposes of the Guarantee Agreement. The company also contends that in respect of particular borrowers it is now under no obligation to make payment of interest under the Guarantee Agreement because their primary obligations have been extinguished pursuant to the terms of an agreement with the Growth Industries Group. A default judgment was obtained against Growth Industries Pty Ltd and Mid-West Finance (ACT) Pty Ltd on 15 February 1991. These proceedings have continued on between MGICA, Permanent Trustee Australia Ltd and Hambros Australia Ltd which has played no active role in them. Permanent Trustee Australia Limited cross-claims under the Guarantee Agreement seeking to enforce its terms against MGICA.
The case involves complex factual questions and a variety of matters relating to alleged misrepresentation and non-disclosure by Growth Industries Pty Ltd and Mid-West Finance (ACT) Pty Ltd, the effect of the default judgments, the proper construction of the Guarantee Agreement and the effect of arrangements made with particular borrowers by principals of the Growth Industries Group.
The Australian Viticultural Project No. 2 - A General Description
On 24 May 1989, a prospectus issued for the Australian Viticultural Project No. 2. The stated objective of the project was to secure established vineyards in conjunction with land for the development of new plantings and to supply high quality grapes to a company called Australian Grape and Winebrokers Pty Ltd under a Grape Sale Agreement guaranteed by Wyndham Estate Wines Limited. The prospectus sought to raise funds by way of subscription for contracts which, it was said, would entitle investors to have grapes cultivated for them on grower's allotments. The allotments were prescribed interests regulated by a Viticultural Investment Deed. The subscription price was $10,000 per grower allotment payable in full upon application. A minimum of 5,000 growers' allotments was available for issue with a further 3,500 available for over subscriptions. The minimum acceptance level for the project to proceed was $50 million within 4 months of the issue of the prospectus. Investors who were issued with contracts were designated as Growers in the prospectus. They were entitled to elect, in their application for allotments, to receive a guaranteed minimum return. The vineyard manager would guarantee to such growers a return per allotment of not less than $2,100 for the year ended 30 June 1994 and $2,700 for the year ended 30 June 1995.
The vineyard manager was a company called Growth Industries Management Pty Ltd ("GIML"), a wholly owned subsidiary of Growth Industries Pty Ltd ("GIPL"). Where it is convenient to do so and unnecessary for the purposes of the judgment to distinguish between subsidiaries in the Growth group, GIPL and its subsidiaries or any of them will be referred to as "the Growth Group". The directors of GIML were David John Towey, who was Chairman and Managing Director, Vincent John Moran, John Bernard Stack, Geoffrey Denney, Francis Swain, Peter Harper, Ambrose Dunne and Peter Burrows. Perpetual Trustee Company Limited was designated as Representative of the Growers, its function being described in the prospectus as the entry into Project Agreements on behalf of the Growers and generally acting on their behalf and representing their interests in the project. The Underwriter to the issue was Benney Partners Pty Ltd whose directors were Peter Kelly, Frank Magnus and Bruce Benney. Peter Kelly was Managing Director and Chairman of that company. The auditors for the issue were Messrs Cooper and Lybrand. Other entities connected with the project were Mid-West Finance Limited, which was a wholly owned subsidiary of GIPL and Mid-West Finance (ACT) Pty Ltd ("Mid-West (ACT)") a wholly owned subsidiary of Mid-West Finance.
Mid-West (ACT) provided finance for persons wishing to invest in the project as growers. It raised funds for that purpose from institutional investors to whom it issued promissory notes maturing on 24 October 1996 and in respect of which interest was payable six monthly in arrears. The principal sums due under the notes were guaranteed by the Government Insurance Office of New South Wales ("GIO"). Hambros Australia Limited ("Hambros") provided a Bill Acceptance or Endorsement Facility to enable timely payment of interest due under the notes. Interest payments due to Mid-West (ACT) by growers were guaranteed by MGICA Limited, a financier described by the manager of its Securitisation and Banking Division as a lender of last resort. GIML was insured by Strathford Insurance Co. under an All Risks Insurance Agreement against the minimum return not being achieved. Permanent Trustee Australia Ltd ("Permanent") was trustee for the noteholders under a Trust Deed dated 30 June 1989 and held various securities in trust for them. Permanent Trustee Company Limited guaranteed to the noteholders the performance by the Permanent of its obligations under the Trust Deed.
Finance and Security Arrangements
The securities put in place to support the financing of the project were complex and comprised a number of interlocking and overlapping agreements. It is convenient to set out and explain briefly the principal security documents.
1. The Trust Deed
Central to the arrangements was a Trust Deed dated 30 June 1989, the parties to which were Permanent as trustee, Mid-West (ACT) as issuer of notes to the noteholders, Permanent Trustee Co. Ltd and Hambros. The Trust Deed contained declarations by Permanent that it held on trust for the noteholders and Hambros various securities relating to the interest and principal entitlements of the noteholders (cls.2.1 and 2.2). The securities referred to in relation to the interest entitlements were a guarantee to which Permanent was a party with MGICA, Mid-West (ACT) and Hambros ("the MGICA Guarantee") and a charge by Mid-West (ACT) in favour of Permanent ("the Charge"). The securities referred to in relation to the principal were a mortgage in favour of Permanent by Perpetual Trustee Company Limited, the Charge and the GIO Guarantee in favour of Permanent. In addition Permanent declared a trust of its rights under the Bill Acceptance and Endorsement Facility to which it was a party with Mid-West (ACT) and Hambros and under a management agreement to which it was a party with Mid-West, GIML, GIPL, Hambros and Mid-West (ACT).
The Trust Deed recited, inter alia, that Mid-West (ACT) was to issue the Charge in favour of Permanent, procure MGICA to enter into the MGICA Guarantee, the GIO to provide its guarantee and Perpetual Trustee Company Limited to execute the mortgage in favour of Permanent. Mid-West (ACT) agreed to establish an Interest Account and a Principal Account in its name (cls.6.2 and 6.3). It was required to deposit into the Interest Account all money received by it as interest on borrowings from any grower and to arrange that withdrawals could only be made by Permanent (cls.6.1(g) and 6.2(a)). It expressly authorised Permanent to withdraw money standing to the credit of the Interest Account from time to time to make interest payments to the noteholders and to pay fees to the GIO and Hambros and to pay Permanent's own fees under the terms of the Deed (cl.6.2(d)). Permanent was to keep records of money paid into the Interest Account monthly by Mid-West (ACT) and to procure that Mid-West (ACT) promptly made claims to which it was entitled under the MGICA Guarantee in relation to any interest which a borrower had failed to pay to it (cl.6.2(f)).
The Deed also provided that Permanent could give its consent to Mid-West (ACT) arranging for a Bill Acceptance or Endorsement Facility to enable Mid-West (ACT) to ensure that the Interest Account would have sufficient money on an Interest Calculation Date to enable Permanent to make interest payments to the holders on the next Interest Date. Mid-West (ACT)'s entitlement to drawn on the facility was to be limited to the event of a failure by a borrower to pay any interest on borrowings due to Mid-West (ACT) (6.5(a)). Its right to draw down was also to be conditioned upon the auditor certifying to Permanent that an event had occurred which entitled Mid-West (ACT) to make a claim under the MGICA Guarantee for an amount not less than the amount of the proceeds of the Bills to be accepted or endorsed by Hambros.
By cl.2.1 of the Trust Deed, Permanent declared and acknowledged that it held and would hold its rights under the MGICA Guarantee and the Charge upon trust for and for the benefit of the holders and Hambros. Upon the occurrence of an interest shortfall it was required to promptly notify Mid-West (ACT) which must in turn procure the auditor to certify to Permanent whether the shortfall was caused by events which entitled Mid-West (ACT) to make a claim on MGICA under the MGICA Guarantee. If the auditor so certified then Permanent and Mid-West (ACT) were to promptly give a draw down notice to Hambros in accordance with the terms of the Bill Acceptance and Endorsement Facility requesting Hambros to make available to Permanent bills with net proceeds at least equal to the relevant Deficient Amount calculated under cl.3.3(b)(ii). And on the sixtieth day after Permanent and Mid-West (ACT) had given a draw-down notice to Hambros, Mid-West (ACT) must give a demand in writing to MGICA for payment to Permanent of interest payments owing but not made by any borrower to Mid-West (ACT) as at the date of giving such demand (cl.2.1(b)).
2. The MGICA Guarantee
This document lies at the heart of the present litigation. The parties to it were MGICA, Mid-West (ACT), Permanent and Hambros. It recited that Mid-West (ACT) which was called the Lender, might from time to time receive applications for loans under loan agreements for the purpose of enabling or assisting the applicants to invest in the Australian Viticultural Project No. 2. Recital B said:

"MGICA acknowledges that the Lender does not intend to accept any such application unless MGICA has issued to the Lender a guarantee on the terms and subject to the conditions herein contained."

