Texas Consolidated Pty Ltd v Sklovsky
[2020] VCC 1870
•30 November 2020
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-20-02730
| TEXAS CONSOLIDATED PTY LTD | Plaintiff |
| v | |
| MICHAEL GREGORY WEIGALL SKLOVSKY | First Defendant |
| and | |
| TOBY LEPOER DARVALL | Second Defendant |
---
JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 9 November 2020 | |
DATE OF JUDGMENT: | 30 November 2020 | |
CASE MAY BE CITED AS: | Texas Consolidated Pty Ltd v Sklovsky & Anor | |
MEDIUM NEUTRAL CITATION: | [2020] VCC 1870 | |
REASONS FOR JUDGMENT
---
Subject:Application for summary judgment under guarantee
Catchwords: Application for summary judgment under guarantee – Whether guarantee liability conditional upon completion of corporate restructure – Security agreement executed in connection with financing documents – Arguable guarantor liability conditional upon grant of security agreement – Agreement unperfected and ineffective in insolvency of principal debtor company – No evidence of value lost by failure to perfect security – Uncertainty to fall on applicant for summary judgment – Summons for summary judgment dismissed
Legislation Cited: Corporations Act 2001 section 436A; Civil Procedure Act 2010;
Cases Cited:Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd (2013) 42 VR 27; Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; Scott v Forster Pastoral Co Pty Ltd v Ors [2000] NSWCA 241; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Re Kwan; ex parte Hastings Deering (Solomon Islands) Ltd (1987) 15 FCR 264; Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654
Judgment: Summons for summary judgment against first defendant dismissed
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. L. Glick QC | Sackville Wilks Pty Ltd |
| For the First Defendant | Ms. M. Harris | KCL Law |
HIS HONOUR:
Background
1 In this proceeding, the plaintiff seeks recovery of alleged advances made by it to the first defendant in the sum of $600,000 plus interest at the rate of 10 per cent per annum.
2 The claim was brought under a Loan Agreement said to have been entered into in July 2016. (Affidavit of Jonathan Gelfand, Exhibit JG2) Reliance is also placed on another document executed as part of the same suite of documents and styled “Security Agreement”. (Exhibit JG3 of Mr Gelfand’s affidavit)
3 According to the particulars to paragraph 4 of the plaintiff’s Statement of Claim, “the Loan Agreement is partly in writing and partly implied”. The plaintiff’s case, as presented to me, was that the Loan Agreement should be regarded as an agreement entirely in writing, apart, for instance, from certain obligations which the law might imply, such as the obligation of parties to a contract to cooperate in the performance of that contract. Clause 7.4 of the Loan Agreement under the heading “Entire Understanding” stated:
“This document contains the entire understanding between the parties with regard to its subject matter. Ail previous agreements, representations and warranties affecting this subject matter are superseded by this document and have no effect.”
4 The plaintiff alleges that it advanced some $400,000 in July 2016 and a further $200,000 on or about August 2016 “pursuant to the terms of the Loan Agreement”. (Statement of Claim, paragraph 6).
5 Clause 3.6 of the Loan Agreement provided for interest payable by monthly instalments at the rate of 10 per cent per annum. According to the plaintiff, no interest has been paid since January 2019, that is every monthly instalment of interest since then has gone unpaid. The repayment date shown in the schedule as the date for repayment of the principal sum under the Loan Agreement was nominated as 31 January 2022.
6 Clause 4.4.1 of the Loan Agreement under the heading “Acceleration of amounts owing under this agreement” provided:
“The Lender may elect to treat the Loan Outstanding as payable automatically and immediately if any of the following occur:
4.4.1a Borrower fails to pay an amount due in accordance with this Agreement and does not remedy this non payment within 30 days of being notified in writing of the breach by the Lender;”
7 There was no evidence put before me that any notification in writing of the breaches of the obligation to pay interest had been served on the borrower, Michael Sklovsky Pty Ltd. For the purposes of the present proceeding, counsel for Texas Consolidated Pty Ltd (“Texas”), Mr Glick QC, said that Texas relied on clause 4.4.5 of the Loan Agreement, which rendered the advances repayable forthwith in any of the following events:
“4.4.5any of the following insolvency events occur in relation to a Borrower or the Guarantor:
4.4.5.1it becomes insolvent or anything occurs that reasonably indicates that there is a significant risk that it is or will become unable to pay its debts as they fall due;”
8 Administrators were appointed to the company under the terms of the Corporations Act 2001 on 20 February 2020. (Affidavit of Mr Sklovsky, 4 November 2020, paragraph 32) Mr Glick QC referred to section 436A of the Corporations Act, stating the circumstances in which administrators might be appointed to a company which necessarily entailed insolvency.
