Micarone and Bechara v Perpetual Trustees & Ors No. Scgrg-94-1917, Scgrg-94-1711 Judgment No. S6438

[1997] SASC 6438

MICARONE  and  BECHARA  v  PERPETUAL TRUSTEES AUSTRALIA LTD & ORS

Civil
Duggan J

Introduction

This matter comprises two actions which have been heard together.  The plaintiffs in the first action (No. 1711 of 1994) are Ennio and Linda Micarone (Mr and Mrs Micarone) and the plaintiffs in the second action (No. 1917 of 1994) are Joseph and Daad Bechara (Mr and Mrs Bechara).  Mr and Mrs Micarone are the parents of Amelia Bechara who is married to Antoine (Tony) Bechara, the son of the plaintiffs in the second action.

On 15th December 1992 the Micarones and Becharas mortgaged house properties owned by them as security for a loan of $640,000 advanced by the first defendant Perpetual Trustees Australia Limited (Perpetual).  The Micarones, the Becharas, Tony Bechara, Amelia Bechara and Marisa Micarone (another daughter of Mr and Mrs Micarone) were the joint borrowers.  Mr and Mrs Micarone mortgaged two house properties situated at 25 Kings Avenue, Blair Athol (the Blair Athol property) and 19 Gladstone Road Prospect (the Prospect property).  Mr and Mrs Bechara mortgaged a house property situated at 14 The Parkway, Hampstead Gardens (the Hampstead Gardens property).  The Micarones and the Becharas entered into the agreement to borrow the money so that funds could be used to assist their children, Tony and Amelia Bechara and, to a lesser extent, Marisa Micarone in a business enterprise.   Perpetual took action for possession of the properties of the Micarones and Becharas after defaults in payments of instalments due under the loan.

The essence of the claim against Perpetual is that the Perpetual mortgage and two extensions of it to which I will refer in due course should be set aside for various reasons including undue influence by Tony Bechara, misrepresentations by Tony Bechara and his accountant Allen Frost who is the second defendant and unconscionable conduct, mainly on the part of Tony Bechara.  It is alleged that Perpetual had actual or constructive knowledge of the misrepresentations made by Tony Bechara and Allen Frost and the conduct of Tony Bechara.  It is further alleged that Perpetual acted in an unconscionable manner by taking advantage of the plaintiffs’ alleged position of disadvantage.  The plaintiffs also seek damages and an indemnity for monies payable under the Perpetual mortgage from Mr Frost by reason of his alleged misrepresentations.  Similar relief is sought against the third defendant, Carmine Belperio, a legal practitioner, and the fourth and fifth defendants who, at all material times, were partners of Mr Belperio in a legal practice.  The case against the third defendant is that he breached his duty of care towards the plaintiffs as their legal adviser, particularly, in relation to the Perpetual transaction.   It is alleged that although he purported to give them independent legal advice, he failed to carry out that task adequately.  The fourth and fifth defendants had no direct involvement  in the transaction, but it is claimed that they are liable as partners of the third defendant.  Contribution notices have been issued by Perpetual to the second and third defendants; by the third, fourth and fifth defendants to the first and second defendants; and by the second defendant to the third, fourth and fifth defendants.

The factual issues to which the pleadings give rise centre on the plaintiffs’ level of understanding of the transaction, the extent to which they were subjected to outside pressures in entering into the agreement with Perpetual, whether or not they were provided with an adequate explanation of the nature of the Perpetual transaction and independent legal advice on the consequences of entering into it, whether misrepresentations were made to them by Tony Bechara and Mr Frost which influenced them in agreeing to enter into the agreement with Perpetual and whether Perpetual had actual or constructive knowledge of matters which should have alerted it to the plaintiffs’ situation and which rendered it unconscionable for Perpetual to proceed with the transaction.

Although the main focus of the pleadings is on the mortgages executed on 15th December 1992, evidence was given of other transactions which preceded it and which arose from attempts by the plaintiffs in both actions to assist Tony and Amelia Bechara.   Furthermore, evidence was led of various property transactions entered into by the plaintiffs since their arrival in Australia as migrants.  This evidence was directed mainly towards providing an insight into the level of understanding of the various plaintiffs concerning the legal nature of loans, mortgages and guarantees.

Brief overview of the facts

Before examining these transactions in detail, it is convenient at this stage to say something more about the plaintiffs in the actions.   Mr and Mrs Bechara were born in Lebanon where they met and were married in 1964.  They are aged 52 and 51 respectively.   Three of their children, including Tony, were born in Lebanon.  The family moved to Australia in March 1969.  Four more children were born in Australia.   Tony is the third eldest child and the eldest son.  After spending some time in Sydney, the family moved to Adelaide in 1976 where the parents have resided ever since.  A few months after moving to Adelaide Mr and Mrs Bechara purchased a fish shop business at Prospect Road, Blair Athol.  The business involved the lease of the shop and an attached house.  In 1979 they sold that business and purchased another business known as the Bowden Snack Bar.

Towards the end of 1979 the Becharas purchased a house at 390 Regency Road, Prospect.  Some years later the ownership of this property was transferred to Tony Bechara and another of their children, Mary.   In 1981 Mr and Mrs Bechara purchased the Hampstead Gardens property.  The Becharas continued to live at the Bowden shop until they sold that business in 1984.   Mr Bechara suffered a back injury while working in his shop and in 1985 he applied for and was granted an invalid pension.   He is in receipt of this pension at the present time.

Both Mr and Mrs Micarone were born in Italy.   Mr Micarone is 72 years of age and Mrs Micarone is 65.  Mr Micarone came to Australia in 1955.  Mrs Micarone migrated in mid-1962.  They were married in 1964.  Mr Micarone commenced working at General Motors Holdens, Woodville in October 1955 and was employed there until his retirement in March 1990.  He was a metal finisher for the last 25 years of his employment. They have two daughters, Marisa, who was born in 1965 and Amelia, Tony Bechara’s wife, who was born in 1966.

Mr Micarone and his brother purchased a house at 27 Gladstone Road, Prospect six months after Mr Micarone’s arrival in South Australia and when Mr and Mrs Micarone were first married they lived in this house.  Mr Micarone purchased his brother’s share in 1962.   In 1972 Mr and Mrs Micarone purchased 19 Gladstone Road, Prospect (the Prospect property) and went there to live although they retained ownership of the property at 27 Gladstone Road.  At this stage Mrs Micarone was working as a kitchen hand at Calvary Hospital.  Mr and Mrs Micarone purchased the Blair Athol property in 1977 and rented it out. Mrs Micarone left her employment to look after her family when they were young, but in due course she resumed working in restaurants.

Tony Bechara was born in August 1968.  He attended school in South Australia and left at the age of 14 after completing Year 9.  After leaving school he assisted his father in the running of the Bowden  delicatessen.  In 1984 and 1985 Tony and his uncle began operating a business known as the Vogue Deli at Kingswood.   The business was not a success and Mr Bechara Senior had to provide financial assistance to keep it afloat.  Tony Bechara then bought his uncle’s share and ran the business himself.    Eventually the business was taken over by Tony’s sister, Rita.   Tony went to work at San Remo Pasta after Rita assumed control of the Vogue deli. 

In July 1988 Tony purchased another delicatessen on Hanson Road (the Bechara delicatessen).   Finance of $100,000 was arranged through Hindmarsh Financial Services Ltd.  Mr and Mrs Bechara guaranteed the loan and mortgaged the Hampstead Gardens property as security.  The mortgage was subject to two other mortgages on the property, a first mortgage which secured a loan of $37,431 registered on 18th August 1981 and a second mortgage securing a loan of $15,000 registered on 20th August 1986.

Tony Bechara married Amelia in October 1989.  He gave evidence that at about the time of the marriage he told Mr and Mrs Micarone that it would be a good idea for Amelia and her sister Marisa to buy a shop together.  He said that Mr and Mrs Micarone did not like the idea, but he continued to urge it upon them over a period of some months.   While these discussions were going on Tony discovered that a delicatessen business in Hutt Street, Adelaide (the Hutt Street delicatessen) was for sale.   He told his father and parents-in-law of his find and eventually talked Mr and Mrs Micarone into supporting their daughters in the purchase.  Tony Bechara said in evidence that he "nagged" his parents-in-law until Mr Micarone "cracked down to pressure".

The Hutt Street business was purchased by Amelia and Marisa in January 1990.  The purchase price was $150,000 plus stock.   Mr and Mrs Micarone guaranteed the loan taken out by Amelia and Marisa and mortgaged their properties at Blair Athol and 19 Gladstone Road, Prospect to Citibank Savings Ltd (Citibank) as security.   At the time of this transaction the two properties were unencumbered.  The amount of the loan was $172,000. Amelia and Marisa worked at the Hutt Street delicatessen but it is clear from the evidence that the effective control of the business was in the hands of  Tony.  He made all the business decisions and it seems that he had control over the profits.  Amelia and Marisa took cash from the shop when they required funds, but they did not draw wages. 

In March 1990 Tony Bechara obtained a loan by means of a Mortgage Power Account with Citibank.   He took out a loan of $140,700 which was guaranteed by Mr and Mrs Bechara.  They provided the Hampstead Gardens property as security and the previous loans secured by this property were paid out as part of the transaction.

The Hutt Street delicatessen was destroyed by fire on 28th July 1991.   At that stage the business was insured with Guild Insurance and a claim for loss and damage to stock and plant and loss of profits was formulated with the accounting assistance of Mr Frost.  The maximum which could be claimed under the policy was $300,000.00.  The calculation of the loss presented to the insurance company by the solicitor acting for Tony and Amelia Bechara and Marisa Micarone was a little over $300,000.00, which sum included $199,808.00 for loss of profits.  The claim for loss of profits was based on calculations made by Mr Frost.  In the meantime various accounts due in relation to the Hutt Street delicatessen had to be paid and Tony Bechara said that he met these from the profit being made out of the Bechara delicatessen and by drawing on his Mortgage Power Account.  He said that savings totalling about $8,000 from the Hutt Street delicatessen takings were available to pay instalments due on the loan in relation to that business.

However within three or four months following the fire there were insufficient funds to meet loan instalments and trading accounts due in respect of both the Bechara delicatessen and the Hutt Street delicatessen along with legal and accounting expenses.  Tony Bechara said he started borrowing from friends.   He and Mr Frost then approached the Commonwealth Bank for a loan of $30,000.   According to Tony he told Mr Frost that he wanted the loan to buy a fish and chip business at Valley View.  He said Mr Frost inspected the shop and told him it was worth buying.  Tony said Mr Frost assisted him to obtain finance through the St Agnes branch of the Commonwealth Bank where Mr Frost had a contact, the manager Mr Trussell.   The loan of $30,000 was advanced to Tony and his wife.  Mr and Mrs Micarone agreed to grant a second mortgage over their two properties as security for the loan.  The mortgage documents were signed on 23rd December 1991.   According to Tony Bechara he told Mr Micarone that the money was going to be used "to keep everything going, the Citibank loan, pay the lawyers, pay accountant’s fees, until the insurance claim came through".   He said he did not tell the Micarones that some of the money would be used for the Valley View business.  Tony Bechara said he also had to borrow money from Household Commercial Finance to fund the purchase of the business.  It would seem that Mr Frost assisted with the preparation of cash flow projections to support the last-mentioned advance.

The $30,000 loan did not put an end to the financial difficulties which had arisen and in the first half of 1992 Tony Bechara and Mr Frost began discussing the possibility of re-financing the loans associated with the businesses.   According to Tony Bechara, Mr Frost suggested replacing the loans with one loan.   Tony said that Mr Frost also suggested reopening the Hutt St delicatessen for the reason that "it would look good for the insurance company".

An approach was made to the Commonwealth Bank St Agnes branch to become involved in the proposed re-financing, but the application was refused.  Tony Bechara then enlisted the services of a finance broker, Adelaide Finance Agency Pty Ltd (Adelaide Finance), to procure the finance he was seeking.  He dealt with a Mr Hartley from that company.   Mr Hartley arranged finance through a number of lenders.

