Pozzan v Gibbons
[2006] SASC 163
•5 June 2006
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
POZZAN v GIBBONS
[2006] SASC 163
Judgment of The Honourable Justice Perry
5 June 2006
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXECUTION OF DOCUMENTS - GENERALLY
Where document executed by Kangaroo Island Ferries Pty Ltd ("KIF") and two natural persons was described in the body of the document as a "deed" - where KIF's execution clause did not contain the words "executed as a deed" - whether deed validly executed pursuant to s 127(3) or s 127(4) of the Corporations Act 2001 (Cth) - Held: deed validly executed.
Law of Property Act 1936 s 41; Corporations Act 2001 (Cth) s 127, referred to.
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
The plaintiff, the defendant and Kangaroo Island Ferries Pty Ltd ("KIF") entered into a "Deed of Loan Agreement" whereby the defendant purported to provide security for a loan of $300,000 from the plaintiff to KIF - a memorandum of mortgage was executed by the plaintiff and the defendant, pursuant to the Deed of Loan Agreement - whether the terms of the mortgage should be rectified as not representing the agreement between the parties, in that it created a personal guarantee or indemnity by the defendant of KIF's debt - Held: the mortgage creates either a guarantee or indemnity, and that guarantee or indemnity being contemplated by the parties, no case for rectification is made out.
Meagher, Gummow and Lehane's Equity: Doctrines and Remedies Meagher R, Haydon D, Leeming M, Butterworths LexisNexis, Australia, 2002, considered.
GUARANTEE AND INDEMNITY - DISCHARGE OF SURETY - GIVING TIME
Kangaroo Island Ferries Pty Ltd ("KIF") defaulted on repayments pursuant to loan agreement - defendant "instrumental in getting the parties together" to arrange for extra time within which to pay - whether defendant's obligations as guarantor discharged due to lack of consent to variation - held: unclear that binding variation was formed - the defendant's participation in the negotiation is properly construed as consent to any variation that was formed - the defendant's obligations were not discharged by the giving of time - judgment entered for the plaintiff against the defendant for the full amount of the principal and interest to the date of judgment.
Hancock v Williams (1942) 42 SR (NSW) 252; The Modern Contract of Guarantee O'Donovan and Phillips, LBC Information Services 1996 (3rd edition) at 339 et seq; Wren v Emmett Contractors Pty Ltd (1969) 43 ALJR 213, considered.
POZZAN v GIBBONS
[2006] SASC 163Civil
PERRY J. The plaintiff, Dorian Justin Pozzan, sues in his capacity as trustee of the Pozzan Family Trust. He claims against the defendant the sum of $300,000 plus interest and other relief.
The plaintiff alleges that the defendant personally guaranteed repayment of a loan of that amount made by the Pozzan Family Trust on or about 28 November 2003. The loan was to a company with which the defendant was associated, namely Kangaroo Island Ferries Pty Ltd (“KIF”). KIF is now in liquidation.
The plaintiff also asserts that the defendant executed a mortgage over three properties by way of security for repayment of the loan to KIF.
Amongst the relief sought in the proceedings, the plaintiff claims an order for possession of the three properties.
The plaintiff also claims damages for an alleged misrepresentation as to the value of the properties the subject of the mortgage.
In his defence, the defendant admits the making of the loan to KIF and admits that he offered security to the plaintiff over the properties to secure its repayment. However, he pleads that both the loan agreement and the mortgage are unenforceable against the defendant for reasons which I will refer to in due course. Further, he denies that he agreed to give a personal guarantee.
Background
The plaintiff is employed as the financial controller for a credit union based in Queensland.
Together with his wife, the defendant operates a kiosk at Cape Jervis.
For some time before the transactions now in question, the kiosk business included a booking service for Philanderer Ferries, a ferry service operating between Cape Jervis and Kangaroo Island.
At some time before the transaction in question in this action was entered into, the defendant struck up a business relationship with Prakash Dhupelia.
