National Australia Bank Limited v Smith

[2014] NSWSC 1605

Supreme Court

New South Wales

Medium Neutral Citation:	National Australia Bank Limited v Smith [2014] NSWSC 1605
Hearing dates:	25-28 March 2013, 3, 4, 5, 15, 17, 18, 19, 22 April 2013 and 23 October 2013
Decision date:	13 November 2014
Jurisdiction:	Common Law
Before:	Slattery J
Decision:	See paragraph [366].
Catchwords:	BANKING - a bank advanced money to a company for the purchase of a business and took mortgage security over the domestic residence of the company's principal and his wife to support their guarantees of the bank's advance to the company - the company defaulted on the loan - the guarantors sold their residence partially to satisfy the Bank's claims on the guarantees - whether the Bank engaged in misleading and deceptive conduct or unconscionable conduct in relation to the guarantees and the mortgage - whether these securities are unjust under the Contracts Review Act 1980 - whether these securities should be declared void, varied or their provisions not enforced.
Legislation Cited:	Australian Securities and Investment Commission Act 2001 (Cth) Contracts Review Act 1980 (NSW) Fair Trading Act 1987 (NSW) Real Property Act 1900 (NSW)
Cases Cited:	Ankar Pty Limited v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 Antonovic v Volcker (1986) 7 NSWLR 151 Beneficial Finance Corporation v Karavas (1991) 23 NSWLR 256 Blomley v Ryan (1956) 99 CLR 362 CBA v Smith (1991) 42 FCR 390 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Commonwealth Bank of Australia v Starrs [2012] SASC 222 Con-stan Industries of Australia Pty Limited v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226 Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371 Dilosa v Latec (Finance) Pty Limited (1966) 84 WN (Pt 1) (NSW) 557 Elkotairi v Permanent Trustee Co Limited (2002) 11 BPR 20 Fast Fixed Loans Pty Limited v Samardzic [2012] NSWCA 260 Garcia v National Australia Bank (1998) 194 CLR 395 Holme v Brunskill (1878) 3 QBD 495 Jones v Dunkel (1959) 101 CLR 298 Louth v Diprose (1992) 175 CLR 621 Nguyen v Taylor (1992) 27 NSW LR 48 Payne v Parker (1976) 1 NSWLR 191 Perpetual Trustee Company v Khoshaba [2006] NSWCA 41 (2005) 14 BPR 26 Perpetual Trustees Victoria v Longobardi [2009] NSWSC 654 Provident Capital Ltd v Papa [2013] NSWCA 36 Riz v Perpetual Trustee Australia [2007] NSWSC 1153 Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWSC 676 State Bank of New South Wales v Chia (2000) 50 NSWLR 587 Sun North Investments Pty Ltd v Dale & Anor [2013] QSC 44 Ting v Blanche (1993) 118 ALR 543 Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Westpac Banking Corporation v Belgroup Ltd (in liq) (No. 3) [2012] WASCA 157 Yerkey v Jones (1939) 63 CLR 649
Category:	Principal judgment
Parties:	National Australia Bank (P) Craig Trevor Smith (D1) Denise Vitalli-Smith (D2) Patrick George Smith (D3) Nadine Anne Smith (D4) GHS Financial Services (XD)
Representation:	Counsel: D.C. Price (P) B. McClintock SC/G. Rubagotti (D1&2) M Tibbey (D3 and D4) B. McManus (XD) D.C. Price (P) B. McClintock SC/G. Rubagotti (D1&2) M Tibbey (D3 and D4) B. McManus (XD) Solicitors: Gadens Lawyers (Plaintiff) Peter Barker (D3 and D4)
File Number(s):	2009/296546
Publication restriction:	No

Judgment

1. In December 2004 Statewide Telescopic Forks Pty Ltd ("Statewide") borrowed more than $1.6 million from the National Australia Bank Ltd ("the Bank") to fund its purchase of an equipment hire business. Mr Craig Smith, Statewide's principal, and his wife Mrs Denise Vitalli-Smith guaranteed Statewide's loan obligations under various interrelated facilities. They mortgaged their family home in Oyster Bay to secure their guarantee obligations to the Bank. Statewide defaulted in 2006. The Bank called on their guarantees and they sold their Oyster Bay property in 2007; applying their equity in it of $113,578.92 to reduce Statewide's liability to the Bank. The plaintiff Bank commenced these proceedings in 2009 and now claims $2,117,170.21 from them. The Smiths have cross-claimed against the Bank for relief from any liability to the Bank and for damages for their lost equity in the Oyster Bay property, on the grounds that the Smiths' guarantees: were unjust under the Contracts Review Act 1980; and were occasioned by misleading and deceptive or unconscionable conduct within the Australian Securities and Investment Commission Act 2001 (Cth) and the Fair Trading Act 1981.

1. These proceeding originally involved three other parties. To secure the Bank's advance to Statewide it also took guarantees from Mr Craig Smith's parents, Mr Patrick and Mrs Nadine Smith, supported by a mortgage over their Sylvania Waters property. And it took charges over Statewide's business assets.

1. Mr Garry Steinberg, a finance broker, who provided broking services through his company GHS Financial Services Pty Ltd ("GHS Financial"), acted as the finance broker to arrange this transaction.

1. Much of the evidence in these proceedings concerns the Bank's dealings with individual members of the Smith family. For convenience and without intending disrespect to members of the family, these reasons will refer to family members by their first names.

1. The Bank commenced these proceedings by Statement of Claim against Craig, Denise, Patrick and Nadine seeking possession of Patrick and Nadine's property and judgment against each of Craig, Denise, Patrick and Nadine under their respective guarantees to meet the balance of Statewide's remaining financial defaults.

1. Patrick and Nadine cross-claimed against the Bank ("the First Cross Claim"), to set aside, or vary, both their guarantees and the mortgage over the Sylvania Waters property. They later cross-claimed against GHS Financial ("the Third Cross Claim") for the amount, if any, which they may be required to pay to the Bank under their guarantees.

1. Craig and Denise also cross-claimed against the Bank and GHS Financial ("Second Cross Claim") for orders declaring their guarantees void, or prohibiting their enforcement, and alternatively for damages from the Bank and from GHS Financial. In answer the Bank contended it relied on certificates and declarations Craig and Denise and their advisors signed to the effect that each had received independent legal and financial advice in relation to their dealings with the Bank. GHS Financial denied the allegations made against it in both the Second and the Third Cross Claims

1. The hearing of these proceedings took place over fourteen days between 25 March 2013 and 23 October 2013. All the claims among the Bank, GHS Financial, Patrick and Nadine settled by consent on 22 April 2013. The claims among the Bank, GHS Financial, Craig and Denise continued. But the remaining parties settled with GHS Financial on the last day of the hearing, 23 October 2013.

1. That left a contest between the Bank and Craig and Denise on the Statement of Claim and on the Second Cross Claim. Despite the two settlements, the evidence of Patrick, Nadine, Mr Steinberg and the Bank's officers who dealt with them, remained an important part of the relevant factual narrative.

1. It was not in contest that were the Bank to be successful on the Statement of Claim, it was entitled to judgment against Craig and Denise for approximately the amount it claimed: $2,117,170.21 plus accruing interest. The primary contest in the proceedings was on the issues that Craig and Denise's Second Cross Claim raised, which may be shortly summarised as follows:

(1)   Are the guarantees Craig and Denise gave the Bank unjust within the meaning of the Contracts Review Act 1980 (NSW)?

(2)   Did the Bank or GHS Financial give Craig financial and business advice and if so was such advice misleading or deceptive or negligent?

(3)   Did the Bank or GHS Financial engage in unconscionable conduct?

(4)   Did the Bank or GHS Financial breach any fiduciary duties they owed to Craig and Denise?

(5)   Did the Bank contravene the Code of Conduct?

1. Counsel and solicitors efficiently conducted these proceedings on all sides.

Mr D. Price of counsel appeared for the Bank instructed by Gadens Lawyers. Mr B. McClintock SC and Ms G. Rubagotti appeared for Craig and Denise instructed by Landerer & Company. Ms M. Tibbey appeared for Patrick and Nadine instructed by a solicitor. And Mr B. McManus appeared for GHS Financial instructed by an attorney.

Overview of the Principal Uncontested Facts

1. This section of the Court's reasons contains an outline narrative of the principal uncontested facts to introduce the main witnesses and issues. The detailed terms of the security and other documents and the Court's decisions on the remaining contested matters are reserved for later sections of these reasons.

1. The equipment hire business which Statewide purchased in 2004 had only been operating since 2002. Before Statewide acquired this business in 2004, Mr Claudio Provenzale and his wife Gina operated it through a company they controlled known as Statewide Telehandlers & Plant Hire Pty Limited ("Telehandlers"). Mr Provenzale was the sole director of Telehandlers and Mrs Provenzale its sole shareholder. To avoid confusion with Statewide, the similarly named company that Craig established later, Mr and Mrs Provenzale's company is called "Telehandlers" throughout these reasons.

1. Telehandlers hired motorised telescopic equipment including forklift trucks. The business encompassed what is known in the equipment hire industry as both the "wet" and "dry" hire of equipment; "wet" hire of equipment includes the services of a driver but "dry" hire does not. Telehandlers principally hired equipment on medium and long term contracts to major building industry contractors.

1. Craig became an employee of Telehandlers in 2003. He gained knowledge of the operations of the business through his employment. But the parties contested the extent of his knowledge, particularly in relation to the financial performance of the business. Craig was mostly involved on the operational side of the business. Mr and Mrs Provenzale ran a lean operation at Telehandlers: they were the only other permanent employees of that company involved in running of the business.

1. But Telehandlers did not actually own the equipment it used in running its hire business. Another company Mr and Mrs Provenzale controlled, Newtral Pty Limited ("Newtral"), owned all Telehandlers' hire stock, and made that stock available to Telehandlers as it required.

1. In mid-2004 Mr Provenzale asked Craig whether he was interested in purchasing this equipment hire business from Telehandlers. He decided to investigate Mr Provanzale's proposal. They began to negotiate the terms of purchase, each assisted by a solicitor.

1. Mr Provenzale opened negotiations by asking for $2.2 million dollars for the business, a figure which Craig managed to reduce to $2 million. Craig needed time to organise finance. After unsuccessful discussions with a number of financiers, on Mr Provanzale's recommendation, Craig approached a finance broker Mr Garry Steinberg of GHS Financial.

1. Mr Steinberg contacted the Bank in relation to the possible financing of the transaction being proposed between Mr Provenzale and Craig (referred to throughout these reasons as "the Statewide transaction"). He initially spoke to Mr Mark Donovan, one of the Bank's relationship managers, who was then responsible for managing the accounts that Mr and Mrs Provenzale and Telenandlers already maintained with the Bank. But because of this pre-existing relationship with the accounts of Telehandlers and Mr and Mrs Provenzale, Mr Donovan referred Mr Steinberg to another Bank employee, Mr Alan Shackleton for assistance.