9 The Loan Agreement was also executed by the first defendant, Mr Sklovsky, and the second defendant, Mr Darvall. Clause 6 of the Loan Agreement under the heading “Guarantee and indemnity” provided as follows:
“6.1 Guarantor's obligations
In consideration of the Lender, at the request of the Guarantor, entering into this Agreement, the Guarantor:
6.1.1covenants with the Lender to punctually perform and observe the Borrower's obligations under this Agreement and to pay to the Lender any amounts due under this Agreement and the amount of any loss, damage, cost, charge or expense recoverable against the Borrower; and
6.1.2indemnifies the Lender against any loss arising from the Borrower's failure to perform and observe the Borrower's obligations under this Agreement.
6.2Matters not affecting guarantee
The liability of the Guarantor will not be affected by:
6.2.1the Lender granting time or any other indulgence to, or agreeing not to sue, the Borrower or any Guarantor;
6.2.2any assignment or variation of this Agreement; or
6.2.any failure by the Guarantor to properly execute this document.”
10 The Loan Agreement was, as its name indicates, styled as an agreement. The execution was introduced by the words, “executed by the parties as a deed”. Texas and the borrower, Michael Sklovsky Pty Ltd, executed pursuant to s127(1) of the Corporations Act with the signatures of two directors present, Mr Sklovsky and Mr Darvall. Their execution was introduced by the words “signed sealed and delivered”.
11 The Loan Agreement referred to other contemporaneous documents which counsel for Mr Sklovsky, Ms Harris, described as being part of the same “suite” as the Priority Deed and a Security Agreement. (Exhibit JG3 to Mr Gelfand’s affidavit) Clause 4 of the Security Agreement, under the heading “Charge over Collateral”, provided a charge by Michael Sklovsky Pty Ltd over “all its personal property present and future and wheresoever situated”, with provisions for the grant of further security. The document appears to be in the form of what under previous corporate security regimes might have been described as a “fixed and floating charge” or a “debenture charge”.
12 I have been informed that a Judgment in Default of Appearance has been entered against the second defendant, Mr Darvall. A Summons filed 23 September 2020 seeking summary judgment in favour of Texas against the first defendant, Mr Sklovsky, came on for hearing before me. Texas represented by Mr Glick QC, relying on an affidavit by its director, Mr Gelfand, contended that whilst Mr Sklovsky via his solicitors had filed a Defence, it had no prospect of success and so summary judgment ought to be given to Texas pursuant to Order 22 of the Court’s Rules and ss61 and 63 of the Civil Procedure Act 2010.
13 Mr Gelfand’s affidavit exhibited to the Loan Agreement and the Security Agreement attested to the advance of the $600,000, described the borrower’s alleged failure to pay interest as described above, and asserted Mr Sklovsky’s liability for those monies as guarantor in accordance with the provisions described above.
Defendants’ Defence
14 The Defence of Mr Sklovsky dated 18 August 2020 denied the Loan Agreement as alleged in the Statement of Claim, stating that “A loan agreement dated 19 July 2016 was entered into between [Texas] and [the first defendant]. (Defence, paragraph 4) This agreement was said to be “partly in writing and partly to be implied and partly implied by law”. The term said to be implied was that the Security Agreement, Priority Deed and another document described as “Shareholders Agreement of Adherence” and “Option Agreement”, which were referred to in the Loan Agreement, formed part of it:
“(ii)any personal obligation imposed on Sklovsky as a guarantor under the loan agreement was limited to the period during which he was a director of the company and had authority to control the performance and observe the company’s obligations under the loan agreement. (First Implied Term)
(iii)any personal obligation imposed on Sklovsky as a guarantor under the loan agreement was limited to the proportion of the shareholding in the company which he controlled by reason that Sklovsky and Darvall were severally but not jointly liable under clause 6.1 of the loan agreement (Second Implied Term)”
15 According to the Defence, those two implied terms were implied “to give business efficacy to the loan agreement and [they were] obvious terms”.
16 Further, it was said that the loan agreement was entered into “by the company [viz the borrower] and [Texas] at the request of the second defendant Toby Darvall … for the company but not Michael Sklovsky [the first defendant]”.
17 The Defence then proceeded to recite what was said to be the factual matrix in which the loan transaction was entered into. At the relevant time, it was said that Mr Darvall was one of two directors of the borrower and was the “controlling mind of the majority shareholder of the [borrower], Darvall Group Pty Ltd, which held 575,000 of the 960,000 issued capital of the shares (being 60% of the issued ordinary share capital)”.