In correspondence between the parties and throughout the proceedings, he has been called “Prakash”. To avoid confusion, I will continue to describe him by that name.
The defendant and Prakash decided to establish a new ferry service between Sunset Cove Resort (formerly Wirrina Cove Resort) and Kangaroo Island.
KIF was incorporated by Prakash with the intention that it be the operating vehicle for the proposed new service.
Later, in about July 2003, the defendant was responsible for the incorporation of Australian Capital & Equity (South Australia) Pty Ltd (“ACE”) which became trustee of a unit trust, named the Friends of Kirk Unit Trust. The unit trust was set up to receive investments of money from individual contributors, as a means of financing the acquisition of the ferry to be operated by KIF.
The plaintiff’s brother, Edgar Pozzan, has qualifications as a marine engineer and was known to Prakash. Prakash introduced Edgar Pozzan to the defendant. Subsequently, Edgar Pozzan was engaged to inspect vessels which could be deployed as a ferry and which were available for sale on the international market.
Eventually a vessel was chosen for that purpose. KIF was to be the purchaser. Arrangements for the financing of the purchase were made. It became necessary to find a deposit of $300,000.
By this stage Edgar Pozzan was employed by KIF as manager of marine operations.
At some time in 2003, Edgar Pozzan introduced the plaintiff to the defendant when the plaintiff was visiting South Australia from Queensland.
The defendant invited Edgar Pozzan to invest in ACE, to help finance the project.
The plaintiff and his brother said that they were not interested in investing in ACE.
After the plaintiff had returned to Queensland, the defendant asked Edgar Pozzan to ascertain whether the plaintiff might be interested in a loan to KIF, rather than an investment with ACE. The defendant informed Edgar Pozzan that he could offer as security for repayment of the loan a mortgage over two properties which he owned which he said were worth $600,000. The loan which was contemplated was $300,000.
Subsequently, the plaintiff entered into negotiations with the defendant, the upshot of which was the entry into a deed, described as a “deed of loan agreement”, made on 28 November 2003 (“the loan agreement”). During the course of the negotiations, and in response to expressions of concern by the plaintiff as to the adequacy of the security, the defendant added a further property, making three in all, to be the subject of the mortgage.
In the loan agreement, the plaintiff in his capacity as trustee for the Pozzan Family Trust, is described as the lender, KIF as the borrower, and the defendant as the guarantor.
The essential terms of the loan agreement are that:
·the plaintiff would advance, as from 28 November 2003, $300,000 by way of loan;
·the loan would be for a period commencing on 28 November 2003 and expiring on 30 November 2004;
·KIF would pay interest at the rate of 20 per cent per annum, provided that if there was no default by KIF, and if quarterly interest payments as provided in the agreement were paid on time, this would reduce to 13 per cent per annum;
·KIF would pay quarterly interest payments of $9,750 on the 28th day of February, May, August and November 2004, with the balance of interest calculated to the loan termination date, to be paid on repayment of the principal on the termination date;
·the defendant agreed to guarantee KIF’s “obligations and performance” under the agreement “by providing security acceptable” to the plaintiff;
·repayment of the principal sum and interest was to be secured by what was described as a registered second bill of mortgage over the guarantor’s properties located at three addresses specified in the loan agreement;
·a caveat was to be lodged over the three properties until registration of the bill of mortgage had been effected.
In accordance with the loan agreement, the plaintiff advanced the principal sum of $300,000 to KIF on 28 November 2003.
On the same date, a caveat was lodged in favour of the plaintiff over the three properties owned by the defendant.
There was a delay in registration of a mortgage over the properties. The plaintiff pressed the defendant to attend to the execution and registration of the mortgage. Various excuses were given. The delay was not satisfactorily explained in evidence.
Westpac Banking Corporation (“Westpac”) held a first mortgage over the properties. On 31 May 2004, Westpac gave a letter of priority to the plaintiff, in which it agreed to allow the plaintiff to register a second mortgage over the properties on the basis that the Westpac mortgage would rank in priority to the extent of $320,000.
