Seifert v Chaudhary

[2012] VSCA 17

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2011 0162

BERNHARD ULRICH SEIFERT	Applicant
	v
HEMANT CHAUDHARY	Respondent

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JUDGES	WEINBERG JA and KYROU AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	9 February 2012
DATE OF JUDGMENT	9 February 2012
MEDIUM NEUTRAL CITATION	[2012] VSCA 17
JUDGMENT APPEALED FROM	Chaudhary v Seifert  (Unreported, County Court of Victoria, Judge Anderson, 29 September 2011)

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PRACTICE AND PROCEDURE – Application by judgment debtor for stay pending appeal from summary judgment – Deed of Loan – Guarantee by sole director of company – Loan subject to second mortgage – Borrower failed to execute relevant security documents –Whether guarantor obliged to pay – Requirements for stay not demonstrated in the circumstances – Sonntag v Graziano (Unreported, New South Wales Court of Appeal, Mahoney, Clarke & Sheller JJA, 18 April 1994) applied – Application for stay refused

APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr A Schlicht	Simon Nixon
For the Respondent	Mr M J Campbell	Heinz & Partners

WEINBERG JA:

1. The applicant, Bernhard Seifert, seeks a stay pending appeal against summary judgment in favour of the respondent, Hemant Chaudhary, in the sum of $1,280,516.90 plus costs.  That judgment was given in the County Court, at Melbourne, on 29 September 2011. 

1. Mr Chaudhary has countered by seeking security for costs in the event the stay is granted.  In the light of the reasons that follow, it will become apparent that the application for security need not be considered.

1. The background facts may be briefly stated.  Mr Seifert was, at all relevant times, the sole director and shareholder of RJ & RC Electrical Solutions Pty Ltd (‘the company’).  The company was the first defendant in the proceeding below, but is now in liquidation.  For reasons that remain somewhat obscure, Mr Seifert resigned as a director in September 2010.  

1. The loan agreement that led to the debt that was the subject of summary judgment stipulated that Mr Chaudhary would be entitled to security, by way of a second mortgage, over a property situated at 11 Clark Road, Ivanhoe.  The company was the registered proprietor of that property.  The loan agreement also provided for additional security in the form of a second ranking registered fixed and floating charge over the assets of the company. 

1. By Deed of Loan executed on 29 June 2010, Mr Chaudhary lent the sum of $1,000,000 to the company.  Mr Seifert personally guaranteed that loan.  The loan was specified to be for a period of 12 months.  Interest was to be paid at the rate of 20 per cent, and was to be capitalised monthly, in arrears. 

1. For reasons that are not immediately apparent, Mr Chaudhary took no steps to secure the mortgage over the property, or the additional security over the assets of the company, for some eight months or so, until about February 2011.  The likelihood is that this was simply an oversight on his part.

1. In any event, from about February 2011 onwards, Mr Chaudhary sought to have the various security documents executed.  However, the company, which was by that stage no longer in Mr Seifert’s hands, proved to be uncooperative.  Finally, on 2 May 2011, by notice of default, Mr Chaudhary demanded payment of the amount that was owing and still unpaid. 

1. On 2 December 2011, the Bank of Western Australia, the first mortgagee of the Clark Road property, arranged for its sale for the sum of $2,550,000.

1. In the interim, Mr Chaudhary obtained judgment against Mr Seifert, as indicated earlier.  On 13 October 2011, Mr Seifert lodged an appeal against the decision to grant summary judgment.

1. On 18 October 2011, Mr Chaudhary’s solicitors advised Mr Seifert that unless the judgment debt was paid within seven days, they would move to execute against him. 

1. On 22 November 2011, Mr Chaudhary’s solicitors further advised Mr Seifert that they had instructions to issue and serve a bankruptcy notice against him.  It seems that no bankruptcy proceedings have yet been instituted.

