Minumbra Pty Ltd v AM Lancewood Investment Nominees Pty Limited

[2015] NSWSC 302

Supreme Court

New South Wales

Medium Neutral Citation:	Minumbra Pty Ltd v AM Lancewood Investment Nominees Pty Limited [2015] NSWSC 302
Hearing dates:	9 March 2015
Date of orders:	31 March 2015
Decision date:	31 March 2015
Jurisdiction:	Equity Division
Before:	Young AJA
Decision:	1. The plaintiff’s claim wholly fails. 2. The proceedings must be dismissed with costs. 3. The exhibits may be returned after 28 days.
Catchwords:	CONTRACTS – Guarantees – whether guarantee subject to a liability cap a guarantee of part – whether guarantor has rights of subrogation before lender fully paid
Cases Cited:	Barclays Bank Ltd v T.O.S.G. Trust Fund Ltd [1984] AC 626 C & J Clark Ltd v Inland Revenue Commissioners [1973] 1 WLR 905, 911 Challenge Bank Ltd v Mailman (1993) NSWCA 54 (BC9301897) Ellis v Emmanuel (1876) 1 ExD 157 Goodwin v Gray [1874] 22 WR 312 Harding v Coburn [1976] 2 NZLR 577 Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank Plc [2002] EWCA Civ 691 Mailman v Challenge Bank Ltd (Cohen J, 10 April 1992, NSWSC) (BC9201948) Re Bland Bros v The Council of the Borough of Inglewood (No 2) [1920] VLR 522 Re Butlers Wharf Limited [1995] BCLC 43 Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank Plc [2002] EWCA Civ 691
Texts Cited:	Pearce & Geddes “Statutory Interpretation in Australia” para 12.4 (LexisNexis Butterworths, 8th Edn, 2014)
Category:	Principal judgment
Parties:	PLAINTIFF - Minumbra Pty Ltd FIRST DEFENDANT - AM Lancewood Investment Nominees Pty Limited (ACN 158561365) as trustee for the Lancewood Investment Trust and as trustee for the Lancewood Investment Trust 2 SECOND DEFENDANT - Minumbra Lancewood Pty Ltd (ACN 156 281 711) as trustee for the Minumbra Lancewood Trust (Receivers and Managers Appointed)
Representation:	Counsel: Plaintiff – G Curtin SC; SR Derham & EB Cowpe Defendant 1 – GKJ Rich SC & BK Lim Solicitors: Plaintiff – James Beatty & Associates Defendant 1 – Arnold Bloch Leibler
File Number(s):	2014/254650

Judgment

1. HIS HONOUR: The present dispute is over the question as to whether in the facts of the present case a surety is able to be subrogated to the remedies of the principal creditor even though moneys are still owed to the principal creditor.

2. Essentially the vital point is whether the surety has granted what Mr Rich SC termed a “part guarantee” (under which the surety only guarantees part of the debt owed to the principal creditor) or is it what he referred to as a “limited recovery guarantee” (whereby the surety guarantees the entire debt but limits the amount which the principal creditor can actually recover from the surety under the guarantee)? I am indebted to Mr Rich for the terminology and I will use it in the judgment.

3. The case came on for hearing before me on 9 March 2015. Mr G Curtin SC with Mr SR Derham and Mr EB Cowpe appeared for the plaintiff and Mr GKJ Rich SC and Mr BK Lim appeared for the defendants. Both sets of counsel put in very helpful detailed written submissions as well as a very clear set of oral submissions and I am indebted to them for that.

4. The plaintiff is a guarantor, the defendant is the principal creditor which loaned the Borrower (the entity whose liability was partially guaranteed) approximately 13 million dollars. Although there are two defendants, which are associated companies, it is convenient merely to refer to them as “the defendant” or “the Lender”.

