Re Neducic, M. Exparte James, D.A. and ors

[1992] FCA 565

SbS /Q2

IN TEIE FEDERAL COURT OF AUSTRALIA	)	JUDGMENT NO. ....,	.......,,,,. ,	.
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VICTORIA DISTRICT REGISTRY	)	No VB 428 of 1990
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BANKRUPTCY DIVISION	1

BETWEEN:  MIROSLAV NEDUCIC

( ~ankrubt)

EX PARTE:  WNALD ALLAN JAMES and
PATRICIA MARY JAMES

(Applicants)

AND :	TFIE OFFICIAL TRUSTEE I N
BANKRUPTCY

Coram:	Ryan J
Place:	Melbourne
Date:	10 August 1992

REASONS FOR JUD-NT

This is an application by Donald Allan James and Patricia Mary James pursuant to s.104 of the Bankru~tcv Act 1966 ("the Act") for a review of the decision of the trustee of the bankrupt estate of Miroslav Neducic to reject a proof of debt lodged by the applicants.

machines leased from Australian Guarantee Corporation Ltd ("AGC"). As well, an overdraft was obtained from the

In 1984, the male applicant and a workmate, Jack Gal, together

with their respective wives formed a company, Afrigland Pty

Ltd, to conduct a tool making business under the firm name or

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style of "Jaga Tool & Die Makers". In the course of conducting the business, liabilities were incurred for the purchase of machinery and for instalments of rent on other

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Keysborough branch of the Commonwealth Bank secured by a bank bill to which Mr James was a signatory.

Mr and Mrs James and Mr and Mrs Gal entered into personal

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guarantees of the liabilities for rent of the factory premises and instalments of the purchase price of machinery in favour of a Mr Thompson who had leased factory premises to Jaga Tool

& Die Makers and had sold a quantity of machinery to it for

use in its business. As well, the same guarantors gave

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personal guarantees to AGC and other financiers which had

prov,ided other machinery on lease to the business.

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. .. ~arl$ in 1987, Mr James was minded to retire from the business

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'	of' Jaga Tool & Die Makers, and arrangements were made by Mr
~al' .for Mx - Neducic, the bankrupt, to acquire Mr James '
interest. After the accountant for Jaga Tool & Die Makers had
put a figure on the value of Mr James' interest, an agreement
was reached that Mr James would receive two instalments of
$5,000, one on or before 27 April 1987 and the other within six months of 27 March 1987 which was the date fixed for Mr
Jamesr retirement from the business. Those moneys were never
in fact received by Mr James. Instead, an amount of $10,000 injected into the business by Mr Neducic was paid, according to Mr Gal, to Mr Thompson as promised in a letter dated 23 March 1987, although it had been intended to go to Mr James in payment of the agreed price for his share of the business. The letter, to Mr Thompson, under a typed letterhead "Afrigland Pty Ltd trading as Jaga Tool & Die Makers" was in

these terms:

"Our Company Afrigland Pty Ltd t r a d i n g a s Jaga Tool and D i e Makers i s

a t t h i s present time undergoing a ma2or change m management. M r .

Don James is leavrng t h e company and is being replaced by Mr. Michael

Neducic of M.R.N. Engineermg.

A s our company had bought c e r t a i n machinery from Braeside TooJing
which was secured by Don James and myself, we now advise t h a t Michael

Neducic w i l l t a k e over Don James' p a r t of t h e secur i ty .

A t t h e s t a r t , arrangements were made f o r repayments of t h e loan. It

i s my understanding t h a t t h i s arrangement was never met on a r egu la r Frlday, 27th March 1987.

bas i s . We the re fo re propose t o g ive you a payment of $10,000-00 on

A s you are aware, t h i s payment i s two payments i n one. This w i l l

g ive u s enough time t o t r a d e t h e company o u t of i t 's [ s r c ] f i n a n c i a l

d i f f i c u l t i e s which it i a facing a t t h e p resen t and r e t u r n t o normal

t r a d i n g terms and a leo i f possrble repay t h e loan e a r l i e r .

W e a r e hopeful t h a t you accept our of fer ."

On 24 March 1987, according to a memorandum recorded by Mr Torley, the relieving manager of the Keysborough branch of the Commonwealth Bank:

"We contacted M r Jarnes today concernrng t h e workrng account debt which w a s t o have been c leared e a r l i e r t h i s month. It appears t h a t $20000 owed t o them by James Sephton P l a s t r c Pty Ltd s rnce e a r l y t h r s year has not been received and r t rs not known when t h e matter w r l l

be s e t t l e d .

