Octocane P/L v S R J Property Dev & NAT Aust Bank (No 2) No. Scgrg-98-831 Judgment No. S360
[1999] SASC 360
•31 August 1999
OCTOCANE PTY LTD v S R J PROPERTY DEVELOPMENT & NATIONAL AUSTRALIA BANK (NO 2)
[1999] SASC 360
Appeal from a Master
OLSSON J This appeal came before me on 25 May 1999 at short notice. On 4 June 1999 I published written reasons for the conclusion to which I came in light of arguments advanced by counsel (Octocane Pty Ltd v S R J Property Development & National Australia Bank [1999] SASC 231). I thereupon pronounced an order allowing the appeal and setting aside the order for security which had been made by a Master.
On 2 July 1999, before my order had been sealed and entered, Mr Marsden, of counsel for National Australia Bank (“NAB”), made an ex parte application for leave to appeal. In the course of his submissions it appeared possible that, as to three issues of fact, there may have been either a misapprehension on my part, or some lack of clarity in what had been put by counsel.
In the circumstances I recalled my non-perfected order and listed the matter for supplementary submissions on those three matters. These were subsequently addressed by Mr Abbott QC of senior counsel for the NAB and Mr Tilmouth QC of senior counsel for the appellant, who each spoke to very helpful written, note form outlines.
These reasons should be read as supplementary to those published on 4 June 1999.
I now turn to the three issues to which I have referred.
Cheque representations
In my initial reasons I made reference to the fact that it is the plaintiff’s case that, prior to the entry of the parties into the relevant contract of sale, the NAB made certain oral and written representations concerning two post dated cheques. This forms the basis of the plaintiff’s claim for relief.
It is said on behalf of the NAB that the initial reasons indicate an imperfect understanding of the cheque transactions in question in a fashion which, in effect, substantially exaggerates the apparent strength of the plaintiff’s case.
As I pointed out in those reasons, the appellant agreed to sell the subject property to the first respondent (“SRJ”) for a total sum of $450 000. The appellant was to receive $200 000 by way of bank cheque at settlement. It was also to receive two post dated cheques, one for $150 000 payable on 6 May 1998 and one for $100 000 payable on 6 June 1998.
It is the appellant’s case that the two cheques in question are those issued by and in the name of SRJ. It is said that the NAB represented, prior to consummation of the contract for sale, that such cheques would be honoured on presentation. The representation was by way of letter addressed to the appellant and given to one of its directors, and, orally, to its banker. Settlement then proceeded on that basis. A copy of the letter was exhibited to an affidavit filed in the proceedings.
It is now said that, at the time of the original submissions on the appeal, it was not made clear to me that there were in fact two separate sets of cheques.
The first, was handed over by the first respondent to the deponent Lang, on behalf of the appellant on 14 April 1998. This consisted of two cheques, one in the sum of $100 000 and the other in the sum of $150 000. Those cheques were in fact drawn by a company known as Adsyd Holdings Pty Ltd (“Adsyd”) and not the first respondent. It was later observed, for the first time, that the cheques had in fact been drawn by Adsyd and not SRJ.
A second set, upon the basis of which the appellant brings its action against the NAB, was subsequently issued by SRJ, in replacement of the Adsyd cheques, at the request of the appellant.
The relevant NAB letter, upon which the appellant sues, is dated 31 March 1998. It is addressed to the appellant and signed by the Business Banking Manager of the NAB (“Robb”). Its text is as follows:-
“We understand after the property settlement at 416-420 King William Street S R J Property Development Pty Ltd have promised to pay $150 000 6/5/98 and $100 000 6/6/98 we confirm these cheques will be honoured.”
An affidavit by one Bini, an officer of the appellant’s banker, is to the effect that he telephoned Robb on or about 31 March 1998. He did so as a result of a conversation which he had with one of the directors of the appellant, who informed Bini that he had received a letter from NAB stating that the two post dated cheques envisaged by the settlement agreement would be honoured. Bini deposed that, in the course of the telephone conversation, he requested Robb to confirm the genuineness of the above letter, a copy of which had been faxed to him. He said that Robb confirmed:-
that the letter was genuine and “the cheques would be paid”; and
that there were property settlements being done by SRJ “further down the track” with moneys due on or before the dates of the cheques and that the money would be there on the day.
The NAB now says that it is not liable in relation to its subsequent dishonour of the SRJ cheques. Notwithstanding that they met the description in its letter and that such letter simply adverted to the SRJ promise to pay, it is now said by Mr Abbott QC that the NAB representation, in fact, was intended only to relate to the Adsyd cheques which were then in existence.
I pause to note that, in an affidavit filed, the solicitor for the NAB refers to the possibility that the Adsyd cheques had been drawn on or about 31 March 1998.