5. The plaintiff seeks a series of declarations as to its rights under a collection of deeds made on 3 July 2012.

6. There are three questions for me to address:

1.   Is the plaintiff’s guarantee a part guarantee or a limited recovery guarantee?

2.   Does the plaintiff have rights of subrogation which prevail over the defendant?

3.   Does the plaintiff have a proprietary interest in any surplus?

7. The background is that a very complicated series of transactions were entered into between a group of companies controlled by the Knight interests and a group of companies controlled by the Ashe Morgan Group. A single venture company, Minumbra Lancewood Pty Ltd, which is half owned by each of the interests I have named above and which was formed to purchase and operate a remote residential facility in Queensland (“the Village”). The basic documents refer to this entity as “the Borrower” and I will do so also. It would seem that the facility was to provide residences for people involved in the mining industry who needed temporary accommodation. Unfortunately the venture failed, why, I am not told, nor do I need to know. The venture was financed by the defendant which is an Ashe Morgan company.

8. The venture was the subject of a series of deeds between the companies. These included the securityholders deed PX01 which dealt with the overview of the venture and most importantly for present purposes the unit holder loan agreement and the deed of guarantee.

9. Although there is, in a loose sense, a cooperative venture between the Knight interests and the Ashe Morgan interests, the deeds specifically say, vide clause 30.3 of the securityholders deed, “the parties acknowledge and agree that nothing in this deed will constitute one party the partner of, employee of, agent of or joint venturer with the other…” Similar provisions occur in the other deeds.

10. I now turn to address Question 1.

Question 1

11. Under the loan agreement the Lender was to provide a secured loan to the Borrower. Under the deed of guarantee the Knight interests agreed to guarantee the plaintiff Borrower’s obligations subject to clause 3.1 which I will set out shortly.

12. Clause 2.2 of the deed of guarantee provides “each guarantor, jointly and severally, guarantees to the Lender the due and punctual payment by the Borrower of the Guaranteed Money”.

13. Clause 1.1 contains numerous definitions including the following:

“Guaranteed Money” means, subject to clause 3.1, all amounts (including damages), that are payable, owing but not payable, or that otherwise remain unpaid by the Borrower to the Lender under the Loan Agreements, including by way of principal, interest, fees, costs, charges, indemnity or damages, and all moneys which the Guarantor becomes actually or contingently liable to pay, for and on behalf of the Borrower.

“Guaranteed obligations” means the obligations of the Borrower to pay the “Guaranteed Money”.

14. I should note here that although there was more than one guarantor for all intents and purposes the only person whose rights are in question is the plaintiff.

15. Clause 3.1 reads as follows:

Clause 3.1 Liability Cap

a Despite any other provision of this Deed, the maximum amount that the Lender may finally recover and receive from the Guarantors is aggregate under this Deed shall be an amount equal to the Liability Cap.

b For the avoidance of doubt, clause 3.1(a) does not limit the right of a Lender to recover any costs or expenses the Lender may incur as a result of taking enforcement action against the guarantor for failure to comply with its obligations under the deed.

16. “Liability Cap” is defined as meaning:

the amount equal to the sum of:

a   50% of the outstanding amount… as at the date of any demand for payment under the loan agreement; and

b   50% of any accrued but unpaid interest of the outstanding amount from the date of demand under the loan agreement until the amount is paid under this deed or the loan agreement.

17. “Outstanding amount” is defined in the loan agreement which definition is picked up in the deed of guarantee as meaning:

the principal sum and any accrued but unpaid interest and all other monies owing by the Borrower to the Lender under or in connection with this agreement from time to time.