On 16 July 2004, the defendant executed a memorandum of mortgage, pursuant to which he mortgaged the whole of his estate and interest in the three properties to the plaintiff.
On 2 September 2004, the caveat was withdrawn and the mortgage was lodged for registration.
KIF paid the interest instalments due in February, May and August 2004, but defaulted on payment of the interest instalment due on 28 November 2004. KIF failed to repay the principal and the residual payment of interest due on 30 November 2004.
The ferry began operating on 24 September 2004. Until a date in November 2004, Prakash was the sole director and sole company secretary of KIF. In October 2004, some turbulence developed in the management of KIF. Prakash was ousted as director, and new directors were appointed, namely Arthur Smith, Martin Darcy, Neil Hermes and the defendant.
An administrator of KIF was appointed on 3 February 2005, at about which time the ferry ceased operating. Subsequently, pursuant to a creditor’s voluntary winding up, Peter Macks was appointed liquidator of KIF as from 28 April 2005.
In the meantime, in about mid-December 2004, the defendant was present at a meeting at Maleny in Queensland between the plaintiff and the directors of KIF, at least Neil Hermes and Michael Conski. An agreement was reached to allow further time for payment.
Although the evidence is not entirely clear, it appears that it was agreed that repayment of the principal would be effected by monthly instalments of $100,000 plus interest on the outstanding balance, the instalments to be paid on each of the following next three months. The agreement further provided that before the three instalments were paid, the arrears of interest would be paid up. The arrears were paid in December 2004.
It does not appear that any further payments have been made since then.
Findings as to credit
The plaintiff and his brother Edgar Pozzan both gave evidence, as did the defendant.
I accept the evidence of the plaintiff and his brother. I find that they were honest witnesses, and I have no reason to doubt their credit.
The defendant was garrulous and unimpressive. I do not accept that he was as naïve as he made out to be in his understanding of the transaction, more particularly the terms of the mortgage. He attempted to distance himself from documents which he found embarrassing.
For example, he made the farfetched suggestion that an email from him to Prakash, in which he referred to the security which he had given as amounting to $800,000, was a “cut and paste” document, and he prevaricated over the question whether he had signed the receipt for the terms and conditions of the mortgage, when clearly he had done so.
I am not prepared to accept the defendant’s evidence on any critical issue where it differs from that given by the plaintiff and his brother.
Validity of the loan agreement
Mr Manetta of counsel for the defendant argued that:
·each party executes a deed in consideration of the covenants of the other parties to it;
·the execution by KIF of the loan agreement was ineffective;
·if KIF was not bound by the deed, neither were any other parties to it.
There is no doubt that the parties intended the document to be a deed. The opening words are “This deed of loan agreement is made this 28th day of November 2003”.
After the recital appear the customary words “Now this deed witnesses as follows”.
Above the execution clause, appear the words “In witness whereof the parties hereunto have hereunto (sic) set their hands and seals the day and year first hereinbefore written”.
No seals are affixed to the document. This is in accordance with modern practice.
Section 41(1)(a) of the Law of Property Act 1936 (“the LPA”) provides “a natural person executes a deed by signing, or making a mark, on the deed”. The plaintiff and the defendant both signed the deed.
Section 41(2) of the LPA requires that a deed which is executed by a natural person be attested “by at least one witness who is not a party to the deed”. The signatures of both the plaintiff and the defendant are attested by one witness who was not a party to the deed.
On Mr Manetta’s argument, the problem arises with respect to the purported execution of the deed by KIF.
The execution clause by KIF reads:
EXECUTED by KANGAROO ISLAND PTY LTD
(ACN 096 751 567) in accordance with the
Corporations Act 2001Mr Manetta did not advance any argument by reference to the fact that the word “Ferries” was omitted from the description of KIF. Rather, he contended that the purported execution by KIF did not accord with either the common law or relevant statutory requirements.