1. On 30 November 2011, Mr Seifert’s solicitors wrote to Mr Chaudhary advising that Mr Seifert would be seeking a stay of the judgment against him, pending appeal, pursuant to r 64.25 of the Supreme Court (General Civil Procedure) Rules 2005.   

1. On that same day, Mr Chaudhary made an open offer to Mr Seifert indicating that he would consent to a stay of the orders of 29 September 2011, pending the conclusion of the appeal, if the entire sum owing was paid to Mr Chaudhary’s solicitors to be held on trust for the successful party to the appeal.  That offer was not accepted.

1. The principles that govern the grant of a stay pending appeal are well settled.  Basically, in a case such as this, the applicant for the stay must satisfy the Court that the appeal enjoys reasonable prospects of success, that it will be rendered nugatory if a stay is not granted, and that the grant of a stay will not cause serious injustice to the respondent.  It goes without saying that the desire to avoid bankruptcy is not, of itself, sufficient to warrant the grant of a stay.

1. It was accepted by counsel for Mr Seifert that his client had to show 'special or exceptional circumstances' before a stay would be granted.  Absent such circumstances, a successful judgment creditor is entitled to the fruits of his or her victory.[1] 

   [1]Cellante v G Kallis Industries Pty Ltd [1991] 2 VR 653, 657; and Gangemi v Osborne [2008] VSCA 221.

1. Dealing first with the prospects of success, Mr Seifert proposes to contend, on the appeal, that Mr Chaudhary’s failure to procure the execution of the relevant security documents (particularly the second mortgage over the Clark Road property) had the effect, in law, of avoiding the guarantee. 

1. That this may indeed be the effect of a kind of laches is clearly established.  In Sonntag v Graziano,[2] the New South Wales Court of Appeal, in dealing with a not wholly dissimilar situation, said the following: 

It is, of course, clear that where a transaction of which a guarantee is part envisages that a security will be given for the performance of the principal obligation guaranteed and that [if] security is not given, prima facie the guarantee is avoided: see Halsbury's Laws of England Vol 20, para 282 and the cases there referred to; see also Phillips and O'Donovan The Modern Contract of Guarantee (2nd ed) (1992) pp 343-345; Marks and Moss Rowlatt on the Law of Principal and Surety (4th ed) (1982) pp 185-186. The matter was discussed in Williams v Frayne (1937) 58 CLR 710 and in this Court in Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689.[3]

[2](Unreported, New South Wales Court of Appeal, Mahoney, Clarke & Sheller JJA, 18 April 1994) (‘Sonntag’).

[3]Ibid 3 (Mahoney JA with whom Clarke and Sheller JJA agreed).

1. As I have indicated, as a general principle, that is not in dispute.

1. There may, however, be particular circumstances in which the prima facie rule discussed above does not apply.  Plainly, the judge below, in granting summary judgment, was satisfied that this was such a case. 

1. In Sonntag, the Court went on, after setting out the prima facie rule set out at paragraph [17] of these reasons, to summarise the submission advanced on behalf of the respondent in that case in support of the argument that the general rule had been displaced.  The Court said: 

His [Mr Graziano’s] submission is to the effect that Mr Sonntag at all times knew what has happening:  in particular, he knew that the advance of money was taking place notwithstanding that the security had not been given by the company to Mr Graziano.  And he knew and accepted what was being done or not done thereafter, by his solicitor and otherwise.  In these circumstances, he submits, Mr Sonntag is liable on the guarantee even though the security was not given.[4]

[4]Ibid.

1. Later, in the course of the judgment, the Court went on to say: 

The guarantee envisaged that, in the context, the security 'will be furnished'.  It was open to Mr Sonntag to waive or to acquiesce in the non-fulfilment of that arrangement.  The learned judge found that there was in law a waiver of the provision of the security by Mr Sonntag.  I do not dissent from that finding.[5]

[5]Ibid 4.