18. I should also note other clauses of the deed of guarantee.

2.7   Limitations on Guarantor's rights

Until the Guaranteed Obligations have been irrevocably paid and performed in full, no Guarantor may:

(a)   share in any guarantee, Encumbrance or money received or receivable by the Lender in relation to the Guaranteed Obligations, or stand in the place of the Lender in relation to any guarantee, Encumbrance or right to receive money;

(b)   take any steps to enforce a right or claim against the Borrower relating to any money paid by the Guarantor to the Lender under this Deed;

(c)   have or exercise any rights as surety in competition with the Lender;

(d)   receive, claim or have the benefit of any payment (including a payment under a guarantee), distribution or Encumbrance from or on account of the Borrower, another Guarantor or any other person;

(e)   in reduction of its liability under this Deed, raise a defence, set off or counterclaim available to itself, the Borrower or a co-surety or co-indemnifier against the Lender or claim a set off or make a counterclaim against the Lender; or

(f)   claim to be entitled by way of contribution, indemnity, subrogation, marshalling or otherwise to the benefit of any agreement or document to which the Lender is a party.

….

2.11   Extent of Guarantor's liability

This guarantee extends to all the Guaranteed Obligations and any other money payable under this Deed.

19. There is no dispute that an “insolvency event” as defined occurred when the Borrower had a receiver appointed to it.

20. The guarantor paid to the defendant $6,631,933.50 on 30 June 2014 being 50% of what was then owed by the Borrower to the Lender. A deed of release was then entered into, which I will consider shortly.

21. The receivers still hold the Village unsold. It is likely to produce some funds though it would seem that the amount that will be produced will not be as much as the 50% of the debt still owing. The plaintiff says that as a person who has entered into a part guarantee it is entitled to rank equally with the Lender to claim a 50% share of whatever is recovered from the sale of the village or other net recoveries made by the receiver. The Lender denies this right saying that this is merely a limited recovery guarantee.

22. The basal law is quite clear. In Barclays Bank Ltd v T.O.S.G. Trust Fund Ltd [1984] AC 626, in the decision in the Court of Appeal of that case, Oliver LJ said at page 643:

The basic rule is that the proof of a surety cannot displace the proof of the principal creditor unless and until the surety has fully discharged all his liabilities to the creditor. … So long as any liabilities of the surety are outstanding the creditor remains entitled to prove for the full amount of the debt due to him at the date of commencement of the winding up or the receiving order and the surety's proof is excluded.

It is here that there has grown up a distinction, which depends on the construction of the contract of suretyship and which is not altogether easy to understand, between cases where the surety guarantees part of an ascertained debt and cases where he is held to have guaranteed the whole debt but subject to a limitation of his liability to a less amount than the whole. In the former case, the payment of the amount guaranteed entitles the surety to stand, pro tanto, in the creditor's shoes in the insolvency, since he has discharged the whole of his liability to the creditor. In the latter case, so long as any part of the whole debt remains outstanding, the surety, although he has paid up to the limit of his financial liability, is treated as not having discharged his liability to the creditor, presumably on the footing that there nevertheless remains an outstanding obligation on him to see that the whole debt is paid. The distinction may seem over-subtle, but it is clearly established by authority: see the judgment of Blackburn J. in Ellis v. Emmanuel (1876) 1 Ex.D. 157, where the authorities are reviewed.

This rule is, however, subject to a qualification. Where the guarantee is of the whole of a fluctuating balance (e.g. as in the case of a guarantee of the debtor's current account with a bank) with a limit on the liability of the surety, such a guarantee is to be construed as a guarantee of part only of the debt and the surety paying up to the limit of his liability will be entitled to that extent to stand in the creditor's shoes and prove in priority to him: see Ex parte Rushforth (1804) 10 Ves.Jun. 409 and Gray v. Seckham (1872) L.R. 7 Ch. App. 680. The right of the surety in these circumstances to prove in priority to the principal creditor can, however, (as it normally is in bank guarantees) be excluded by the express terms of the contract of guarantee.

23. The House of Lords affirmed the Court of Appeal’s decision without going into full detail. However, I should note that Lord Templeman said at 675 that:

the agency argue that the banks were in a position analogous to the position of a surety who has paid part of a debt and cannot prove in the insolvency of the debtor until the creditor has been paid in full. But the rights and liabilities of a surety depend on the true construction of the obligations which the surety assumes.

24. That is the important matter to remember because, although general rules do assist us in classifying what are the rights of the parties they always depend on the documentation and the agreements that the parties have made.