1. Between mid-October and mid-December 2004 Mr Shackleton handled Craig's application for the Bank's possible financing of the purchase of Telehandlers business. But he did not himself have sufficient authority to approve the financing of a proposed borrowing totalling over $2 million. To seek the necessary approval at a higher level, Mr Shackleton prepared internal credit submissions for the application and provided them to a more senior Bank officer, Mr John Coupe. Principal among these was a Credit Memorandum of 18 October 2004. On 14 December 2004 Mr Coupe approved the financing. Craig and the other members of the Smith family had some legal and financial assistance during this period but the extent of that assistance is in contest.

1. On 24 October 2004 about three weeks before the Bank approved the finance, Craig incorporated Statewide as the proposed purchaser of the business and the borrower from the Bank. Craig was the sole director and secretary of Statewide from its creation. But throughout Statewide's existence each of Patrick and Craig held 50% of its shares. The circumstances in which Patrick became a shareholder of Statewide were in dispute, although that dispute principally relates to whether Patrick was entitled to any relief, an issue which has now been resolved in Patrick's settlement with the Bank.

1. Between 16 and 23 December 2004 Craig executed the principal facility agreements between Statewide and the Bank, which consisted of an Equipment Loan for $1,760,000 to acquire the stock (mainly vehicles) for the business to hire out and an interest-only Fixed Rate Loan in the amount of $400,000, principally to provide working capital. The Bank and Craig, Denise, Patrick and Nadine executed guarantees and mortgages to support Statewide's facility in the same period. Their guarantees of Statewide's obligations under the Equipment Loan were limited to $1.6 million plus interest and costs. More details of the facility and the guarantee documents appear below in these reasons, under the headings "The Loan Agreements" and "The Guarantees and the Mortgages".

1. Statewide used the Bank's advances to complete the purchase of the business from Telehandlers on 11 January 2005. Craig operated the business through Statewide for the next 12 months with assistance from his father. But its trading performance proved to be well below Craig's pre-purchase expectations. Analysis of the difference between the pre and post purchase trading conditions of the business is undertaken later in these reasons. By late 2005 the business was in serious financial distress. Although Statewide had not yet defaulted on its obligations to the Bank both Craig and the Bank officers anticipated that if its trading performance did not change that Statewide was likely to default in early 2006.

1. In January 2006 Statewide requested the Bank to increase its facilities. In mid-January 2006 Mr Coupe for the Bank approved an additional overdraft to Statewide in the amount of $100,000 together with a renewal of Statewide's original Fixed Rate Loan. Craig and Denise executed another guarantee of Statewide's obligations under the Fixed Rate Loan and the January 2006 Overdraft, limited to $510,000 plus interest and costs.

1. Statewide operated under Craig's control for a little over one more year. But in early 2007 Statewide defaulted and on 6 March 2007 it stopped trading, when the Bank appointed a receiver to its assets and operations. About six months later, in August 2007, Craig and Denise sold their Oyster Bay property, realising an equity of $113,578.92, which they paid to the Bank in partial reduction of Statewide's outstanding debt.

1. Statewide was deregistered on 3 May 2009. In August 2009 the Bank made demands on the guarantees, which the Smiths failed to meet.

The Loan Agreements

1. An overview of Statewide's loan facility agreements with the Bank and the securities the Smiths gave to the Bank is complicated as some of them were superseded within barely a week of their execution. These facilities were first signed on 16 December in anticipation of the execution of a draft sale agreement, in which Telehandlers would sell both its business and the equipment it used in that business to Statewide. But that contract did not proceed. Instead each of the goodwill and the equipment of the business were separately sold to Statewide, respectively by Telehandlers and by Newtral. In consequence of this restructured sale, some of Statewide's and the Smiths' loan documentation was resigned in slightly varied form on 23 December 2004, in the circumstances that are explained below.

1. To facilitate Statewide's purchase of the Telehandlers business, on 16 December 2004 the Bank entered, as lender, into two loan agreements with Statewide, as borrower: a "Business Letter of Offer" to provide Statewide a fixed rate interest only one year loan facility of $400,000 ("the Fixed Rate Loan") and an "Equipment Loan Goods Mortgage" to provide Statewide a facility for $1,600,000 to finance the equipment to be acquired in the business the ("the 16 December Equipment Loan"). Other minor facilities were provided.

1. The 16 December Equipment Loan was superseded a week later when the structure of the sale changed. Another "Equipment Loan Goods Mortgage" in identical terms, save the amount of the facility was increased to $1,760,000, was executed on 23 December 2004 ("the 23 December Equipment Loan"). The additional amount of $160,000 was the amount required for the payment of GST on the purchase of the equipment used by the business. The Fixed Rate Loan signed on 16 December was not re-executed on 23 December.

1. As earlier indicated, the last tranche of financing was put in place a year after the acquisition, to help tide Statewide over its growing financial distress. On 24 January 2006 the Bank granted Statewide a further overdraft facility of $100,000 and at the same time extended the term of the Fixed Rate Loan which only had a one year term. Statewide managed to repay the overdraft facility and the Bank does not claim any amount under that facility in these proceedings. Statewide's defaults relate to repayments due under both the Fixed Rate Loan and the 23 December Equipment Loan.

The Guarantees and Mortgages

1. All Statewide's obligations to the Bank were secured by guarantees executed by each of Craig, Denise, Patrick and Nadine supported in turn by mortgages over their respective family homes.

1. On 16 December 2004 each of Craig, Denise, Patrick and Nadine executed a "Guarantee and Indemnity" agreement, which was incorporated as part of the form of the Fixed Rate Loan documentation. By these agreements each of them guaranteed all the amounts owed by Statewide to the Bank under the Fixed Rate Loan up to the limit of $460,000 ("the Fixed Loan Guarantee").

1. On the same day each of them also executed another "Guarantee and Indemnity" agreement up to the limit of $1,600,000 ("the 16 December Equipment Guarantees"). Those guarantees were offered in relation to Statewide's obligations under the 16 December Equipment Loan and formed part of the 16 December Equipment Loan documentation.

1. But the 16 December Equipment Guarantees were superseded by other guarantees in the same form that each of Craig, Denise, Patrick and Nadine executed on 23 December 2004. Again these guarantees were not separate documents but formed part of the 23 December Equipment Loan agreement also executed that day ("the 23 December Equipment Guarantees"). The limit of those fresh guarantees was also increased from $1,600,000 to $1,760,000 to coincide with the increased amount being advanced under the 23 December Equipment Loan.

1. Another set of guarantees was executed by each Craig, Denise, Patrick and Nadine over a year later, in January 2006, when the Bank provided to Statewide the additional $100,000 overdraft facility and extended the term of the Fixed Rate Loan. These guarantees were also in the form of a "Guarantee and Indemnity" agreement ("the 2006 Guarantees") and contained identical terms to the earlier guarantees. They covered all the amounts Statewide owed to the Bank up to the limit of $510,000.

1. The Bank initially held two Real Property Act 1900 mortgages executed on 16 December 2004 securing Craig and Denise's and Patrick and Nadine's guarantee obligations: a mortgage over Craig and Denise's residential property in Oyster Bay and a mortgage over Patrick and Nadine's residential property in Sylvania Waters.

Structure of the Sale and Completion

1. The structure of the Telehandlers-Statewide sale transaction changed between execution of the 16 December Equipment Loan and execution of the 23 December Equipment Loan. This changed structure explains some of the differences between these two equipment loans.

1. Prior to 16 December the contract for the sale transaction was drafted in the form of the Law Society of New South Wales 2000 edition contract for the sale of business, together with additional conditions. Telehandlers was named as vendor and Statewide as purchaser under this draft contract and Statewide was purchasing two types of assets described respectively as "Goodwill" and "Equipment" for a total consideration of $2,000,000. It was apportioned under the heading "Asset and price apportionment" as to $400,000 for "Goodwill" and as to $1,600,000 for "Equipment".

1. Under the 16 December draft contract the parties contemplated that Newtral would assign to Telehandlers its interest in the equipment that Telehandlers was then using for its business. They added a condition to the standard Law Society form of the 16 December Draft Contract to deal with this equipment, as follows:

"The purchaser acknowledges that the Vendor is not at this time the unencumbered owner of all the Tele Handlers and Forklifts referred to in the inventory of equipment is presently owned by Newtrell [sic] Pty Limited. Prior to completion the Vendor will arrange for the assignment of any outstanding interest in the said equipment to it and shall on or before completion discharge all encumbrances so that the Purchaser will receive the equipment without any encumbrances."

1. But the 16 December draft was never executed. It seems to have been drafted with little focus on whether Newtral would actually assign the equipment to Telehandlers before the sale to Statewide. By 23 December it seems to have been clear that such an assignment would not take place. So the 16 December draft was replaced on 23 December by two separate sale contracts under which the transaction ultimately proceeded. Craig signed both these contracts as a director of Statewide.

1. In one of these contracts, again in the Law Society standard form, Statewide agreed to acquire the business from Telehandlers for $400,000 ("the Business Sale Contract"). In the "Asset and price apportionment" section of that contract the consideration of $400,000 was apportioned wholly as to the one item, "Goodwill". And the contract did not deal with equipment at all.

1. In the other contract, entitled "Contract For Sale of Plant & Equipment" ("the Equipment Sale Contract") Statewide agreed to acquire from Newtral the equipment Telehander's was using in the business for a consideration of $1,600,000. The equipment to be sold was specified as the items of equipment, including tele-handlers and forklifts listed in "Schedule A" to that contract.

1. Statewide's acquisition of Telehandlers' business and Newtral's equipment under the two 23 December 2004 sale contracts was completed on 11 January 2005. At settlement Statewide drew down on the facilities provided under both the Fixed Rate Loan and the 23 December Equipment Loan.

1. From the $1,760,000 the Bank provided to Statewide under the 23 December Equipment Loan, it applied an amount of $1,600,000 on account of the settlement moneys payable under the Equipment Sale Contract and the balance of $160,000 was applied towards the GST liability on the purchase. The sum of $400,000 the Bank provided to Statewide under the Fixed Rate Loan was applied to pay the settlement money payable on account of goodwill of the business under the Business Sale Contract.

Solicitors and Financial Advisers

1. In the period October 2004 to January 2005 Craig used the services of two professional advisors, a solicitor Mr Peter Ronis of Shanahan Solicitors and an accountant Mr Geoff Stubbs of Liverpool Taxation Services Pty Limited ("LT Services"). The extent of the involvement of these professionals and the extent to which they advised Craig and Denise is disputed.

1. On instructions from Craig, Mr Ronis negotiated with the solicitors acting for Mr and Mrs Provanzale, concerning the agreements for the purchase of the business. He also witnessed the signatures of Craig, Denise, Patrick and Nadine on the financing documents signed on 16 December 2004: the Fixed Rate Loan, the 16 December Equipment Loan, including the 16 December Equipment Guarantees incorporated in it and the Fixed Loan Guarantee. But he was not involved in the execution of any of the later financing documents, either on 23 December 2004 or in January 2006.