1. In the present case, it seems to me that the argument in favour of there having been a waiver, or acquiescence, on the part of Mr Seifert, is considerably stronger than in Sonntag.  That is because Mr Seifert not only resigned as a director in September 2010, but also arranged for his replacement to be a person who, his counsel frankly conceded in oral submissions this morning, was not at arm's length. 

1. The essence of Mr Seifert’s defence to the claim put forward by Mr Chaudhary for summary judgment is to be found in paragraph 7 of an affidavit sworn by Mr Seifert on 28 September 2011, in which he said: 

The giving of the guarantee was conditional upon the First Defendant providing the security.  This was fundamental to any guarantee given by me as on the then current valuation there was sufficient equity in the land to satisfy repayment of the debt from any sale of the land.  I relied upon the fact that such security was being given and would not have given a guarantee if that had not been the case.  It was an essential term of the loan and guarantee that the land would be mortgaged by the First Defendant to the Plaintiff and a mortgage debenture be given by the First Defendant to the Plaintiff.

1. Mr Seifert went on to say in paragraph 8 of that affidavit: 

For some reason the Plaintiff and/or his solicitors failed to obtain an executed mortgage over the land and an executed debenture charge over the company prior to the advance of the loan.

1. When he resigned as a director in September 2010, not only was Mr Seifert fully aware of the fact that Mr Chaudhary had not obtained the relevant securities over the property and assets of the company, but he also, in effect, ‘washed his hands’ of the matter by putting it into the hands of someone other than himself.  By his own actions he ceded control over the company, and rendered it impossible for him to facilitate the execution of the relevant security documents when Mr Chaudhary ultimately sought to have his rights under the Deed of Loan vindicated. 

1. If it were the case that Mr Seifert was totally dependent upon the security being given, in the way that he identified in paragraph 7 of his affidavit, his having taken the step of resigning as director hardly sits well with his now relying upon the failure to procure that security as his sole defence to the application for summary judgment.

1. In short, the present case is one in which Mr Seifert seeks to make an entirely unmeritorious answer to a perfectly valid claim for recovery of a debt owing on a personal guarantee.  In my opinion, the prospects of success on the appeal should be regarded as doubtful.  

1. Mr Seifert also submits that the judge below was wrong to grant summary judgment in this case because there were disputed issues to be resolved, and facts to be determined.  Frankly, I doubt that this was so.  It seems to me that all of the central issues were agreed, or not in dispute.  The only contentious matter to be determined was whether this case fell within the prima facie rule spoken of in

Sonntag, or whether, for the reasons discussed, it plainly did not fall within that rule.

1. Moreover, it seems to me that Mr Seifert, who of course carries the onus in relation to the application for a stay, has not identified with any precision just what unresolved issues of fact or law there were that rendered summary judgment inappropriate. 

1. As regards Mr Seifert’s argument that his appeal will be rendered nugatory if he is denied a stay, it is sufficient to say simply that there is no proper foundation for that submission.  It is by no means clear, on the material before this Court, that even if Mr Seifert is bankrupted, his trustee would not, if persuaded that the appeal had merit, pursue it.  That is particularly so since there is evidence that funding for an appeal would be available from a third party associated with Mr Seifert.

1. I should add that the evidence suggests that Mr Seifert has, until very recently, been unforthcoming, and uncooperative, in providing information about his financial position.

1. We were told that as a result of the sale of the Clark Road property Mr Chaudhary has, in fact, been paid (by the liquidator) just over half of the amount of the judgment debt.  Although that is a relevant consideration in determining whether to grant a stay, it is by no means decisive. 

1. It must be remembered that an applicant for a stay of a judgment pending appeal is not entitled, as a matter of course, to that remedy.  The law imposes significant hurdles that must be overcome before the unusual course of granting such a stay is adopted.  In my opinion, those hurdles have not been overcome in this case.

1. For these reasons the application for a stay should, in my opinion, be refused.

KYROU AJA:

1. I agree.