25. In Ellis v Emmanuel (1876) 1 ExD 157 the English Court of Appeal consisting of Lord Cairns LC, Blackburn and Brett JJ said that, there was a prima facie rule, where one has a question as to whether a guarantee is a part guarantee or a limited recovery guarantee. Blackburn J, who gave the Court’s judgment, said at 168 that the decisions “establish that in such a case the suretyship is prima facie at least to be construed as a security for part only of the debt”.

26. A large number of other authorities were referred to by counsel but it is not necessary to refer to many of them as the real question is the proper construction of the deed of guarantee signed and sealed in this case.

27. The most significant of the New South Wales cases is Mailman v Challenge Bank Ltd (Cohen J, 10 April 1992, NSWSC) (BC9201948) and on appeal Challenge Bank Ltd v Mailman (1993) NSWCA 54 (BC9301897).

28. In Mailman’s case the guarantor’s liability was limited by clause 13 which provided “notwithstanding anything contained in this Guarantee the liability of each of the Guarantors for the Debt is limited as follows”

[A] as to 50%;

[B] as to 25%;

[C] The Mailmans… as to 25%.

29. Cohen J then set out the general proposition which I have already discussed in terms and with which both sets of counsel here agree, and then held that the guarantee was really three separate guarantees and that the Mailmans had only guaranteed 25% of the debt. Accordingly the Mailmans were entitled to be subrogated so that they could recover their proportion of the surplus. In the Court of Appeal Kirby P and Priestly JA agreed with Cohen J. Mahoney JA dissented.

30. Mailman’s case was decided as all these cases are or should be on the wording of the guarantee before the court. I do not consider that it takes us very far with respect to the first question. It is however, of relevance to question 2 and Mahoney JA’s dissent is relevant to question 3.

31. Apart from what I have already quoted I should also set out the terms of a couple of clauses of the Deed of Guarantee. Clause 2.6 provides “this document is a continuing security, and remains in full force until the guaranteed obligations have been irrevocably paid and performed in full despite any transaction or other thing (including a settlement of account or intervening payments)”. Clause 2.7 provides so far as it is relevant, “until the guaranteed obligations have been irrevocably paid and performed in full, no guarantor may: (a) share in any guarantee, encumbrance or money received or receivable by the Lender in relation to the guaranteed obligations, or stand in the place of the Lender in relation to any guarantee, encumbrance or right to receive money…”. Clause 2.11 which is headed “Extent of guarantor’s liability” provides “this guarantee extends to all the guaranteed obligations and all other money payable under this Deed”.

32. Counsel for the Lender submit that the natural way of reading the words “guaranteed money” is to focus not on the obligation of the guarantor but on the obligation of the Borrower. The definition refers to the guarantee being in respect of amounts payable by the Borrower. Likewise, the definition of guaranteed obligations.

33. Counsel for the Lender put that the guarantor’s argument neglects this emphasis. They further put in paragraph 41 of their written submissions, if “guaranteed obligations” is given its proper meaning, it is quite obvious that the parties intended the guarantee to operate as a limited recovery guarantee. The parties agreed expressly, that the guarantors would not take any of the steps listed in clause 2.7 until the Borrower had paid all the amounts which it is obliged to pay under the loan agreement. It would be entirely inconsistent with the express agreement of the parties, as recorded in clause 2.7, to construe the guarantee as a part guarantee, which permitted the guarantors to make claims against the Borrower and compete with the Lender notwithstanding millions of dollars remained outstanding under the loan agreement.

34. Counsel for the plaintiff put that although it is true that nowhere in the documents does it say that the parties agreed to share equally in losses in the joint venture or even if there was a joint venture this is clearly the effect of the terms of the relevant documents.

35. It is true that there are difficulties in construing the documents in that the parties have assumed different and sometimes conflicting roles, such as the Knight interests tend to be in the Borrowers’ camp and the Ashe Morgan interests in the Lender’s camp, but I do not consider one can get over the express words of the contracts providing that the parties are not in a joint venture agreement and I do not consider that on the proper construction of the documents one can imply some sort of implied term that losses of the venture were to be shared equally.