1. As part of the execution of the Fixed Loan Guarantee on 16 December 2004 Mr Ronis signed four certificates, one for each guarantor, certifying among other matters, that he had explained the effect of the relevant guarantee to each guarantor.

1. The parties contested: whether Mr Ronis did provide any legal advice about the effect of the Smiths' guarantees; and if any such advice were provided, whether its content was sufficient and whether it was independent advice. Mr Ronis was not called by either side to give evidence. Both sides asked the court to draw inferences about the nature of the advice that he gave, without the Court hearing from him.

1. It was not in contest that in October 2004 the principal of LT Services, Mr Stubbs, organised the incorporation of Statewide for Craig. He also provided advice to Craig in relation to the structure of Statewide's proposed acquisition of Telehandlers' business and about the tax consequences of that acquisition.

1. The extent of Mr Stubbs' other involvement beyond this was in contest in these proceedings. The Bank claims that in providing finance to Statewide it relied on two certificates of financial advice that Mr Stubbs had apparently signed. On their face these two certificates, which bear a signature purporting to be that of Mr Stubbs, state Mr Stubbs provided financial advice to Craig and Denise and to Patrick and Nadine in relation to the acquisition. But in his evidence Mr Stubbs denied that he gave any such financial advice to either of them. Moreover he denied that the signatures on the two certificates were his. If his evidence is accepted, it is probable someone forged Mr Stubbs' signature on the certificates and provided them to the bank.

1. This completes an outline of the principal uncontested facts. To outline the contested facts requires a more detailed narrative of events.

Statewide Buys and Runs a Business which Collapses - 2002 to 2007

1. This section of the Court's reasons contains the Court's findings in relation to the contested dealings between Craig and Denise and the Bank and with the other parties. This more detailed narrative represents the Court's findings as to what happened, recording some further uncontested facts and deciding the contested matters that require decision.

Craig, Mr Provenzale and Telehandlers

1. At the time of the trial Craig Smith was 46 years old. He left school in year 12 in 1984. At the time of the Statewide transaction in 2004 he was 37 years old. His post school work was mainly in clerical, administrative and junior management fields. He worked in industries as varied as insurance and motor home rental.

1. Between 1998 and 2003 Craig worked for JTF Supplies as an administrative assistant, a company that supplied lifting equipment, including chains and shackles in the construction industry. Craig's father Patrick then worked at JTF Supplies as a sales representative and was Craig's introduction to the firm. Although Patrick was styled as "Group General Manager" and as an "accountant manager" for JTF Supplies, I accept that neither he nor Craig ever had any accounting experience or gained any accounting qualifications.

1. Soon afterwards Craig met Mr Provenzale, who had business dealings with the owner of JTF Supplies. Whilst Craig was working as a branch manager for JTF Supplies in Perth, Mr Provenzale offered him a job working for Telehandlers in Sydney. Craig found this attractive. He accepted employment with Telehandlers in 2003 and brought his young family to Sydney. Craig's principal role at Telehandlers was to manage Mr Provenzale's existing customers, operating out of a small office located in Mr Provenzale's residence in Camden. Craig's duties included managing Mr Provenzale's existing customers and contacting potential customers to try and increase the rental sales of the company's motorised telescopic equipment, including forklifts. His time was spent with Mr Provenzale in trying to win tenders and to arrange for the leasing out of the company's equipment. Mr Provenzale's wife, Mrs Gina Provenzale, managed the books, financial accounts and paperwork of the company and paid Craig's salary.

1. Craig was also responsible for arranging the ongoing maintenance and repair of some of Telehandler's leased equipment, although he did not process repair bills and was unaware of the maintenance costs of the business. The Bank sought to make a case that Craig was familiar with the financial workings of the Telehandlers business through his employment. But I accept Craig's account that he was not close to this aspect of the business, which Mrs Provenzale handled. Until Mr Provenzale made an offer to Craig to acquire the business, Craig had no ambitions in that direction.

1. Craig did not know the full financial position of Statewide. He was familiar with the hire rates for the particular equipment that he leased. But Mr Provenzale exclusively managed other classes of equipment. On the costs side Craig did not know of the general outgoings for equipment and for insurance, for maintenance or transport costs or of the need to lease equipment from competitors (known as "cross-hiring") from time to time.

1. It was not difficult to look at Craig in the witness box and infer what he would have been like in his mid-30's: a man without any prior experience in running his own business and a tendency to naivety. In mid-2004 Mr Provenzale first tried to interest Craig and Patrick in investing in some of his equipment that Telehandlers was leasing. But satisfactory agreement could not be reached. When those negotiations broke down, Mr Provenzale tried another tack: he declared that he wanted to leave the hire industry. He asked Craig whether he would be interested in purchasing the whole business.

1. Although keen to have the autonomy of running his own business, Craig was uncertain what to do next. So he approached a number of people who he thought knew much more about finance than he did.

1. Craig first went to a mortgage broker in Sutherland, Combined Financial Services ("Combined"), who asked for Telehandlers' profit and loss statements. One measure of Craig's naivety at that time was that he took this Combined request to Mr Provenzale who replied to Craig "you don't need them [the profit and loss statements]", a position that surprisingly Craig accepted.

1. Craig then contacted Mr Darren McNamara at Smartline Mortgage Brokers, who Craig had met at TJF Supplies, where he was the Chief Financial Officer for a period which overlapped with Craig's employment at that company. Mr McNamara asked for the same kind of financial statements, tax returns and bank statements for the business as Combined had done. But I accept Craig's evidence that Mr Provenzale would not give him this information.

1. So Craig and Mr McNamara met Mr Provenzale's accountant, a Mr Gregory Hammond. Craig and Mr McNamara asked to see Telehandlers' books. Mr Hammond declined. Mr McNamara made inquiries with a number of banks about funding the purchase but was unable to assist Craig any further. Mr McNamara did not give Craig any substantive financial advice about his purchase of the Telehandlers business.

1. Within a day of two of Craig's unproductive meeting with Mr Hammond Mr Provenzale approached Craig and said to him "Don't worry, I know a guy who'll get you a loan". Within days he had arranged for Craig to meet Mr Garry Steinberg, describing Mr Steinberg as "...a good guy. He will get you the loan".

1. Mr Steinberg and Craig met shortly afterwards at Mr Steinberg's office in suburban Liverpool. Mr Steinberg indeed confirmed that Mr Provenzale had spoken to him about Craig. Mr Steinberg assured Craig "I know Claude's [Mr Provenzale's] business. I understand the situation you're in and I can help you get the business. I know it's a very good business and this is an excellent opportunity for you". Mr Steinberg's approach from this moment was to take control of the information gathering to support Craig's loan application, saying "I'll handle everything" and "I know all about this business. I can get the loan for you".

1. I accept Craig's account of his first meeting with Mr Steinberg. He was relieved at what he had heard: for the first time he could see the obstacles to obtaining the loan being removed by someone with an insider's connection to Mr Provenzale. And somehow Mr Steinberg seemed to know what prior unsuccessful efforts Craig had made to obtain finance and really asked Craig to "leave it to me".

1. I accept Craig's account that he had about six further meetings with Mr Steinberg between May and September 2004 about the loan application. In the course of one of these meetings Mr Steinberg identified the bank to which he proposed to take Craig's application and said to Craig "I am going to go with the NAB because I have a very close relationship manager at the Bankstown Business Branch". Later he described the new relationship manager as follows: "There is also a new relationship manager who is also very keen to secure his first business deal".

1. At their second meeting Mr Steinberg asked Craig to prepare financial forecasts for the business showing both revenue and costs for the whole business. Craig pointed out how little he knew about the business financials apart from the leasing income of the hire units he managed. Mr Steinberg said to him "That doesn't matter. Give it a go".

1. These first few meetings are remarkable for the absence of any representation from Mr Steinberg that he was acting on behalf of the Bank. Craig and Denise make a case that Mr Steinberg was the Bank's agent in all his dealings with Craig and Patrick. But even on Craig's account, which I prefer to Mr Steinberg's account, Mr Steinberg did not claim any authority to speak in the Bank's name or point to authority that the Bank had given him to act for it. He had a broker agreement with the Bank at the time although at this distance the date of that agreement is unclear. Admittedly the Bank had not been approached at the time of Craig and Mr Steinberg's first meeting

1. Moreover, the statements that Mr Steinberg made to Craig are hardly consistent with Mr Steinberg acting on behalf of the Bank. I accept Craig's evidence that Mr Steinberg said to him at various meetings "Don't worry, leave it to me, I'll look after you" and things like "this is about your best interests and I have everything under control". Mr Steinberg was seeking to promote trust and confidence in Craig with statements that placed him much closer to Craig than to the Bank.

1. It took a while for Craig and Mr Steinberg to put together his forecasts. It was a task travelling in the background between July and September 2004. This was not surprising given Craig's basic lack of understanding of the business he was to buy. I accept that he said to Mr Steinberg "the forecasts are just estimates; I have no financial records from the company for which to base any of them". Mr Steinberg urged Craig to put down figures that Craig was describing as his "best guesses".

The Finance Application - 22 September 2004

1. In the meantime Mr Steinberg had been dealing with the Bank. On 22 September 2004 he submitted to the Bank a finance application for the financing of the purchase of the business, based on the information he had gathered so far.

1. The 22 September 2004 finance application contemplated that both Craig and Patrick would be involved in the purchase of the entire business of Telehandlers. By then Craig had drawn his father into the idea of a purchase and held intra-family discussions about the proposal. Craig initially put the first involvement of his father in the transactions as occuring in November 2004. But this cannot be right. The 22 September finance application contains asset and liability information for both Craig and Denise and Patrick and Nadine consistent with Patrick having been approached at that time. I otherwise accept Craig's account of approaching Patrick about assisting in the purchase. Craig repeated to his father that Mr Steinberg was saying to him that the proposed purchase was a "good deal".

1. Craig and Patrick met Mr Steinberg to discuss the loan application at Mr Steinberg's office probably before 22 September 2014. Mr Steinberg made some very positive comments at this meeting "Let me tell you that we are dealing with here with a very good business. I know that because I know the owner. I am his friend and I do all his business transactions for him". He then went on to say "I wouldn't want to see Craig let this go because I tell you he will own the business in three years' time and he will be a multimillionaire". Mr Steinberg was enthusiastic about this proposed purchase. I prefer Craig and Patrick's versions of their discussions over Mr Steinberg's. But Mr Steinberg's enthusiasm is an important factor in inferring what happened between Craig and the Bank. I accept Craig's evidence that Mr Steinberg repeatedly emphasised that "this is a great opportunity. This is a really good business. You are lucky to have this opportunity" and assured them that he could "get the deal done".