In recital F it was said that in consideration of a fee and at the request of Permanent, MGICA had agreed to issue to Mid-West (ACT) a guarantee in respect of the obligations of each borrower to pay interest under the loan agreement to which the borrower is a party. By cl.2.1, Mid-West (ACT) might give MGICA applications from persons who have applied to borrow moneys (in an amount not exceeding $550 or such other figure as MGICA may in its absolute discretion agree with Mid-West (ACT)) from Mid-West (ACT) pursuant to a loan agreement.

Clause 2.2 provided for loan applications to follow a form annexed to the agreement. By cl.2.3 MGICA could give notice in writing to the Lender that any loan application had been provisionally accepted by it for the purposes of this agreement. Where such a Provisional Acceptance Notice was given, Mid-West (ACT) could give to MGICA a notice of its desire to make the loan the subject of a loan application specified in the notice (cl.2.4). Following receipt of such a notice MGICA was to give to Mid-West (ACT) a notice confirming that the loan application was acceptable to MGICA and specifying the fee which MGICA required to be paid to it in respect of the loan agreement relevant to that loan application (cl.2.5).
Clause 3.1 provided:
"Subject to the succeeding provisions of this Clause 3,

MGICA hereby undertakes that during such time as a Loan Agreement is Sixty Days in Arrears MGICA shall pay to the Lender:

(a) subject to paragraph (b) hereof, not later than the second Business Day following demand in writing from time to time by the Lender, all Interest which is due under that Loan Agreement as at the date on which MGICA shall make payment pursuant to that demand; or

(b) where the Loan Agreement is terminated by reason of default on the part of the Borrower and, as at any of the dates on which Interest would, but for such termination, have become due under that Loan Agreement, the Lender has not been repaid in full all principal outstanding under that Loan Agreement, an amount equal to so much of that Interest which would have been payable in respect of that portion of the principal amount which has not been repaid to the Lender as at that date.

3.2 Notwithstanding any provisions to the contrary

contained in this Agreement, MGICA shall not be obliged hereunder to pay to the Lender any amount in relation to any Loan Agreement unless at the time at which demand is made pursuant to Clause 3.1:

(a) MGICA's Fee in respect of that Loan Agreement has been paid in full to MGICA; and

(b) at the time at which MGICA would otherwise be obliged to make that payment the agreement by the Borrower under that Loan Agreement to repay all amounts borrowed thereunder and to pay Interest which has accrued or which might from time to time accrue thereunder and the guarantee and indemnity by the Guarantors (if any) of the Borrower's obligations duly enforceable in accordance with their respective terms notwithstanding any security created by the Loan Agreement in favour of the Lender being invalid or found to be invalid and the Borrower's and Guarantor's obligations to pay or repay moneys outstanding under the Loan Agreement or any guarantee (as the case may be) are not liable to be set aside or otherwise avoided by operation of law or otherwise other than pursuant to any rule of law or equity arising solely by reason of the Borrower having become Insolvent.

3.3 The Lender shall, upon giving to MGICA any notice

demanding payment of any Interest owing by any Borrower to the Lender under any Loan Agreement, be deemed to have warranted to MGICA that the matters referred to in Clause 3.2 are as at the giving of the notice and will as at the time at which MGICA is obliged to make a payment pursuant hereto be true and correct so far as they relate to that Loan Agreement with the intent that if those matters or any thereof were not true and correct as at the relevant time the Lender shall be obliged to indemnify MGICA to the extent of any payment made by MGICA pursuant to that demand whether or not MGICA has or ought to have known at the time of that payment that those matters or any thereof were not true and correct."

Mid-West (ACT) covenanted under cl.4 that it would not, without prior written approval from MGICA, do anything to diminish the value of its rights or interests under the Loan Agreement (4.1(a)), nor vary the agreement or waive any rights (4.1(b)). It was to give written notice to MGICA of any arrears of principal or interest due by a borrower within 14 days after the day on which any such amount became 30 days in arrears and thereafter written monthly reports detailing all defaults including any further default by the relevant borrower (4.1(c)). Clause 4.1(d) provided that:

"without limiting the operation of (c) hereof, the Lender will keep MGICA fully and punctually informed of all matters or things (of) which a responsible officer of the Lender is or hereafter becomes aware which might reasonably be expected to have a material effect on the ability of any Borrower or Guarantor to satisfy any of his obligations under the Loan Agreement to which he is a party."

Mid-West (ACT) agreed by cl.5 that, subject to any prior right of Permanent or Hambros, MGICA would be subrogated to all the rights of Mid-West (ACT) under the Loan Agreement to the extent to which MGICA had paid money owing to Mid-West (ACT) (cl.5.1)). Mid-West (ACT) was to pay MGICA an establishment fee of $20,000 upon execution of the Guarantee Agreement and a fee in respect of each Loan Agreement "on or prior to Date of Advance for that Loan Agreement". The fee payable was the product of the Principal advanced under the Loan Agreement, the interest rate payable and a factor of 0.1125 (cl.9.3). Clause 12 required MGICA to pay all amounts payable by it under cl.3 in cleared funds into a bank account maintained by Permanent in Canberra as Permanent might from time to time nominate or otherwise into a bank account opened by MGICA in the name of Permanent.