A t h r s reques t w e t e l e ~ h o n e d a frnance broker F I Reinehr of 213

Lonsdale S t Melbourne who confirmed t h a t he was arranging f inance f o r Sephtons through Beneficial Finance and approval was delayed temporari ly u n t i l documentation could be completed. A t t h ~ s s t age

Sephton's Managing Director was r n t e r s t a t e but it was an t i c ipa ted

t h a t t h e matter would be reaolved rn a day o r two.

Under t h e crrcumstances we w r l l allow our approval f o r temporary

excesses t o s tand f o r another week.	Debt a s shown above i s not t o be
exceeded.

W e were a l s o informed t h a t Mr James w a s t o sell h i s i n t e r e s t i n Jaga Tool & Diemakers and p lans a r e rn hand f o r Mr G a l and a new par tne r t o form a new company t o t a k e over t h e assets and l i a b r l i t i e s of Jaga.

M r Janes was advised t h a t h r s s e c u r i t y would not be re leased u n t i l

c u r r e n t commitments were paid o r we could e n t e r i n t o s a t i s f a c t o r y

arrangements with t h e new company.

A f u l l d iscuss ion is t o be arranged a s soon a s possible."

On 27 March 1987, the same day apparently on which transfers

of shares in Afrigland Pty Ltd and documents to evidence Mr James' resignation and Mr Neducic's appointment as a director of that company were executed, Mr and Mrs James, together with

M r and Mrs Gal, executed a deed of guarantee of the

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performance by Afrigland Pty Ltd of its obligations under a lease from Amev Finance Limited ("Amev") of a milling machine with associated readout counter and linear transducers. That machinery had been delivered to Jaga Tool & Die Makers some time before 27 March and the deed of guarantee had been engrossed by Amev to include Mr and Mrs James as guarantors but made no mention of Mr Neducic.

In about April 1987, a new company, Gal & Neducic Pty. Ltd., was formed by Messrs Gal and Neducic and from 23 April 1987 amounts totalling about $50,000 in respect of work which had been commenced by Jaga Tool & Die Makers were paid to the credit of an account in the name of the new company. From about the same date no significant amounts were paid to the credit of the account in the name of Jaga Tool & Die Makers.

at the instigation of Mr Gal or Mr Neducic or both of them	It also appears that after 27 March 1987, payments were made
under leases of machinery from AGC, Amev and other financiers.
After Mr James' retirement, the business failed and Afrigland Pty Ltd was placed in liquidation in September 1987. Mr and Mrs Gal apparently became bankrupt on their own petition at about the same time. Thereafter AGC called on the personal guarantees which had been given to it by Mr and d s James and on 19 March 1990 entered judgment against them in the County Court for $32,096.89 together with interest of $1,436.23 and
costs of $479.40. i
Mr and Mrs James then instituted proceedings in the County
Court to enforce an obligation which they allege M r Neducic had assumed to indemnify them against liability on the personal guarantees. On 7 June 1990 they obtained judgment against the bankrupt for $32,576.29 plus interest of $2,325.33 and costs to be taxed. In the meantime, on 12 April 1990, a sequestration order had been made in this Court against the estate of Mr Neducic. Mr and Mrs James then lodged a proof of debt in Neducic's bankruptcy for the amount for which AGC had entered judgment against them. -
The Official Trustee has rejected that proof of debt and it is of that decision that the applicants seek review. The review raises the narrow question of whether Mr Neducic expressly, or -
by implication, agreed to indemnify Mr and Mrs James against liability on guarantees which they had given for due
performance of Jaga Tool & Die Makers' obligations under leases of machinery including those from AGC.
The evidence on this question is not entirely satisfactory, partly because the three participants in the transfer of Mr Jamesr interest to Mr Neducic were toolmakers with little appreciation of the formalities required to evidence, or give effect to, their intentions. These problems were compounded by the fact that negotiations for the sale of Mr James' interest were largely conducted through Mr Gal as intermediary and not between buyer and seller face to face.

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However, it is clear that all parties regarded it as an essential term of their agreement that Mr James would retire from the business and that Mr Neducic would acquire his interest by taking a transfer of Mr James' shares in Afrigland Pty Ltd in consideration of a payment of $10,000. I am not able to find on the evidence that anything was said about the continuing contingent liability to which Mr and tlrs James were subject under the personal guarantees which they had given.

Nevertheless, in my view, the circumstances of this case give rise to an implication of a term of the contract between Mr James and Mr Neducic that the latter would indemnify Mr and Mrs James against their liability on the guarantees which they had given to the various lessors of machinery including AGC.

