QBM Lawyers (A Firm) v Quinlivan
[2011] FMCA 520
•1 July 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| QBM LAWYERS (A FIRM) v QUINLIVAN | [2011] FMCA 520 |
| BANKRUPTCY – Guarantees and Indemnities – construction – whether demand required before liability arose – effect of “principal debtor” and “collateral obligation” clauses – matter of demand does not impinge upon principal obligation. |
| Bankruptcy Act 1966 (Cth), s.49 |
| David Securities Pty Ltd v Commonwealth Bankof Australia (1992) 175 CLR 353 Esso Petroleum v Alstonbridge Properties Ltd [1975] 1 WLR 1474 General Produce Co v United Bank Ltd [1979] 2 Lloyd’s Rep. 255 McNamara v Langford (1931) 45 CLR 267 Re Taylor; Ex parte Century 21 Real Estate Corporation (1995) 130 ALR 723 |
| Applicant: | QBM LAWYERS (A FIRM) |
| First Supporting Creditor: | EQUITITRUST LIMITED |
| Second Supporting Creditor: | DINERS CLUB PTY LTD |
| Respondent: | DUDLEY JAMES QUINLIVAN |
| File Number: | BRG 84 of 2011 |
| Judgment of: | Burnett FM |
| Hearing dates: | 29 June and 1 July 2011 |
| Date of Last Submission: | 1 July 2011 |
| Delivered at: | Brisbane |
| Delivered on: | 1 July 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr Bland |
| Solicitors for the Applicant: | QBM Lawyers |
| Counsel for the First Supporting Creditor: | Mr de Jersey |
| Solicitors for the First Supporting Creditor: | Tucker and Cowan |
| Solicitors for the Second Supporting Creditor: | Eggleston Mitchell Lawyers |
| Counsel for the Respondent: | Mr McQuaid |
| Solicitors for the Respondent: | Robinson & Robinson |
ORDERS
That pursuant to s.49 of the Bankruptcy Act 1966 (Cth), Equititrust Limited, ACN 061383944, be substituted for the petitioning creditor in the creditor’s petition number BRG084 of 2011 in place of QBM Lawyers (A Firm).
That the Respondent pay the Petitioning Creditor’s costs agreed to be fixed in the sum of $10,000.00.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 84 of 2011
| QBM LAWYERS (A FIRM) |
Applicant
| EQUITITRUST LIMITED |
First Supporting Creditor
| DINERS CLUB PTY LTD |
Second Supporting Creditor
And
| DUDLEY JAMES QUINLIVAN |
Respondent
REASONS FOR JUDGMENT
(Revised from Transcript)
Equititrust Limited, the first supporting creditor seeks to be substituted as a petitioning creditor pursuant to s.49 of the Bankruptcy Act 1966 (Cth). The application turns on a short but difficult point. Was the creditor a party to whom the respondent debtor was indebted at the time that he committed the act of bankruptcy enlivening the initiating crediting petitioner’s application? If so, the applicant may be substituted. If not, it has no standing: McNamara v Langford.[1]
[1] (1931) 45 CLR 267
The respondent submits that the applicant was not a debtor at the relevant time. He contends first, that no debt came into existence because the guarantee by its terms required a demand before its obligations came into existence. Secondly, and in any event, the obligation created by the deed of guarantee and indemnity was a collateral obligation to that of the principal debtor. Ultimately the matter is one which falls to be determined upon a proper construction of the deed. However, before proceeding to do so it is helpful to set out some of the legal framework governing disputes in this context. The relevant principals are collected in the decision of Burchett J in Re Taylor; Ex parte Century 21 Real Estate Corporation,[2] a case where a similar question was being considered although for a differing purpose.
[2] (1995) 130 ALR 723
First, addressing the general rule as to whether a demand is necessary before liability attaches under a guarantee, his Honour observed at page 725:
“The general rule as to whether a demand is necessary before liability attaches under a guarantee is stated in Rowlatt on the Law of Principal and Surety (4th ed, 1982), p 115, as follows:
A surety has not, unless his contract so provides, any right to require a demand to be made upon him before action. If a surety gives a bond conditioned to be void on the payment of a similar sum “on demand”, or covenants or promises to pay the principal debt “on demand”, a demand must be made upon him before he can be sued. His obligation is to pay the collateral sum, and differs from a promise to pay on demand a present debt owing by the promisor. In the latter case an action can be brought at once without any other demand than the writ.
The broad proposition, that a surety whose contract did not stipulate for notice became immediately liable when due payment was not made, is supported, with reference to a guarantee of payment under a bill of exchange, by the judgment of Lindley LJ in Barber v Mackrell (1892) 68 LT (NS) 29 at 31; see also Bank of Montreal v Hache (1982) 38 NBR (2d) 54 at 57-8; G Andrews and R Millett, Law of Guarantees (1992) p 163.