The GIO Guarantee

The parties to this Deed were GIO as Guarantor and Permanent as Trustee. GIO guaranteed the payment to Permanent for the benefit of the Noteholders of the Outstanding Principal Amounts defined in the Trust Deed (cl.3.1). This term referred to the aggregate principal amount of all Notes on issue from time to time (Trust Deed cl.1.1). If Mid-West (ACT) did not pay or make available to Permanent any of the Guarantee Money on time, GIO would pay the guaranteed money up to the Guarantee Limit to Permanent upon demand. The Deed contained a series of warranties by GIO including one of full disclosure to Permanent of all facts material to the assessment of the risk undertaken by Permanent in entering the guarantee (cl.10.1). There was no equivalent provision in the MGICA Guarantee. GIO also undertook to promptly give to Permanent information that Permanent reasonably requested from time to time (cl.11). Permanent undertook at all times to enforce the Trust Deed (cl.11.2(c)). Its rights under the Guarantee were additional to and did not merge with or affect and were not affected by any security interest then or later held by Permanent or any other obligation of GIO to Permanent (cl.12). There was no equivalent of cls. 11 or 12 in the MGICA Guarantee.
4. Hambros - Bill Acceptance or Endorsement Facility
This Deed, dated 30 June 1989, was executed by Mid-West (ACT), Hambros and Permanent. By cl.2 Hambros granted Mid-West (ACT) a Bill Acceptance or Endorsement Facility of an amount not exceeding the Facility Limit which was defined in cl.1.1 as "$2,500,000 as reduced by the aggregate of all cancellations under the agreement". Hambros was under no obligation to provide financial accommodation unless it received a Draw-down Notice (cl.3.3(c)) with an auditor's certificate that an event had occurred which entitled Mid-West (ACT) to make demand upon MGICA for payment to Permanent of an amount at least equal to the proceeds of the Bills to be accepted or endorsed by Hambros (cl.4.2(f)). Mid-West (ACT) was to pay Hambros an establishment fee of $25,000, an acceptance fee in respect of each Bill and a commitment fee (cl.6). Hambros was subrogated to Mid-West (ACT)'s rights to receive payment from MGICA under the MGICA guarantee (cl.8.1).
5. GIPL Guarantee
The Hambros Bill Acceptance and Endorsement Facility was supported by a guarantee from Stack, Towey, GIML and GIPL dated 29 June 1989. They guaranteed payment to Hambros of all amounts then or in the future payable to it by Mid-West (ACT) in connection with the facility (cl.3).
6. Perpetual Trustee Company Limited Mortgage
By a deed dated 30 June 1989, Perpetual Trustee Co. Ltd as sole representative of the guaranteed growers who had entered Loan Agreements with Mid-West (ACT) mortgaged to Permanent various rights in relation to a bond premium, mortgaged bonds and a sub-mortgage in the bond premium account.
7. Mid-West Finance - Management Agreement
Mid-West Finance, GIML, GIPL, Permanent, Hambros and Mid-West (ACT) were all parties to a Management Agreement dated 30 June 1989 under which Mid-West Finance as manager covenanted with Permanent and Hambros that it would procure due and punctual performance of Mid-West (ACT)'s obligations (cl.2.1). The obligations were defined as all the covenants, undertakings and agreements of Mid-West (ACT) contained in the Trust Deed, the MGICA Guarantee and the Hambros Facility. Permanent was given various powers in the event of a default by Mid-West (ACT) in the performance of its obligations under cl.6.1 of the agreement.
8. Mid-West (ACT) - Fixed Equitable Charge
By a charge dated 30 June 1989, Mid-West (ACT) charged in favour of Permanent all its present and future rights, property and undertaking. The charge was expressed to be a fixed charge on the whole of that property including "all rights, title and interest of the chargor in and arising under the MGICA Guarantee".
9. Performance Bond
By a deed dated 30 June 1989 GIPL guaranteed to Perpetual Trustee Co. Ltd that GIML would so conduct the business carried on by it in the project that minimum returns would be achieved to the extent that they were not received from claims under insurance.
10. Fidelity Bond
By a Fidelity Bond dated 29 June 1989, Strathford Insurance Co . Ltd indemnified GIPL against all loss sustained and all liability from time to time incurred by GIPL under the Performance Bond.
11. Strathford Insurance Mortgage
Strathford Insurance Co. Ltd mortgaged the all risk insurance agreement between itself and GIML and the Fidelity Bond in favour of GIML and GIPL. The mortgage was expressed to be security for Strathford Insurance's obligation to GIML to pay net claims under the insurance policy, its obligations to GIPL to pay indemnities under the Fidelity Bond, its obligations to GIML and GIPL under the mortgage itself and its warranties to those companies under the policy and the mortgage.
12. GIML - GIPL Mortgage
By a deed dated 30 June 1989, GIML and GIPL mortgaged to Perpetual Trustee Co. Ltd their rights to receive claims from Strathford Insurance Co. under the policy and indemnities under the Fidelity Bond. They also mortgaged their rights under the Strathford Insurance Co. mortgage. Each of these was a security for the obligation of GIML to Perpetual under the Minimum Return Agreement, the obligations of GIPL to Perpetual under the Performance Bonds and their obligations to Perpetual under the mortgage itself. Permanent was also a party to the mortgage. Perpetual undertook that if required by Permanent it would assign its rights under the Strathford Insurance mortgage to the GIO.
13. The Relevant Loans Agreement - 28 July 1989
The circumstances leading to the formation of this agreement and in particular representations said to have induced MGICA to enter into it were in issue in these proceedings. By an agreement dated 28 July 1989 between Mid-West (ACT), MGICA and Permanent, MGICA agreed to approve, for the purposes of the MGICA Guarantee, certain loans set out in a schedule and designated "the Relevant Loans" (cl.1). Mid-West (ACT) and MGICA were to establish an account in their joint names to be styled the Collateral Account of which MGICA would be sole signatory (cl.3.). Permanent was to deposit into the Collateral Account from time to time up to a limit of 18.72% of the Relevant Loans, all money constituting the surplus (as defined in the Trust Deed) being the excess of money in the Interest Account on an interest date over $500,000 and the aggregate of payments required to be made by Permanent on that date. By the agreement Mid-West (ACT) directed Permanent accordingly (cl.4). Upon any reduction in the face value of the Relevant Loans, MGICA was required upon the written request of Mid-West (ACT), to distribute any difference between the balance in the Collateral Account and the requisite 18.72% as Mid-West (ACT) should direct (cl.5(a)). If MGICA made any payment under the MGICA Guarantee in respect of a Relevant Loan, then it could withdraw an equal amount from the Collateral Account and apply it to its own benefit (cl.6). There was a top-up obligation on the part of Permanent in the event of such a withdrawal by MGICA (cl.7). The agreement was to terminate when the whole of the Relevant Loans were repaid and the MGICA Guarantee released and when MGICA had no further right to draw upon the Collateral Account (cl.10). Mid-West (ACT) covenanted to grant to MGICA a charge over its interest in the Collateral Account and its right to give Permanent directions in relation to the surplus under cl.6.2(c) of the Trust Deed and to receive payments pursuant to that clause (cl.11). Permanent consented to Mid-West (ACT) entering into the various obligations. A schedule of Relevant Loans amounting to $6,725,760 comprising advances to some 36 borrowers formed part of the agreement. Among the borrowers were the following:

Joseph Charles Learmonth

Duffy (NSW) Pty Ltd $2,705,460 Gifford Holdings Pty Ltd $ 60,000 Burleigh Nominees Pty Ltd $ 508,740 Pardo Pty Ltd $ 457,890 Goldfields Developments

Pty Ltd $ 508,740 Benney B. $ 457,890 Kelly P. $ 457,890 Magnus F.D. $ 457,890

The agreement was supported by an equitable charge dated 8 September 1989 whereby Mid-West (ACT) charged in favour of MGICA its rights to the Collateral Account and its rights under cl.6.2(c) of the Trust Deed.

Amending Deed

On 15 December 1989, Mid-West (ACT), Permanent, Permanent Trustee Co. Ltd and Hambros executed an Amending Deed under which certain provisions of the Trust Deed were varied. These related to the making of demand upon MGICA in respect of interest shortfalls and the appointment of Permanent as attorney for Mid-West (ACT) to make demand in writing to MGICA for payment to Permanent of interest payments. The Amending Deed also established a Subscription Account in the name of Mid-West (ACT) and required Mid-West (ACT) to deposit into it all subscription moneys for Notes, other than moneys used to discharge a debt of Mid-West (ACT) the incurring of which had been approved by the Trustee under cl.6.1(f) of the Deed. The Amending Deed also provided for investment of money standing to the credit of the principal Account and for closing of the books during the period from and including each Interest Calculation Date up to close of business on the next succeeding Interest Date.
A simplified diagram of the principal features of the project is Annexure 1 to these reasons.
The Pleadings
The identities and corporate status of the parties pleaded in paras 1 to 6 of the Third Further Re-amended Statement of Claim are not in issue but the characterisation of GIPL as a trading and financial corporation is (para 7). The formation of the Guarantee Agreement of 30 June 1989 between MGICA on the one hand and Mid-West (ACT), Permanent and Hambros on the other, is common ground (para 8). It is not in dispute that on 28 July 1989 MGICA, Mid-West (ACT) and Permanent executed the Relevant Loans Agreement under which MGICA would approve additional scheduled loans for the purposes of the Guarantee Agreement of 30 June 1989 (para 10). It is also accepted that on several subsequent occasions until January 1990 documents were executed between MGICA, Mid-West and Permanent providing for further loans to be treated as though included in the class of loans covered by the Relevant Loans Agreement of 28 July 1989 (para 11). It is alleged, but not admitted, that certain of the Relevant Loans and their associated guarantees were not legally binding and/or that the borrowers' and guarantors' obligations were liable to be set aside or otherwise avoided (para 12). These loans and the facts relied upon to support the contentions are set out in a Schedule to the Statement of Claim. Because of this it is said that MGICA had no obligation to pay Mid-West (ACT) anything in relation to those loans (para 13).
Between 18 and 28 July 1989 Mid-West (ACT) and GIPL are said to have represented to MGICA that Mid-West (ACT) had not yet entered into certain loan agreements with persons later included in the schedule to the 28 July agreement (para 14). They are also said to have represented that:

(1) borrowers would pay interest to Mid-West

(ACT) on monthly bank authorities;

(2) Mid-West (ACT) and GIPL intended and believed that interest payments would be made in that way; and

(3) there was nothing known to them which ought reasonably to have led them to believe that any of the borrowers would not or could not perform their obligations to pay interest (para 14).