Section 127 of the Corporations Act 2001 (Cth) reads:
SECTION 127 EXECUTION OF DOCUMENTS (INCLUDING DEEDS) BY THE COMPANY ITSELF
127(1)A company may execute a document without using a common seal if the document is signed by:
(a)2 directors of the company; or
(b)a director and a company secretary of the company; or
(c)for a proprietary company that has a sole director who is also the sole company secretary – that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.
127(2)A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by:
(a)2 directors of the company; or
(b)a director and a company secretary of the company; or
(c)for a proprietary company that has a sole director who is also the sole company secretary – that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company.
127(3)A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).
127(4)This section does not limit the ways in which a company may execute a document (including a deed).
Mr Manetta conceded that at the time of the execution of the loan agreement, Prakash was sole director and also the sole company director of KIF, which is a proprietary company.
It follows that s 127(1)(c) is of application.
Section 127(1) relates to the execution of a “document” as distinct from a “deed”.
Section 127(3) allows the company to execute a document as a deed if it “is expressed to be executed as a deed”, and is executed in accordance with subsection (1) or (2).
Mr Manetta contended that s 127(3) was not of application, because the words “executed as a deed” do not appear on the loan agreement.
In my view, that is a far too literal construction of s 127(3). There are a variety of ways in which a document may be expressed to be executed as a deed.
I have already drawn attention to a number of expressions in the loan agreement which make it patently clear that the parties were intending to execute the document as a deed. In my view, that is sufficient to attract the application of s 127(3), and by virtue of that subsection, s 127(1).
If I was to be wrong in that view, that is not an end of the matter.
Subsection (4) makes it plain that a company may execute a document, including a deed, in any other way which is legally efficacious.
Section 41(4) of the LPA provides:
Notwithstanding the defective execution of a deed by or on behalf of a party to the deed, the execution will be taken to be valid if it appears from evidence external to the deed that the party intended to be bound by it.
Section 41(4) identifies one of the “ways in which a company may execute a document (including a deed)” within the meaning of s 127(4) of the Corporations Act.
There is ample evidence external to the loan agreement to indicate that KIF intended to be bound by it. It circulated the unexecuted document to the other parties for execution by them; it received the advance of $300,000; it paid three quarterly instalments of interest and another instalment of interest in December 2004; and it subsequently negotiated an agreement for an extension of time within which to repay the moneys.
However the matter is approached, the loan agreement takes effect as a deed binding on all three parties to it.
The defendant’s primary argument was that the loan agreement was not enforceable for the reasons which I have already dealt with.
In his defence, the defendant pleaded that in circumstances where the loan agreement was unenforceable, the mortgage was likewise not enforceable against the defendant.[1] Whatever may be the soundness of that proposition, given my findings as to the validity of the loan agreement, there is no basis upon which it could be advanced.
[1] Second amended defence, par 14.
Rectification
In the alternative, the defendant pleads that the mortgage should be rectified to accord with the agreement of the parties.
The memorandum of mortgage defines the consideration for the mortgage as:
Three Hundred Thousand Dollars And No Cents ($300,000)
(herein called “the principal sum”) lent by the Mortgagee to Kangaroo Island Ferries Pty Ltd ACN 090 751 567 …Against the heading “Terms of Repayment”, appears the following:
The Mortgagor shall repay the principal sum to the Mortgagee on the 30th November 2004 being the loan termination date.
The memorandum of mortgage further provided that the mortgagor:
… shall pay quarterly instalments of $9,750 for interest accrued on the principal sum with any balance of interest being paid on loan termination date.
At the foot of the memorandum of mortgage there is a receipt in the following terms:
THE MORTGAGOR HEREBY ACKNOWLEDGES that the Mortgagee provided the Mortgagor with a copy of the said standard terms and conditions contained in Memorandum No 7678698 (comprising 17 pages plus index) before the Mortgagor executed this mortgage.