36. Counsel rely on the presumption in Ellis v Emmanuel that there is a part guarantee as opposed to a limited recovery guarantee, but, as I pointed out earlier, this prima facie rule must give way to the actual words that the parties have used in their transaction.

37. Counsel for the plaintiff put that if one incorporates the definition of “liability cap” in clause 3.1 it would result in the substance of clause 3.1 being as follows: “the maximum amount that the Lender may finally recover and receive from the Guarantors shall be an amount equal to 50% of the Outstanding Amount (as defined in the Loan Agreement) as at the date of any demand for payment under the Loan Agreement”. They then say that when the substance of clause 3.1 is brought into the definition of “guaranteed money” and they add “in substance and stripped of all complexity”, “guaranteed money” should be construed to the following effect: ““guaranteed money” means 50% of all amounts owed by the Borrower to the Lender under the Loan Agreement”. This then would mean that clause 2.2 in substance would provide that “the guarantor guarantees to the Lender the due and punctual payment by the Borrower of 50% of what the Borrower owes to the Lender under the Loan Agreement”.

38. Counsel for the defendant say that this is just rewriting the whole agreement. I agree with this submission that this particular way of approaching the problem is just unhelpful. There is no doubt that if the proposed paraphrase was accepted then the plaintiff’s argument would prevail, but there is no valid reason for ignoring a number of words in the definition of “guaranteed money” in order to get the answer that the plaintiff desires.

39. Counsel for the Lender point out that the words “subject to” in phrases like “subject to clause 3.1” have normally got a particular meaning and they refer to the Eighth Edition of Pearce & Geddes “Statutory Interpretation in Australia” para 12.4 (LexisNexis Butterworths, 2014). That paragraph contains reference to a series of cases including Re Bland Bros v The Council of the Borough of Inglewood (No 2) [1920] VLR 522, 533 which says of the words “subject to”: “the section should first be construed without them, and then, if there is anything in the other provisions in the Act inconsistent with the interpretation so arrived at, these other provisions must yield”.

29. The learned authors say “what must be avoided is the treating the phrase as if it indicates that there is a conflict between the sections of the Act”. See also C & J Clark Ltd v Inland Revenue Commissioners [1973] 1 WLR 905, 911 and Harding v Coburn [1976] 2 NZLR 577 at 582.

30. In my view the plain words of the document show that the drafter was making a very clear distinction between what was the subject matter of the guarantee, namely, payment by the Borrower of all that the Borrower owed the Lender and the cap on liability of the guarantor which was as set out in 3.1. In my view, despite the prima facie rule in the Ellis case, this is a limited recovery guarantee.

Question 2

42. Because of my answer to question 1 this question is really otiose. However, in accordance with current practice I shall give brief consideration to it and an answer to it in case this matter goes further. As has been noted already when I quoted from the reasons of Oliver LJ in the T.O.S.G. case, the basic rule is that proof of a surety cannot displace the proof of a principal creditor until the surety is fully discharged – all liability is to the creditor.

43. Mr Curtin SC in his address acknowledged that the words of Cohen J in Mailman’s case which I am setting out below correctly stated the law:

It is settled law that where a guarantee is given of the whole of the debt then the guarantor is not entitled to stand in the place of the creditor in respect of any security or rights which the creditor might have until the debt has been fully paid.

44. I quote those words because there was discussion before me as to whether there is a distinction between cases where the principal debtor is being administered in insolvency and where it is not. The present case, as was Mailman, is one where there is no complication caused by insolvency of the principal debtor yet the general rule still applies.