The bank authority representations are said to have been made by Mid-West (ACT) without reasonable grounds and to be deemed misleading or deceptive by virtue of s.51A of the Trade Practices Act 1974. The other representations are also said to have been false and/or misleading or deceptive (para 16). The allegations are extensively particularised. Reliance is placed on the fact of some of the Relevant Loans being entered into prior to execution of the Relevant Loans Agreement, a promise by GIPL to indemnify certain of the borrowers under their loans and an agreement by the project underwriters, Benney Partners Pty Limited, to indemnify two companies namely Burleigh Nominees Pty Ltd and Goldfield Developments Pty Ltd whose borrowings were included in the Relevant Loans. The non-disclosure by Mid-West and GIPL of the fact that they had not received bank authorities from certain of the borrowers is relied upon, as is their alleged intention that the borrowers would not pay interest on their loans at all. For these reasons, it is said, Mid-West (ACT) and GIPL engaged in conduct that was misleading or deceptive or likely to mislead or deceive (para 17).

GIPL is said to be a promoter of the viticultural project and to have owed a fiduciary duty to the applicant to exercise utmost good faith in making disclosure of all matters material to the applicant's decision to assume obligations under the project (para 19). Because of the misrepresentations earlier pleaded, it is said to have breached that duty and Mid-West (ACT) is said to have participated with knowledge in that breach (para 20). Mid-West (ACT) itself is also alleged to have owed MGICA a duty to disclose to it any unusual matters relating to the loan agreements and is said also to have breached that duty by reason of the various misrepresentations (para 21). MGICA pleads that in reliance on the representations and/or in the belief that the companies had fulfilled their duties of disclosure, it executed the 28 July 1989 agreement (para 23).
The representations are pleaded as continuing immediately prior to 22 August 1989 and further non-disclosures in breach of the duties of GIPL and Mid-West (ACT) are said to have occurred prior to MGICA signing a letter on 22 August 1989 accepting additional loans under the Relevant Loans Agreement (para 29). The non-disclosures pleaded related to prior entry into loan agreements with persons who were included in the schedule of relevant borrowers, Capital Hall's threat to withdraw an offer to guarantee JCLD's loan, the existence of an interest free loan to Towey, Stack and Denney and the non-payment of interest by partners and companies associated with Benney Partners. A guarantee given to Hambros by GIPL and GIML is also relied upon. Similar pleas setting up the continuing representations and others relating to the performance of certain borrowers and the reasons for non-payment of money into the Collateral Account are pleaded as misleading or deceptive conduct by Mid-West (ACT) and GIPL and breaches of their fiduciary duties (paras. 26 and 27). On the basis of this conduct, MGICA says that on 12 and 19 December 1989 and 8 January 1990 it despatched letters agreeing to the inclusion of further loans in the schedule to the agreement of 28 July 1989 (para 35).
It is not in dispute that on 17 September 1990, the chartered accountants, Moores purporting to act on behalf of Mid-West (ACT), demanded payment by MGICA of moneys allegedly due under the Guarantee Agreement (para 36). The demand is said to have been made without authority or to have been of no force or effect. (para 37-39). On or about 2 October 1990 MGICA paid $410,000 to Permanent under protest and now contends that the money is held as money had and received to the use of MGICA (para 40).
The warranty in cl.3.3 of the Guarantee Agreement that any obligations in respect of which demand is made upon MGICA are legally binding and enforceable is said to have been breached (para 42). MGICA claims that Mid-West (ACT) is obliged to indemnify it in relation to the payments so made to the extent that it related to the various loans referred to in the Relevant Loans Agreement and in a schedule to the statement of claim (para 43). Breaches of the Guarantee Agreement are alleged and an entitlement to equitable compensation asserted (para 45). In the alternative, and upon the proper construction of the Guarantee Agreement, MGICA alleges that its obligation under cl.3.1 was owed solely to Mid-West (ACT) and not to Permanent or Hambros (para 46). Alternatively it says that neither Permanent nor Hambros gave any consideration to the applicant for its promise under cl.3.1 (para 47). By reason of these matters and upon the proper construction of the Guarantee Agreement, it is not to have any effect against or in relation to Hambros or Permanent or be enforceable by Permanent against MGICA in the event that MGICA is relieved by a court of competent jurisdiction of its obligations to pay any moneys to Mid-West (ACT) under the terms of the Relevant Loans Agreement (para 48). Alternatively, it is said that on the proper construction of cl.3.2(b) MGICA was not obliged to make any payment in respect of a loan agreement once the obligation of the borrower had been extinguished by order made by a court of competent jurisdiction (para 49). Reliance is then placed in the pleading on a default judgment given by this Court in other proceedings to the effect that the indebtedness of JCLD to Mid-West (ACT) under its loan agreement had been absolutely extinguished (para 50).
The statement of claim goes on to allege that if MGICA establishes as against Permanent facts which had the applicant prosecuted these proceedings against Mid-West (ACT) beyond default judgment, would have entitled it to set aside, avoid or rescind the Relevant Loans Agreement, it is entitled as against Permanent to have an order setting aside, avoiding or rescinding that agreement and/or its liability to pay money under it (paras. 53 and 53A).
The statement of claim deals in an anticipatory manner with an allegation foreshadowed by Permanent that the Guarantee Agreement and the Relevant Loans Agreement and various letters adding further loans to the list of those covered by the Relevant Loans Agreement were contracts of insurance for the purpose of the Insurance Contracts Act 1984 (para 54). On the assumption that that allegation could be made out, it is pleaded that Mid-West (ACT) failed to comply with statutory duties of disclosure (para 59), that its failure was fraudulent (para 60), that MGICA would not have entered into the contracts on the same terms and conditions if Mid-West had not breached its duty (para 64) and that by reason of these and other matters it is entitled as against Mid-West, Permanent and Hambros to avoid the Relevant Loans Agreement and all amendments thereto under sub-s.28(2) of the Insurance Contracts Act 1984 (para 66). Alternatively, it is said that by virtue of s.28(3) of that Act the liability of MGICA under the agreement is reduced to that which would place it in the position in which it would have been if failure to disclose had not occurred or the misrepresentations alleged had not been made. That is said to be a nil liability (para 67). And the demand made by Moores on 17 September 1990 is said to have been fraudulent so far as it extended to certain of the borrowers (para 68). By reason of s.56 of the Act, MGICA says it is entitled to refuse payment of the claims (para 70). There is also an allegation of a failure to comply with the duty of utmost good faith implied under s.13 (para 71) and that and the other matters entitled MGICA to cancel the 28 July 1989 agreement and all amendments thereto under s.60 (para 72). Section 48 of the Act is invoked to support an assertion that if either of Permanent or Hambros was a party to the contract or otherwise entitled to claim under it, they have not suffered any loss which would entitle them to make any claim upon MGICA (para 73). An alternative plea is that MGICA was to be liable under the Guarantee Agreement only in respect of truly fortuitous happenings, that is matters happening by chance or accident and not caused by Mid-West (ACT) (para 74). The failure of various of the borrowers to pay interest on their loans is said to have been caused by Mid-West (ACT) and reference is made to the interest payment arrangements in respect of those borrowers (paras. 75 and 76). Mid-West (ACT) is said to have led various of the borrowers to believe they would not be required to pay interest on their loans (para 77 and 78) and their failure to do so is said not to have been a fortuitous event (para 79). MGICA says it is entitled to refuse to make payment with respect to any of Benney, Kelly, Magnus, Pardo, Burleigh and Goldfields (para 80). In the event, however, although characterisation of the agreements as insurance contracts was pleaded by Permanent, that point was abandoned in closing. MGICA nevertheless did not formally abandon the issue as pleaded on its statement of claim and asked that findings be made if appropriate.