Certainly the above detailed scenario was not appreciated by me at the time when I wrote my initial reasons. However, the point which I was then seeking to make in that regard was that, on the face of the affidavits, the appellant/plaintiff had a strong prima facie basis for its claim against the NAB and that was a matter of relevance.
I am constrained to say that what is now amplified to me does little to alter that scenario. The fact remains that the NAB letter was unqualified in its terms and referred only to SRJ and its post dated indebtedness. There was no mention whatsoever of Adsyd and specific cheques issued by it, in either the letter or the verbal conversation with Bini. Nor is there any positive evidence on file that the relevant cheques were, in fact, actually in existence, in the knowledge of NAB, when it wrote its letter on 31 March 1998.
Furthermore, a substantial issue to be resolved at trial will be the effect that the NAB letter had on the appellant. The key issue may well not be the positive state of knowledge or belief of NAB. Rather it may be the possible absence of knowledge of the appellant of what was intended by the NAB letter of representation and the legal effect of the unqualified letter, simply referring, as it did, to SRJ.
Whilst it is true that paragraph 23 of my initial reasons requires some elaboration and qualification to reflect the above situation, nevertheless, the essential significance remains largely unchanged. There is no real dispute as to the relevant sequence of events (save, perhaps, as to the date when the Adsyd cheques came into existence) and, on the face of those events, the appellant would appear to have a strong prima facie case.
The financial position of the appellant
Upon the further consideration of this matter substantial debate occurred as to the true content of the appellant’s balance sheet and its significance - particularly what would be the impact of writing back into it the $250 000 claimed by the appellant.
I see no profit in reiterating the competing arguments in detail.
I accept that I misapprehended that the $250 000 must be considered to have an offset of like amount, being moneys advanced by Lang to the appellant to assist in clearing an existing mortgage liability on the subject property and which were not shown in the balance sheet previously constructed by counsel for the NAB.
There can be no doubt that, once that is taken into account, there is, on the figures, some excess of liabilities over assets, when the realistic value of the subject property is borne in mind.
As against that Mr Tilmouth QC points out that, up to sale of the subject property, the appellant was apparently paying its debts as they fell due. The property was let to a number of tenants and returning significant rental revenues. Mr Tilmouth QC argued that, had the representation not been made by the NAB, the appellant would not have consummated the sale and, presumably, would have continued to trade.
This may well be so up to a point but, for present purposes, it must be accepted that, at all material times, the appellant has, technically, been insolvent, in the sense that its liabilities have exceeded its assets. It remains a moot point how long it could have continued, given the analysis made by Mr Abbott QC of its rental revenues in relation to its apparent recurrent liabilities.
Such a situation was clearly sufficient to enliven the jurisdiction to make an order for security for costs. I, of course, accepted, in my initial reasons, that this was so. However, it still remains for consideration whether such an order was appropriate in the circumstances.
Moreover, although there was an obvious misapprehension reflected in paragraph 42 of my reasons, this did not, in the event, reflect adversely against the NAB in the eventual outcome of the appeal.
The conduct of the NAB
The learned Master expressly did not base his decision on the suggestion that Lang was, in reality, standing behind the appellant and stood to benefit from any success in the action. That topic was not raised by the NAB in any notice of alternative contention. This is not surprising, as the evidence in that regard was by no means clear cut and the assertion seems to have been based solely on inference.
I dealt with this feature of the appeal at paragraphs 44 to 46 of my initial reasons. Nothing has been said on this occasion to cause me to recant from what was said there.
It seems to me, at the time of publication of my initial reasons, that the critical focus of the appeal remains the issue of the effect of the relevant conduct of the NAB.
There can be no doubt that there is a strong basis for contending that the unqualified representations of the NAB prima facie led the appellant into what was, from its perspective, a disastrous financial situation and a transaction which it would not otherwise have consummated in the manner in which it did.
Moreover, having considered the further submissions made to me, I adhere to the conclusion to which I originally came.
Mr Abbott QC strenuously argued that I was incorrect, as a matter of fact, in assessing that, as a consequence of the relevant transaction, the NAB had improved its position at the expense of the appellant. He said that, far from improving its situation, the NAB had “stepped into this transaction on the basis of misrepresentation, and that, at worst for the Bank, all it did was hold a position whereby it lent money and obtained security for such a loan”.
It is not entirely clear to me precisely what misrepresentation is said to have been involved, although it is not asserted that the appellant was concerned.
Prior to the transaction the appellant was the registered owner of the subject property and thus fully secured as to its value of at least $450 000, given any liabilities which it had to meet.