DATED this [21/2/04]
[Signed]
I reject the defendant’s evidence in which he doubted that he had signed the receipt.
I find that he not only signed the receipt, but that he was also provided with a copy of the standard terms and conditions referred to in the receipt.
Those standards terms and conditions provide in the very first clause, under the heading “To repay the principal sum”:
1.The Mortgagor shall pay the principal sum and all other moneys hereby secured to the Mortgagee at the time provided for the repayment of the principal sum in the terms of repayment in the schedule.
Pausing there, the provisions of the memorandum of mortgage to which I have so far referred would constitute the defendant a principal debtor, rather than a guarantor. Those provisions would be appropriate if the agreement with the defendant was that he give an indemnity, rather than a simple guarantee.
The defendant’s case is that those provisions are not in accordance with the loan agreement.
The loan agreement is far from clear as to just what the defendant was undertaking.
The recital to the loan agreement reads:
In consideration of the Lenders making the advance the Guarantor has agreed to guarantee the Borrower’s obligations and performance under this agreement by providing security acceptable to the Lenders.
Clause 4 of the loan agreement reads in part:
The secured moneys shall be secured by:
(a)the terms of this Loan Agreement;
(b)a registered second Bill of Mortgage over the Guarantor’s properties located at [the addresses of the properties are then set out] ….. and
(c)a caveat to be lodged over the properties identified in clause 4(b) until the registration of the Bill of Mortgage has been completed. The guarantor undertakes to execute simultaneously with the execution of this loan agreement all such documents necessary to give effect to the terms of this agreement; ….
There are no terms in the loan agreement which could be construed as imposing a personal liability upon the defendant to guarantee repayment of the debt, let alone an indemnity. Hence the contention of the defendant that the mortgage should be rectified to conform with what the defendant contends to be a proper construction of the loan agreement.
The defendant gave evidence that at the time he executed the mortgage, he owned some 70 properties in all. He described them as all residential properties, except for four blocks of land. He stated further in evidence that they are all investment properties subject to mortgage.
The defendant said that he leased the properties to long-term tenants.
With the obviously wide experience which he had had in property dealings in general and executing mortgages in particular, I do not accept that he was under any misapprehension as to what he was signing when he executed the mortgage in question.
He said in evidence that he had no involvement in the preparation of the mortgage, but that he was told by the plaintiff that a “lady” that they had appointed would be in touch with him, and he had to sign “these mortgages post haste”.
In fact, the mortgage was prepared by Butchart & Co, a firm of property conveyancers. The mortgages were enclosed in a letter to the defendant from Butchart & Co dated 17 February 2004.
In the letter, apart from explaining that the defendant was to sign each of the three copies of the mortgage which were provided to him, he would also need to sign and date the receipt “… to acknowledge that you have been provided with a copy of the standard terms and conditions by the mortgagee”.
The defendant’s evidence was that he read the documents very quickly. Notwithstanding the terms of the mortgage, he said in evidence that it was never his intention or understanding that he was required to accept “the same obligations as a borrower in relation to repayment of the money”. He went on to say:
… at no stage would I have been expected to pay anything. Kangaroo Island Ferries was the borrower, not myself.
The evidence of the plaintiff was that he had no input into the instructions for the preparation of the mortgage.
Elizabeth Butchart, who was the conveyancer within Butchart & Co who attended to the documentation, was not called to give evidence.
I must say that on the evidence, it is not clear where the instructions came from for her to prepare the mortgage. I tend to think that despite his denial of being involved, the plaintiff must have given instructions, or caused them to have been given by someone.
He did say in evidence that Ms Butchart was paid by KIF. That circumstance does not assist in identifying who was the source of instructions for the preparation of the mortgage.
From the point of view of rectification, however, the important question is whether the defendant has proved that there was a mutual mistake on the part of both parties to the mortgage, in particular as to its operation in constituting the defendant a principal debtor.