The schedule to the statement of claim pleads a loan to JCLD of $2,705,460 under an agreement that as JCLD procured further contracts to be subscribed in the project or as new contracts were subscribed for other than by JCLD or other underwriters, the liability of JCLD top Mid-West (ACT) under its loan agreement would be correspondingly reduced. By November 1989 it is said that JCLD had procured new investors or alternatively new contracts had been subscribed for which were equivalent to the number of contracts subscribed for by it. Mid-West (ACT) is said to have been in breach of its agreement in failing to cancel the obligations under the loan agreement or release JCLD from them. Alternatively, it is said, the amount repayable under the loan agreement was extinguished by November 1989. By reason of these matters there was no legally binding obligation on JCLD to repay principal and interest under the loan agreement. Alternatively, it is said to be unconscionable for Mid-West (ACT) to seek to rely upon its legal rights pursuant to its contract of loan with JCLD by reason of which again the agreement did not constitute a legally binding obligation.
The second class of loans relied upon in the schedule are amounts of $457,890 to each of Pardo, Benney, Kelly and Magnus and loans of $508,740 to each of Burleigh Nominees and Goldfields Developments. An agreement is pleaded between each of these borrowers and Mid-West (ACT) under which Mid-West (ACT) agreed that as further contracts were subscribed for the viticultural project other than those procured by JCLD, the liability of each of the borrowers to Mid-West (ACT) under the loan agreements would be correspondingly and proportionately reduced. By September 1989 and alternatively 1989, it is said further contracts had been subscribed in the viticultural project other than those procured by JCLD in a number equivalent to the total number of contracts subscribed for by the borrowers mentioned. Mid-West (ACT) is said to have been breach of its agreement by failing to cancel the obligations of the borrowers. In the alternative, the amounts repayable are said to have been extinguished. Pleas of unconscionable conduct and estoppel in relation to these loans are also raised.
By its defence Permanent says that the rights of Mid-West (ACT) under the Guarantee Agreement and any moneys paid by MGICA were held in trust for Permanent (D para 4). It admits the pleaded terms of the Guarantee Agreement (D para 6) and the subsequent inclusion of additional loans (D para 7). It also admits the lodgment of the prospectus for the Australian Viticultural Project No. 2 with the Corporate Affairs Commission of New South Wales in or about May 1989 (D para 9). It asserts that Moores CA made demand on behalf of Mid-West (ACT) for payment of money due under the Guarantee Agreement (D para 11). The contention that the demand was not valid is denied (D para 13). In reference to the payment of $410,000 Permanent denies that it is held as money had and received to the use of MGICA (D para 14). In further answer to the claim for recovery of that money, Permanent says MGICA was obliged to pay it and it was paid in full knowledge of the terms of the Trust Deed which required Permanent to disburse such money to noteholders under the Deed. By reason of that matter it is said that Permanent has changed its position in such a way as to make it unconscionable for MGICA to recover the sum whether or not it was obliged to pay it (D para 17).
Permanent maintains that the obligation of MGICA under cl. 3.1 of the Guarantee Agreement was owed to it directly (D para 19A). Even if it did not give consideration as alleged, Permanent says the Guarantee Agreement was made between the parties to it jointly and consideration was given for MGICA's promise by Mid-West (ACT) (D para 19B).
In reference to the default judgment on the proceedings brought by JCLD (NSW), Permanent says that the judgment was given expressly by default of Mid-West (ACT) and GIPL and not so as to derogate from the right of Permanent to pursue any issue arising in these proceedings. Such a judgment in any event has no effect as between MGICA and Permanent (D para 19G). It was given in circumstances in which MGICA, by counsel, conceded that it had no effect upon any party other than Mid-West (ACT) and GIPL (D para 19H). The judgment is also said to have been given in conflict with s.33 of the Insurance Contracts Act 1984 and otherwise contrary to the legal rights of the parties and should be set aside (D para 19H). This latter contention was abandoned in closing as a consequence of Permanent's decision not to contest the insurance point. So far as the relief sought by MGICA is based upon the default judgment, Permanent says it should be refused upon discretionary grounds (D para 19I).
So far as MGICA's claim against Permanent is based upon an order or declaration that the 28 July 1989 agreement and amendments are void or void ab initio, Permanent says that no such relief is or can be available either under s.87 of the Trade Practices Act 1974 or otherwise. Paragraphs 14 to 35 of the statement of claim, it says, should be struck out as well as such part of para 38 as appears after the number "13" (D para 20).
Reference is made to the various security documents associated with the project which were executed by Permanent and the other parties (D para 21). They are set out in a schedule to the defence. MGICA, it is said, was aware that Permanent had entered the agreement as trustee for the noteholders (D para 22). The noteholders through Permanent subscribed for notes under the Trust Deed and thereby committed $45 million to the project which enabled Mid-West (ACT) to make loans to the investors. The amount invested under the notes increased to $48,200,000 as at January 1990 (D para 23). The noteholders committed funds to the project on the faith of the terms of the Guarantee Agreement. That Agreement would entitle MGICA to sue Mid-West (ACT) for damages for breach, but not to terminate or rescind it (D para 24). Permanent itself says it entered the Agreement and the noteholders committed funds on the faith of MGICA's implied representation that it would undertake diligent and thorough inquiries as to the credit worthiness of persons to whom Mid-West (ACT) made loans for the purposes of investment in the project (D para 25). These matters are relied upon to support a plea that an order against Permanent in the nature of rescission of the Guarantee Agreement or that it is void or voidable is not or should not be available as a matter of discretion (D para 26). It is said to be unconscionable for MGICA to seek such relief and it is also said that MGICA is estopped from so doing (D para 27).
The plea is then raised, as anticipated in the amended statement of claim, that the Guarantee Agreement and the Relevant Loans Agreement are insurance contracts for the purposes of the Insurance Contracts Act 1984. This contention was, as has already been noted, abandoned in closing.
In its reply to the amended defence, MGICA relies in paras. 49, 50 and 51 upon the effect of the judgment obtained by JCLD in separate proceedings, WAG 111 of 1990, and not upon the judgment obtained in these proceedings (R para 4). Alternatively, the judgment in these proceedings against Mid-West (ACT) and GIPL does not operate and is not relied upon as effecting a res judicata so far as the rights inter se of MGICA and Permanent are concerned (R para 5). Permanent, it says, has no interest in the issue whether money is owed by MGICA to Mid-West (ACT) and has no standing to be heard on that matter. There is no obligation by MGICA to Permanent at law or equity in terms of cl.3.1 of the Guarantee Agreement (R para 5). The balance of the pleadings turn on the insurance point which is no longer in issue.
By its amended cross-claim Permanent sues MGICA and Mid-West (ACT), inter alia, on the Guarantee Agreement and the Relevant Loans Agreement. It claims a declaration that MGICA is liable to pay to it a sum of money equivalent to all outstanding interest owed by Mid-West (ACT) by borrowers from that company under the Australian Viticultural Project No. 2. It claims in this respect judgment in the amount of $1,975,485.04 as at 11 January 1991 and orders for payment of further amounts as may have accrued since that time together with interest under s.51A of the Federal Court Act. If the Relevant Loans Agreement is to be declared void or void ab initio, Permanent seeks an order that MGICA refund to it all moneys received under that Agreement and its amendments. An account or inquiry for such purpose is also claimed.
Undertaking and Concession
It is convenient at this point to refer to an undertaking given to the Court by MGICA on 7 June 1991. It was in the following terms:

"The Applicant, by its counsel, undertakes to the Court that:

(a) if the Court relieves the Applicant entirely from liability under the Guarantee Agreement of 30 June 1989 with respect to all of the loans the subject of the Agreement of 28 July 1989 and all amendments thereto, the Applicant will surrender any claim to the collateral account established under the 28 July 1989 agreement;

(b) if the Court relieves the Applicant from such liability in part, the Applicant will accept that as a reduction pro tanto in the face value of the Relevant Loans for the purposes of clause 5(a) of the 28 July 1989 Agreement."

In addition, MGICA formally accepted that if Permanent is ordered to pay the $410,000 plus interest in respect of moneys paid over by MGICA on 2 October 1990 there should be set off against that sum the amount of fees received by MGICA with respect to the Relevant Loans in respect of which the Court has entirely relieved MGICA of liability.