As a consequence of agreeing to settle on the basis of the post dated cheques it took a second mortgage, ranking in priority after a mortgage to the NAB, over the subject property. Due to the quantum of moneys advanced by the latter for purposes which, in part at least, had nothing to do with the sale and purchase, the second mortgage was worthless as a security. The appellant, for all practical purposes, was relegated to the situation of an unsecured creditor.
For its part, the NAB had taken, or took, a debenture from SRJ over the whole of its undertaking on 30 March 1998, with a later, collateral first mortgage over the subject property. These were “all monies” type securities.
The evidence to date indicates that the appellant was not privy to the internal arrangements between SRJ and NAB or the extent to which the latter had made, or proposed to make, secured advances to it.
In the event, NAB lent SRJ $469 000, secured, inter alia, over the subject property by a mortgage ranking in priority to that of the appellant.
As Mr Tilmouth QC stressed, no one entering into a sale transaction would, in the normal course, dream of completely surrendering title to a purchaser merely on the basis of post dated cheques for more than half of the consideration to be paid. As he put it:-
“The fact of the matter is ... the only reason why we allowed the National Australia Bank to jump the queue and become first mortgagee and us to become second was because of the letter and the oral assurance that the letter was genuine, otherwise the transaction would have made no commercial sense at all. Normally, we would have been first mortgagee.”
He pointed out that, quite apart from relative priority, the NAB obtained security for the whole of the moneys advanced by it in excess of the sale price of the property, thus rendering any security to the appellant ineffective.
There was, in my earlier reasons, no real misunderstanding on my part, other than as to the extent of the secured lending. I had actually inferred that the NAB lending was for portion only of the purchase price. The true facts simply render the situation worse.
The “significant advantage” to which I referred in paragraph 43 of my initial reasons was in fact the relegation of the appellant to second mortgage status and the gaining by the NAB, to the disadvantage of the appellant, of first mortgage status on the faith of the representation made.
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True it is that there will, no doubt, be evidentiary issues as to the circumstances in which the two sets of cheques were issued, their respective dates of issue, and as to whether there is any basis for asserting that the appellant knew, or ought to have known, that the NAB representation was intended (if that was the case) to relate to the Adsyd cheques, rather than simply advert generally to cheques to be issued, as provided for in the contract of sale. No doubt a complicating factor will be Lang’s involvement in what took place.
However, at this juncture, the Court can only view the factual scenario as it is presented and consider what inferences, prima facie, arise. Whether that will change on a consideration of evidence led at trial is a matter for another day.
Even given my misapprehension concerning the $250 000 adjustment to the balance sheet, as I said on 4 June 1999, the conduct of the NAB was such as to achieve a very significant advantage for itself. It also brought about a situation which, de facto, made an existing poor financial position of the appellant disastrously worse.
This was a matter of prime importance which, as I pointed out, rated no more than a passing mention, in a narrative fashion, in the reasons published by the learned Master.
I concluded my initial reasons by saying:-
“The whole crux of the appellant’s case is that it was this conduct which has precipitated a significant reduction in the means of the appellant; and there is a substantial basis of admitted fact upon which it is able to maintain that assertion. In my opinion that factor alone militates strongly against the making of the order which was sought. Had it been given full consideration it should, as I see the position, have been a decisive aspect.
In exercising the discretion in this matter afresh, I have come to the conclusion that this is not an appropriate case in which to order security for the costs of the second respondent.
The appeal must be allowed and the order for security set aside. The appellant must have the costs of the appeal and at first instance, to be taxed.”
I have no hesitation in adhering to those conclusions. I would, perhaps, merely substitute for the word “admitted”, where it is used, the word “apparent”.
I therefore repronounce the order which I recalled, as of today.
Mr Abbott QC has, in effect, flagged that, in the event that I so conclude, he seeks leave to appeal to the Full Court pursuant to SCR 94.01.
The order now made is an interlocutory order and is based on an assessment of factual issues revealed by the affidavit evidence. It is trite to say that the applicable authorities mandate that leave to appeal against interlocutory orders will only be given in circumstances in which questions of general principle or importance arise (Campbell v O’Sullivan [1947] SASR 195). Where, as here, what is sought to be impugned is a discretionary interlocutory order, there must be a fair argument that the judge has acted on a wrong principle, has allowed extraneous or irrelevant matters to guide or affect him, has mistaken the facts or has failed to take into account some material consideration (Consolidated Gold Mining Areas NL & Ors v Enterprise Gold Mines NL & Anor (1992) 57 SASR 584, Decor Corporation Pty Ltd & Anor v Dart Industries Inc (1991) 33 FCR 397). Generally, see the authorities referred to in Lunn, “Civil Procedure South Australia”, note R94.01.25.
I will hear counsel as to those matters.
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