… As Rowlatt indicates, these words may require a demand. The question was considered by Chitty J (as he then was) in Re J Brown’s Estate, Brown v Brown [1893] 2 Ch 300 at 304-5. That learned judge said, in relation to the rule that, where money is lent payable upon request, no demand is necessary before bringing the action:
That is a general proposition…and…it is plain that a distinction has been taken and maintained in law, the result of which is, that where there is a present debt and a promise to pay on demand, the demand is not considered to be a condition precedent to the bringing of the action. But it is otherwise on a promise to pay a collateral sum on request, for then the request ought to be made before action brought.
He added the conclusion, “It is a question, then, of the construction of the instrument”, that is to say, as I understand his reasoning, in order to ascertain whether it provides for the payment of “a collateral sum on request”. This case was relied upon, together with a number of other authorities, by Scrutton LJ in Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 at 848-9, where he said:
Was it here necessary for the plaintiff to prove a demand? Generally, a request for the payment of a debt is quite immaterial, unless the parties to the contract have stipulated it should be made: per Parke B in Walton v Mascall (1844) 13 M & W 452 at 458; 153 ER 188. Even if the word “demand” is used in the case of a present debt, it is meaningless, and express demand is not necessary, as in the case of a promissory note payable on demand…But it is otherwise where the debt is not present but to accrue, as in the case of a note payable three months after demand…; or where the debt is not a present debt, but a collateral promise: Birks v Trippet 1 Wms Saund 32; 85 ER 34; Re J Brown’s Estate [1893] 2 Ch 300. The promise of a surety to pay on demand if his principal does not appear to me to be a collateral promise within the authorities; and I entertain no doubt that in this guarantee the provisions about demand are a real stipulation, and not mere words. The surety is to pay “on demand” …; while, as the guarantee is “against loss on the realisation of debentures”, the surety would need to be informed by demand of the amount he was called upon to pay. I am of the opinion that the creditor must prove a real demand, and therefore that the Statute of Limitations did not run till the demand had been made.
…
It was agreed on behalf of the defendant that the words “on demand” should be neglected because the money was due, and therefore a demand was unnecessary and added nothing to the liability. This proposition is true in the case of what has been called a direct liability – for example, for money lent. There the liability exists as soon as the loan is made, and a promise to pay on demand adds nothing to it, as in the case of a promissory note for the amount payable on demand, and the words “on demand” may be neglected. It has, however, been held long ago in cases more particularly mentioned by the other members of the court that this doctrine does not apply to what has been called a collateral promise or collateral debt, and I think a promise by a surety to pay the original debt is such a collateral promise, or creates such a collateral debt….”
His Honour concluded by noting at the bottom of 726 of his judgment that the matter ultimately fell to one of construction of the particular instrument in question.
Before going to the instrument here it is worth considering the question that was then before his Honour; as I have noted the facts are not dissimilar to those before me although the terms of the guarantee do materially differ. In that case, before proceeding to examine the subject guarantee, his Honour noted at page 728:
“There is no doubt that a true guarantee is a collateral contract not only in the strict sense of an additional contract related to the principal contract, but also in the sense that it involves a secondary obligation. A true indemnity involves a primary obligation.”
Here the applicant relies upon a guarantee clause in the loan agreement. It is, as Burchett J observed, a collateral agreement in the sense that it “must be understood” in the sense of “related to” or even “in addition to”. See his Honour’s remarks in respect of David Securities Pty Ltd v Commonwealth Bankof Australia.[3] The significance of that matter, as was identified by Burchett J in Re Taylor (supra) was discussed at page 729, and has parallels in this case. There the guarantee clause – clause 1 – was plainly expressed as a secondary obligation. It called upon the guarantor when demanded. Clause 2 of the relevant contract was an indemnity clause and gave rise to liability to the guarantor. Clause 3 of that contract provided that each of clauses 1 and 2 were principal obligations and not ancillary.
[3] (1992) 175 CLR 353
There were difficulties between these clauses which led the court to consider whether as a matter of construction the requirements of clause 1 to make demand were gainsayed by the operation of clause 3. His Honour continued at page 730:
“The general rule is that there is no right in a surety to require a demand to be made upon him unless his contract so provides. That general rule is reinforced, in the present case, by clause 3(b) which throws the responsibility on the guarantors to ascertain for themselves whether the principal debtor is in breach of its obligations. Cf the remarks of Lord Diplock in Moschi at 348.
It has been suggested the presence, in a contract of guarantee, of a “principal debtor” clause will obviate the need for a demand, where it would otherwise be required.
His Honour referred then to Esso Petroleum v Alstonbridge Properties Ltd,[4] and the observations of Walton J, and continued:
“However, Walton J did not really commit himself to this proposition. He said (at 1483) referring to the fact that the guarantee he was construing stipulated for payment “on demand”, but also it entitled the creditor to treat the sureties as principal debtors:
[W]here the character in which payment is required is that of surety, a demand is, in general, necessary; but I assume for present purposes (without finding it necessary to decide) that the provisions…equating the liability of the sureties to that of principal debtor, [are] effective to obviate the necessity for a demand merely on this ground.”