In April 1992 Tony Bechara arranged a meeting at the Micarone home attended by the Micarones, Becharas, Tony and Amelia Bechara, Marisa Micarone and Mr Frost.  The topics discussed included the financial situation of Tony, Amelia and Marisa, the reopening of the Hutt St delicatessen, the insurance claim and the use to which the proceeds of the claim would be put.   I accept the evidence that it was contemplated by the families that the proceeds of the insurance claim would be used towards repayment of the proposed new loan.
         Eventually the Micarones and Becharas agreed to support the obtaining of the loan.  In fact it was a series of loans from a number of financiers put together by Adelaide Finance.   This series of transactions was referred to in evidence as the first re-financing.  The borrowings totalled approximately $420,00.00.  The transactions were entered into in June and July 1992.  The four plaintiffs assumed personal liability to repay the loans which were secured by their properties.   The following is a summary of these transactions. 

FINANCIER       AMOUNT ADVANCED      BORROWERS  MORTGAGORS        PROPERTY
The Burrows loan arranged by Mr B.M. Swincer            $ 72,000.00  (A8)     Amelia BecharaMarisa Micarone   Mr and Mrs Micarone First mortgage over Blair Athol property
Don Clarke Nominees Pty Ltd  (arranged by Mr B.M. Swincer)              $126,500.00  (A9)           Amelia BecharaMarisa Micarone   Mr and Mrs Micarone First mortgage over Prospect property
Credential Acceptance Corporation Pty Ltd          $ 70,535.95  (A10,B12)    Amelia BecharaMarisa Micarone   Mr and Mrs Micarone Second mortgages over Blair Athol and Prospect properties
Australian Guarantee Corporation Ltd                   $ 30,000.00  (A14)    Amelia BecharaTony BecharaMarisa Micarone   Mr and Mrs Micarone Third mortgages over Blair Athol and Prospect properties
The Ramsey loan (arranged by Mr B.M. Swincer)          $ 92,000.00  (B11)   Amelia BecharaMarisa Micarone   Mr and Mrs J Bechara        First mortgage over the Hampstead Gardens property
Australian Guarantee Corporation Ltd                   $ 15,000.00  (B16)    Amelia BecharaTony BecharaMarisa Micarone   Mr and Mrs J Bechara        Third mortgage over the Hampstead Gardens property
                  $406,035.95  

It was at the stage of the first re-financing that Mr Belperio became involved.  He came to know the Micarone family through Marisa and Amelia Micarone.  He also met Tony Bechara through the Micarones.  He witnessed the signatures of the borrowers to various documents associated with the first re-financing.  Some of the documents were signed at Valley View on 17th June 1992 and others were signed at Prospect on 20th July 1992.  According to Mr Belperio he explained the nature of these documents to the Micarones and the Becharas at the time of signing. All the plaintiffs contend that the documents were not explained to them.

After the first re-financing the Hutt St delicatessen was reopened in July 1992.  Trading was poor and the takings did not exceed more than $3,500.00 per week.  The re-financing did not resolve the financial difficulties and the repayments on the loans fell into arrears.  The lenders began issuing notices of demand and Tony Bechara said that he had frequent discussions with Mr Frost about the situation.  Eventually they discussed a further re-financing and Tony Bechara began making enquiries through brokers.  One of the brokers was Mr Peter Finnimore of  Capital Link Australia Pty Ltd (Capital Link).

Mr Finnimore told Tony Bechara that if there was to be any success in obtaining a new loan the arrears on the existing loans would have to be paid.   Mr Finnimore also said that financial statements of the businesses would have to be prepared along with new valuations on the properties which were securing the present loans.   Mr Frost prepared these financial statements.

After discussions with Mr and Mrs Micarone and Mr and Mrs Bechara Senior, Mr Finnimore set about finding a lender prepared to advance approximately $700,000 on the security of Tony Bechara’s properties and those of his parents and parents-in-law.    Mr Finnimore dealt through International Financing and Investment Pty Ltd (IF&I), a mortgage originator.   After unsuccessful approaches to two financiers, IF&I approached Perpetual through its agent and manager, Puma Management Ltd (Puma).   Eventually, on 25th November 1992, Perpetual made a formal offer to lend the seven members of the Micarone and Bechara families $640,000.  The proposal was that all seven members would be borrowers and no guarantees were sought.   There was to be a registered first mortgage over five properties which included the property of Mr and Mrs Bechara and the two properties of Mr and Mrs Micarone.   A "Certificate of Acceptance" annexed to the offer was signed by the borrowers and dated 3rd December 1992.   Mr Belperio witnessed the signing by each borrower.

Mortgage documents were prepared in relation to the loan (the Perpetual Mortgages).   They were executed by all borrowers at a meeting which took place at the Micarone home at Prospect on 15th December 1992.   Mr Belperio witnessed the signatures.  He asserted in evidence that he explained the nature of the documents to the borrowers prior to the signing and that he warned the four plaintiffs of the dangers inherent in entering into obligations of this nature.   Again this evidence was contradicted by evidence from the Micarones and the Becharas.

Not long after the execution of the mortgages Puma became aware of  an unfavourable credit reference from one of Tony Bechara’s financiers.  This led to Puma’s insistence on an extension to the mortgages providing additional covenants whereby the borrowers were to take all steps to ensure that the outstanding insurance claim was settled and paid not later than sixty days after settlement.   Upon payment of the insurance claim the sum of $70,000 was to be paid to the mortgagee to be held on deposit with Macquarrie Bank Limited during the currency of the mortgage.  Failure to comply with the covenants would constitute an event of default under the mortgage entitling the mortgagee to exercise various rights and remedies including a power of sale. The extension to the mortgages (the first extension) was signed by the Micarones and Becharas and witnessed by Mr Belperio.   Settlement of the loan then took place on 28th January 1993.

The insurance company resisted the claim from the time it was lodged.  Proceedings were commenced against the company and the matter was listed for trial to commence on 21st June 1993.  The claim was settled for $202,000.00 on the morning of trial on the advice of senior counsel.  According to the four plaintiffs they had been given to understand by Tony Bechara and Mr Frost that the insurance claim was worth well in excess of $400,000.00 and they relied on this advice in agreeing to assist with the first and second re-financing arrangements.  All of them said they were shocked to hear of the amount for which the claim was settled.  Only about $70,000.00 of the monies from the insurance payment went to Perpetual.  The alleged misrepresentations concerning the value of the insurance claim are crucial to the cases of all four plaintiffs.

Some months after settlement Tony and Amelia Bechara sold their property at Regency Road Prospect which was one of the properties used as security for the Perpetual loan.  An application was then made to Perpetual for the release of this property as a security.  Perpetual agreed subject to certain conditions which were incorporated into a further extension of the mortgages (the second extension).  The amount of the loan was reduced to $472,500 and the interest rate was increased by 1%.  The documents to effect these extensions were witnessed by another solicitor, Mr Scragg, and dated 17th September 1993.  The Micarones and Becharas claim that none of the documents associated with the first and second extensions of mortgage were explained to them in the depth deposed to by Mr Belperio and Mr Scragg.  Not long after the second extension the loan facility fell into arrears and possession proceedings were commenced.

The statements of claim

The Micarone plaintiffs claim that the Perpetual mortgage which they entered into is unenforceable by reason of untrue statements and representations made to them by Tony Bechara and Mr Frost and that Perpetual had constructive knowledge of the misrepresentations.   The statements and representations relied upon include the assertion that the proceeds of the insurance claim would be approximately $500,000.00; that these proceeds would be applied in the first instance to discharge the Micarone properties from liability; that any remaining debt would be secured by properties owned by the Bechara family; and that after receipt of the monies due from the insurance claim the remaining debt of approximately $150,000.00 could be met without difficulty by the Bechara securities.

These same matters are relied upon to support the assertion that Perpetual’s conduct was unconscionable and that the execution of the mortgage was procured by undue influence.   It is also claimed that Perpetual was, or should have been, aware of certain other matters of particular relevance to the claims of misrepresentation, unconscionable conduct and undue influence.  They include the advanced years of the plaintiffs; the fact that they did not have a good command of English; that they could not read or understand the mortgage documents; that the loan was not for their benefit; that Tony Bechara was in a position to exercise undue influence over them; that previous applications for a loan of approximately the same amount had been refused by other financiers for reasons associated with the background of the Micarone plaintiffs; and that the plaintiffs had not received proper independent legal advice concerning the Perpetual transaction.

The Micarone plaintiffs also claim damages for the alleged misrepresentations by the defendant Frost and by reason of alleged negligence and breach of duty of care by the defendant Belperio.  The claim against the last mentioned defendant is based on an alleged failure to give proper legal advice to the plaintiffs at the times when  he witnessed their signatures to the relevant legal documents, in particular, the Perpetual mortgage.

The Bechara statement of claim is along broadly similar lines.  It is claimed that the Perpetual mortgage executed by these plaintiffs is unenforceable by reason of unconscionable conduct or, alternatively, undue influence.  Perpetual is said to have had actual or constructive knowledge of a number of matters including the Bechara plaintiffs’ lack of knowledge of English, a limited understanding of commercial transactions, their reliance on the pension and an inability to meet their financial obligations under the terms of the mortgage.   It is pleaded that the Perpetual loan was not for the benefit of the plaintiffs and that Tony Bechara was in a position to exercise undue influence over his parents.  Reliance is placed on the refusals by other lenders to finance the transaction.  Alleged misrepresentations in relation to the insurance claim are also relied upon.

The Becharas’ claim against the defendant  Frost is based upon misrepresentation, negligence and breach of duty of care with particular emphasis on statements allegedly made by Mr Frost in relation to the insurance claim and the state of Tony Bechara’s business interests.  The case against Mr Belperio is founded upon negligence and breach of duty of care in failing to provide adequate and independent legal advice.

The purchase and financing of the Hutt Street Delicatessen

There is no doubt that it was Tony Bechara’s idea that his wife Amelia and Marisa Micarone should purchase the Hutt Street delicatessen.  He did not have the finance to purchase it himself and it is obvious that he conceived the idea of arranging a loan to be secured by the two properties owned by his parents-in-law.  Tony Bechara was called as a witness by the Bechara plaintiffs and great care must be taken in accepting evidence given by this clearly unreliable witness.  However I am quite satisfied that he spoke the truth when he said that he put a lot of pressure on his parents-in-law to become involved in the transaction.  I accept that they were reluctant at first, particularly Mr Micarone, but that in the end Mr Micarone, to use Tony Bechara’s expression, "cracked down to pressure".  The ploy was to convince Mr and Mrs Micarone that their daughters could make a lot of money out of the delicatessen.

It is also clear that, from the beginning, Tony Bechara intended to run the delicatessen and control its finances.   This is what, in fact, occurred.  When the delicatessen was purchased it was controlled by Tony Bechara as though it was his own business.  Mr and Mrs Micarone acted as guarantors and mortgaged their two properties as surety for the loan of $170,000.00 but they stood to gain nothing financially from the business.  The evidence does not persuade me that Mr and Mrs Micarone received anything in the nature of an income from the business.  I should add that I have reached a similar conclusion in relation to the suggestion that the Becharas benefited financially from this and the other businesses in which their son was involved.

The fire and Mr Frost’s role in preparing the calculation of losses for the insurance claim

Mr Frost has practised as an accountant since 1980.  He first met Tony Bechara in 1989 when the latter asked him to act as his accountant.  Prior to the purchase of the Hutt St delicatessen, Frost inspected it at Tony’s request and gave some financial advice in relation to its purchase.   Then in 1990 Tony was anxious to purchase some equipment for the delicatessen and he asked Frost to prepare some accounts for the business which had been requested by a lender from whom he had sought finance.  Frost prepared some interim financial statements for the year ended 31st October 1990.  He said that he found the task difficult because of the inadequacy of records.