1. Craig and Patrick reported their discussions with Mr Steinberg to Denise and Nadine. Patrick seemed charmed by Mr Steinberg, describing him to their wives this way: "I met Garry and he seems like a likeable cove to me. I think we can trust him".

1. The 22 September finance application described Craig and Denise as having net assets of $323,000 and that Patrick and Nadine had net assets of $1,085,000. The 22 September finance application sought a loan of $2.2 million, and described the application in the following terms:

"COMMENTS:

Father and Son wish to purchase the entire business of Statewide Tele Handlers and Forklift Hire Pty Limited. The business is for sale for $2,200,000.00, which is made up of $1,800,000.00 in equipment and $400,000.00 goodwill. The equipment consists of 18 forklifts whereby we submit details as attached.

The security on offer are all the units of which 17 are owed and 1 in under finance to Esanda Finance. A first mortgage on Patrick's house is available with a QS valuation of $900,000. As well, they have cash holdings of $200,000.00, which is on offer.

...

STORY OF PROPOSED PURCHASERS

Craig Smith currently works for Claudio as manager of the operation and has done so for the past 15 mths. Craig was operations manager from TJF/EBC based on Hoxton Park dealing with cranes and forklifts for the past 10 years. Prior to that period he worked for Brambles in sales and rental in the earthmoving business. His father Patrick, is an accountant and also worked for TJF/EBC. As an accountant he looked after the administration side of the company and comes to our new entity with 40 years experience in the crane/forklift industry and administration.

THIS DEAL:

Claudio Provenzale is asking $2,200,000.00 for the business. In that deal he is giving the proposed new purchaser two years rent free on the site at Catherine Field. All the forklifts (18), which have a valuation on $1,800,000.00 and $400,000 goodwill. As previously mentioned your security will be a CHP Agreement over all the equipment, a first mortgage over property at Sylvania Waters and $200,000.00 cash holdings security."

1. Patrick's house was clearly being offered as security at this time. Mr Steinberg would not have done that without Patrick's consent. Whilst Mr Steinberg was pressing the 22 September finance application on the Bank Mr Provenzale was pressing Craig as to whether the purchase was proceeding.

Craig and Patrick Deal with the Bank

1. From about mid 2004 Craig had dealings with Mr Donovan and then Mr Shackleton in parallel to his discussions with Mr Steinberg. Craig met Mr Donovan, the existing Bank relationship manager for Telehandlers, who explained that he had "done a lot of work with Claude [Mr Provenzale] over the years and he runs a very good business". Mr Donovan bowed out early because of this relationship. But I accept that Mr Donovan said to Craig at the outset "But don't worry Craig, I'll be working very closely with Alan and I'll be helping him get this through". The Bank was here representing to Craig that its existing relationship with Mr Provenzale was a factor that would assist the success of his loan application. I accept that the Bank's officers did say these kinds of things to him about Mr Provenzale. Moreover they had a powerful influence on him, and in turn on Patrick, Denise and Nadine to whom they were conveyed. Everything said to Craig needs to be understood in the light of this early impression that Mr Donovan created and which Mr Shackleton soon reinforced by words and conduct. Craig thought he was lucky to have this specialised assistance.

1. Mr Steinberg was giving the same kind of help to Craig based on his prior knowledge of Mr and Mrs Provenzale's business. Mr Steinberg was a close adviser to Craig but the Bank left an impression on Craig and perhaps unwittingly so, that he could rely on its knowledge of Mr Provenzale's business affairs. This echoed Mr Steinberg's advice to Craig and led him to believe that he could trust the Bank, as he trusted Mr Steinberg. This developed and leads the Court ultimately to the conclusion that the Bank, probably quite inadvertently, assumed the role of a financial adviser to Craig. Had the Bank not had as another customer, the vendor in this transaction, there would probably have been less opportunity for Craig to get this impression from the Bank.

1. Mr Shackleton was in a difficult position from the outset. It was clear to him that Craig perceived him as somewhat of a newcomer, who probably had less knowledge of Mr Provenzale's businesses than did Mr Donovan. So he sought to overcome this by instilling confidence in Craig that he knew as much about Mr Provenzale's business as had Mr Donovan. He said to Craig "Look Craig, I know all about the business. I believe this to be a good business. It is definitely something the Bank is interested in". Craig's recollection as to exactly when such statements were made is imperfect and was at times shown to be in error. But his recollection as to the substance of whatMr Shackleton said to him is reliable.

1. Craig had a number of meetings with Mr Shackleton, often at the Bank's Bankstown branch, as his loan application progressed. Craig asked him at one point, when he had provided some information, "How does this all stack up?" to which Mr Shackleton replied, "This looks like a good loan".

1. Mr Shackleton went further. On another occasion at Mr Shackleton's office Mr Shackleton said to him "I think you are lucky to have this opportunity". And in response to Craig's question "Should I proceed with this?" Mr Shackleton replied "Yes, absolutely, this is something you should do". I do not accept Mr Shackleton's evidence distancing himself from making such statements.

1. Craig was naïve. A more sophisticated person would probably have hesitated to ask Mr Shackleton some of the questions Craig asked, on the basis that they would not expect the Bank to commit itself in answer. But that did not deter Craig. At one point in about October he said to Mr Shackleton "Is this something I should still be going ahead with? Should I keep pushing forward with this?"

1. Mr Shackleton was in a very difficult position not of his own making. Not to answer this question of Craig, given the Bank's knowledge of the Provenzale's business would have appeared very strange. So he answered it, saying "Yes, absolutely. It'll just take a bit of time. We've been looking at the figures of the current business, of the loan, what you are putting in, all aspects of it to make sure that this is a good loan for you". Then he concluded, "This is a good loan".

1. Such statements were ambiguous. Mr Shackleton was probably only intending to convey to Craig that the loan looked as though it would meet the Bank's lending criteria. But to a reasonable listener in Craig's position the statements also looked as though the Bank was vouching for the reliability of the figures that the Bank had from Telehandlers its other client, and the financial health of that business in Mr and Mrs Provenzale's hands. This ambiguity would not have arisen if the Bank did not appear to have access to information about Mr and Mrs Provenzale's business Telehandlers, either directly or through Mr Steinberg.

1. Craig did share his inexperience with Mr Shackleton by explaining that he was only "working as a sales guy for this company [Telehandlers]. I don't know all the financials of the company" and "I'm relying on you to help me with the financial side of this and to guide me through the loan to make sure I am doing the right thing". Craig says that he also said this to Mr Steinberg. I accept he saw both GHS Financial and the Bank as having superior knowledge to him about the financial performance of Telehandlers business under Mr and Mrs Provenzale. I accept that Mr Shackleton said to him in response "Look you're only going to get the loan if we know its going to work", a statement that had the same ambiguity as Mr Shackleton's earlier statements. But it was open to Craig to interpret this as a statement that the Bank would have to satisfy itself from its own knowledge and from information available to Mr Steinberg, as well as anything Craig gave the Bank, as to the reliability of Telehandlers' past financial performance.

1. I infer from Craig's evidence that he had concluded from what Mr Shackleton had told him that if the Bank were to approve this loan that: (1) such approval would be based on the Bank's own assessment that this business could be financed post-acquisition from its cashflow; and (2) that such assessment would be based on all the information available to the Bank whether from Mr Steinberg or the Bank's own resources, after applying the Bank's internal credit procedures.

1. Mr Shackleton, to his credit, made some concessions in cross-examination about what he said to Patrick and Craig. He conceded that he had "portrayed an optimistic portrait of the business of Telehandlers" to Craig. Mr Shackleton thought it was probable that he did say that the Bank "had been looking at the figures of the current business, the loan, that you are putting in, and all aspects of it to make sure that this is a good loan for you". Mr Shackleton even conceded it was a possibility that he had said "I believe this to be a good business" and "I know all about the business" and that "it is definitely something the Bank is interested in". But the Court's findings do not depend on Mr Shackleton's concessions. The findings may be based alone on the Court's relative assessment of Craig and Mr Shackleton in these conversations. Importantly though Mr Shackleton conceded that the effect of what he had said to Craig was that this was a business which Craig could safely purchase.

1. Craig relied on the statements that Mr Shackleton made. The fact that the statements were made, as Craig said, by an officer of one of Australia's big four banks, was something which I accept impressed Craig and influenced him in accepting the correctness of what was said. But part of what was unusually influential in this case on Craig's mind was the extra weight added to the Bank's statements by the fact that Telehandlers was already a customer of the Bank.

1. These statements also indirectly later influenced Denise to give her guarantees. Craig and Denise appeared to have a relationship where they communicated well. Both Patrick and Craig took the trouble to explain to their spouses the impressions they had received about this proposed transaction from both the Bank and Mr Steinberg.

The 8 October Meeting

1. The first combined meeting between vendor, purchaser, Bank and mortgage broker took place on 8 October 2004. The meeting was held at Telehandlers' business premises in Catherine Fields. The purpose of this meeting was for the Bank officers to inspect the machinery used in the business. Present were Craig, Patrick, Mr Shackleton, Mr Grainger, Mr Steinberg and Mr Provenzale. In fact no operating machinery was able to be inspected. Mr Shackleton took this as a good omen, saying to Craig, "It's good there's not much to look at, because it's all on site". Craig wrongly thought that Mr Donovan was at this meeting. But that was only a minor error and did not much affect Craig's credibility.

1. Craig and Mr Shackleton met up again a few days later at a building site near Homebush, where Mr Shackleton observed one of the telehandlers in action.

1. Some statements were also made to Craig at a later restaurant meeting. There was much controversy in the proceedings as to when this restaurant meeting took place, and indeed whether it was after the loan was made. The Bank's witnesses are right and the restaurant meeting took place later than Craig thought. But what Mr Shackleton said on this occasion repeated what he had said earlier: "This looks very good, you are very lucky to have this opportunity". I accept that Craig relied on these statements to enter the Statewide transaction and to persuade Denise to do so as well.

The Credit Memorandum - 18 October 2004

1. On 18 October 2004 Mr Shackleton submitted to the Bank's credit manager, Mr Coupe, a memorandum for the financing of the transaction ("the Credit Memorandum"). Mr Shackleton first gave the background to the application in the Credit Memorandum:

"Preamble...

Statewide Tele-Handlers & Plant Hire Pty Limited ("Statewide") is a business already utilising National Facilities throughout Liverpool Business Banking centre and have done so for a trouble free period of 2 ½ yrs, The Current owners of the company being Claudio (sole Director) & Gina Provenzale (100% sole Shareholder), Claudio is selling the business as he is wanting to return to his former interest of larger scale "Crane Hire" to such companies as Caltex, Shell & Kell and Rigby. To this he has offered his current operations Manager "Craig Smith" the opportunity to purchase the business after successfully running the "day to day" operations for the last 15months. The opportunity to fund the purchase came about through Claudio's relationship with Garry Steinberg of GHS financial services who is part of the Banks accredited broker Asset Finance scheme.