[4] [1975] 1 WLR 1474
Burchett J continued to observe that the statement was discussed by Lloyd J in General Produce Co v United Bank Ltd[5] where Lloyd J made it clear that the extremely guarded dictum, if that was what it really was, in the earlier decision, could offer little guidance for a different case. He also made it clear that a principal debtor clause does not necessarily mean the guarantor is to be regarded as the principal debtor for all purposes from the inception of the guarantee, but only that the creditor is entitled to treat him as a principal debtor following certain events. Ultimately his Honour concluded that no generalisation was possible, and the question would always turn upon the construction of the particular guarantee in question.
[5] [1979] 2 Lloyd’s Rep. 255
In this case, the relevant provisions are broadly to be found within clauses 3, 9 and 24 of the deed of guarantee and indemnity (the Deed) which was executed between the applicant and the respondent with the applicant as lender and the respondent as guarantor.
Clause 1 dealt with definitions, and for present purposes it is noteworthy that clause 1 defined the Money Secured, a matter which is particularly referred to in the latter provisions to include the “Loan Amount” and “all moneys deemed by the Secured Agreement or any Security to be principal in arrears” together with various other amounts including the sums that “were owing and payable by the Borrower to the Lender” and that were “owing by the Borrower to the Lender but not presently payable”.
The term “Secured Agreement” referred to items provided for in item 5 of the Schedule, which were principally the Credit Facility Deed. “Security”, as defined, included those matters contained in item 6 of the Schedule. They were the various mortgages and fixed and floating charges.
Clause 3 of the Deed, the guarantee provision, provided as follows:
“3.1 The Guarantor unconditionally guarantees to the Lender the principal performance and observance by the Borrower of all the covenants, terms, conditions and other provisions of the Security, including without limitation, the payment of the Money Secured by the Borrower at the time or times and in the manner provided for in the Secured Agreement and/or the Security, and undertakes to pay the Money Secured to the Lender on demand.
3.2 The obligations of the Guarantor hereunder applies whether or not any of such obligations…are…contingent and (whether or not any contingency has or has not occurred) presently accrued or due.”
Clause 9, the principal liability clause, relevantly provided:
“9.1 The obligations contained herein are absolute and unconditional in all circumstances, and can be enforced by the Lender without the Lender first taking any steps…against the Security Provider. In order to give full effect to the provisions of this Deed, the Guarantor…waives all rights inconsistent with such provisions and which the Guarantor might otherwise as surety be entitled to claim and enforce.”
Clause 24 provided that:
“24.1 The guarantor shall upon demand immediately pay to the Lender the Money Secured.”
For the respondent, it was contended that the principal obligation arises under clause 24, being:
“The guarantor shall pay upon demand immediately to the lender the Money Secured.”
No demand has been made; accordingly on the respondent’s contention that there was no debt due at the relevant time and accordingly the applicant ought to fail in the application.
For the applicant, it was submitted that clause 9 of the Deed, imposes a primary obligation upon the guarantor leaving then for consideration the question of whether or not that obligation in turn also required, as a pre-condition, a demand as suggested by clause 3.1.
The terms of clause 3 are in my view carefully drafted. The first part of clause 3.1 imposed upon the Guarantor the obligation to unconditionally guarantee that which is the subject of the principal obligation provided in clause 9.1. It then continued to provide an undertaking to pay the Money Secured to the lender on demand, giving rise to what was referred to in argument as a contingent obligation.
The contingent obligation however is addressed in clause 3.2 which provided that the obligations of the guarantor apply whether or not any such obligations including those which are contingent have or have not occurred. That is to say, the matter of demand does not impinge upon the principal obligation. It follows in my view that clause 3.1, as it operates with clause 3.2, did not caveat the principal liability imposed pursuant to clause 9.1 (which of itself does not require a demand). The principal obligation included the Guarantor’s unconditional observance by Equititrust of, inter alia, payment of the Money Secured.
Further, the Guarantor had a principal obligation by operation of clause 9. The event of default by Equititrust, the principal debtor under the Secured Agreement gave rise to default of the applicant: clause 25(4). It follows that by clause 9 the applicant had an immediate primary obligation to repay the Secured Money. No demand was required to enliven the obligation.
In this case there is no evidence to contest the evidence that a debt has been incurred, and that upon the default of Equititrust it remains unpaid. It follows in my view that the debt was in existence at the time that the bankruptcy notice was issued and accordingly the applicant is entitled to bring this application.
I order that pursuant to s.49 of the Bankruptcy Act 1966 (Cth), Equititrust Limited, ACN 061383944, be substituted for the petitioning creditor in the creditor’s petition number BRG084 of 2011 in place of QBM Lawyers (A Firm).
That the Respondent pay the Petitioning Creditor’s costs agreed to be fixed in the sum of $10,000.00.
I certify that the preceding twenty-four (24) paragraphs are a true copy of the reasons for judgment of Burnett FM
Date: 25 August 2011
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