Mr Frost said that prior to the fire on 28th July 1991, Tony spoke to him about fire insurance.   According to Frost, Tony showed him an insurance policy and there was a discussion about what could be claimed.  Frost said that at the end of the conversation he commented to Tony "But you have to have a fire or something like that" and Tony replied "Plan on it.  It’s going to happen".

Mr Frost said that after the fire either Tony or Mr Mahony, a solicitor then handling the insurance claim, asked him to prepare financial statements as part of the claim.   A request for this information was made by Mr Mahony in a letter to Tony Bechara dated 22nd October 1991.  Frost was advised that all relevant records had been destroyed in the fire and it was necessary to obtain information from banks and contact suppliers to the delicatessen.   The process was one of reconstruction.  I find that Mr Frost had frequent contact with Tony in preparing the financial statements for the fire claim and that he also spoke to Mr Mahony.

The main components of the fire claim were the loss of plant, equipment and stock and loss of profit.  Mr Frost prepared financial statements for the year ended 30th June 1991 and the period ended 28th July 1991 in support of the claim.   The plaintiffs contend that these financial statements were false and that both Mr Frost and Tony Bechara knew they were false.   The insurance policy was not tendered at the hearing but it would appear from a document issued by Guild Insurance and discovered by Mr Frost that the maximum claim available for "business interruption" was $300,000.00 which provided indemnity for a period of 12 months.   Based on the financial statements prepared by Mr Frost a claim was made to Guild Insurance for $199,808.00 loss of profits and $101,112.26 for fixed costs.   The plaintiffs point out that the total of these amounts ($300,920.26) is just over the $300,000.00 maximum and argue that this figure was arrived at by means of deliberately inflated figures.

It becomes necessary, therefore, to examine the evidence as to the preparation of these accounts.   A cash takings book for the period 29th January 1990 to 5th December 1990 (E168) was tendered at the hearing as the only original record available for the period, but Mr Frost said that he did not have the takings book available to him at the time he set about reconstructing the accounts. He carried out a series of trial balances with the aid of the computer in his office.  The aim was to prepare financial statements for the year ended 30th June, 1991. The principal components of these trial balance print-outs were figures for sales, purchases and drawings by Amelia and Marisa (the latter representing the net profits of the business).   At one point in this process Mr Frost fed into the computer a sales figure of $624,000.00 for the 12 month period based, he said, on an assertion by Tony Bechara that the business was turning over $11,000 - $12,000.00 gross per week.   Prior to this the sales figure in the trial balances was $450,324.16.   The combined drawings for Amelia and Marisa using the latter figure totalled $73,478.67.  When Mr Frost used the figure of $624,000.00 for sales the combined drawings of Amelia and Marisa came out at $107,605.84.   This would give a gross profit ratio of approximately 28%.   The gross profit ratio is based on the comparison of gross trading profit with sales.

A reconstructed handwritten journal was being prepared in Mr Frost’s office as part of the general reconstruction of the accounts and, after producing the trial balance which showed the net profit as $107,605.84 Mr Frost directed his staff to insert a journal entry numbered 47 which effected a reduction in purchases of stock of $95,000.00.  This had the effect of increasing both gross and net profit, the latter being increased to over $199,000.00.  It was shown in the accounts as drawings by Amelia and Marisa totalling that amount.   The notation at journal entry 47 is "Deduction in purchases as advised by T Bechara and A Frost".   These calculations culminated in a set of accounts for the year ended 30th June 1991 prepared by Mr Frost under his firm name.   Sales were shown as $624,000.00 and net trading profit as $199,877.00.  The gross profit percentage on these figures is approximately 45%.   This compares with a gross profit percentage of 27% if the figures in the interim accounts for the period up to 31st October 1990 are used.   These trial balances were carried out on 20th November 1991.

The solicitors for Guild Insurance sought an opinion on the accounts prepared by Mr Frost from Mr Ellery of Edwards, Marshall and Co., chartered accountants.   Mr Ellery gave evidence and his report to the solicitors for Guild Insurance was tendered.  Mr Ellery reported that the financial statements prepared by Mr Frost "lacked the necessary veracity and accuracy to be relied upon".  Mr Ellery made various criticisms of the accounts but, in particular, he focused attention on the reduction in purchases by $95,000.00 and the resulting increase in profits consequent upon journal entry 47.  He made enquiries of Mr Frost as to the basis for certain figures in the accounts.

Mr Heinrich, for Frost, submitted that the evidence of Mr Ellery is "fundamentally flawed" in that Ellery proceeded on the basis that the takings book was an accurate record whereas there was evidence that money had been taken out of the business by the owners without a record being made of it.   However I am not restricted to Mr Ellery’s evidence in determining the significance of the preparation of the various sets of accounts by Mr Frost.   I have access to a good deal more evidence as to the circumstances in which the accounts were prepared.   Mr Ellery’s evidence was to the effect that the accounts lacked veracity on the information before him.   In my view he had good grounds for making this statement and the evidence led at the trial has convinced me that the more important financial accounts prepared by Frost were false and misleading and that he was fully aware of that fact.   I propose to review some of the evidence which leads me to that conclusion.   Before I do, however, I should point out that the actual accounts were not shown to any of the plaintiffs.  The relevance of this evidence lies more in the fact that Mr Frost put the accounts forward as information which was to form the principal basis of the insurance claim.  In my assessment he realised that the amount claimed could not be supported by truthful and reliable evidence.   And yet, as I will explain later, he encouraged all the plaintiffs to believe that it was a genuine and realistic claim for this amount.

It is clear that the accounts were formulated following discussions between Frost and Tony, some of them taking place while the trial balances were being performed on the computer in Mr Frost’s office. Tony Bechara denied that he advised Mr Frost that the figure of $12,000.00 was about the level of the weekly takings.  Whether or not this is so, I have little doubt that he told Frost that money was being taken from the business without it being recorded.  I have borne in mind Mr Heinrich’s submissions as to the significance of this consideration, but I am equally convinced that it did not give Mr Frost the licence which he took in preparing the accounts. The sales figure of $12,000.00 per week was somewhat higher than indicated by the financial information before Mr Frost. However the argument as to the falsity of the accounts is based more on the $95,000.00 reduction in the figure for purchases which was made in the course of the exercise with trial balances which took place in Mr Frost’s office.

According to Mr Frost, he did his original trial balance based on the information which he had collected from suppliers, banks and other sources.  Tony then told him that the resulting figure for sales was too low and they decided to work on $12,000.00 per week.   This required a journal entry to be inserted so as to raise the figure for purchases by $137,558.80.  The journal entry is number 40 in the reconstructed journal E199.  A trial balance then produced a gross profit figure which, according to Frost, Tony said was also too low.  Frost then directed that journal entry 47 be inserted to reduce the purchases by $95,000.00.  This had the effect of increasing profit to the level which was eventually put forward in the accounts.   Frost’s description of this part of the exercise is in the following passage of evidence:

"       ...and then 40, I think from memory, was an entry that we put through because we felt the purchases were too low.  We just didn’t have enough information and then when Tony saw the figures he was quite insistent that the purchases were too high and then we adjusted it down by the $95,000 on the information he provided us, which was just verbal.

Q      I think if one looks at the journal entries for 40 and 47 we can see what they say in the exhibit.  Are you able to say whether there were any documents or records supplied which in any way were used to calculate the amounts in journal entries 40 to 47?

A      No, there was nothing at all.   I’d done all the research I could and I had all the information I could find, so it was purely a figure that we worked out on what we thought the gross profit was and then when Tony insisted it was higher, it was just adjusting that figure.

Q      Tony insisting it was higher, adjusting what figure?

A      Adjusting the actual gross profit by decreasing the purchases.

Q      For example, journal entry 47 was that done before the accounts were finalised?

A      Yes, it was.

Q      Prior to doing journal entry number 40, what was your view as to whether you had received information that accurately indicated the total of the purchases for the year in question?

A      I was of the view that I was probably never going to get any straight answers.  I found it impossible.  Tony just wouldn’t help me get the information I found it extremely hard, so I felt that that was all the information I was going to get because I’d spent quite sometime trying to get as much information as I could.

Q      Presumably before doing journal entry 40 you had come up with a total for purchases, is that right?

A      Yes, I had.  It was too low.

Q      What was your view about the accuracy of that total?

A      That was way too low."

Mr Frost said that when Tony suggested the profit was as high as it was he (Frost) tried to get some evidence to establish whether it was "a provable gross profit".   As I understand his evidence he was looking for some sort of corroboration for the conclusion arrived at in the accounts.  He said he rang the Business Centre on South Terrace and asked for an appropriate gross profit to sales ratio for the business.   He said that he relied on Tony’s statements as to the nature of the business and concluded that a gross profit ratio of 45% ( as shown by the accounts) was appropriate.   I have already commented that the statements which he prepared for the period ended October 1990 showed a gross profit ratio of 27%.

I appreciate that in many respects an accountant is reliant on information given by his or her client and that this is particularly so where very few accounting records exist.   This was a point made by Mr Frost on a number of occasions during his evidence.   However it is another thing for an accountant to become involved in a process of preparing accounts by means of manipulating figures to suit the transparent motives of a clearly dishonest client.   I have little doubt that this is what occurred in the present case.   The usual disclaimer in relation to accounts which was also relied upon in the present case cannot absolve an accountant from the consequences of knowingly co-operating in an exercise of this nature.

Mr Frost was asked about reducing the purchases by $95,000.00 so as to increase the gross profit.

"Q     Did you say that you realised that at the time this was being done that his (Tony Bechara’s) motive was wanting to get it up to the $300,000 mark?

A      I was fairly confident of that.  The trouble is I don’t have any other information to say he is wrong or he is right.

Q      Did you put it to him?

A      I could have, I could not have, I can’t recall."

All of this is against the background of evidence, which I accept, although it was denied by Tony Bechara, that Tony told Mr Frost that there was going to be a fire.  I have no doubt that Mr Frost realised at the time he was preparing the reconstructed accounts that his client was acting dishonestly in relation to the claim. There is nothing on the face of the financial statements, which were eventually produced and used for a variety of purposes to assist Tony Bechara including in relation to the insurance claim, to suggest that they were other than a genuine set of accounts prepared on the basis of reliable information.  It was only when Mr Ellery went behind the accounts that there was any inkling of their real nature.  Apart from preparing the accounts Mr Frost swore a statutory declaration on 15th November 1991 which was prepared by Mr Mahony as part of the material to be used for the fire claim.   It set out the fixed costs as $101,112.26 and included the following paragraphs:

1. I have prepared the financial statements referred to hereinbefore on the instructions of my clients’ and consistent with the records and accounts produced by my aforesaid clients’.

1. The gross trading profit for the Hutt St Deli partnership for the year ended 30th June 1991 is ONE HUNDRED AND NINTY NINE THOUSAND, EIGHT HUNDRED AND EIGHT DOLLARS  ($199,808.00)"

Again it is what is not said which creates a false impression.  There were very few "records and accounts" and they played a subsidiary role to the unsubstantiated material which was the major premise of the accounts.

I will discuss Mr Frost’s continuing role in this matter later in these reasons, but I am constrained to say that I found him to be a most unsatisfactory witness, particularly in his attempts to explain  a number of his actions which were clearly designed to assist in making a claim based on spurious assertions by Tony Bechara.  The evidence which he gave at the Coroner’s hearing into the cause of the fire is also of relevance to his credibility.  The Coroner’s hearing took place in January 1993.  Mr Frost had given a statement to the police in which he stated:

"Mr Bechara did discuss with me sometime ago, some months, perhaps three to six months about insurance for the business but I can not recall the actual discussion."

It is obvious that Mr Frost did recall the important discussion he had with Tony Bechara when the latter indicated that a fire was going to take place.  Mr Frost was asked by the coroner if he wished to add to his statement, but he did not mention a conversation with Tony Bechara before the fire.  The cross-examination on the matter before this court proceeded as follows:

"Q     Why didn’t you refer to the conversation a month before the fire?