It does certainly appear on the evidence of the plaintiff, that his belief was that the defendant was to be a guarantor, and that the defendant’s liability would not arise unless there was a default by KIF.
The case advanced by the defendant goes one stage further, in that he denies that he ever assumed an obligation as guarantor, and did not agree to assume an obligation to repay as a joint principal debtor.
It is true that, ordinarily, rectification would be ordered if the document with respect to which rectification is sought does “not truly reflect the provisions of the antecedent agreement because of some common or mutual mistake amongst the parties”.[2]
[2] Meagher R, Haydon D, Leeming M, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, Butterworths LexisNexis, Australia, 2002, at 886.
In the circumstances of this case, the conclusion must be drawn that the provisions of the mortgage, insofar as they cast a personal liability upon the defendant to repay the debt, extend beyond the express terms of the loan agreement.
But that is not an end of the matter.
As I have pointed out, the Recital obliges the defendant to provide “security acceptable to the lenders” (emphasis added).
Furthermore, I accept the evidence of the plaintiff that his belief at all relevant times was that the defendant was to personally guarantee repayment by KIF.
The defendant’s actions after he was called upon to repay the debt are not consistent with the state of mind which he now maintains he held throughout.
He was given a “default notice” dated 31 January 2005 pursuant to s 55A of the Law of Property Act 1936 by solicitors acting on behalf of the plaintiff. That notice asserted that he was in default by having failed to pay on time the amounts due under the mortgage. It demanded repayment of the principal and interest.
He did not respond to the notice by indicating that he had not assumed any personal liability to repay the moneys.
The plaintiff has tendered a series of emails from the defendant in which he made a number of promises to pay. For example, by an email dated 24 February 2005, the defendant advised the plaintiff:
Signed new lending paperwork today. Paying application fee tomorrow. Sorry for delay … moving in the right direction.
The plaintiff responded:
Great. Expect funds early next week then.
The defendant sent a further message on about 6 March 2005:
… how much will you require to allow time to reduce down the debt at reasonable timing. Thinking of offering something for say pay one year in advance to cover interest, this allows things to (a) conclude (b) rearrange finance through a range of property’s (sic) (c) pay lump sums as things happen, ie sell off other property’s (sic) not related to second mortgages and reduce debt to PFT … I have three party’s (sic) wanting to buy into another company I have that will pay out the loan in full but will take about one month to pull together …
The plaintiff replied:
What has happened with the refinancing people?
Best option is you refinancing and pay us out asap.
In an exchange of emails dated 14 April 2005, the plaintiff suggested that the defendant was “playing games” with him, to which the defendant replied:
I have made a commitment to you and your family. And it is being addressed.
The plaintiff gave evidence of other promises by the defendant to pay.
Most of those promises were made after the appointment of an administrator of KIF on 3 February 2005. Furthermore, at the time the promises were made, he was not a director of KIF. In those circumstances, it is clear that the promises were made on his own behalf, rather than on behalf of KIF.
It is no answer to say that he may not have had the benefit of legal advice at that stage. His defence is that at no time did he believe that he had given a personal guarantee. That assertion simply cannot be reconciled with the long series of broken promises to pay and pleas for more time.
If his state of mind was what he now asserts it to have been, one would have expected him to respond to the demands for payment, by saying that the plaintiff could take the properties, but was not entitled to anything more from him.
I accept that the provision in the mortgage constituting the defendant a principal debtor was not expressly provided for in the loan agreement, and does not appear to have been contemplated by the plaintiff. On the other hand, for the reasons which I have given, the defendant must be taken to have been well aware of the effect of what he signed when he executed the mortgage.
Furthermore, I am left in no doubt on the evidence that there was a common understanding between the plaintiff and the defendant that the defendant would personally guarantee repayment of the loan.
At this stage, the borrower, KIF, having defaulted in repayment, it makes no practical difference whether the defendant is held liable as a guarantor or as a party giving an indemnity.