18 Mr Sklovsky was employed by the borrower company as its marketing manager and was chief executive and “controlling mind” of a minority shareholder, Udaipur Lake Pty Ltd (“Udaipur”), holding 28 per cent of the issued share capital of the borrower, viz 394,000 shares, and Begski Pty Ltd, as trustee of the Begski Family Trust, held 40,133 B class shares in the borrower company.
19 It was said that Mr Gelfand, the sole director of Texas, and Mr Darvall “were in discussion about Gelfand acquiring an interest in the company by acquiring some or all of the shares held by Sklovsky in the [borrower] company by lending money to the company to pay Sklovsky”.
20 Mr Gelfand was to acquire shares in the company with the loan advance to the borrower company being “reduced according to the purchase price of the shares”.
21 Mr Sklovsky would be paid $1.1 million over five years for his 18 per cent of the company, and he was to sign the Loan Agreement so that Texas “would lend money and Gelfand join the company as its COO [Chief Operating Officer] and enable the change of management and buy out of Sklovsky’s shares”.
22 It was said that representations to this effect were made by Mr Darvall to Mr Sklovsky. There was a proposed agreement to be entered into by Mr Darvall and Mr Sklovsky arising from a mediation, described as the “exit agreement”. Mr Sklovsky signed the Loan Agreement, according to his Defence, “Induced by the Representation and not otherwise”.
23 After the Loan Agreement, it was said that Mr Darvall did not execute or carry into effect the proposed exit agreement. It was said that Mr Gelfand of Texas did not execute any option to acquire shares in the borrower company, though “from 2016” he represented himself as part owner of the borrower company.
24 Then it was said that Mr Sklovsky was excluded from day to day management in the company, leading to him and his company, Udaipur, commencing oppression proceedings in the Supreme Court against Darvall Group Pty Ltd and Mr Darvall. Those proceedings were the subject of a mediation on 7 March 2018, and the parties entered into a Term Sheet. According to the Defence, Texas “was aware of the terms of the Term Sheet”.
25 The Defence referred to the parties having entered into the Security Agreement and a Priority Agreement relative to its ranking with securities held by Darvall Group Pty Ltd and Begski Pty Ltd, and to a Shareholders’ Agreement of Adherence. It also referred to an option arrangement, whereby Texas would have the right to exercise an option for $1 at one or more times during the option period and acquire shares free of any security interest in the borrower company, with an arrangement for capitalisation of interest. It was in consideration of those arrangements that Mr Sklovsky executed as guarantor under the Loan Agreement.
26 As to the further advance of $200,000 under the Loan Agreement, it was said “no consideration passed in respect of the advance of $200,000.00, as past consideration is no consideration”.
27 According to paragraph 14 of the Defence, it was said:
“to the extent the defendants are liable to the plaintiff under clause 6.1 of the loan agreement, [presumably this should be taken as a reference to the second and third defendants and not the first] they are severally not jointly liable, there being no agreed term to be jointly liable;”
28 Next, there was reference to the borrower companies entering into a “Deed of Company Arrangement” following its term of administration. Insofar as Texas had voted to adopt the Deed of Company Arrangement, it was said Texas had “agreed to vary the loan agreement by allowing the securities to be released or impaired and so breached its equitable duty to Sklovsky”. As a result, it was said that the loan agreement had “been discharged”.
29 Further, it was said that any claim against Mr Sklovsky had to be adjusted by reference to the implied terms said to operate relative to the loan agreement and in light of the “Consideration” on issue, the second advance should be excluded from recovery.
30 Finally, it was said that it was “unconscionable for [Texas] to seek recovery from Sklovsky by reason of the Plaintiff’s Awareness”. That is, its awareness of the Term Sheet.
31 The Defence, in paragraphs 16-20, denied liability under the Security Agreement. As the plaintiff’s claim was presented by Mr Glick QC, Texas placed no reliance on the Security Agreement for the purposes of its claim against Mr Sklovsky.