This implication satisfies, I consider, each of the criteria	identified by the Privy Council in BP Refinerv (Western~ortL
Ptv Ltd v Hastinas Shire Council (1977) 52 ALJR 20 at 26 and approved by the High Court, e.g. in Codelfa Construction Pty Ltd v State Rail Authoritv of New South Wales (1982) 149 CLR 337 and Hospital Products Ltd v United States Surcrical
Cor~oration (1984) 156 CLR 41.
The suggested implied term is reasonable and equitable because
Mr Neducic acquired, for a sum much less than the contingent
liability on the guarantees, the right, to the exclusion of Mr
James, to control the financial affairs of Afrigland Pty Ltd
and its use of the leased machinery. In those circumstances,

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it would be inequitable to deny Mr and Mrs James recourse to Mr Neducic, if, because under his and Mr Gal's control, Afrigland Pty. Ltd. became unable to satisfy its primary liability to the lessors of machinery. Nor does the implied term go beyond what is necessary to give the contract business efficacy by providing fol: the rights of Mr and Mrs James and Mr Neducic inter se, if Afrigland Pty Ltd were to default in the performance of its continuing obligations to one or more of the lessors. Since the agreement contemplated that m Neducic and Mr Gal could, as they did, do whatever they wished with the assets of Afrigland Pty Ltd including work in progress valued at about $200,000 and very valuable machinery held on lease, the suggested implied term is so obvious that it goes without saying. It is also capable of clear expression in the sense that no other formulation can

parties. Finally, the term does not contradict any express	effectively supply what has presumptively been omitted by the
term of the contract which I have found was concluded between
Mr James and Mr Neducic.
I do not regard the execution by Mr and Mrs James on 27 March 1987 of the guarantee in favour of Amev as weakening the implication which I have found to arise from all the circumstances. Their action is explicable by the fact that,

as prepared by Amev, the document required their execution. The substitution of Mr Neducic for Mr and Mrs James could only have been achieved with Amev's acquiescence. A delay to obtain that acquiescence might have imperilled Afrigland Pty

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~td's continuing possession of Amev's machinery, and, with it, the sale of Mr Jmes' shares which he was obviously anxious to finalise. Indeed, Mr James' readiness to undertake the new liability to Amev on the last day of his effective association with Afrigland Pty. Ltd. is really explicable only on the basis of a belief by him that Mr Neducic was bound to indemnify him against that new liability.

On the other hand, I have not been influenced in coning to the conclusion indicated above by the judgment obtained in the County Court by Mr and Mrs James against Mr Neducic. ~ v e i if one were to dismiss as a technicality the failure, before entering that judgment, to obtain leave pursuant to s.59(3) of the Bankru~tcv Act, the inference is at least equally open that Mr Neducic's failure to resist the summons for final

reflected by the sequestration order made against him on 12	judgment after March 1990 was due to his insolvency as
April 1990, rather than to his acceptance that he had no defence on the merits of the action to enforce the alleged indemnity.
It was also submitted on behalf of the trustee that if, as I have found, it was a term of Mr Neducic's agreement to purchase Mr James' shares in Afrigland Pty. Ltd., that he, Neducic, would indemnify Mr and Mrs James against liability under their personal guarantees, that term was required to be evidenced in writing signed by Mr Neducic or a person lawfully authorized in writing by him. In the absence of a writing of that kind, so it was argued, the liability was not enforceable by virtue of s.126 of the Instruments Act 1958 of the State of Victoria. Accordingly it was argued, on the authority of
Konaonis (1963) 19 A.B.C. 96, that a debt arising from that liability cannot be proved in the bankruptcy of the debtor. The short answer to this point is that the promise which I have imputed to Mr Neducic was not one to answer for the debt default or miscarriage of another person so as to bring it within s.126. It therefore fell within that class of promise, outside the Statute of Frauds, which was described as follows by Vaughan Williams L.J. in Harbura India Rubber Comb Co. v Martin [l9021 1 K.B. 778 at 784:

"Before leaving t h e s e ins tances I wish t o mention one o the r c l a s s ,

which I do no t treat a s an exception from s.4,	b u t which, I think,
does not come w i t h m t h e sec t ion a t a l l .	I mean t h e cases whrch have
been spoken of a s "indemnity cases."