A      I haven’t referred to it, I’m probably wrong in not doing that.

Q      You told an untruth to the coroner on oath?

A      I don’t think it was an untruth, I just didn’t add additional information.

Q      You concealed the truth?

A      You could put it that way.

Q      You did not tell the whole truth?

A      Yes, that’s possible.  If I have to wear that, I will.

Q      Why did you tell an untruth?

A      Because it was a very difficult position to be in and I didn’t know how to handle it."

I find Mr Frost’s evidence on this issue quite unsatisfactory and I also find that he did not give any indication to the police at any time that Tony Bechara made the statement which Mr Frost has now revealed.

Mr Frost’s willingness to assist in the manipulation of figures in order to advance Tony Bechara’s interests is demonstrated by the preparation of information for the taxation department.  No taxation returns had been filed by Marisa and Amelia in relation to profits made at the Hutt St delicatessen and Mr Frost advised Tony at around the time the insurance claim was being processed that this would have to be rectified.  Quite clearly the claim would have been adversely affected if there were no taxation returns which gave some indication of the performance of the business.   However, on the day after the insurance claim was settled, a print-out from the general  ledger for the business which was on the computer in Mr Frost’s office was altered in consequence of an entry (No 49) which was made in the hand written journal for the Hutt Street delicatessen which was also kept in Mr Frost’s office.  The amendments to the general ledger increased gross purchases by $106,000.00, thus reducing the profit and, therefore, the income of Amelia and Marisa.   The entry in the hand written ledger was accompanied by a note which read:

"Alter gross profit as per the Edwards Marshall report."

Taxation assessments had already been received for Amelia and Marisa based on returns which showed profits in accordance with the financial statements prepared for the insurance claim.  Mr Frost said that after making the adjustment to the accounts which had the effect of significantly reducing the profit of the business, he contacted the taxation department and advised that the profit and therefore the incomes of the two women shown in the earlier accounts, appeared to be too high and he said the officer to whom he spoke agreed with him.   Amended assessments were then prepared.

According to Mr Frost the adjustments to the profit shown in the accounts came about in the following way.  He said there had been a lot of pressure on Amelia and Marisa from the taxation office and Tony Bechara came in to see him.  Tony told him that he understood more about gross profits now and he said he thought that the profit was too high and the gross profit ratio should have been about 28%.   He said he wanted it adjusted.   Mr Frost said that he could do that, but warned of a possible audit from the taxation department.   Mr Frost thereupon made the journal entries to which I have referred.

The incident supports the conclusion that Mr Frost was prepared to produce accounts to support whatever result his client wished to achieve.  Another example of their joint disregard for reality in relation to financial accounts is demonstrated by a note written by Mr Frost to Tony Bechara referring to a taxation return which Mr Frost had prepared for Tony to sign in relation to the 1989 financial year.  The note reads:

"Tony,

Copy of accounts as requested.
I have chosen to have you pay a small amount of taxation
eg. Tax   $187.20
     Prov $187.00
              $374.20   

To have nil tax may be questionable and open way for tax investigation.

AGF"

The explanation for the note given by Mr Frost in his evidence was quite unsatisfactory.  He said he meant to convey that Tony Bechara had given him financial information which was ridiculous as he did not wish to pay tax and Mr Frost decided to encourage him to pay some tax.   I have no doubt that the note refers to a manipulation of the financial statements regarding Tony Bechara’s business affairs so as to show an income on which a nominal amount of tax would be payable.

I have referred to Mr Frost expressing confidence in the fire insurance claim to financiers and it is appropriate that I should refer to some specific incidents.

The formulated claim of which the loss of profits was the main single component was referred to on a number of occasions by Mr Frost when acting on behalf of Tony Bechara.   On 26th February 1992 Mr Frost wrote to the manager of the Commonwealth Bank, St Agnes branch:

"We wish to confirm that Mr Bechara’s wife and sister-in-law have a current insurance claim for $435,000.00 relating to the Hutt St Deli. 

We expect the claim to be completed in five weeks."

On the same date he forwarded an application to the Commonwealth Development Bank on behalf of Tony, his wife and Marisa enclosing financial statements for the business.

In a Commonwealth Bank diary memorandum dated 17th March 1992 it is recorded:

"When we first became re-involved with Tony Bechara in December 1991, we were led to believe insurance settlement at $400K was imminent.

Valued referral source (Allen Frost) had checked out claim at that stage and was satisfied payment would be forthcoming without undue delay.

In discussing again with clients & Frost it now appears that insurer, Guild Pharmacy, have changed tack and are having second thoughts about payment of claim.

Present indications are that claim will need to be settled in the courts.  Clients have reacted by changing legal representation to well known council [sic], Michael Abbott.

In any event it now appears any settlement could be a long way off."

I find that the note supports the inference that Mr Frost gave the bank encouragement along the lines suggested in the note. 

In an undated statement of assets and liabilities prepared in Mr Frost’s office Amelia Bechara’s assets include "outstanding insurance $225,000.00".   There is also a note of a Commonwealth Bank officer, Mr Pressley, on a memorandum dated 3rd February 1992 (F1) which refers to the insurance claim.   It states:

"We are led to understand letter offering ‘high $300’s’ will be received this week and Allen Frost confirmed all financial aspects had been accepted."

Mr Frost rejected making this statement, describing it as "rubbish".  Nevertheless I find that it is consistent with the manner in which he described the prospects of the insurance claim when speaking to various people at about this time.

On 28th January 1993 Mr Frost wrote to one of Tony’s creditors, BMW Australian Finance Ltd as follows:

"The fire which destroyed the Hutt St Deli on the 28th July 1991 has caused financial difficulty for all those associated with the business.   These problems will be solved when the insurance claim is finalised in the next few months.

Until that claim is finalised Mr Bechara will have difficulties fulfilling the terms of his contract with BMW Finance."

The loan of $30,000.00 from the Commonwealth Bank

In the overview of the evidence I refer to a loan of $30,000.00 which was advanced to Tony Bechara by the Commonwealth Bank in December 1991.  Mr and Mrs Micarone agreed to a second mortgage being placed over their properties when Tony Bechara told them that the money was to be used to keep the Citibank loan going until the insurance claim was paid out.  In fact some of the money (Tony Bechara said he cannot recall how much) was used to purchase the business at Valley View.  Mr and Mrs Micarone were not told that any portion of the funds was to be used for the latter purpose and the incident is an example of a continuing course of deceit by Tony Bechara.

The meeting in April, 1992 to discuss the re-financing

Mr Mahony forwarded the formulated claim to the solicitors acting for Guild Insurance on 12th December 1991.  Mr Frost said that in February or March 1992 he went to Mr Mahony’s office with Tony Bechara, Mr Micarone and Mr Bechara.  The fire insurance claim was discussed.  There was dissatisfaction with the progress of the claim and eventually Mr Scragg, another solicitor, was engaged to act on behalf of the Micarone and Bechara interests.    There was a meeting in Mr Scragg’s office some time between the Mahony meeting and April 1992.   Mr Frost said this meeting was attended by himself, Mr Scragg, Tony Bechara, Mr Bechara and Mr Micarone.   Mr Frost said that one of the matters discussed was whether Tony was the arsonist.

Then in April 1992 there was the meeting at the Micarone home attended by Mr Frost, Tony Bechara, Mr and Mrs Bechara, Mr and Mrs Micarone, Marisa and Amelia.   As I have earlier pointed out the meeting took place at a time when the financial difficulties which had arisen in the first half of 1992 continued and Tony began investigating the possibility of re-financing.   Mr Hartley of Adelaide Finance was approached by Tony Bechara in April 1992 to discuss this prospect.

Tony Bechara gave evidence that he organised the meeting at the home of his parents-in-law.   He said he spoke to Mr Frost and told him that nobody agreed to the re-financing and asked if he (Frost) could help him speak to his parents and parents-in-law.  Frost agreed.  Tony then asked his parents and parents-in-law "to come and hear everything from an accountant’s point of view".   He said his parents reluctantly agreed.   Tony described the broad nature of the conversation:

"I said I wanted to refinance, for the reason that I wasn’t keeping up with the payments to the banks and on the properties.  I had overcommitted myself in every way I could think possible.  Then I asked Allen to explain how it all would work and why we needed to join the properties together.  Allen started by telling them that it was the only way to negotiation, that Tony had so many loans that he couldn’t keep up with them, that we had already found a couple of people that would refinance the money and that the repayments would be dropped by thousands of dollars and in his opinion that was the best and only way to fix the problem."

According to Tony, Frost said that it would be appropriate to reopen the Hutt St delicatessen as this would assist the insurance claim and it would soon get back to the turnover it was doing.  The examination-in-chief continued:

"Q     Was there a discussion about the insurance claim?

A               The discussion was -

Q               Who said it, what did they say?

A      I was saying that the insurance claim should be coming soon and that when it comes everything will be sorted out, and Allen said that we’ll have enough money to cover any money that we’ve borrowed from the insurance claim to pay off all these debts, and that we’d be on top of the world after the insurance company paid.

Q               Was there an amount of the insurance claim discussed?

A               It was over $400,000.

Q               Who said that?

A               Allen did.

Q      Was there any discussion about the amount of the claim would be the same as the amount which would be paid?

A      It would be very close to the amount of money that we borrowed.

Q      Was there anything said about  whether the amount that was being claimed from the insurance company was the same as the amount that the insurance company would pay?

A               Yes, Allen said that it would be approximately the same.

Q               What else did Mr Frost say?

A               That we’re not too far away from settling the insurance claim."

Tony said that Frost explained that he (Frost) had calculated what the insurance claim was worth.  Frost did not suggest that they should ask a lawyer any questions about the insurance claim.   He agreed that he and Frost told Mr and Mrs Micarone that they should not worry about the arrangements because their properties would be released when the insurance claim monies were paid.   They were not told that there was any doubt or dispute about the insurance claim.  Tony said that he had an argument with his father as to whether Frost or his father would have control over the finances if the borrowing scheme went through and he said that nothing was resolved at the meeting.  It was his recollection that he asked Mr Frost to come back and see his parents-in-law on some other occasion and Frost agreed.

In his evidence Mr Micarone summarised some of the topics discussed at the April meeting:

"A     Tony, his father and Allen Frost said that there should be new financing done to pay back Citibank and with the rest of the money we would open the shop because with the shop opened we would be able to repay back the interest when the claim comes in.  They said when the claim for the fire would come in that my property would be paid off and the rest of the money they would use to pay off the debts.

Q               Who said that.  You’ve said what was said but who said that?

A               Allen Frost and Giuseppe Bechara.

Q               Did Tony say it?

A               Yes, Tony said it too.

Q               Was it said more than once?

A               Yes."

Mr Micarone gave evidence that Frost said it would be better to reopen the shop because with the new finance and with the shop at Hutt St and the one at Valley View, it would be easier to make the repayments and it would be better to unite the properties and obtain one loan.  The witness said that Tony and Frost told him that he would be paid when the insurance money came "and it was about $390,000".   Mr Micarone said that neither he nor his wife agreed to the proposal at the meeting.

Mr Bechara Senior summarised his version of what Mr Frost told the group at the meeting.  He said:

"He was explaining to the whole lot, Tony doing well, everything okay, and that we have to put the property altogether to reopen Hutt Street deli and will be some income.  Maybe it’s going to take four or five thousand a week, and every week will be one, maybe one, two thousand dollars more, and a couple of months the deli get back to what it was before, taking between $10,000 and $12,000.  And he said when our insurance money come Tony will be on top of the world."

Mr Bechara said that Tony had told him before the meeting that Mr Frost would be there to explain the matter because he was the expert.   The new loan was to be in the region of $400,000.00.   He said it was possible someone asked Mr Frost how much the insurance claim was worth.  He said he had an argument with Tony over who was going to assist with control of the finances, himself (Mr Bechara) or Mr Frost.   He said he refused to become part of the suggested arrangement to borrow more money.  He denied helping Mr Frost and Tony to present the proposals.  He also denied that any suggestion was made that the Micarone properties would be released first.  He denied trying to persuade the Micarones to agree to the proposal or agreeing with it himself on this evening.