In those circumstances, no case for rectification is made out.
Discharge by variation of the principal contract
This defence only arises if the relationship of the defendant to the plaintiff is that of a guarantor, rather than that of a principal debtor.
The principle is well known and has clearly been established by authority. If the principal debtor and the creditor, without the guarantor’s consent, agree between themselves to alter the nature of the principal’s obligation, ordinarily the guarantor is discharged. The rationale for the principle is that the obligation in its altered form is not what the guarantor guaranteed.[3]
[3] See, for example, Hancock v Williams (1942) 42 SR(NSW) 252 per Jordan CJ at 255. See also The Modern Contract of Guarantee O’Donovan and Phillips, LBC Information Services 1996 (3rd edition) at 339 et seq.
An agreement by a creditor with the principal to extend time for payment, has generally been regarded as a separate category, albeit within the rubric of the general rule that variation of the principal contract discharges the guarantor.
I have already referred briefly to the agreement reached at a meeting held in December 2004 to allow KIF further time for payment.
Although I have referred to it as an agreement, it is by no means clear to me that it was a binding agreement. There was nothing in writing between the parties which was tendered in evidence. The evidence as to the circumstances in which the so-called agreement was entered into is sketchy.
The plaintiff’s evidence in chief was that he had a meeting with three directors of KIF in Queensland in early December 2004 at which the defendant was present. He said that he was told then by one of the directors, Neil Hermes, that there were insufficient funds in the company to pay the principal back, and that they needed more time. The plaintiff said that he agreed to an arrangement to have the loan paid back by instalments over the following three months, that is, instalments in December, January and February, but the instalments were not paid.
In cross examination, he said that present at the meeting were Neil Hermes, Michael Conski, whom he also believed to be a newly-appointed director of the company, and the defendant. He said that it was part of the agreement that accumulated interest to the date upon which the agreement was reached, was to be paid and that it was in fact paid, presumably in December 2004.
In his examination in chief, the defendant said:
Q.Were you aware of any arrangement that had been made by Kangaroo Island Ferries and the Pozzans for an extension of time.
A.I was not aware of any arrangement that was made, but I was asked to become instrumental in getting the parties together.
Q.First of all, when did this occur.
A.This occurred when Neil Hermes realised that the money wasn’t paid after I said to him “Everybody is exposed here”, and that was around about the end of November.
Q.What was your involvement at that point.
A.I was currently in Darwin – sorry, in Queensland. I was notified by Neil Hermes and Michael Kosky whether I could divert to Melany. I meet them in Queensland and actually drove up to see Dorian and to try and get the group together to extend this loan period, or to sort some agreement out.
Q.As a consequence of that, was a meeting arranged between Dorian Pozzan and the directors of Kangaroo Island Ferries.
A.Yes, it was.
Q.When was that.
A.Some time in the early December period – sorry, about mid December I think.
Q.Were you present at that meeting.
A.I was, but not as a director. Just merely to get the parties together and it was held at Rick Gould’s place.
Q.Who was Rick Gould.
A.Rick Gould was a gentleman who was working for myself prior to that, he was also very good friends of Dorian’s and Ed’s.
Q.So it was neutral ground.
A.Yes.
Q.From your observations at that meeting was an agreement struck between Mr Dorian Pozzan and the directors.
A.Yes, there was.
Q.As best you can recall, what were the terms of that agreement.
A.There was a late payment fee that had to be paid with a large interest component and there was some money paid to take the loan forward, I believe until about February, $30,000-something I believe.
Q.Did you have any input in framing that agreement.
A.No.
Q.Were you asked to consent to that agreement.