MGICA - Decision-making Structure

In 1984, MGICA conducted its business through three divisions known as the Mortgage Insurance, Financial Services and Credit Insurance Divisions respectively. In July of that year the General Manager, Mr J. Haigh, established a credit committee to approve applications for facilities in the three divisional categories exceeding the approval limits of individual product managers. Initially the committee comprised the Managing Director as Chairman and the Managers of each of the divisions. The Chairman had a right of veto. The General Manager was Alternate Chairman and the Manager Finance and Administration and the National Marketing Manager could act as alternates for the divisional managers. Sometimes other employees were invited to participate in meetings of the committee. From about mid-1988 it was normal practice for the General Manager to attend and chair the meetings.
From time to time there were promulgated within the company what were called "Underwriting Authority Limits". These specified the maximum loan amount and associated risk that could be approved by each nominated officer. On 14 June 1989 managers had limits of $1 million for full cover mortgage insurance, $600,000 for financial service bonds and guarantees and $1,250,000 for credit insurance. The credit committee had a limit of $5 million in mortgage insurance and $8 million in credit insurance. Above these limits approval was required by a Board sub-committee.
In mid-1986 responsibility for commercial mortgage insurance was transferred from the Mortgage Insurance Division to the Financial Services Division which was renamed the Commercial Services Division. Mr Brian Richardson became the manager of that division and was a member of the credit committee from mid-1986. At the relevant time in mid-1989, the Commercial Services Division dealt with commercial and pool mortgage insurance, bonds, including contractor's performance and customs bonds and financial guarantees.
The 1988 Projects
An agreement to provide financial guarantees was entered into by MGICA in 1988 in respect of three projects known as the Australian Viticultural Project No. 1 and the Australian Horticultural Project Nos. 1 and 2. The agreement was dated 25 May 1988 and the parties to it were MGICA, Mid-West Finance and the State Bank of New South Wales. Subscribers for units in these projects could fund their subscriptions by borrowing money from Mid-West Finance under standard form loan agreements guaranteed by MGICA. No application for such a loan would be accepted unless MGICA had issued a guarantee in accordance with the terms and conditions of the agreement of 25 May 1988. The Bank had on the same day provided a credit facility to GIPL which was guaranteed by Mid-West Finance and GIML. The structure of the arrangements for this project generally was set out conveniently in a diagrammatic form in an MGICA minute of 12 April 1989 which is Annexure 2 to these reasons.
Loan applications in respect of the 1988 projects were submitted to MGICA until October or November of that year. A number were declined. The Commercial Services Division under Mr Richardson, administered MGICA's participation in these projects. Some 800 applications were assessed and approved and guarantees provided in respect of loans in excess of $40 million.
MGICA - GIPL - Negotiations on 1989 Project
In about the middle of March 1989, Richardson had a discussion with Denis Simmons who had been an officer of the State Bank of New South Wales but had since joined GIPL as its General Manager, Finance. Simmons said that he would be responsible for the documentation of new GIPL projects for 1989 including a further viticultural scheme. He wanted MGICA to provide guarantee support similar to that given to Mid-West Finance in the previous year. Richardson asked him to put his proposals in writing.
Simmons wrote on 23 May 1989 on GIPL letterhead seeking "a firm proposal for a Financial Guarantee in respect of interest payments due to our finance company". Reference was made to proposed viticultural and prawn projects. Applications from investors in each would be accepted in multiples of $10,000. A total maximum investment of $85 million in the viticultural project was anticipated and $90.5 million in the prawn scheme. A guaranteed minimum return option would be available to investors. Loan finance would be available to eligible investors who elected the guaranteed minimum return option. The terms and conditions of the loans would be "the same as for existing borrowers". This was a reference to investors in the 1988 projects. Security arrangements, processing and audit confirmation with respect to the loan applications would be the same. Interest would be payable monthly in arrears. GIPL sought "cover for the full interest obligations of borrowers along the lines of our existing insurance arrangements with your company". The letter went on:

"We consider that minimal if any applications will be received after 30 June 1989 with respect to the projects.

You will appreciate that all documentation received prior to 30 June must be processed by the end of the financial year. To that end we are taking steps, including computerisation of transactions, to facilitate a smooth flow of documentation. We are also looking to establish an operations/processing centre at a city location. As discussed with you it would be of considerable assistance if your company could allocate personnel to process MGICA documentation and provide necessary approvals at the "operations centre"".

Richardson replied on 4 April 1989 advising that MGICA was prepared to provide cover for borrowers approved by it. Underwriting requirements would remain as in 1988. This was a reference to MGICA's requirements set out in cl.2 of the Guarantee Agreement of 25 May 1988. That clause provided for the information to be furnished in respect of each loan application submitted for MGICA's approval. Because of an increase in reinsurance cover, interest on loans to a total of $500,000 for any one borrower could be guaranteed. Fee proposals were set out and GIPL advised that if they were acceptable MGICA would instruct its solicitors, Westgarth Middletons, to prepare an updated guarantee document. At the time, Richardson believed that the State Bank of New South Wales was to be the ultimate lender to those seeking finance to subscribe for the units. He also stated that there would be no establishment fee for the guarantee agreement and that he would require $20,000 before going ahead with the documentation.
On 5 April 1989, GIPL sent MGICA a cheque for $20,000 as requested. On the same day the NSW/ACT manager of MGICA, Ian Graham, sent a letter to the Assistant Manager, Mark Anderson, referring to the 1988 projects and noting that negotiations were proceeding on a similar project to be promoted in May and June. He expected that $100 million worth of guarantees would issue and that credit approvals for those applications would be shared between the Commercial Services Division and the NSW/ACT branch office of MGICA. Paul Eagar, the Underwriter - Commercial Services Division and Steven Brown, a Senior Credit Analyst of the NSW/ACT branch would be responsible for the credit assessment and approval process. Anderson was asked to make allowance in his planning for Brown's commitment to the programme. The next day Richardson sent a memo to Graham suggesting that responsibility for the 1989 programme be passed to the NSW/ACT branch on the understanding that he would be available to provide any assistance that might be required in setting it up. Paul Eagar, he said, would be available to assist with underwriting of loan applications upon receipt.
At that time or shortly afterwards, Richardson telephoned Simmons and said that before progressing further with the proposal, he wanted to know that there were no arrears of repayments of interest by borrowers in the 1988 project. Simmons said that there were none and had not been any. Richardson asked for written confirmation and on 11 April was sent a letter signed by Stack advising that as at 28 February 1989 Mid-West Finance had 1,075 borrowers with aggregate loans outstanding of $65,991,012, none of whom were in default. On the same day Simmons wrote to Richardson indicating that some investors would want to borrow more than $500,000. He proposed that they be submitted to MGICA for approval to cover a guarantee of interest on the first $500,000. He added that in the event that applications for loans in excess of $1 million were received, he would like to be in a position to negotiate separate cover with MGICA and sought a proposal from Richardson in that regard. He also suggested that MGICA's fees be re-examined to take into account:

1. The absence of delinquent accounts in respect of borrowers in the 1988 programme.

2. Predictions by market forecasters that high interest rates would not continue for the term of the policy.

3. A likely high incidence of early loan repayment for the provision by borrowers of Letters of Credit to secure principle and interest obligations.

On 12 April, Richardson met with Anderson, Brown and Eagar of MGICA to talk about the 1989 project. They noted that it was very similar to that set up in 1988. A minute of matters discussed referred to its salient features, the contemplated audit assessment procedures and the guidelines to be applied by MGICA in deciding whether or not to approve individual borrowers for the interest guarantee. On 13 April Anderson wrote to Simmons setting out MGICA's proposals which included the following:

1. A general limit of $500,000 per borrowing to be guaranteed subject to risk sharing on a pari-passu basis for borrowers exceeding $500,000 provided MGICA's exposure would not exceed $500,000 (the latter should no doubt be read as a shorthand reference to the limit of MGICA's liability to guarantee interest repayments in respect of any borrowed amount exceeding $500,000).