Mrs Micarone said that the discussion centred around obtaining another loan, repaying the previous loan and reopening Hutt St.  She was asked whether any mention was made of how much money would come from the insurance claim and she said Frost or Tony replied that it would be $400,000.00 or something like that. It was said that when the money came their house would be paid off.

Mrs Bechara said that her husband was not anxious at first to become involved in any discussion relating to the finance proposal.   Eventually she persuaded him to go to the meeting in order to assist their son.  She said she did not say anything at the meeting.  Her evidence continued:

"... we went to Micarone house and Allen Frost, he sat at the table and he tell us how Hutt Street is going to open, how it’s going to do, how much money had to pay to open Hutt Street Deli, and the insurance money is going to be $400,000.  And after, if insurance doesn’t pay quick, they have to pay more because the more delay, more they have to pay.  And don’t have to worry, and $490,000 the insurance pay, pay everybody, and Tony will be all right.   And the girl sitting there at the table and Mr and Mrs Micarone and both girl agree insurance money pay, pay everybody, pay Mr Micarone and Mrs Bechara (sic) and that’s it."

Marisa Micarone said that it was put to those at the meeting that it would be a good idea to take out one loan instead of a number of smaller ones and the money could be used to reopen the shop.   It was said that when the insurance came through the money would pay off the loan and her parents home would be released first.  Frost and Tony advised the meeting about these matters.   She said Mr Bechara "was with the idea as well and was just helping out in the presentation of this idea".   She said "I remember him (Mr Bechara) saying that he wouldn’t let anything happen to my parents.  He respected my dad and if anything were to happen he would sell his property first".   She said there was no agreement to the proposal by her parents at the end of the discussion.

Mr Frost said in his evidence that Tony invited him along to the April meeting because there was difficulty in raising finance.   He said Tony wanted him to explain certain aspects in relation to the possibility of re-financing.  He agreed that it was quite possible that Tony wanted him to help convince the others to take part in any re-financing which might be arranged, but he understood his role was to answer questions.  He realised that the idea of the meeting from Tony’s stand point was to get agreement to obtain finance on the understanding that his parents and parents-in-law would be guarantors.

Mr Frost said that prior to going to the meeting he had assisted Tony Bechara in attempting to raise finance and he realised that Tony was going to have "a lot of trouble" in organising a lender.  There was talk about reopening Hutt St and he said he was asked why it was necessary to follow this course.  He said he understood the shop had to be opened in order to "make the claim in full".   He said that this was his understanding of the effect of the policy following discussion with a solicitor who he thinks may have been Mr Scragg.  According to the witness, Tony told the meeting that he needed the income from Hutt St to keep up the payments on the loans.  Tony also said that he had tried unsuccessfully to re-finance and he wanted to find additional finance from somewhere.  Mr Frost then commented to those present that it would be difficult to obtain additional finance because Citibank, the present lender, was pressing fairly heavily and they did not have a business which was operating at that time.   He said that there was some talk about how the borrowings would be repaid but he cannot remember what was said.  He said that he thinks Mr Bechara gave an undertaking that the Micarone home would be paid off first if Mr Micarone agreed to the loan.

Mr Frost said that he was asked on a number of occasions during the meeting what he thought the insurance payout would be and he replied that he did not know and that they should speak to their lawyer about that issue.  In cross-examination he said he could have mentioned the amount of the claim as being around $400,000.00.   The following question and answer took place during cross-examination:

"Q     Did you tell the people who were present that there was a difference between the amount of the claim and the amount which the insurance company might pay?

A      Here again, I don’t know.  I am not sure.  I don’t know if it was even asked of me, I just don’t know."

He said he does not remember if anyone made any comment at the meeting which placed doubt on the success of the insurance claim.   He said he realised that the amount of the insurance payout was important to those who were providing security for the loan.  According to Mr Frost, Mr Bechara Senior was quite vocal for most of the meeting and at the conclusion of the meeting Mr Bechara agreed to the re-financing but Mr Micarone was hesitant and concerned.

Conclusions in relation to the April 1992 meeting

In my view Mr Frost agreed to attend the April meeting with the intention of performing a more important function than simply answering questions.   When his overall role throughout the entire period of this matter is considered it is clear that he went to considerable lengths to advance Tony Bechara’s financial interests.   This included assisting him in obtaining finance.   Immediately prior to the meeting Tony Bechara was in considerable financial difficulty and he could not generate a cash flow from the businesses in which he was involved to enable him to trade out of the difficulty.  He needed the assistance of his parents and parents-in-law.  Mr Frost was fully aware of Tony Bechara’s predicament and his desire to persuade his parents and parents-in-law to assist him.  I refuse to accept that he saw his role as simply answering questions.  I find that he agreed to assist Tony in persuading the senior members of each family to provide their properties as security.  Mr Frost was presented to the family as an expert in financial matters.   Not only could he provide advice on future borrowings but he was already advising on the fire claim. 

Looked at through the eyes of the plaintiffs the fire insurance claim was crucial to their decision to provide further security.  It offered a much more obvious resolution to the problem than the hope that the Hutt St business, if reopened, would generate sufficient funds along with the income from the other businesses to enable the proposed loan or loans to be serviced.   Mr Frost was aware of all these matters.  He showed no compunction in expressing confidence in the insurance claim to financiers and others.   I have no doubt that he expressed the same confidence to those present at this meeting.    I accept the evidence that he represented to them that the claim would be likely to return approximately $400,000.00.  In company with Tony Bechara he assisted in creating the impression that this would resolve the financial difficulties.

I should add that, even on his own version, he did not explain any of the difficulties inherent in the claim.   In view of the manner in which he prepared the financial statements on which the claim was based he must have been well aware of those difficulties.   Indeed on the facts as I find them to be he was aware that a claim for the amount sought on the basis on the accounts which he prepared was, in large part, no more than a sham.

I have reservations about the credibility of all the participants in the April meeting, although in varying degrees.   But I am satisfied on the balance of probabilities that Mr Frost advised the families that the claim would lead to a payout in the vicinity of $400,000.00 and that this would resolve the immediate financial crisis.  I prefer the evidence of the Micarones over that of the Becharas in relation to the claim by the Micarones that they were assured by Mr Bechara that their commitment would be paid out first.  I accept that Mr Bechara was reluctant at first to attend the meeting and had to be persuaded by Mrs Bechara.  I am not prepared to find that he had made up his mind about his own involvement to assist in the re-financing at the meeting, but he does not appear to have been as reticent about that matter as Mr Micarone.

The Micarones and Becharas agree to the first re-financing

Although he did not agree to assist in any re-financing at the family meeting at his house, Mr Micarone said that he did agree after a subsequent visit to his house by Mr Frost and Tony Bechara.   Mrs Micarone was the only other person present.  Mr Micarone said that on this occasion Frost and Tony told them again that when the insurance money came the Micarone debt would be repaid and the rest would go towards the debts of "Tony Bechara and his father".  On the occasion of this second discussion the sum of $450,000.00 was mentioned as the amount which would be borrowed.  In cross-examination he said the second meeting was perhaps three or four weeks after the first.  He said he agreed to the re-financing on this occasion when he was told that he did not have to worry because he "would be paid through the insurance company and things would be set right".

Mrs Micarone also gave evidence about this meeting.  She said that a week or two after the April meeting Mr Frost came to her home with Tony Bechara.   She said Frost and Tony repeated what was said at the earlier meeting.   They spoke of reopening the shop, paying the existing loans and putting all the properties together as security for a new loan.  They said that when the money came from the insurance claim the loan money secured by the Micarones’ security would be paid back.   Mrs Micarone said in evidence "they say the money the insurance of about $400,000.00 will pay back your house and you’re free".   Mrs Micarone said she thought the proposal was appropriate, but her husband would not agree.  She then referred to an occasion approximately a week later when Tony Bechara came and took her husband away for the purpose, she thought, of discussing the loan.   She said they eventually agreed to the re-financing.

Tony Bechara said he is fairly sure that he did not go back on the second occasion, but he did ask Mr Frost to do so in order to convince the Micarones to become involved in the re-financing.  He said Frost did convince them and he gave Frost a bottle of Scotch for his efforts.

I have reached the conclusion that there was contact with the Micarones, at least by Frost, on a second occasion and that Frost either repeated the arguments to convince them to take part in the re-financing or was a party to those arguments being repeated in his presence.  I am conscious of the different versions as to precisely how this took place, but I am satisfied that the Micarones have not invented a story that there was subsequent contact, that Frost was involved and that he convinced Mr Micarone.   I am satisfied that similar arguments were advanced on this subsequent occasion including that relating to the payment of the insurance claim and the use to which the monies would be put.  I also find that Mr Frost’s comments about the insurance claim and the confidence which he expressed in Tony’s business were major factors in influencing Mr and Mrs Bechara to agree to the first re-financing.

The visit to the Commonwealth Bank on 24th March 1992

It is convenient at this point to refer to a diary note made by Mr Trussell, the Commonwealth Bank Manager at the St Agnes branch on 6th April 1992.   In it he referred to a visit to the bank by Tony Bechara, his father and father-in-law.  The note reads:

1. Tony, his father and father-in-law calling on 24 March 1992 to put amended submission to us, viz

Reduce amount sought to $110,000 to re-equip and stock Hutt Street Deli.  Security offered the same, except prior charges to Citicorp would remain in place.  In addition, R/B/S over both shops offered.  Declined verbally without formal writings.

1. Tony rang us a few days later to seek a further amendment, viz still seeking $110,000 to re-open Hutt Street Deli, but funds to be borrowed in the names of his father and father-in-law.  Again declined without further consideration."

Mr Micarone said he does not recall precisely when he went to the bank, but he said that there was an occasion when he accompanied Mr Bechara and Tony Bechara to see the manager.   He said he did not take part in the discussion as he was not very interested in what was being said.   Mr Bechara Senior said that he had no recall of this visit to see Mr Trussell.  I have doubts about the genuineness of both of these versions and I have borne the evidence in mind when considering the credibility of both witnesses for other purposes.  However I do not regard the visit to the bank as being inconsistent to any significant extent with their versions on matters relevant to the major issues in the case.

The role of Adelaide Finance

The first re-financing was arranged through Mr Hartley, a director of Adelaide Finance. The company is a finance broker.  Mr Hartley was approached by Tony Bechara.   He said Tony Bechara told him that he wanted to repay existing borrowings and finance the reopening of the Hutt Street delicatessen.   He said that properties owned by his parents and parents-in-law would be available as security.   He presented Mr Hartley with valuations and financial statements in support of the loan.  All the information which was later included in the application forms for the loan was supplied by Tony Bechara.  The financial statements referred to an anticipated pay out of $450,000.00 from the insurance claim over the fire at the delicatessen.

I have explained in the introduction that the finance was obtained through various financiers.   The total finance arranged was approximately $420,000.00.  There were several loans to make up this amount. Mr and Mrs Micarone’s Blair Athol and Prospect properties were used to secure some loans and Mr and Mrs Bechara’s Hampstead Gardens property was used to secure other loans.  In the case of one loan all three properties were used as security.  The plaintiffs assumed a personal liability to repay the monies borrowed.  They were not guarantors in the strict legal sense.  The result was a complex loan structure which differed from the concept of one loan which had been discussed at the April meeting at the Micarone home.

One component of the series of loans was organised by a Mr Swincer and on 1st May 1992 there was a meeting at Mr Hartley’s office at Eastwood so that the mortgage application forms in relation to the "Swincer loans" could be signed.   It was attended by Mr and Mrs Micarone, Mr and Mrs Bechara, Tony and Amelia Bechara and Marisa Micarone.