Background/History of Business...

Statewide as the name suggests [sic] are involved in the Hire (both wet & dry) of Telescopic Materials handling equipment. The equipment is able to be used in a number of industries including Construction, Public work, Agricultural, landscaping & Shipping. The specific tasks the machines are able to be used for within the above industries are varied from being used as a maintenance platform to a Sweeper or its more common used [sic] as a lifting device for products such as Hay or Building materials. "Tele-handlers" are very popular in Europe & America with the use of the machines rapidly becoming popular here in Australia based on their versatility."

1. Mr Shackleton further explained the purpose of the submission for approval in the Credit Memorandum:

"Purpose of the Submission...

We have been approached to look at assisting current operations Manager "Craig Smith" and his father "Patrick Smith" in purchasing the business from current owners. R/M has recently met prospective proprietors now on two occasions, firstly at business premises @ Catherine Fields along with Garry from GHS & David Granger (Mgr Asset Finance). Secondly R/M net with just Craig @ Mirvac - Nevington site @ Homebush where R/M was able to view machinery @ work.

Both Craig & Patrick bring a wealth of knowledge & experience to the table with Craig working directly in the business for the past 15 mths. Craig' previous experience prior to "Statewide" was as a "Operation's manager" for TJF/EBC based at Hoxton Park dealing with Forklifts & Cranes for 10 yrs and his Father Patrick (recently retired). Having 35yrs in the Construction, mining, Transport & Manufacturing industries during his role as a senior management for J.Blackwood & Son as a Senior Accountant."

1. The last statements about Patrick's role in "senior management" and as a "Senior Accountant" were wrong. Without intending any disrespect to Patrick, having seen him in the witness box, heard him give an account of himself and his background in evidence, he has neither the manner nor the conversation of a retired senior accountant.

1. The Credit Memorandum identified 17 Telehandler units to be financed and identified the structure of the purchase as Business Assets $1,800,000 and Goodwill $400,000. The memorandum suggested that the assets to be acquired were suitable for equipment finance with a term of 5 years being acceptable to the Bank, given the asset type.

1. The Credit Memorandum proposed Patrick and Nadine's unencumbered home and Craig and Denise's home and the re-finance of their existing ANZ Bank lending.

1. The financial and management analysis in the balance of the Credit Memorandum is divided into sections: on Debt Servicing/Sensitivity; Cash flow Forecast; Management/Management Information Systems, aspects of which have become the subject of expert commentary and analysis in these proceedings.

1. Credit Memorandum - Debt Servicing Sensitivity Analysis. The Credit Memorandum addressed the financial projections of the purchased business, and commented bluntly "we have completed a debt servicing table based on existing financial performance which indicates that at current levels debts would not be able to be serviced". Indeed for the 12 months projected forward to 30 June 2005 the Debt servicing sensitivity analysis showed a deficiency of $68,832. This conclusion was then mitigated to a degree by the comment "This does not reflect the growing rate of sales/income which has occurred during 2004". The Credit Memorandum

"We have been provided projected CFB and P&L with the following summary which shows;

Customer protection	Bank Adjusted
Projected Sales/Income for Oct 04 till Sept 05	$1,071,112	$1,071,112
Less Expenses (includes debt servicing as per above table)	$ 838,000	$935,508
NPBT	$233,112	$135,604

Notes on projected P&L"

1. The source of these figures was a forecast for the year October 2004 to September 2005 (Exhibit A) that had been produced largely by Mr Steinberg with some input from Craig and Patrick, which showed a gross profit for the business of $1,071,112 for the 12 months, expenses of $838,000 leaving a net profit before tax of $233,112. Craig and Patrick later signed this forecast on 11 November in the presence of Mr Shackleton. Although he does not remember the occasion, it must have occurred as he acknowledges his signature on the document. And I accept the Bank's contention that Craig signed the 11 November forecast, Exhibit A to signify his agreement with its contents. Mr Steinberg was largely responsible for putting this 11 November forecast together. The Bank's adjustment to the projected business expenses added back $97,061 in depreciation which had not been included in the 11 November forecast.

1. The financial commentary on this information continued in the credit memorandum:

"1...Leasing expenses allowed @ $33k pm with actual being $36,245pm amortising over 5 yrs in full Adjusted amount in leasing commitments $434,940pa. Business Mortgage finance also added to expenses @ $58,068pa

2...Directors wages paid $172,800 out of expenses sufficient to cover personal HML debt &Credit card expenses.

3...No allowances for depreciation

4...LER dd 15/10/04 confirms continued trend of increasing sales with the following;

Turnover 12 mths till 30/09/04 $964,789

Sep. ¼ Turnover $324,585"

1. The September Quarter figures of $324,585 if projected for the full year ($1,298,340) showed a recent lift in sales but this was only identifying one quarter's performance.

1. Credit Memorandum - Conditions Precedent. Mr Steinberg proposed Conditions Precedent to be met before drawdown of the loan, which were later reflected in Mr Shackleton's 26 October memorandum of the Bank's approval sent to GHS Financial. Apart from a requirement for satisfactory Bank approved machinery valuations, which is dealt with below, the Credit Memorandum required "signing all CFB [Cash Flow Budget] additional financial information along with a separate accountants' due diligence of vendors financial statements".

1. This condition was designed to ensure that the Bank was lending on verified genuine vendor's figures that Craig and Patrick accepted as correct. But no due diligence was done on the vendor figures for the Bank's other client, Telehandlers. What such due diligence would have then shown cannot now be decided as the Bank's lending files for the vendor are not available. Nor is there any letter produced by an accountant for Statewide, Patrick or Craig indicating that such due diligence had been done.

1. The Credit Memorandum - Exit Analysis. Finally, the Credit Memorandum concluded with an "Exit Analysis", which calculated when the Bank would have the proposed facility of $2,200,000 paid out. Taking the available FY03 ($122,927) and FY04 ($196,533) NPATs, the exit analysis calculated an average NPAT (of $160,879 - the average the figure is slightly wrong) and projects forward NPAT of $163,173 for FY05.

1. Dividing the average NPAT of $160,879 into the total to be drawn down of $2,200,000, the result is a pay out after 13.67 years. The memorandum commented that this was "outside current guidelines, exceeding 8 years".

1. But the Exit Analysis takes some comfort that despite exceeding the 8 year guidelines for exit: (1) the asset finance was based on a 5 year term with "serviceability proven prior to NP [net profit] results; term funding against residential property "could be taken over 20 years term"; and, the directors wages of $172,000 to be drawn before calculation of net profit "could be adjusted as required". In other words the, Bank's excessive exit period is mitigated to an extent by "proven serviceability" and a buffer through the directors not taking wages from the business. But the validity of these mitigating factors relies upon the accuracy of the figures, which Mr Steinberg had partly sourced from the vendor.

1. On 26 October Mr Shackleton obtained Mr Coupe's approval to the Credit Memorandum. Mr Coupe's approved facilities totalling $2.461 million "subject to the conditions and covenants contained in the Credit Memorandum". The Bank's approval was therefore on the basis of a condition precedent that included Craig and Patrick "signing of all CFB & additional financial information", which they did comply with when they signed the 11 November forecast, Exhibit A and an associated current weekly revenue analysis, Exhibit B. But the Bank's approval was also based on obtaining "a separate accountants due diligence of vendor's financial statements". This was never done.

1. Mr Shackleton sent a facsimile to Mr Steinberg the same day thanking him for "this quality referral" and stating "it gives me pleasure to advise that the following funding has been approved, subject to the conditions of lease covenants detailed below".

"Asset Finance - Equipment Loan $1.8 million

Equipment Loan - $1.8 million

Term Business Funding - $400,000"

1. The 26 October communication of approval identified the security for the facility as: (1) a registered mortgage debenture of the asset holding company and trading company including goods mortgages over individual assets being purchased; (2) director's guarantees for the total amount of $2,200,000 fully supported by mortgages over the Sylvania Waters and Oyster Bay property; and, (3) a key person policy over Craig and Patrick with the Bank noted as an interested party.

1. The Bank then identified the conditions precedent before loan draw down in substantially the same terms that Mr Shackleton had identified in the Credit Memorandum. Most of these were purely administrative and need not be mentioned. Two were of special importance: (1) satisfactory Bank approved valuations and inspection of the machinery assigned to the Bank provided in advance; and (2) a "letter to be provided by Clients Accountant that Due diligence of vendor's Financial Statements has been completed". Mr Shackleton had turned the requirement for accountant's due diligence of the vendor's financial statements into, a condition that such due diligence be evidenced by a letter.

1. The machinery valuation and inspection was done and has not been controversial in these proceedings. Machinery valuation firm, Slattery Auctions undertook a valuation on 23 November 2004 of 15 units identified on various building sites around Sydney. Slattery Auctions valued these units at fair market value on two bases: (1) fair market value for existing use purposes was "in the vicinity of $1,140,000"; and (2) an estimate for realisable purposes only was $856,000. Both sides accept the accuracy of this valuation.

1. Other Conditions Precedent Findings. Mr Coupe explained the importance of the conditions precedent placed on this loan approval, conditions for the due diligence letter and the financial advisers' certificates. He agreed that they were conditions that he "fundamentally wanted to have carried out" and that "they protected both borrowers and the guarantors, the customers...and the Bank". He saw them as "fundamental requirements before these transactions could be completed" to which he did not expect Mr Shackleton or anyone else in the Bank to merely "pay lip service". Unfortunately neither Mr Stubbs nor anyone else on behalf of Statewide did such due diligence nor provided a genuine financial advisers' certificate.

1. A later issues under the Banking Code of Practice is whether the Bank failed to "exercise the care and skill of a diligent and prudent banker" in forming its opinion about Statewide's ability to repay the loan for which it had applied. Some of Mr Coupe's and Mr Shackleton's own evidence about these pre conditions and the circumstances in which they were imposed is relevant to this judgment. Mr Coupe explained that he thought Mr Shackleton at that stage was relatively experienced in "doing transactions of this size". He believes it is likely, and I accept what probably happened, is that Mr Coupe "workshopped" the transaction with him to explain to Mr Shackleton that what Mr Coupe wanted put in by way of preconditions in the Credit Memorandum. Mr Coupe was a very candid witness and was plainly unsettled by the possibility that the preconditions that he had imposed on this loan might not have been fulfilled and I accept the following judgments that he made on the situation as the soundly based opinions of a practising banker:

(1)   "it would have been a serious breach of the Bank's policies";

(2)   "he would not regard that as an action of a prudent banker";

(3) "it would be unfair both on the banker on the borrowers"; and

(4) "he would have expected the due diligence to be completed if he had imposed the condition" and he would have expected that the Bank's client also would "normally want a due diligence done...before they completed the purchase".