2. A fee rate for the facility set at 0.375% per annum.

3. MGICA would assume a rate of 18% for each loan in determining its fee. Mid-West (ACT) would advise MGICA quarterly of the new interest rate. The difference between the fee paid on assumed interest of 18% and the nominal fee would be calculated based on actual interest charged over the year. A compensating adjustment to the fee paid could be made.

The allegation is made in para 14(d) that GIPL and Mid-West (ACT) impliedly represented that there were no matters known to them which led or ought reasonably to have led them to believe that any of the borrowers would not or could not perform their obligations to pay interest under the loan agreements. This implication was said to arise from the fact that they had previously requested MGICA to guarantee loans to such borrowers and that it had declined the request because of the risk. The facts relating to the willingness and ability of the borrowers to perform their obligations were said to be essentially within the knowledge of GIPL and Mid-West (ACT). In addition, facts pleaded to support the characterisation of Mid-West (ACT) as a promoter of the project, owing a fiduciary duty to MGICA among others, were relied upon. I am satisfied as a matter of inference from the context of the request for a guarantee of the Relevant Loans and specifically the matters referred to in sub-paragraphs (d)(i), (ii) and (iii) of the particulars to para 14, that there was an implied representation that GIPL and Mid-West (ACT) knew of no matters which led them to believe that any of the borrowers' obligations could not or would not be performed. I do not go so far as to say that it was to be inferred from the circumstances of the case that they represented there were no matters known to them which ought reasonably to have led to the belief that the borrowers would not or could not perform. No do I consider that it is necessarily to be implied that the borrowers would personally perform the obligations they had undertaken. The implication is that there is a belief that the obligations will be performed. The precise mechanism of their performance is not to be implied. The representation pleaded is said to be falsified by the indemnity arrangements made by GIPL with Kelly, Benney, Magnus and Pardo on the one hand, and between Benney Partners and Goldfields Developments and Burleigh Nominees on the other. A further oral agreement is alleged that GIPL's indemnity would extend to the latter two companies. In my opinion, the provision of the indemnities and the agreement by GIPL to meet interest payments neither falsified the representation pleaded nor that which I have found.
On the basis of the preceding findings, I conclude that in respect of the matters pleaded in paras. 14(b), (c) and (d) there was no misrepresentation and therefore no misleading or deceptive conduct as alleged in para 17. In respect of the pre-existing loans representation in para 14(a), I find that there was a misrepresentation, but that it had no affect upon the decision by MGICA to enter into the Relevant Loans Agreement.
Paragraph 18 of the statement of claim sets up various matters relied upon to support a plea that Mid-West (ACT) was a promoter of the viticultural project and owed a fiduciary duty to MGICA to "exercise the utmost good faith in making disclosure of all matters material to its decision to assume obligations under the project". It is said to have breached that duty by reason of the various mis-representations pleaded in para 14. So far as the breach of duty relies upon those pleaded misrepresentations, it must fail. Only one was made out as a misrepresentation and found to have had no impact upon the decision. The case of breach of fiduciary duty resting, as it does, upon the pleas of misrepresentation must in that respect fail.
It is separately pleaded in para 21 that Mid-West (ACT) owed a duty to MGICA to disclose to it any unusual matters relating to any loan agreements entered or to be entered by persons with Mid-West (ACT) which loan agreements Mid-West (ACT) sought at any time to have brought under the Guarantee Agreement. Mid-West (ACT) is said to have breached that duty. The breach relied upon in para 22 is said to arise from:

(i) The absence, pleaded in para 15, of reasonable grounds for making the direct debit authority representation in para 14(b).

(ii) The various matters set out in para 16 which are said to falsify the representations pleaded in paras.14(a), (c) and (d).

The breach of duty alleged is only of significance in light of the pleading in para 23(b) that, in the belief that Mid-West (ACT) and GIPL had fulfilled their duties to MGICA, MGICA executed the 28 July 1989 agreement. I am not satisfied, however, that the disclosure of the various matters referred to in para 16 would have had any effect upon the decision to execute that agreement. The item referred to in 16(g) relating to a bridging facility allegedly provided by Hambros was not, in the end, relied upon by MGICA.

It is then alleged in para 24 that immediately prior to 22 August 1989, the para 14 representations continued in force and applied also to subsequent loan agreements. Additional matters are pleaded in para 25 to falsify those representations. So far as they relate to the pre-existence of loan agreements, I am not satisfied they had any effect upon MGICA's decision-making. Reliance was also placed, in para 25(c), upon the letters dated 17 August 1989 from Capital Hall and JCLD withdrawing the guarantee of JCLD and JCLD's application for units unconditionally. There was at the time no proposal to grant any further loan to JCLD or any loan to Capital Hall. In my opinion, these matters were not the subject of a duty of disclosure that was relevant to the decision to bring additional loans into the Relevant Loans Agreement.
The failure by Mid-West (ACT) to disclose that a decision had been made that Towey, Stack and Denney would not be liable to pay interest on their loans was also pleaded in para 25(e). As to that, I am not satisfied that the evidence, in particular the conversation between Denney and Richardson on 13 June 1990 and the letters from Towey and Stack to Mid-West (ACT) of 7 and 15 September 1990, established that any such decision was made. The failure to pay interest does not of itself establish a lack of intention to meet the relevant obligations. I am not satisfied therefore that the non-disclosure pleaded in para 25(e) is made out.
Paragraph 25(f) alleges a failure by GIPL and Mid-West (ACT) to disclose that none of Kelly, Benney, Magnus, Pardo, Goldfields Developments or Burleigh Nominees had paid interest for the month of July. But as senior counsel for Permanent pointed out, they were not being brought into the Relevant Loans Agreement as at August 1989. They were already in it. The alleged non-disclosures were neither representational nor material in the circumstances.
Paragraph 25(g) alleges that GIPL and Mid-West (ACT) knew that Stack and Towey had given a guarantee to Hambros with respect to any amount payable to Hambros by Mid-West (ACT) under the Bill Endorsement Facility. This was allegedly not disclosed. It was pointed out on behalf of Permanent that there had been effective disclosure of this arrangement in Item 1 of Schedule 1 of the Bill Endorsement Facility. That item referred to a security by way of guarantee and indemnity provided by GIML, GIPL, Stack and Towey, "to the financier on or about the date of the agreement". The facility was expressly referred to in the Guarantee Agreement. In my opinion, the allegation of non-disclosure is not made out. In any event, I am not satisfied that it was a matter which would have been material to the decision-making process of MGICA in August 1989.
For these reasons I am not satisfied that the case of misleading or deceptive conduct or breach of duty alleged in respect of the August loans is made out.
Paragraph 30 of the statement of claim sets up the para 14 representations and those pleaded in para 24. It adds the allegation in para 30(b)(i) that on and prior to 8 January 1990, Mid-West (ACT) and GIPL represented that all interest had been paid when due with respect to all loans from Mid-West (ACT). Paragraph 30(b)(ii) alleges that it was represented that loans to Kelly, Benney and Magnus and Pardo were strictly in default but because GIPL considered that the contracts they held were valuable assets, interest was being paid by GIPL pending a formal arrangement to take over the contracts. These representations were said to have been made to Richardson by Towey and Simmons on 3 July 1990. Having regard to the discussion of this conversation earlier in these reasons, I am not satisfied that the alleged representations were made.
Paragraph 30(b)(iii) alleges that it was represented that the reason that moneys had not been paid into the Collateral Account in October 1989 was that they had been required to be spent on establishment expenses. But this representation is not falsified on the pleadings.
For the preceding reasons generally MGICA's case in misleading or deceptive conduct and breach of duty fails.
Permanent's Standing to Sue
MGICA contends in para 46 of the amended statement of claim that upon the proper construction of the Guarantee Agreement its obligation under cl.3.1 was owed solely to Mid-West (ACT) and not to Permanent or Hambros. Alternatively it is pleaded that neither Permanent nor Hambros gave any consideration to MGICA for the promise under cl.3.1. For these reasons, it is said, upon the proper construction of the Guarantee Agreement and the Relevant Loans Agreement the latter is not enforceable by Permanent against MGICA. Permanent says that in the context of the Trust Deed MGICA's obligation under cl.3.1 of the Agreement is owed to it directly. It denies the allegation of want of consideration and refers to its joint involvement in the Guarantee Agreement as sufficient to support the promise in cl.3.1.
In my opinion, on the proper construction of the Guarantee Agreement, Permanent does have the right to enforce MGICA's obligations under it. It is proper in approaching the construction of the agreement to bear in mind the central role of Permanent as protector of the noteholders' interests. This is reflected in both the Guarantee Agreement and the Trust Deed. The stage is set in that regard by recitals C to F in the Guarantee Agreement. They are in the following terms:

"C. The Lender may from time to time hereafter issue Notes in accordance with the Trust Deed.