Mr Hartley said that the majority of the discussion was with Tony Bechara who was the spokesperson for the group.  He said he went through with Tony the amounts that were being sought through Mr Swincer and the fact that the monies borrowed would be used to repay the existing Citibank loans.   His evidence continued:

"A     I explained that the securities would be mortgages over those particular properties to support the borrowings.

Q      Was anything discussed about the consequences if there was a default?

A      Yes, there was.  I explained that the properties would have to be insured throughout the life of the loan with the relevant lenders noted on the policies as being mortgagees, and that the loans would have to be repaid in terms of arrangements being made, and, if those repayments fell into default, that the properties could be taken and sold to recover the outstanding monies.

. . .

Q      Was anything said about the issue of solicitor certificates?

A      Yes, there was.  ...  I said that most lenders required third party mortgagors to attend to a solicitor’s office to have the mortgage document explained to them, and also that the solicitor was obliged to advise against executing such mortgages."

In evidence-in-chief Mr Hartley stated that he explained the amounts involved in the application, how the proceeds were to be applied, the interest rates which were being charged by Mr Swincer and the securities which were being offered.  However in cross-examination he said that this part of his evidence was not based on actual recollection but rather on what was his usual practice.

Mr Hartley said that Mr Bechara Senior made a comment that he thought the interest rate was too high and that this led to a "side discussion" between Tony Bechara and his father.   He said there was some antagonism between the two and he concluded that the people present had not been briefed fully by Tony before they arrived at his office.   He said Mr Micarone did not say anything, but nodded as though he was aware of what was happening during the meeting.   Tony Bechara did most of the talking apart from Mr Hartley.   The meeting took between an hour and an hour and a half.   According to Mr Hartley the signatories to the application were afforded an opportunity to read the documents but he could not say whether any of those present actually read them before they were signed.  There were four documents, one for each property put forward as security for the Swincer loans.  The only loan amount mentioned was that which reflected the total borrowings.  The individual amounts secured by the various properties were not discussed.  No-one was asked whether he or she understood the effect of the documents.

Under cross-examination Mr Hartley said that he did not form any opinion as to Mr and Mrs Micarones’ ability to read or understand English.  He could not recall Mr Micarone saying "Who will repay this money?  I’m a pensioner.  I’m retired", nor did he recall Tony Bechara saying that the borrowers could manage until the insurance money arrived.

Mr Hartley said that when he submitted the application to the lender he thought that the parents and parents-in-law were to be guarantors, not borrowers.   However Mr Swincer, who was acting on behalf of the lenders, told him that he would require the property owners to join in as borrowers.  It was not explained to the parents or parents-in-law that it was anticipated they would be borrowers and not guarantors.   Mr Hartley disagreed with the suggestion that the meeting was fragmented in that initially everyone came into the office, some then went out and they all came back to sign the documents.

Mr Micarone said that when he signed the applications in Mr Hartley’s office he realised they concerned the re-financing.  He said he thought the repayments were too high and he told Mr Hartley that he did not think they would be able to meet them. He said he thought there were two meetings with Mr Hartley at about this time.  He said his belief was that Adelaide Finance was the lender.   Mrs Micarone said that she was aware that the papers which she signed in Mr Hartley’s office were "to make another mortgage" but she said they were n
ot explained.  She said there was talking going on in the office, but she did not understand much of what was said.   She agreed that she left this sort of thing to her husband.  She said she can remember her husband saying "We are getting all this money.  How are we going to repay all this money?"   She said she thinks she can recall the sum of $450,000.00 being mentioned as the amount to be borrowed and she understood that the Becharas’ property would also be brought into the transaction.

Mr Bechara said that before he went to the meeting with Mr Hartley he had agreed in conversation with Tony that the Bechara property could be used as part of the security for the re-financing.   However the effect of his evidence is that almost nothing was said by way of explanation to the meeting as to the purpose of the mortgage applications which were to be signed.  He said that during this incident he spent a good deal of time outside with Mr Micarone while talking was going on inside.  Tony did most of the talking.  He said he does not remember Mr Hartley talking about the amount to be borrowed or the interest rates.

Mrs Bechara can remember going to Mr Hartley’s office to sign papers.  She said Mr Hartley did not speak to her, but spoke to the men.  She said she did  not hear Mr Hartley offer any explanation about the documents to be signed.   Marisa Micarone said she attended the meeting at Adelaide Finance, but she said she has almost no recollection of the discussion which took place.

Tony Bechara said that Mr Hartley told them the source of the borrowings and spoke about the interest rates and the amount of the repayments.  He said that he thought he and his father and father-in-law were present at this stage of the discussion.  According to Tony, Mr Micarone stated that he was a pensioner and asked how the money was to be repaid.  He said Mr Hartley also identified the lenders.

Generally, I prefer the evidence of Mr Hartley to that of the other witnesses who attended this meeting.  Mr Bechara, in particular, was unimpressive in his haste to deny that anything of much relevance was said during the meeting.  As for the others, however, I think it is understandable that they may have forgotten the details of this incident.  It must be conceded that the events of the meeting could well have been confusing to them.   Mr Hartley commented on the fact that it appeared they had not been properly informed of what was to take place prior to the meeting.  This appears to have led to the heated discussion between Tony and Mr Bechara.  The details surrounding the first re-financing are complex having regard to the number of financiers and the documents which were required in relation to particular properties and for different loan transactions.   The confusion continued after the meeting because everyone, including Mr Hartley, thought that the plaintiffs would be guarantors whereas they eventually assumed liability as borrowers.  The urgency of Tony Bechara’s financial situation and that of his wife and Marisa left little time to absorb the complexities of this series of transactions.  I should add, however, that I accept Mr Micarone’s evidence that he asked Mr Hartley where the money was going to come from to pay the instalments.

The information prepared by Adelaide Finance on the instructions of Tony Bechara for potential lenders in the first re-financing suggested a favourable lending proposition.  The application is an example of the material supplied to the financiers.   As part of the background it records the following:

According to Tony Bechara the papers were ready to be signed when he went into the dining room.  He said "let’s get this over and done with" and the papers were signed.   Mr Belperio gave no explanation of the content and effect of the documents except to say that they were the same as the mortgage papers signed on the occasion of the first re-financing.   Mr Belperio also said that it was a cheap interest rate and mentioned a figure of 8.00%.   Tony Bechara said that his parents and Mr Belperio left at the same time.   His parents had been there for about half an hour to 45 minutes.

Marisa’s friend, Tanya Zahra, was called by counsel for Mr Belperio.  She said she called on a social visit on this evening and sat in the family area watching television.   For all practical purposes the room in which she was sitting is part of a larger area which takes in the dining area at the other end.  She could see the dining room table from where she was sitting.  She said Mr Belperio arrived just after 10.00 pm.   All those who were to sign the documents were there by then.

She said Mr Belperio and the group sat around the dining room table as soon as he arrived.  She was watching television and could not hear the words which were being spoken, but she heard the background sound of conversation.  Mr Belperio appeared to be doing most of the talking.  It appeared from the inflection in the voices that questions were being asked.  The conversation appeared serious; she described it as "a very, very in-depth discussion". Ms Zahra said she stayed until 11.00 pm.  At one stage Marisa came out and apologised, saying it was taking longer than expected.  Marisa then returned quickly to the dining room.  She does not recall documents being signed by the time she left.   She does not remember coffee being served before she left.

I accept the evidence of Mr Belperio in relation to the signing of the certificate of acceptance and the execution of the Perpetual mortgage documents at the Micarone home.  I am satisfied that he was a truthful witness.   Care must be taken with his evidence in that, in some instances, he did not purport to recall actual events but rather relied on his usual practice.  In the event of any conflict between Mr Belperio and the other witnesses I prefer his evidence.   I do not accept that he offered no explanation at all as suggested by Mr Bechara Senior in particular.  To a limited extent he is corroborated by the evidence of Tanya Zahra.  There is further limited corroboration for his claim that he offered some explanation in the few notes which he made. I formed the clear impression from the Bechara and Micarone witnesses that they exaggerated this aspect of their case by down playing Mr Belperio’s involvement.

As will be explained in more detail later, Perpetual requires certificates of independent legal advice to be completed by solicitors in certain circumstances.  In the present matter Puma at first directed that no such certificates were needed.   However after the mortgages were executed a direction was given by Puma that the certificates would be required.  They were prepared by Puma’s solicitors and Mr Belperio was requested to sign them some time after the execution  of the documents.  He was handed a certificate in relation to each borrower.   He said in evidence that he perused the contents of the certificates and satisfied himself that he was able to certify as accurate the statements which they contained.  He signed the certificates on 21st December 1992. 

Each certificate included the following clauses:

1. I have been instructed by [BORROWER] of [ADDRESS] (the ‘Client’) to explain to him/her  the content and effect of the loan and security documents referred to in the schedule below (the ‘Documents’) relating to the financial accommodation and to be provided to the Client by Perpetual Trustees Australia Limited.

1. Before the Documents were executed by the Client and which execution I have witnessed, I:

(a)     read over and explained the Documents to the Client;
                  and
(b)     examined the Client touching his/her knowledge of the Documents.

1. To the best of my knowledge and belief and in my opinion:
            (a)     the Client appeared to understand the true import and effect of      the Documents, including the rights of Perpetual Trustees Australia Limited on default, the method of calculation of, and the implications in relation to,  the costs payable by the Client on voluntary prepayment and early termination under the Documents, and the nature and extent of the legal liability and obligations which the Documents place upon him/her;  and

(b)     the Client has freely and voluntarily executed the Documents.

1. I regularly advise clients in relation to agreements and securities similar to the Documents and I am qualified to fully explain the import and effect of the Documents to the Client.

1. I have been engaged by the Client in advising him/her and have given this Certificate independently of all other parties to the Documents."

On the occasions on which Mr Belperio gave advice to the plaintiffs and witnessed their signatures, he had not been asked by them to attend. The request came from Tony Bechara. However Mr Belperio conceded in evidence that he assumed the role of legal adviser to the plaintiffs and he took his instructions "to be implied". In these circumstances the element of proximity sufficient to attract the law of negligence was clearly present. (Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348 at 363). What then was the content of the duty of care?

Mr Belperio said in evidence that he saw his role as being mainly to look after the interests of the parents.  He said he told Mr Micarone that he could not advise on the insurance claim.  He also said that he told Mr Micarone that he should get the agreement for his home to be paid off first put in writing.  When asked to explain his understanding of his own role in cases such as the present he said:

"To explain the document and to ensure that people appeared to understand it, and that there was no undue influence or pressure being placed upon those signing the form.  Broadly that is what I now recall my understanding and my obligations to be at the time."

He added:

"I was aware of McNamara’s case and I was aware of the fact that is there was some suggestion that the solicitor should give some sort of financial advice.  Frankly, I did not consider myself qualified or experienced to do that, and I considered that I had discharged my obligation in relation to that issue by advising the client that I wasn’t an accountant etc and advising them to see an accountant.  I accept, though, that most clients chose not to see accountants and maybe I should have forced them, I don’t know."

The certificates of independent legal advice which Mr Belperio signed subsequently stated that he had read over and explained the documents; that the clients appeared to understand them; and that they freely and voluntarily executed them.

In Hawkins v Clayton (1988) 164 CLR 539 Deane J was of the view that the liability of a solicitor to his or her client was not to be regulated entirely by the contract of employment. He said (at 574):

"The emergence and development of the modern law of negligence, particularly since the decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, inevitably led to a reappraisal of the isolation of a solicitor from the reach of the ordinary law of negligence in relation to his professional dealings with a client. The clear trend of modern authority is to support the approach that the duty of care owed by a solicitor to a client in respect of professional work prima facie transcends that contained in the express or implied terms of the contract between them and includes the ordinary duty of care arising under the common law of negligence..."

After observing that the content of the duty of care in a particular case is governed by the relationship of proximity, his Honour continued (at 579):

"The relationship of solicitor and client is, as has been seen, a relationship of proximity which ordinarily involves the combination of those elements with respect to foreseeable loss which may be caused to the client by the performance of professional work.  It is a relationship of proximity of a kind which may well give rise to a duty of care on the part of the solicitor which requires the taking of positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client.  Whether the solicitor-client relationship does give rise to a duty of care requiring the taking of such positive steps will depend upon the nature of the particular professional task or function which is involved and the circumstances of the case."