1. But Mr Coupe accepted that some Bank's customers simply do not understand the concept of "due diligence". In my opinion having seen him in the witness box, Craig Smith was such a person. Nor in my view did anyone from the Bank or Mr Steinberg or Mr Stubbs bring home to Mr Smith exactly what this precondition meant, and how it might benefit him.

1. Mr Shackleton also supported the need for Craig and Patrick to receive financial advice, as the loan approval preconditions required, because of the special risks associated with this particular transaction. Mr Shackleton understood in the absence of some other source of capital and based purely on Patrick and Nadine and Craig and Denise's personal balance sheet that if the business being acquired did not perform and the Slattery Auctioneer's valuation was correct (so the assets could only be sold for $1.14 million) that the Smiths would inevitably have to find about $900,000 and would lose their houses.

Other Aspects of the Credit Memorandum

1. Patrick Smith. Patrick was a salesman and had no accounting experience. As the Credit Memorandum shows, Patrick's accounting and management experience was used as a way of justifying the probable revenue generation of the new management at Statewide. Mr Shackleton rightly regarded Patrick's management experience as something "significant to draw to Mr Coupe's attention". But in my view Mr Shackleton was probably misled by information sourced from Mr Steinberg, to conclude that Patrick had a professional accounting background. A tax return that Mr Shackleton had been sent certainly showed that Patrick was a salesman with an income of only $24,000 at FY04 year end. Mr Shackleton was unable to explain why he put what he did in the Credit Memorandum. I accept Mr Shackleton's evidence that he does not think he met Patrick until about 23 December. But Mr Shackleton is not to be blamed in my view for this mistake about Patrick, because it was contributed to by Mr Steinberg, acting on behalf of Craig. Mr Steinberg's 22 December finance application makes similar but less effusive statements. But the mistake emphasises how much of the Bank's logic in approving this application was based upon assumptions about Statewide's management that had not been verified.

1. Debt Service and Error. The debt servicing sensitivity table and the Credit Memorandum showed that on the financial accounts for the Telehandlers business there was a debt servicing deficiency of $68,832 projected for 2005, leaving Mr Shackleton to agree that the business was not viable. But Mr Shackleton had made an error by understating the amount outstanding on the mortgage on Patrick and Nadine's house by $100,000 ($240,000 rather than $340,000). Had the mortgage been correctly recorded the debt servicing deficiency would have been even larger.

1. Evidence of Growth of 47 Per Cent. The Credit Memorandum projected sales growth of 47 per cent based on Telehandlers' 2004 cashflow budgets. These budgets were not available at the time of hearing. But there is evidence in the Credit Memorandum itself that some such budget information had been obtained from Telehandlers. But in the absence of documents proving that something was obtained in writing from Telehandlers I am not prepared to infer that the information the Bank received was anything more than a verbal communication.

The LT Services Certificate - 22 November 2004

1. Shortly after 22 November Mr Stubbs sent a rather non-committal and poorly structured letter to the Bank:

"22/11/04

A.B.N: 23 002 443 174

National Australia Bank Limited

Atom Alan Shackle ton [sic]

402-410 Chapel Road

Bankstown NSW 2200

Dear Sir,

We confirm we are newly appointed accountants for Craig and Patrick Smith. They come recommended

By Garry Steinberg. [sic]

My association thus far, is that I discussed with both Craig and Patrick a company structure, planning, purchase contract and the general procedures. To date I have not studied the financials for the purchase of Statewide Telehandlers Pty Limited. From discussion with Craig and Patrick and a brief overview of the company, it seems that the business may be viable.

If you have any further questions in relation to this matter, please contact Geoff Stubbs on the above number.

Yours faithfully,

Liverpool Taxation Services Pty Ltd

[signature]

Per

Geoff Stubbs"

1. Mr Stubbs composed, signed and sent this LT Services letter to the Bank. I accept his recollection that he sent the letter directly to the Bank for Mr Shackleton's attention. The faxed original then remained in his file, until just before 21 December, when as the evidence later reveals, Mr Steinberg requested a copy of the letter that Mr Stubbs had already sent.

1. I infer from its contents that the 22 November letter was prepared when Mr Stubbs had only been newly appointed as an accountant "for Craig and Patrick Smith". It does not convey that Mr Stubbs was giving accounting advice to Denise or Nadine. He did not advise either Denise or Nadine. It accurately set out the limits of Mr Stubbs' involvement thus far: "to date I have not studied the financials for the purchase of the company, it seems that the business may be viable". This was a clear statement that Mr Stubbs was not then in a position to advise any of the Smiths about the future viability of this business. Importantly the letter invited the Bank to whom it was addressed to contact Mr Stubbs if "you have any further queries in relation to this matter". Mr Stubbs made clear that a communication from the Bank to make contact with him to resolve the Bank's remaining queries would not be unwelcome.

1. Mr Stubbs was firm about the limitations in what he was communicating to the bank in this letter. Although what the letter conveys to the Bank must be assessed objectively, Mr Stubbs' subjective assessment of what he was communicating through it coincides with an objective view. He was ably cross-examined by Mr Price, the Bank's counsel, but remained firm in his evidence about this letter and his actual advice - evidence which I accept. Mr Stubbs only provides taxation services, as his letterhead implies. He is a chartered tax adviser and is a member of the Taxation Institute of Australia. He said that the only "general procedures" referred to in the letter that he discussed with Craig or Patrick were "tax procedures" and that he did not give general advice about the merits of the purchase contract. He said that he only gave tax advice as to the company structure that Craig and Patrick were proposing. He did not provide any services beyond tax services and in my assessment, read as a whole, his letter did not imply that he did.

1. The 22 November letter also implies that Mr Stubbs has not done any due diligence on the financials in the vendor's business. The letter shows that no steps had been taken by then to fulfil that condition precedent in Mr Shackleton's Credit Memorandum. Mr Stubbs arranged for the incorporation of Statewide. Craig became the sole director and company secretary, and Craig and Patrick became shareholders, each holding 90,000 shares.

1. Had the Bank given any consideration in mid-December to whether that condition precedent had been or might be fulfilled, the 22 November letter was a powerful reminder to the Bank that nothing in the nature of due diligence on the vendor had been done by late November by the only accountant then known to be associated with Statewide.

1. Mr Stubbs did not see the 16 December draft contract or the Business Sale contract or the Equipment Sale contract pursuant to which Statewide acquired Tele-handlers' stock and business. They were of course not available when he wrote his 22 November letter to the Bank. But even after that and before 23 December, Craig did not get any business or financial advice from Mr Stubbs, who I accept did not hold himself out as competent to give such advice. I accept as correct Mr Stubbs' denial that Craig and Patrick asked him for his opinion on the viability of the business that they were proposing to acquire.

1. Craig received the Slattery's Auctions valuation shortly after 23 November, valuing 15 units at $1,140,000, and $856,000 on a forced sale basis. I accept that Craig was concerned that the valuations would not support his planned borrowing, and tried to persuade Mr Provenzale to lower his asking price below $2,000,000. Mr Steinberg expressed the view that "Claude's [Mr Provenzale] is not going to budge". Even when Craig rang Mr Provenzale directly he would not lower his price. This episode shows once again that Craig thought Mr Steinberg could be asked to act in obtaining the finance and effecting the Statewide transaction in Craig's interest. It is difficult to see how Craig could have seen Mr Steinberg and GHS Financial as the Bank's agent rather than his.

1. The Bank had required that $200,000 be placed into the Statewide's new business after the purchase, as working capital. Patrick and Nadine were to be the source of this sum. But this was reduced at the time of a supplementary Credit Memorandum to $180,000 to be paid into Craig's account with the Bank. The reduction was to take into account the professional fees the Smiths had by then already incurred.

The Supplementary Credit Memorandum

1. Mr Shackleton prepared a supplementary credit memorandum for Mr Coupe's approval. The Supplementary Credit Memorandum showed a weakening of the Smiths' application due to the poor results of the equipment valuations from Slattery's Auctions. And the Supplementary Memorandum commented on the fact that the Slattery's Auctions valuation (recorded here curiously at $1,270,000) was well below the contract for sale equipment figure, as follows:

"While the overall position for application has weakened due to the Asset finance valuations showing a lower valuation that the contract of sale. However the cashflows of the business have not weakened and infact R/m has confirmed that the Business for the month of Oct 2004 were @ $170k v's the $92k projected in the original CFB.

Pricing for deal will reflect changed position with R/M to discuss with leasing appropriate margin. Plus no discount on BMIOL rates.

R/M has found in the 2 months since being introduced to these clients that they are trustworthy & honest and have the full support of the R/M into this transaction."

1. Mr Stubbs must also have spoken to Mr Shackleton the operation of proposed reporting covenants, as the Supplementary Credit Memorandum refers to such contact having taken place. But it was not a conversation that touched on due diligence on the vendor's financial statements. No Bank officer received from Mr Stubbs any indication that he had done such due diligence or that it had been done by others.

1. Interestingly the Supplementary Credit Memorandum returned to the question of the need for satisfaction of the conditions precedent, saying:

"Recommend approval of memo subject to eBL being updated & outstanding precedent being completed being;

1....Letter from Account[ant] regarding due diligence

2....All parties to transaction (Directors & Guarantors) to have completed Financial Advisors Certificate

3....Formation Balance Sheet in State-wide

4....Business Insurance policy with NAB noted as interested party to be held prior to settelement."

Involvement of Mr Ronis - Late November 2004

1. Craig's initial account of the Statewide transaction and of proceeding to sign the Bank's security documents in mid-December 2004 omits reference to the solicitor Mr Ronis. But Mr Ronis witnessed these documents and Craig engaged him to act as solicitor on the purchase of the Telehandlers' business. The solicitors for the vendor sent a draft contract for the sale of the equipment and business to Mr Ronis on 30 November. On 7 December the solicitor for Telehandlers provided information to Mr Ronis about Newtral and updated the equipment purchase list to 17 items.

1. When it was put to Craig in cross-examination that he had requested Mr Ronis "to give advice to your wife and your parents in relation to the effect of the guarantees they were to execute", Craig said that "I asked him to check the documents and make sure they were OK for us". Mr Ronis later certified that he had explained the legal effect of the guarantees to Denise and Craig. He was not called in evidence. To the extent that Craig and Denise suggested in their evidence that they did not understand the legal nature of the transaction they were entering I do not accept their evidence. They did at other times admit sufficient understanding of their guarantees and the mortgage over their Oyster Bay property. And in the absence of any account from Mr Ronis, their evidence of the limits of what he had advised them was an unsatisfactory part of their evidence. In my view, Mr Ronis is likely to have conveyed to Craig and Denise the legal effect of all the Statewide transaction documents.

The Guarantor Warnings - 16 December 2004

1. These reasons have already set out the loan agreements, guarantees and mortgages and sale agreements that Smith family members all signed on 16 and 23 December 2004: see above under "Overview of the Principal Uncontested Facts". But a number of warnings and legal advice certificates were included in those instruments and they are set out in more detail here.