45. As pointed out by Oliver LJ in the T.O.S.G. case, there is an exception to the general rule, in some cases a fluctuating guarantee, the example given by Oliver LJ is where there is a guarantee of the fluctuating balance of a bank account. Although there is some degree of flexibility of the amount guaranteed in the instant case because of reference to contingent debts and to interest, etcetera. However, it does not seem to me that this is the sort of fluctuating debt that Oliver LJ referred to. There is some amount of uncertainty in the final amount that has to be paid but it is nowhere near the great fluctuation that might be expected in a current bank account and it would be rather odd if minor flexibility in the amount covered by the guarantee so as to remove the principal creditor’s protection.

46. Counsel for the plaintiff say that if there is no subrogation then the transaction operates in a bizarre way so that if there is a payment by the guarantor before the subject property is sold and as opposed to a payment made after the property is sold then the loss is shared in different ways by the guarantor and the principal creditor. Assuming this is the case, as it appears to be, that in itself would not be a sufficient reason for construing the rules of subrogation in a different way to their normal operation. In many aspects of the law timing can produce different results.

47. I mentioned earlier that there was a deed of release. This was entered into on 30 June 2014 immediately after a considerable amount in respect of the guarantee. Recital E to the deed reads “the parties have agreed that as at 30 June 2014 the guaranteed money is the amount of $6,631,933.50 which encompasses all amounts which the lender represents are and may at any time form part of the guaranteed money”. Clause 5 then provides mutual releases. Clause 5.1a contains an acknowledgment by each party that “as at the date of this deed … it does not have any action, suit, claim, demand or cause of action whatsoever at law, in equity or under statute against any other party or any other party’s related entities … in respect of arising out of or in connection with the Lancewood documents or the transactions contemplated by them”. Clause 5.1b then contains an unconditional and irrevocable release and discharge from all claims demands and causes of action.

48. However, clause 5.2 provides that nothing in this deed prejudices or anyway affects:

a   The rights (if any) of Minumbra … to make a claim to be subrogated to the rights of the Lender against the Borrower in respect of or arising out of the payment of the guaranteed money to the Lender. …

b   The Lender’s right to immediate repayment of the balance of the outstanding amount by the Borrower …”.

49. It does not seem to me that anything in the deed of release affects the situation here. The guarantor’s right of subrogation is not released but it does not exist in view of the fact that this is a part guarantee for the reasons that I have already set out. The release of rights and obligations generally just deal with other aspects of the rights and liabilities that the parties may otherwise have had.

50. Accordingly, subrogation rights are not available until the whole of the Lender’s claim on the Borrower under the deeds have been paid in full.

Question 3

51. Again this question does not arise. It is to a great degree academic as to whether if there were subrogation rights available to the guarantor whether before the Lender is paid in full the guarantor’s rights are a proprietary right or a mere equity. There is some authority to the effect that they are a proprietary right: see eg Re Butlers Wharf Limited [1995] BCLC 43 a case which appears to be approved by the English Court of Appeal in Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank Plc [2002] EWCA Civ 691.

52. Butlers Wharf was a decision of Mr Richard Sykes SC sitting as a Deputy Judge in Chancery. He reached the result he did by relying upon a decision of Jessell MR in Goodwin v Gray [1874] 22 WR 312. His Lordship was urged by counsel not to follow that decision but he did not exceed to that submission.

53. The NSW Court of Appeal decision in Mailman was not cited to his Lordship. In that case Cohen J had ordered that upon payment by the guarantors of 25% of the debt the mortgage was held on trust as to 25% for the plaintiffs. In Mailman Mahoney JA said at BC9301897 at 24 that the decision of Jessell MR was not authority for the proposition that a partial guarantor is in principal entitled to have a proportion of interest in the creditor’s security before the creditor’s debt has been paid. With respect I would agree with what Mahoney JA said.

54. Until there is payment there is some equitable right that is I think inaccurate to describe it as a proprietary right. In my view the only relief that would be given in such a situation is a declaration.

55. To conclude, for the reasons I have already given, the plaintiff’s claim wholly fails and the proceedings must be dismissed with costs. The exhibits may be returned after 28 days.

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Decision last updated: 31 March 2015