The nature of Mr Belperio’s task in the present case is to be implied from the circumstances and, as no direct instructions were issued, it is an important starting point to have regard to the task which he assumed.   Although signed in retrospect, the certificates of independent legal advice are of significance in that Mr Belperio agreed that they accurately summarised his role as he understood it at the time he advised the plaintiffs.   They go beyond mere explanation of the documents and refer to independent advice and the requirement to certify that the client has freely and voluntarily executed the documents.

Although McNamara v Commonwealth Trading Bank of Australia (1984) 37 SASR 232 was a case dealing with s44 of the Consumer Transactions Act, 1972, the advice contemplated by that Act is of the same type as that referred to in the certificates which were signed by Mr Belperio. Section 44 provides that the category of agreement earlier described in the section shall be void -

"Unless the agreement is executed by the guarantor in the presence of a legal practitioner instructed and employed independently of the credit provider or mortgagee and the legal practitioner certifies in writing upon the agreement -

(f)     that he is satisfied that the guarantor understands the true purport and effect of the agreement;
and
(g)     that the guarantor has voluntarily executed the agreement in his presence."

In McNamara’s case King CJ referred to the nature of the advice to be given in such a case (at 241):

"The section requires that the practitioner certify ‘that he is satisfied that the guarantor understands the true purport and effect of the agreement’.  This demands a careful explanation to the guarantor of the terms of the document and its legal effect.  Although it is sufficient for the validity of the guarantee that it be executed by the guarantor in the presence of the legal practitioner and that the legal practitioner certify as required by the section, the duty of a solicitor to a client who consults him for advice prior to signing a guarantee extends much further.  The solicitor should raise with the client questions relating to the prudence of entering into the guarantee and should ascertain whether the client wishes to be advised as to such questions.  The client may, of course, indicate that he does not wish advice as to those matters and that he is prepared to rely upon his own judgment.  But unless the client so instructs the solicitor, the instructions from the client should be regarded as extending to advice on all matters relating to the guarantee, including the wisdom of entering into it from a practical point of view.  The state of the financial affairs of the principal debtor should be discussed as well as the extent of the assets of the client.  A client whose assets are few and who will be putting the whole of his assets, perhaps including his home, at risk obviously needs careful and perhaps quite forthright advice.  The need is even greater where, as so often is the case, the affairs of the principal debtor are precarious.  Solicitors undertaking to advise clients in relation to guarantees would do well to study the cases as to the type of independent advice which is required to rebut a presumption of undue influence.  They should remember, among other things, that there is a potential conflict of interest between the principal debtor and the prospective surety.  Frequently the debtor who desires to be guaranteed is a near relative and the prospective surety is under considerable emotional pressure.  It is essential that the solicitor act and be understood to act solely for the prospective surety.  The section requires that the solicitor be ‘instructed and employed independently of the credit provider’.  Sound professional practice requires also that the solicitor be and be seen to be free to advise the prospective surety unencumbered by any ties to the principal debtor.    The solicitor, moreover, should be at pains to ensure that his client’s decision is as free of the influence of the debtor as he can arrange.  I was disturbed to read in the present case that the principal debtor, a son, was present in the office of the solicitor when he was advising the appellants as to Ex. P. 1.  Sound professional practice requires that the debtor should not be present when the solicitor is advising the client and receiving his instructions."

In Tarzia v National Australia Bank (Federal Court of Australia No. G85 of 1994, 12th October 1995) the court pointed out that:

"It is not generally the task of solicitors to explain the financial result or prudence of the transactions involved in documents they are merely instructed to explain. Unless they undertake the task of doing so, or are specifically retained to perform it and supplied with the necessary information and documentation, they will not be negligent for failing to do so: Hogan & Anor v Howard Finance Limited & Anor [1987] ASC 55-594 per Hope JA at page 57,539; O’Brien & Anor v Hooker Homes Pty Ltd & Ors [1993] ASC 56-217 at page 58,270."

However the court went on to state:

"In certain situations it may be negligent of a solicitor not to ensure that his client has good financial advice, particularly when the client is at a disadvantage with respect to the other parties to the transaction, and where the results are potentially disastrous for the client: McNamara v Commonwealth Trading Bank of Australia [1984-5] 37 SASR 232 at 241 per King CJ."

It is obvious that Mr Belperio should not have been expected to give detailed advice on matters such as the insurance claim and the various financial aspects of the transaction.  But as McNamara’s case makes clear, the giving of independent legal advice, particularly in cases where persons may be under a disability of the type discussed in Amadio’s case, will often necessitate directing  attention to the prudence of entering into the transaction and explaining why it may be imprudent.   Furthermore, it is clearly within the solicitor’s duty in such cases to give consideration to the possibility of influence from persons who stand to benefit from the transaction.

Mr Belperio knew the Micarone family and he had some knowledge of the Bechara family.   He was aware of the level of understanding which they had of the English language.  He knew that the transaction was similar to that of a guarantee in that there were considerable dangers associated with the parents and parents-in-law entering into it.   Indeed he told them that it was dangerous, but he made no investigation as to the particular circumstances of the transaction or why the plaintiffs wished to enter into it and whether there might have been any influence or pressure brought to bear on them.  In the latter respect he did no more than observe that there did not seem to be any evidence of influence at the time the documents were signed.  When Mr Micarone raised two issues which were obviously of importance to him, he was told that he should seek advice but no suggestion was made to the effect that the document should not be signed until such advice had been given.  Indeed the document which was signed provided to the contrary of what Mr Micarone understood to be the position in relation to the early release of his property.

It is obvious that Mr Micarone was concerned about the insurance claim and he first raised the issue with Mr Belperio when some of the documents for the first refinancing were being executed.  When Mr Belperio referred him back to the lawyer acting in the insurance claim he said Mr Micarone appeared "uneasy or disappointed".  When, according to Mr Belperio,  Mr Micarone again raised the topic at the execution at the Perpetual documents, no enquiry was made as to whether he had received independent legal advice and no suggestion was made to him that the documents should not be signed without the advantage of such advice.   No discussion took place as to how important the insurance claim was in relation to the decision to enter into the transaction or that it would be dangerous to place too much reliance on the insurance company agreeing to pay the amount claimed.   This is an issue which affected all parties, although only Mr Micarone raised the topic.  It was not discussed directly with the Becharas.

There was a further shortcoming in the manner in which Mr Belperio went about his task.   He acknowledged that he assumed the function of giving independent advice.  He said that when he signed the certificates he took the reference to independent advice to mean independent of the financiers. He said he saw it as his duty to issue warnings to the plaintiffs because they were putting up their properties as security for their children’s business venture but he conceded that that his explanations were given to the group as a whole.  He accepted the proposition put to him in evidence that he should have separated the parties and advised them separately. 

It is not difficult to feel sympathy for Mr Belperio in the position in which he was placed.  He was undertaking this responsibility as a favour to the family.  He appears not to have had access to the documents prior to any of the occasions on which he gave advice.   The documents themselves were difficult to explain to this group of people who had a limited knowledge of English and limited business experience.  One of the group was illiterate. I have found that the nature of the documents was explained to the group and Mr Belperio told them they were dangerous documents to sign.  He went further and advised against signing the documents.   However he gave this advice on the basis that  undertakings of this type are, by nature, dangerous.  He did not address the considerations which were crucial to the present case, namely, the improvident nature of this particular transaction, the fact that as pensioners they had no income to assist with repayments, the question as to whether they were putting their faith in the insurance claim and how unwise that might be, the danger in the case of the Micarones of signing the agreement without any binding agreement that their properties would be paid off first and whether or not the children had pressured them into the transaction.   The plaintiffs were unlikely to raise this last mentioned issue for discussion or talk freely about it when the two children were present and Tony Bechara had arranged for Mr Belperio to provide the legal advice.  The legal effect of the transaction and the fact that it was dangerous to sign documents of this general nature was only a part of the advice rendered necessary by reason of the position in which the plaintiffs were placed.

In my view Mr Belperio was under a duty of care by reason of the relationship of proximity which arose when he assumed the responsibility to give legal advice appropriate to the situation. For the reasons which I have given, the legal advice fell significantly short of what was required in the circumstances and, in my view, amounted to a breach of the duty of care. I am of the opinion that the breach had the effect of making it more likely that the plaintiffs would enter into the agreement than would have been the case if the issues to which I have referred had been properly canvassed. I repeat that this would not have required extensive advice about matters beyond Mr Belperio’s knowledge and experience. The improvident nature of this transaction was very close to the surface; it would not have been a difficult task, for example, to warn about reliance on the insurance payout. At the very least I think that a solicitor in Mr Belperio’s position should have told the plaintiffs that he would not witness the execution of the documents until they had the opportunity to go away and receive independent legal advice on the insurance policy and other financial matters. In the result, I have reached the conclusion that Mr Belperio, although he acted with the best of intentions in difficult circumstances in endeavouring to assist the plaintiffs without remuneration, was negligent in failing to provide essential advice which was called for in the circumstances. The failure to give the advice was causative in the sense explained in March v Stramare (1991) 171 CLR 506 and I am of the view that the plaintiffs’ claim against Mr Belperio has been made out. In my view the plaintiffs were not guilty of contributory negligence at any stage of the first or second re-financing.

Events subsequent to the execution of the Perpetual mortgage

The system put in place by Perpetual and Puma includes, as part of the procedure, the appointment of "approved solicitors" with defined duties.  The approved solicitors in this State were Lempriere Abbott McLeod and the solicitor from that firm who handled the matter was Mr Greg McLeod.   Approved solicitors were issued with a "Solicitors’ Pak" which sets out in some detail the duties of solicitors and the procedures to be followed by them in acting on behalf of Perpetual.   An approved solicitor is required to provide a certificate in terms set out in a schedule to the "Solicitors Pak" advising that various procedures have been undertaken and checks made.  Included in these instructions under the heading of "Additional Obligations of Solicitors" is the following instruction:

"4.1.1        Certificate of Independent Legal Advice

A certificate of independent legal advice in the form contained in Attachment III must be obtained for all Guarantors unless specifically waived by the Manager."

A pro forma certificate is contained in a schedule to the "Solicitors Pak".   I have referred already to the relevant paragraphs. 

Mr McLeod forwarded a memorandum to Puma on 14th December 1992 touching on a number of issues relating to the transaction. He made the following comment concerning the provision of certificates of independent legal advice:

"Please confirm that no independent legal advice certificates are required (loan is to refinance non-commercial loans, & 6 of the 7 debtors are the mortgagors)".

Mr Brennan wrote "O.K." next to this part of the memorandum when he received it.  However on 21st December 1992 he sent the following facsimile transmission to Mr McLeod:

"Further to previous discussion I now advise that Certificates of Independent Legal Advice must be held for all borrowers.  This is a specific condition of the approval.  I apologise for my earlier advice however the condition must stand."

Mr Brennan said in evidence that one of his superiors at Puma, Mr Ganis, had decided to include this as a requirement despite the fact that the plaintiffs  were not guarantors.  Mr Belperio said that he perused the contents of the certificates and satisfied himself that he was able to certify as accurate the statements which they contained.   He signed them on 21st December, 1992.

Settlement was postponed on two occasions.  On the second occasion when settlement was scheduled for 22nd December 1992 the delay was caused by the fact that no communication had been received from AGC, one of Tony Bechara’s creditors.   Eventually a credit reference was obtained from AGC which was in unfavourable terms.  Mr Brennan said that officers at Puma gave some consideration to whether they should proceed with the transaction.  Eventually it was decided to go ahead, but additional conditions were imposed on the borrowers.   These conditions were set out in a letter dated 4th January 1993 from Mr Brennan to IF&I in the following terms:

"We refer to recent discussions in regard to the above matter and wish to formally advise that the following additional conditions will now apply to this facility.