A.No. (my emphasis)
It must be accepted that mere knowledge on the part of a guarantor of a variation between the creditor and the principal debtor, is not of itself a sufficient basis from which to infer consent. So much was made clear in the judgment of Menzies J in Wren v Emmett Contractors Pty Ltd.[4] Although Menzies J was in dissent as to the outcome of the appeal in that case, what His Honour had to say on this point is not inconsistent with the remaining judgments:
It seems to me that if the defendant as controlling director of Celebrity Theatres Pty Ltd arranged an extension of time for the payment of what was due by the company under its contract with the plaintiff he cannot be heard to say, when sued upon the guarantee, that the extension was given without his consent. Mere knowledge of the variation of a contract or the giving of time does not of itself amount to consent but for a guarantor on behalf of the principal debtor to bespeak time to pay what is owing betokens his concurrence with the giving of time to pay. Were this not so the law would be out of touch with reality.
[4] (1969) 43 ALJR 213 at 220.
Returning to the passage which I have quoted from Mr Gibbons own evidence, when he maintains that he said to Mr Hermes, “Everybody’s exposed here”, that expression, applied to himself, made it clear, if it was necessary to do so, that he was acutely aware of his exposure under the guarantee.
When he makes the further statement that he “actually drove up to see Dorian [the plaintiff] and to try and get the group together to extend this loan period, or sort some agreement out”, this makes it clear that he organised a meeting with the directors and with the plaintiff expressly with the view of trying to gain more time or to reach some sort of accommodation with the plaintiff.
When he answered later questions to the effect that he did not have any input in framing the agreement and was not asked to consent to it, I regard that as nothing more than an attempt on his part to distance himself from what was eventually agreed.
He was much more of an active party than he is prepared to admit.
I have no doubt at all that he was vitally concerned to see to it that some relief was given from what he regarded as his own personal exposure, not by the entry into an agreement that would extinguish his liability on the guarantee, as it is clear from his subsequent actions that he did not believe that that had occurred. Rather, his object was to try to gain further time for KIF to pay, in the hope that with further time, KIF might be able to repay the debt and reduce or limit his exposure.
Those circumstances take the case out of a situation where there is nothing more than mere knowledge of a variation.
In my view, it is proper to conclude that he consented to the variation, namely an extension of time to pay, in the belief that it was in his interests as guarantor to do so.
This ground of defence fails.
Penalty interest
At a late stage, during the course of addresses, Mr Manetta attempted to raise an argument that the default interest rate of 20 per cent was a penalty.
No plea was raised in the pleadings asserting that it was a penalty. No evidence was called by either party on the question whether or not such a default interest rate fell outside of ordinary commercial rates, and the issue was not raised in any way during the course of the trial before it was brought up by Mr Manetta.
I expressed the view that any challenge to the default interest rate should have been raised in the pleadings, so that the issue could be addressed in the course of the presentation of the case on both sides.
If it had been raised at an early stage, the plaintiff would have had an opportunity, now denied to him, of calling evidence on the topic.
I ruled that the issue was raised too late to be addressed.
Misrepresentation
Mr Keith advanced a claim for damages for misrepresentation on the footing that it was an alternative claim to the money claim against the defendant.
As I am disposed to allow the money claim, there is no need to address further the claim for misrepresentation.
Conclusion
The various defences fail.
There will be judgment for the plaintiff for the principal moneys lent, that is, $300,000, together with interest.
Mr Keith tendered a calculation of interest, adopting the 20 per cent default rate. The total, including interest to the date of judgment, that is, 5 June 2006, is $391,161.60. Mr Manetta did not raise any objection to the calculation, but in fairness to him, I will give him an opportunity to speak to the calculation before judgment is sealed.
The judgment will speak from today.
Subject to any correction of the calculation of interest, the order of the Court is:
1.Judgment for the plaintiff against the defendant in the sum of $391,161.60 inclusive of interest to the date of judgment.
2.Order:
(a)dismissing the counterclaim
(b)that the plaintiff’s claim for possession of the properties the subject of the mortgage in question be referred to a Master for further hearing and determination in light of the reasons for judgment published this day.
(c)that the defendant pay to the plaintiff the plaintiff’s costs of action to be taxed.