1. The Bank's guarantee documents contained warnings in two places. The front page of the Fixed Loan Guarantee included the following notice ("the Front Page Warning"):

Warning!

Please Read!

You should independent legal and financial advice on the effect of this guarantee and indemnity before you agree to sign it.

You can refuse this guarantee and indemnity.

There are financial risks involved in signing this guarantee and indemnity (for example, it may become necessary for you to sell your assets so that you can pay us).

You have the right to limit your liability under this guarantee and indemnity in accordance with the Code of Banking Practice (if it applies to this guarantee and indemnity) and as allowed by law.

You can request information about credit contract or other facility or financial obligation to be guaranteed (including any existing credit contract, facility or financial obligation with us to be refinanced by the new credit contract, facility or financial obligation).

This guarantee and indemnity applies in relation to future credit contract or other facility of financial obligation to the extent it is within a limit previously agreed by you in writing. Otherwise this guarantee and indemnity only applies to a future credit contract or other facility or financial obligation if we give you a copy of the relevant contract document and subsequently obtain you written acceptance of the extension of the guarantee and indemnity in this regard.

This Guarantee and Indemnity is an important document.

By signing it you become personally responsible instead of, or as well as, the customer up to the amounts described in the details, even if you have given the Bank separate facility. They include amounts, which the customer owes the Bank with any other person. They may also include amounts, which may increase, for example if the customer has borrowed in a foreign currency or seeks to repay a fixed rate loan early.

In addition you can become responsible for additional amounts up to maximum liability.

It is likely that the Bank will be able to resort to any mortgage or other security which the Bank holds or which you give the Bank in relation to your own affairs as security for the amounts covered by this document. If you are an individual this would include any mortgage over your family home."

1. The Fixed Loan Guarantee included a separate final execution page for each guarantor. Above the execution blocks on each of those pages the following text appeared ("the Execution Page Warning"):

IMORTANT

BEFORE YOU SIGN

READ THE GUARANTEE AND INDEMNITY AND THE TERMS RELATING TO THE CREDIT CONTRACT OR OTHER FACILITY OR FINANCIAL OBLIGATION TO BE GURANTEED

You should obtain independent legal and financial advice.

You should make your own enquiries about the credit worthiness, financial position and honestly of the debtor.

THINGS YOU MUST KNOW

Understand that, by signing this guarantee and indemnity, you may become personally responsible instead of, or as well as, the debtor to pay the amounts which the debtor owes and our expenses in enforcing the guarantee and indemnity.

If the debtor does not pay you must pay. This could mean you lose everything you own including your home.

You may be able to withdraw from this guarantee and indemnity or limit your liability. Ask your legal adviser about this before you sign this guarantee and indemnity.

This guarantee and indemnity applied in relation to a future credit contract or other facility or financial obligation to the extent it is within the limit previously agreed by you in writing. Otherwise this guarantee and indemnity only applies to a future credit contract or other facility or financial obligation if we give you a copy of the relevant contract document and subsequently obtain your written acceptance of the extension of the guarantee and indemnity in this regard.

1. As the High Court further explained in Ankar, the principle is the by-product not so much of the general law of contract as of the special relationship between creditor and surety arising out of the suretyship contract upon which equity fastened to protect the surety when the creditor's conduct affected the surety's liability: and Ankar at 559; and Holme v Brunskill (1878) 3 QBD 495 per Cotton LJ, at 505. The High Court explained this in Ankar [at 559]:

"According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety's risk, eg, a reduction in the debtor's debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety."

1. But important issues are whether the express terms of the suretyship agreement made between the Bank and Craig and Denise overcome the terms of this general principle.

1. The Bank answers Craig and Denise's conditions precedent argument by contending that the conditions precedent with the benefit of the Bank and could be waived by the Bank. That is correct in contract. The Bank did not insist on those conditions precedent being fulfilled. The Bank's contention is correct that that does not give a contractual remedy to Craig and Denise. But that does not impair the force of the Bank's failure to enforce the conditions precedent when the Court is assessing relief for example under the Contracts Review Act.

1. The Bank disputes that causes of action based on ASIC Act, s 12ED have not been properly pleaded. Before the Court makes findings on this the pleading issue should be resolved.

(e) Claims in Negligence

1. Craig and Denise's claim in negligence is predicated upon the findings that Mr Shackleton gave Craig financial advice in connection with the 23 December Equipment Loan and the Fixed Rate Loan offered to Statewide. Craig and Denise contend that Mr Shackleton acted well beyond the role of an employee of the bank and took upon himself the mantle of adviser to Craig and Denise. They rely upon the principle that where a bank actually gives advice to a customer upon financial affairs, then in addition to the ordinary contractual rights that may exist between the bank and its customer, the relationship between the parties may be such as to found either or both a common law duty of care or a fiduciary duty: CBA v Smith (1991) 42 FCR 390, at 391.

1. Here Craig and Denise contend that Mr Shackleton (and Mr Donovan) assumed the position of business adviser to Craig and Denise. Craig and Denise alleged that accordingly the Bank was under a duty to advise them with due care and skill. They further allege that the bank failed in the following ways to advise the Smiths with due care and skill: contrary to Mr Shackleton's advice, the business was not good and profitable and would not be able to meet its loan repayment; the bank failed to advise Craig and Denise of the commission to GH Services and that without an injection of funds the business would inevitably fail given the value of the business equipment and the Bank would inevitably make a call on the guarantees; the Bank failed to undertake any proper internal due diligence as to the serviceability of the loan and did not disclose that it had not done so; the Bank failed to fulfil its own conditions precedent; Mr Shackleton knowingly misrepresented Mr Patrick Smith's occupation to Mr Coupe; about the circumstances in which Mr Donovan had procured Denise's signature on the second guarantee; and, the Bank engaged in misleading, deceptive and unconscionable conduct.

1. The Smiths say that they relied upon the bank's advice and suffered loss and damage as a result.

1. The Court has found that Mr Shackleton gave advice to Craig. In my view he took sufficient responsibility for the correctness of the representations he made and was seen by Craig to be in a position know whether the representations were correct that a duty of care was attracted. Those representations did cause Craig and Denise to enter this transaction.

1. The Bank contends that it did not give financial advice. But in my view it fails in that contention.

(f) Claims in Breach of Fiduciary Duty

1. Craig and Denise allege the bank owed them a fiduciary duty. They say that the Bank, although being expected to act in its own interests in ensuring the security of its position as lender to its customer, this case nevertheless created in its customer the expectation that it would nevertheless advise in the customer's interests as to the wisdom of this proposed investment: CBA v Smith, at 391.

1. When can a fiduciary relationship arise? Craig and Denise point to CBA v Smith, at 391 which makes clear that a bank can create such an expectation "whether customer may fairly take it that it to a significant extent his interest is consistent with that of the bank in financing the customer for a prudent business venture" and by that means the bank may become a fiduciary and occupy the position that Brennan J described as "an investment advisor" in Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 384 - 385.

1. Craig and Denise allege that the bank gave financial advice to Craig in the form of representations as to the viability of the business of Telehandlers that Craig and Denise fairly took it that their interests were consistent with those of the Bank in financing a prudent business venture.

1. Craig and Denise say that accordingly the Bank occupied a fiduciary relationship with them, acting as their investment advisor in respect of the 23 December Equipment Loan and the Fixed Rate Loan. Moreover Craig and Denise say that the bank breached its fiduciary duty by much the same kind of conduct as attracts liability in negligence.

1. Craig and Denise allege that the Bank was also the Bank for the vendor parties "in a manner capable of giving rise to a conflict of interest". But there is very little evidence in this case as to what that conflict of interest with the vendor parties really was. This is because of the documents missing from the Bank's file.

1. Craig and Denise also made allegations about GHS Financial owing fiduciary duties to them. The settlement of the portion the proceedings involving GHS Financial means that these allegations need not be considered.

1. The Bank rejects in submissions that it gave any financial advice. In my view, contrary to those submissions the Bank did give financial advice through the statement Mr Shackleton made the subject of a Court's findings. Accordingly Daly v Sydney Stock Exchange duty is attracted. Craig and Denise have not established any conflict of interest on the Bank's part. The parties did not really articulate in final address the precise breaches of fiduciary duty relied upon. Any remedy for breach of fiduciary duty may be no wider than the conclusions as to negligence.

(g) Claims under the Contracts Review Act 1980

1. Craig and Denise also make a claim under the Contracts Review Act. They submit that the guarantees were each within Contracts Review Act s7 "unjust in the circumstances relating to the contract at the time it was made" and that "for the purpose of avoiding as far as possible an unjust consequence or result" the Court should in exercise of its power under that section, refuse to enforce or declare void the Guarantees and should also grant Contracts Review Act s 8, and Schedule 1 relief for the payment of money by way of compensation to Craig and Denise.

1. Contracts Review Act s 4 defines "unjust" as including "unconscionable, harsh or oppressive, and injustice shall be construed in a corresponding manner". Contracts Review Act s 9 serves a number of important purposes, requiring the court to have regard to the public interest as well is to all the circumstances and identifying a list of potentially relevant matters as follows:

"(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:

(a) compliance with any or all of the provisions of the contract, or

(b) non-compliance with, or contravention of, any or all of the provisions of the contract.

(2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following:

(a) whether or not there was any material inequality in bargaining power between the parties to the contract,

(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,

(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,

(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,

(e) whether or not:

(i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or

(ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity,

(f) the relative economic circumstances, educational background and literacy of:

(i) the parties to the contract (other than a corporation), and

(ii) any person who represented any of the parties to the contract,

(g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed,

(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,

(i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,

(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:

(i) by any other party to the contract,

(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or

(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,

(k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and

(l) the commercial or other setting, purpose and effect of the contract.

(3) For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made.

(4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.

(5)In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made."

1. The relevant applicable law in relation to Contracts Review Act may be shortly stated. The contract may be unjust "because of the way it operates in relation to the claimant [substantive injustice] or because of the way in which it was made [procedural injustice] or both": West v AGC (Advances) Ltd (1986) 5 NSWLR 610, at 620 (West). Contract may be "unjust" under the Contracts Review Act even though the circumstances that give rise to the injustice are unknown to the other party and so contract can be "unjust" even if it does not qualify as unconscionable, harsh or oppressive: West, per McHugh JA at 621, Beneficial Finance Corporation v Karavas (1991) 23 NSWLR 256, at 277 (Karavas), Nguyen v Taylor (1992) 27 NSW LR 48 at 71, per Sheller JA (Nguyen), and Perpetual Trustee Company v Khoshaba [2006] NSWCA 41 (2005) 14 BPR 26,639 at [94] - [96] (Khoshaba).