Of course i n one sense a l l guarantees, whether they come wrthin s .4

o r not , a r e c o n t r a c t s of mdemnity. But t h e d i f f e r e n c e between those

indemnit ies which come within t h e sec t ron and t h o s e whrch do not i s

very s h o r t l y t h u s expressed l n t h e notes t o Forth v. Stanton,

W~l l iams ' Notes t o Saunders, ed. 1871, vol . i.p.234: "These cases

e s t a b l i s h t h a t t h e s t a t u t e appl ies only t o promises made t o t h e

person t o whom another LS already o r i s t o become answerable."

That, t o my mind, i s an accurate d e f i n i t i o n of a guarantee o r

indemnity which comes withrn s .4 of t h e s t a t u t e , a s d is t inguished

from an o r i g i n a l l i a b i l i t y which rs n o t wi th in t h e sec t ion , and which

has no re fe rence t o t h e debt of another, b u t creates a new l i a b i l i t y

which is undertaken by t h e promisor, and has been c a l l e d i n t h e

course of t h e argument a cont rac t of indemnity. I w i l l not go

through t h e s e cases a t length, but it seems t o m e t h a t Gurld & Co. v.

Conrad [l8941 2 Q.B. 885 e n t i r e l y confirms t h i s as being t h e true

view of t h e d r s t i n c t i o n between an ~ndemni ty and a guarantee which

comes wi th in s.4. That case was decrded by Lindley, Lopes, and Davey

L.JJ. There t h e defendant had o r a l l y promised t h e p l a r n t i f f t h a t i f

he would accept c e r t a i n b i l l s f o r a f i rm i n which t h e defendant 's son

was a pa r tne r , t h e defendant would provide t h e p l a i n t i f f with funds

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t o meet t h e b i l l s , and it w a s held (aff irming t h e judgment of Mathew

J.) " t h a t t h i s was a promise of

indemnity and no t of guarantee, and

the re fo re not requrred by 8.4 of t h e S t a t u t e of Frauds t o be i n

wri t ing." Lindley L.J. i n t h e course of h i s judgment s a i d ([ l8941 2

Q.B. at p.892) : "The a u t h o r i t i e s a r e Thomas v. Cook (1828) 8 B. &.

C. 728; 32 R.R. 520 and Wrldes v. Dudlow (1874) L.R. 19 Eq. 198.

Thomas V. Cook appears t o m e t o be undrst inguishable from t h i s case

i f t h e f a c t s here a r e such a s I t ake them t o be." Then t h e Lord

J u s t i c e c i t e d t h e following passage from t h e judgment of Parke J. i n

Thomaa v. Cook: "This was not a promise t o answer f o r t h e debs,

de fau l t ,	o r miscarr iage	of	another	person,	but	an	o r r g i n a l	c o n t r a c t
between	t h e s e	p a r t i e s ,	t h a t	t h e	p l a i n t r f f	should	b e	rndemnified

agains t t h e bond. I f t h e p l a i n t i f f , a t t h e request of t h e defendant,

had paid money t o a t h i r d person, a promise t o repay r t need not have

been	i n wr i t ing ,	and t h i s case i s i n substance t h e same."	And	Davey
L.J.	s a i d ([ l8941 2 Q.B.	at p.896):	"In my	opinion, t h e r e is a p l a i n

d i s t i n c t i o n between a promise t o pay t h e c r e d i t o r i f t h e p r i n c i p a l

debtor makes d e f a u l t m payment, and a promise t o keep a person who

has entered, o r is about t o en te r , i n t o a con t rac t of l i a b i l i t y

indemnified aga ins t t h a t l i a b i l r t y , independently of t h e ques t ion

whether a t h i r d person makes d e f a u l t o r not.""

It follows that I should order that the trustee's decision should be reversed and direct that the applicant's proof of debt be admitted to the extent of the amount including interest for which the applicants became liable to AGC, but excluding AGC's costs of obtaining judgment in the County . Court. Those costs, I consider, were outside the liability against which Mr Neducic impliedly agreed to indemnify the applicants. Following Re Turner: ex Darte Curtin (1941) 12

ABC 1, the costs of the applicants and the trustee of this

application should be taxed and paid and retained respectively

out of the estate of the bankrupt.	I certify that this and the
preceding nine (9) pages are a true copy of the Reasons for Judgment herein of his Honour
Mr Justice Ryan
Associate:
Date :  '\

[o &j&t (442

Counsel for the Applicants:  Mr C C Hussey I .

Solicitor for the Applicants:  Hussey and CO as agents for

Kempson and CO

Counsel for the Respondent:	M r R Frazzetto
Solicitor for the Respondent:	Australian Government Solicitor