D. The Financier has agreed to provide to the Lender the Facility to assist the Lender to make timely payment pursuant to the Trust Deed.

E. The obligations of the Lender to make payments in respect of Notes are secured by the Charge and the Mortgage and its obligations to make payments in respect of the Facility are secured by the remainder of the Securities. F. In consideration of the Lender agreeing to pay to MGICA the fee calculated as hereinafter provided and at the request of the Trustee (which request is evidenced by the Trustee's execution hereof) MGICA has agreed to issue to the Lender upon the terms and subject to the conditions hereinafter contained a guarantee in respect of the obligation of each Borrower (as hereinafter defined) to pay Interest (as hereinafter defined) pursuant to the Loan Agreement to which the Borrower is a party."

It is apparent from these recitals and particularly recital F that the agreement contemplates a direct interest on the part of the Trustee in MGICA's performance of its obligations.

In cl.1.1 the term "Trust Deed" is defined thus:

""Trust Deed" means the trust deed to be made between the Lender, the Trustee, Permanent Trustee Company Limited and the Financier providing for the holding of the Charge, the Mortgage, the Guarantee (as therein defined), a management agreement and this Guarantee and Indemnity for the benefit of holders of promissory notes issued by the Lender."

Clause 1.8 involves an acknowledgement by both Mid-West (ACT) and Permanent that MGICA has a broad discretion in deciding whether or not to approve particular loans. It is in the following terms:

"The Lender and the Trustee hereby expressly acknowledge that notwithstanding any agreement, arrangement, understanding, undertaking or representation (whether oral or in writing) to the contrary, in deciding whether or not to accept a Loan Application pursuant to Clause 2 or to exercise any other power or discretion contained herein then, except as expressly provided herein, there shall be no requirement on MGICA that such decision be reasonable or bona fide or that in making that decision MGICA act reasonably or bona fide nor shall MGICA be obliged to take into account or not take into account any particular fact or circumstance or to abide by the rules of natural justice."

Clause 3.1 of the agreement was set out earlier in these reasons and imposes the obligation on MGICA to "pay to the Lender" interest due under a loan agreement which is sixty days in arrears. The term "pay the Lender" is given content by cl.12 which provides:

"12. PAYMENTS

12.1 MGICA shall pay all amounts payable by it pursuant to Clause 3 hereof in cleared funds into such bank account maintained by the Trustee in Canberra as the Trustee may from time to time nominate or, failing any such nomination by the Trustee, into a bank account opened by MGICA in the name of the Trustee.

12.2 Upon payment by MGICA of any amounts payable by it pursuant to Clause 3 hereof in accordance with Clause 12.1 or upon payment by any Borrower of any amounts pursuant to any Loan Agreement the amount outstanding under the Trust Deed or the Facility shall, as against MGICA (but not necessarily as against the Lender) be deemed to have been reduced by the amount of such payment.

12.3 Each of the Trustee and the Financier hereby respectively warrant to and covenant with MGICA that the only moneys and/or obligations secured by the Securities will be, in the case of the Mortgage and the Charge, moneys from time to time owing in respect of Notes and, costs, charges, expenses and fees payable or reimbursable pursuant to the Trust Deed or the Securities and, in the case of the other Securities, moneys from time to time owing in respect of the Facility."

Although at first blush able to be described as only a mechanism for the discharge of MGICA's obligations, this clause, when viewed in the light of Permanent's wider role in the project does, in my opinion, confer upon it the right to enforce payment.

The Trust Deed itself contemplates that Permanent has rights under the Guarantee Agreement. In its recital B it says:

"The Trustee has agreed to hold the Guarantee, the Charge and the Mortgage and its rights under the Management Agreement, the MGICA Guarantee and the Facility as trustee for the benefit of the Holders on the terms and conditions set out in this deed."

It defines the "MGICA Guarantee" as:

"... the agreement to be made between MGICA, the Trustee, the Issuer and the Facility Provider pursuant to which MGICA will undertake to pay to the Trustee at the direction of the Issuer an amount equal to any interest on borrowings which any Borrower fails to pay to the Issuer on the terms of the proforma document attached to this deed as Annexure D."

The above definition is consistent with a construction of cl.12.1 of the Guarantee Agreement which treats it not merely as creating an obligation to pay into a bank account nominated by the Trustee, but to pay the Trustee the amounts payable under cl.3 of the Agreement.

If there is any doubt that the Trustee has enforceable rights under the Guarantee Agreement, they are dispelled by cl.2.1 of the Trust Deed which provides, inter alia:

"The Trustee hereby declares and acknowledges that it holds and will hold its rights under the MGICA Guarantee and the Charge upon trust for and for the benefit of the Holders and the Facility Provider...."

I am satisfied that the Trustee, Permanent, may enforce MGICA's obligations under the Guarantee Agreement and that its right in this respect extends to loans brought under the Guarantee Agreement by virtue of the Relevant Loans Agreement. On the question of consideration, I accept that there are covenants by the Trustee in the Guarantee Agreement, see e.g. cl.5.2 and 12.3. There are also a number of express promises by the Trustee in the Relevant Loans Agreement especially in relation to the deposit and distribution of funds in the Collateral Account (see cls.4, 6, 7, 9 and 12).
Enforceability of Certain of the Relevant Loans
In para 12 of the amended statement of claim it is alleged that in relation to certain of the Relevant Loans the borrower's agreements to repay principal and interest do not constitute legally binding obligations enforceable in accordance with their terms. For this reason it is said that by virtue of cl.3.2(b) of the Guarantee Agreement MGICA presently has no obligations under that agreement to pay to Mid-West (ACT) any amount in relation to such loan agreement and by virtue of that proposition it would follow no obligation to pay to Permanent. The Relevant Loans referred to are set out in the schedule to the amended statement of claim, along with the facts relied upon to establish their unenforceability. In each case it is said in effect that there was an agreement whereby obligations incurred by these borrowers would be extinguished or discharged upon the sale of units to other investors of units in the project up to the numbers held by these borrowers.
The borrowers associated with Benney Partners form a discrete group in this regard, comprising Messrs Kelly, Benney, Magnus, Pardo Pty Ltd, Goldfields Developments and Burleigh Nominees. As indicated earlier, I am satisfied that the agreements pleaded in the schedule were made and that the requisite sell down was achieved, releasing these parties from their obligations to Mid-West (ACT). By virtue therefore of cl.3.2(b) of the Guarantee Agreement, MGICA was not obliged to pay Mid-West (ACT) or Permanent interest in relation to those loan agreements.
I am satisfied also that this is the case with respect to the units taken up by JCLD (NSW) having regard to the facts found earlier in relation to the "novation agreement" between that investor and Mid-West (ACT). And if I am wrong in that respect then the default judgment in WA G111 of 1990 has the effect that there was no obligation under the loan agreement between JCLD (NSW) and Mid-West (ACT) and therefore no liability on the part of MGICA to make payment of interest in relation to that loan.
Conclusion
Having regard to my conclusions it is not necessary to determine whether the sum of $410,000 was paid over to Permanent under an unauthorised demand by Moores. The entitlement to that money can be determined in the light of Permanent's residual entitlement after exclusion of the Relevant Loans referred to in the schedule to the amended statement of claim. If any further orders are necessary there will be liberty to apply accordingly.
In my opinion, the orders made at this stage should be limited to declarations on the application and cross-claim which give effect to my conclusions. The parties will have liberty to apply on the question of any money judgement that results and interest thereon as well as on the question of costs and any other necessary orders.

[1992] FCA 315

22 MAY 1992