1. The application of the Contracts Review Act involves a two-step process: Riz v Perpetual Trustee Australia [2007] NSWSC 1153, at [51] per Brereton J. The first step is to determine whether the contract was unjust in the circumstances in which it was made, which is a conclusion of fact although one of ultimate fact involving a broadly based a value judgment: Antonovic v Volcker (1986) 7 NSWLR 151, at 154 - 155 (per Samuels JA, Kirby P agreeing) (Antonovic ). The second step applies if the contract is found to be relevantly "unjust", and involves the exercise of judicial discretion to determine what if any relief should be granted: Khoshaba [34] - [36] and [109].

1. A particular focus of Craig and Denise's submissions is a contention that there was procedural injustice here. The details of their individual contentions are set out in paragraph 10.9 of their closing submission, and will be considered in the course of argument below.

1. Craig and Denise also submitted having regard to the public interest element in Contracts Review Act s 9 (1) that the Court should recognise that in this case the Bank has engaged in a classic case of "asset lending", which authority suggests attracts particular public interest considerations in the application of the Contracts Review Act, as Basten JA explained in Khoshaba at [128]:

"[128] To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f). That does not mean that the Act will permit intervention merely where the borrower has been foolish, gullible or greedy. Something more is required: see Esanda Finance Corp Ltd v Viet Nho Tong & Thi Kim Lien Tong (1997) 41 NSWLR 482 at 491 ; (1997) NSW ConvR 55-819 ; BC9701658 (Handley JA) cited with approval in Elkofairi (above) at [77] by Beazley JA"

1. But there are analytical dangers in merely labelling any loan transaction as "asset lending". Allsop P explained this in Fast Fixed Loans Pty Limited v Samardzic [2012] NSWCA 260:

"'Asset lending' is not a label or a legal frame of reference. It is a convenient expression, used in cases such as Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 ; 14 BPR 26,639 and Spina to describe a form of lending where the lender has little, if any, regard for the capacity of the borrower to repay and rests satisfied with the security to protect itself. As Campbell JA made clear in Kowalczuk at [96]-[99], the conclusion of "unjust" for the Act, ss 7 and 9 depends on all the circumstances and not on labels. There is no reason why considerations such as those here cannot lead to the conclusion that a contract of guarantee is unjust if entered into by a lender who is uncaring of a guarantor's capacity to repay where there is a real and significant possibility of default by the borrower and the guarantor takes no benefit under the borrowing. This is particularly so in all the other circumstances of this case - most particularly the recognition by the appellant of the only two likely sources of repayment, one (successful refinancing) having a real risk to it. The appellant lent at a significant interest rate, reflecting the underlying commercial risk, appreciating the position the parents had been placed in, without any basis to consider that the parents appreciated the commercial risk or that they could afford to take that risk."

1. Craig and Denise submit that this was a case of a lender who was uncaring of the guarantor's capacity to repay and where there was a real and significant possibility of default by the borrower and the guarantor took no benefit under the borrowing.

1. A substantial purpose of the legislative scheme of the Contracts Review Act is to protect persons who are not able to look after themselves: Khoshaba at [80] per Spigelman CJ. At the heart of the scheme is a recognition of the inadequacy of one party to protect her or his interests in the circumstances: Provident Capital Limited v Papa [2013] NSWCA 36 at [7].

1. Here Craig had not been told by the Bank or Mr Steinberg or Mr Stubbs that the Bank required him to obtain independent financial advice and to obtain a letter of due diligence from an accountant in respect of the vendor's financial statements. Nor was the Bank given clear notice that both those things had been done, both for the benefit of the Bank and Statewide and the guarantors. The only way that the Bank could be reasonably satisfied that these conditions had been fulfilled was to obtain evidence that they had been. The Bank failed to do this. Such information that the Bank did obtain fell well short of showing that financial advice had been given to Craig and Patrick. In light of what evidence the Bank knew it did not have from the Smiths' side of this lending transaction, the Bank is in no position to rely upon the warnings on the front page of documents the Smiths' signed on 16 December and subsequently. The Bank can certainly rely upon the declarations that the defendants signed that they had received financial advice: Perpetual Trustees Victoria v Longobardi [2009] NSWSC 654 at [103] and [104]. But such reliance is displaced by the objective absence of any evidence that due diligence had been done or any reliable evidence that financial advice had been given.

1. The Bank also emphasises that Craig had retained a solicitor and an accountant and that Craig and Denise had ample opportunity to ask questions of them before the transaction was completed. The defendant's also submit that Craig and Denise have failed to identify the manner in which they were to protect their own interest.

1. I do not find labels such as "asset lending" particularly helpful in analysing whether Contracts Review Act relief should be granted in a case such as this. But what is clear in my view from the Court's detailed findings in the earlier factual narrative is that the Bank had reason to know Craig and Denise had not received financial advice. The financial advice certificates that the Bank received were too uncertain a basis to infer such advice had been given. Moreover the Bank knew that due diligence had not been done on the vendor's financial statements because the Bank had neither asked for, nor been given, material which would show that such due diligence had been done. Added to that the multiple departures from prudent banking practice on the Bank's side had the capacity to increase the riskiness of this transaction for Craig and Denise, warranting a finding of unjustness enabling the Court's intervention. The appropriate intervention in my view is that Craig and Denise's guarantees and mortgages over the Oyster Bay property be declared void.

1. Contracts Review Act intervention is also warranted because of the conduct of GHS Financial in allowing signatures on the LT Services certificates to be forged and then for the certificates to be forwarded by facsimile to the Bank. This must have been the result of structural problems in the Bank's relationship with this mortgage broker.

1. The public interest element in relation to the Contracts Review Act is also attracted because the Bank has published its adherence to the Code and much of the risk in this case was created by the Bank's departure from the prudent conduct of a banker under the Code.

(h) Claims for Damages and Declarations

1. Craig and Denise claim that by reason of the Bank's conduct they suffered loss when they sold their Oyster Bay property on 8 August 2007. They applied the $113,578.92 equity realised from that sale in partial reduction of Statewide's obligations to the Bank. Relying upon the several pleaded common-law, equitable and statutory causes of action and claims to relief, Craig and Denise seek recovery of this sum, in addition to their claims to set aside their respective guarantees. Craig and Denise allege that their loss crystallised, and their various causes of action accrued, on the date on which they exchanged contracts to sell the Oyster Bay property, because it was then that what had been merely a prospective loss, became actual damage: cf Wardley Australia Limited v Western Australia (1992) 175 CLR 514, at 532.

1. Craig and Denise seek damages under ASIC Act ss 12GF(1), 12GM(2) and 12GM(7)(d). ASIC Act ss12GF(1) provides that a person "who suffers loss or damage by conduct of another person that contravenes [any of the ASIC Act provisions on which the plaintiff relies on these proceedings]... may recover the amount of the loss or damage by action against that other person...". The ASIC Act s 12GM(2) provides broad rights to compensation for contraventions of the Act.

1. Additionally ASIC Act s 12GM(7) allows the Court: to declare void the whole or part of the contract made between a person who is likely to suffer loss or damage and the person who engaged in relevant contravening conduct; to refuse to enforce any or all of the provisions of such a contract; and to order the person engaging in contravening conduct to refund money or pay compensation. Craig and Denise seek that the guarantees be declared void ab initio or not enforced under this provision.

1. Further Craig and Denise seek damages or equitable compensation: for breach of fiduciary duty, for breach of the ASIC Act, for negligence and for breach of contract. If a fiduciary relationship is established between themselves and the Bank Craig and Denise submit: (1) based on statements in CBA v Smith (1991) 42 FCR 390 (395) that the measure of damages for breach of that duty is relevantly the same as that in negligence, for breach of contract and for breach of the ASIC Act; and (2) that compensation for breach of fiduciary duty should be assessed based on loss at the time of the trial with the full benefit of hindsight: Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] 212 CLR 484, at 499 [35]. And Craig and Denise seek to quantify their damages for any breach of contract by reference to their lost equity in the Oyster Bay property, an approach that Rares J took in Wingecarribee Shire Council v Lehman Bros Australia Ltd (in liquidation) [2012] FCA 1028 and [988].

1. More complex damages issues, if they arise, could be deferred for supplementary hearing. But only one matter needs to be decided now. The Bank submitted that any damages chain of causation was broken by the failure of Craig and Denise to obtain independent advice, procure their own due diligence and that any damages were caused by their own conduct and the down turn in the construction industry. The answer to these contentions is that Craig and Denise's sale of their residential property was not voluntary and the various failures pointed to were in my view ultimately various failures to be sheeted home to the Bank's own conduct.

1. The account balance summary (Exhibit 24) for Statewide shows that $113,578.92 inclusive of interest was paid to the Bank on 7 August 2007 after the sale of Craig and Denise's Oyster Bay property. That is their primary loss. But the loss calculation may be more complicated than this. Craig and Denise may wish to contend that they would not have sold the Oyster Bay property without the pressure of Statewide's obligations to the Bank and would otherwise still own it now. Counsel for Craig and Denise submitted on 23 October 2013 that deferring the assessment of damages may be a procedural option.

1. I will leave this to the parties. Denise and Craig's loss can be assessed at $113,578.92 plus interest unless either party wishes to contend for a different figure. In that case it may be necessary to hold a separate damages hearing. The parties can deal with that issue when settling the short minutes of order to give effect to these reasons.

Conclusion and Orders

1. The Court's principal conclusions may be briefly stated. The Court has found that Craig and Denise Smith, the second cross-claimants are able to set aside the mortgages and guarantees they signed as part of the Statewide transaction which they entered in December 2004 on several grounds, including misleading and deceptive conduct by the Bank through its bank officer, Mr Shackleton, for breaches of fiduciary duty, for contraventions of the ASIC Act and under the Contracts Review Act. It is unclear whether the parties wish the Court to separately address any other aspects of the January 2006 renewal of the Fixed Rate Loan and further overdraft. But if required that can be the subject of further submissions when the parties bring in short minutes of order.

1. The usual order is that costs follow the event. But one or other party may seek a different or special order based on the Court's findings and conclusions or on out of Court communications. If so, the parties will have an opportunity to put argument about costs when the Court is hearing any submissions about the form of final orders. The orders below provide for this to occur.

1. The parties should be able to agree to bring in jointly acceptable short minutes of order to give effect to these reasons. To the extent that agreement cannot be reached on any issue the Court will settle the final form of orders after hearing further from the parties.

1. The Court therefore orders as follows:

(1)   Direct the parties by 5.00pm on 21 November 2014 to file with my Associate and serve either agreed or their competing short minutes of order to give effect to these reasons.

(2)   Direct the parties by 5.00pm on 21 November 2014 to file with my Associate and serve any submissions as to costs.

(3)   Direct the parties by 5.00pm on 28 November 2014 to file with my Associate and serve any submissions in reply as to costs.

(4)   List the proceedings for final argument on costs, the form of relief, and any other outstanding issues at 9.30am on 2 December 2014, or such other time and date as the parties may by agreement arrange with my Associate.

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Decision last updated: 24 November 2014