1. The outstanding insurance claim on the Hutt Street Delicatessen is to be settled within sixty (60) days of the settlement of this facility.  The borrowers are to sign an irrevocable undertaking to this effect.

1. Upon payment of the aforementioned insurance claim the loan to valuation ratio is to be reduced to 75% by the lodgement of funds.  Such funds, equating to $70,000, are to be held on deposit with Macquarie Bank Limited (Perpetual Trustees Australia Ltd will be sole signatories to the account) with full right of set-off in the event of the borrower being in default for any reason.

The Trustees solicitor, Lempriere Abbott McLeod are to draft necessary documentation to the satisfaction of PUMA Management Limited.  The cost of these amendments are to be paid by the borrowers."

Mr McLeod prepared an extension of mortgage incorporating these additional requirements and the extension was executed by the parties in the circumstances which are referred to below.  Settlement took place on 28th January 1993.       By early April the loan was in default.   The $70,000 had not been deposited with Macquarie as required by the terms of the mortgage and an extension had to be granted by Puma.   Debit authorities were declined by the bank.

Tony and Amelia Bechara sold the property at 390 Regency Road Prospect on 22nd July 1993 for $128,000.  As the property was one of those which had been mortgaged as security for the loan, the approval of Perpetual  was necessary for settlement to proceed.   Perpetual agreed that the property could be released from the securities subject to conditions which included:

1. The payment to Perpetual of a "re-arrangement" fee of $1,000 plus a penalty fee.

1. Proceeds of sale of $107,500 along with the sum of $60,000 currently on deposit with Macquarie was to be used to reduce the loan.

1. The interest rate would be increased by 1%.

1. A new loan facility of $472,500 would be drawn down simultaneously with the discharge of the current loan.

1. The security would consist of the four remaining properties.

These changes were effected by the execution of a second extension of mortgage in mid September 1993.  The signatures of the seven borrowers were witnessed by Mr Peter Scragg, solicitor.  Not long after settlement on the Regency Road Prospect property, the loan facility again fell into arrears and possession proceedings were commenced.

The signing of the first extension

I have observed that the first extension of mortgage was occasioned by an unfavourable credit reference coming to the attention of the lender prior to settlement.  Additional covenants were added requiring settlement of the insurance claim within 60 days of the date of settlement of the advance and the deposit of $70,000 after settlement of the claim as security.  The documents appear to have been executed by the borrowers on 17th January 1993.

Mr Belperio said that someone, he thinks either Tony or Marisa, requested him to witness the signing of the extension.  He rode to the Becharas’ home one evening on his motor bike.  The borrowers were present and they sat at a table in the dining area.  Mr Belperio said he was presented with the extension of mortgage documents.  He paraphrased them for the group.  He said he expressed his concern that, in his view, the amendments removed control of the insurance claim to the financiers in that it had to be settled within a specified period of time.   Apart from expressing these concerns he did not issue a warning about the documents as he did not think this was appropriate.  The documents were executed in his presence.  He said he was at the home for approximately three-quarters of an hour and all the borrowers appeared to understand what he said.

Mr Belperio made some notes of his involvement in the execution of the extension documents and they have been tendered in evidence.  Some of the notes are written on a copy of the extension of mortgage signed by the   Becharas.  Adjacent to the covenant requiring settlement of the insurance claim within the time specified, Mr Belperio wrote "could be construed that they to settle on unfavourable basis".   He assumed this was written on the night the documents were signed.  On another part of the document he wrote "not - (indecipherable) would jeopardise client posit - obligation to accept whatever".

Mr Belperio said that on the following day he rang the financier’s solicitor, Greg McLeod.  He made a short note of the topic discussed during the conversation.  He said he told Mr McLeod that he would seek further time to allow the insurance claim to be settled.   Mr McLeod said he was not confident that any further time would be granted.  Mr Belperio said the conversation with Mr McLeod confirmed his view that the families would be adversely affected in their settlement negotiations.  He said he then rang Tony Bechara and advised him not to proceed.  He also rang Marisa and gave her the same advice.  He told her to advise all the others.  He made a note of these telephone attendances.  It must be noted, however, that he did not give advice directly to the plaintiffs and relied instead on a message being conveyed by a person who might reasonably have been regarded by Mr Belperio as having an interest in the document being executed.

Mr Micarone said he went to the Becharas to sign the first extension.   He said that all he knew was that the document had to be signed in connection with the re-financing.   He was told where to sign it.  No explanation of its contents was given by Mr Belperio.   He was not told of the purpose of the amendments.  He has no recall of Mr Belperio saying he was concerned about any of the amendments.   Mrs Micarone denies being given any information about the document.  She said she was told to sign because the document was necessary for the re-financing.

Mr Bechara’s evidence is similar to that of the Micarones.  He said he was given no explanation of the extension documents.  In examination-in-chief he said he was told by Tony or someone else that the renegotiation of the terms of the mortgage required the insurance claim to be settled within 60 days.   In cross-examination he denied that he was advised of this and said that he may not have understood the question put to him in examination-in-chief.   Mrs Bechara said in evidence that Mr Belperio did not explain the extension documents.   However she said her husband told her that the claim had to be settled within the 60 day period.  She thought he had told her this before the signing of the extension documents.  

Tony Bechara said he could not recall the occasion on which the extension documents were signed.  He said he thought he told his parents-in-law that Perpetual wanted $60,000 in 60 days.  He said he could not recall whether or not Mr Belperio said that the document was an extension to the Perpetual mortgage.   Marisa Micarone said she had no recall of the occasion on which the first extension documents were signed. Mr Belperio did not have any involvement in the loan transactions after the events which I have just summarised.

In my assessment Mr Belperio gave an account of the signing of the first extension of mortgage which was more reliable and accurate than the accounts given by the other witnesses.  However the fact that this onerous condition, the performance of which was out of the control of the plaintiffs, was imposed after the loan agreements had been signed and was accepted without demur by the plaintiffs,  provides an insight into their vulnerable situation.   It is my view that the imposition of such a condition and the retrospective requirement for certificates of independent legal advice had much to do with the attitude of the lender in satisfying its procedure and generally ensuring that it fashioned a product which would be attractive to a purchaser in due course.  This commercial motive is quite legitimate, but in the present case it was achieved at the expense of people sorely in need of proper advice.

The signing of the second extension

The second extension of mortgage followed upon the sale by Tony and Amelia Bechara of their Salisbury property.  As this property was no longer available as security, the loan was reduced to $472,500 and the interest rate increased by 1.00%.   Mr Scragg was the solicitor who witnessed the extension documents on this occasion.   He stated in evidence that on a Friday in September 1993 (a cost entry indicates it was 10th September 1993) Tony and Amelia Bechara came to see him with some documents for execution.   He was aware of the sale of the Salisbury property because he had recommended it as a means of relieving the financial burden imposed by the borrowings.  The documents included two certificates of independent legal advice which the lender required in relation to Tony and Amelia.

Mr Scragg said he explained the extension of the document to Tony and Amelia.  His evidence was as follows:

"The document that they had to sign was only a two or three page document, which, effectively, as I recall, extended the mortgage, but released from the mortgage one property, being a property at Salisbury.  I discussed with them the effect of that.  I said to them that ‘What’s happening is you still remain liable under the original transaction, but that securities available are being reduced from five to four, and that you’ve got to be satisfied that the sale price you’ve got for this land is the right price because you are still liable in respect of the balance of the debt’.  I had advised, previously, Tony that he should make the sale.  I explained to them that, by signing the document, they consented to the transaction in question; in other words, security being released, and the terms on which it was being released, for the price it was being released, and the balance of the properties were still liable to satisfy the facility in those terms."

Mr Scragg said that after explaining to Tony and Amelia their obligations, he asked them questions and was satisfied that they understood the explanation.  He signed the two certificates of independent legal advice.  On the same day he witnessed the signatures of the Micarones, Becharas and Marisa to the documents.   He said that took place at his office.  As no certificates of independent legal advice in relation to Tony’s parents and parents-in-law had been sent to him, he did not proffer an explanation to them as to the nature and purpose of the extension document.

On the following Monday Mr Scragg was advised that certificates of independent legal advice were necessary in relation to the other borrowers.  He said he told Tony Bechara that he could not simply sign the certificates; it would be necessary for him to go out and speak to these people in order to satisfy the requirements set out in the certificates. Cost entries in Mr Scragg’s records refer to these attendances.

Mr Scragg said that on the Tuesday Tony drove him to the Micarones house at Prospect.  He took with him a fresh annexure for signing.  The annexure contained the additional covenants relevant to the extension of mortgage.  Mr Scragg said he went through and paraphrased the conditions except clause 8, a definition clause.  He said he satisfied himself that they understood his explanation.  He said he was there for half to three-quarters of an hour.  Mr Scragg said that after the Micarones signed the extension he signed the certificate of independent legal advice.

According to Mr Scragg, Tony then took him to the Bechara home.   Mr Bechara was at home.  He said he repeated to Mr Bechara the explanations he had given to the Micarones.   He said he satisfied himself, through questioning, that Mr Bechara understood what was involved in the signing of the document.   Mr Bechara signed the extension.   Mr Scragg said he was at the home for more than half an hour.   He then went on with Tony to the Valley View fish shop where Mrs Bechara was working.  He repeated the explanations  he had earlier given and Mrs Bechara signed the extension.   Mrs Bechara asked what was going to happen to the surplus monies which would be left over from the sale of the Salisbury property and Mr Scragg answered her on the basis of information given to him by Tony Bechara.  In cross-examination Mr Scragg said that he told Mr Bechara that he and his wife were responsible for the whole of the remaining debt which was secured against the balance of the properties.   Mr Scragg also identified a diagram which he said he drew to explain to the Micarones the fact that one of the properties would be removed from those securing the loan.

Mr Micarone said that when Mr Scragg came to his home on this occasion he said he was in a hurry.  He told Mr Micarone that he had to sign the document in order to release one of the properties.  He said that each property which was sold would reduce the loan and he demonstrated it with a diagram.  Mr Micarone said that Mr Scragg did not read through the document.  Mrs Micarone said that Mr Scragg came to their place to get the extension document signed.   He said he was in a hurry and he was there for only five minutes.   Mr Scragg did not explain the document.  He said that every time one of the houses was sold the effect was to reduce the amount of the loan.

Mr Bechara recalled the occasion when he signed the second extension at his home.  Mr Scragg arrived with Tony.  Tony told him that he had to sign the document; it had something to do with insurance.   Mr Scragg said nothing other than to exchange a greeting.  They were there for only ten minutes.  No explanation was given as to the effect of the document.  Mrs Bechara said that Mr Scragg brought a document for her to sign when she was working at Valley View.   He told her to sign it and she asked him what she was signing.  He did not give her an explanation but said her son would explain it to her.  Tony Bechara said Mr Scragg offered no explanation to his parents or parents-in-law about the document to be signed and Marisa said she did not recall signing this document before Mr Scragg.  I accept Mr Scragg’s evidence where it differs from that given by the plaintiffs and Tony Bechara.   The fact that Mr Scragg made another visit to the plaintiffs after being advised of the requirement for certificates of independent legal advice supports his claim that the extension was explained on the second visit.

Summary

I find that the plaintiffs are entitled to have the Perpetual transaction set aside by reason of the unconscionable conduct of the first defendant.  The plaintiffs are also entitled to relief against the second defendant by reason of his misrepresentations which induced them to enter into the loan transactions, in particular, the Perpetual transaction.  Breach of duty of care has been established against the third defendant; the fourth and fifth defendants are liable also for that breach by reason of the partnership between them and the third defendant.

It was agreed at the hearing that I should refrain from making any orders until I had heard further submissions on damages in the light of my findings.  I will also hear submissions on the relief sought in the contribution notices.  The order I will make at this stage is judgment for the plaintiffs in each action against all defendants on the causes of action identified in these reasons.