Test for summary dismissal
32 Whilst I was referred by counsel to a number of authorities as to the proper test to apply upon an application such as the present, in my view the fundamental and authoritative formulation of the test for the grant of summary judgment under the provisions of the Civil Procedure Act 2010 is to be found in the judgment of the Court of Appeal in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd (2013) 42 VR 27. The summary application for judgment considered by their Honours in that case was a defendant’s application seeking the summary dismissal of the plaintiff’s claim. Here, the application is made by the plaintiff for summary judgment as against one of the defendants. The same principles, however, apply mutatis mutandis. In a joint judgment, Warren CJ and Nettle JA (as he then was) said:
“[35] Upon the present state of authority:
a) the test for summary judgment under s 63 of the Civil Procedure Act 2010 is whether the respondent to the application for summary judgment has a ‘real’ as opposed to a ‘fanciful’ chance of success;
b) the test is to be applied by reference to its own language and without paraphrase or comparison with the ‘hopeless’ or ‘bound to fail test’ essayed in General Steel;
c) it should be understood, however, that the test is to some degree a more liberal test than the ‘hopeless’ or ‘bound to fail’ test essayed in General Steel and, therefore, permits of the possibility that there might be cases, yet to be identified, in which it appears that, although the respondent’s case is not hopeless or bound to fail, it does not have a real prospect of success;
d) at the same time, it must be borne in mind that the power to terminate proceedings summarily should be exercised with caution and thus should not be exercised unless it is clear that there is no real question to be tried; and that is so regardless of whether the application for summary judgment is made on the basis that the pleadings fail to disclose a reasonable cause of action (and the defect cannot be cured by amendment) or on the basis that the action is frivolous or vexatious or an abuse of process or where the application is supported by evidence.” (2013) 42 VR 27, 40
33 The relevant provisions in the Civil Procedure Act 2010 for the purposes of the present application are to be found at ss61 and 63. Those sections provide:
“61 Plaintiff may apply for summary judgment in proceeding
A plaintiff in a civil proceeding may apply to the court for summary judgment in the proceeding on the ground that a defendant’s defence or part of that defence has no real prospect of success.
...
63 Summary judgment if no real prospect of success
(1)Subject to section 64, a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success.
(2)A court may give summary judgment in any civil proceeding under subsection (1)—
(a)on the application of a plaintiff in a civil proceeding;
(b)on the application of a defendant in a civil proceeding;
(c)on the court’s own motion, if satisfied that it is desirable to summarily dispose of the civil proceeding.”
Plaintiff’s contentions
34 Mr Glick QC, appearing on behalf of the plaintiff, contended that summary judgment should be granted to his client. The plaintiff’s claim, he said, was a straightforward claim for the recovery of moneys lent against a guarantor who had guaranteed repayment of those moneys. Mr Glick said for the purposes of the present application his client relied solely on what has been described as the Loan Agreement, and a further pleaded claim for recovery pursuant to the document described as the Security Agreement was not pressed.
35 According to Mr Glick, various matters pleaded in the defence of the first defendant and elaborated upon by Ms Harris in submissions upon the hearing of the application were either misconceived or lacking in substance, and ultimately the matters relied upon by the first defendant had no more than a fanciful prospect of success.
Contentions on behalf of the first defendant
36 Ms Harris, on behalf of Mr Sklovsky, noted that the affidavit of Mr Gelfand, sworn with a view to verifying the allegations in the statement of claim, was inadequate in so far as, in accordance with the provisions of Order 22 of the Court’s Rules, it said that there was no prospect of success for her client’s defence. She said, however, that Rule 22.04(b)(ii) had not been complied with. She noted that whilst the affidavit disclosed the entry of a default judgment against the second defendant, there was no evidence as to “the enforcement steps taken to recover the judgment debt against the Second Defendant and the amount, if any, of the judgment debt recovered from the Second Defendant to date. The amount to be recovered against the First Defendant is therefore unknown.” She said any supplementary affidavit would be out of time. She referred to Rule 22.04(5).
37 She said that the proceeding should go to trial in the normal way. She relied on s64 of the Civil Procedure Act 2010, which provides:
“64 Court may allow a matter to proceed to trial
Despite anything to the contrary in this Part or any rules of court, a court may order that a civil proceeding proceed to trial if the court is satisfied that, despite there being no real prospect of success the civil proceeding should not be disposed of summarily because—
(a)it is not in the interests of justice to do so; or
(b)the dispute is of such a nature that only a full hearing on the merits is appropriate.”
38 According to Ms Harris, proper adjudication of these matters required a consideration of the factual matrix in which they occurred. The “Loan Agreement” was, she said, part of a “suite of documents” and part of a larger transaction. As to the relevance of these matters, she relied on a decision of the Court of Appeal, Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201 [70]−[71], [106]−[119] and [142]. She conceded that according to the Court of Appeal’s analysis, whilst surrounding circumstances were admissible to establish the objective background against which agreements were made, evidence of the parties’ statements and conduct with a view to disclosing their actual intentions and expectations was inadmissible [2020] VSCA 201 [70].
39 She said analysis of the documents in their totality and the events showed that “Gelfand and his interests were intended to replace [Mr Sklovsky] and his interests in the [borrower] company over time.” She said this was based on what Mr Sklovsky had been told by Mr Darvall. She referred to an email from Mr Hilton of Cornwall Stodart dated 9 June 2016 (Exhibit MGWS2). She also referred to a document styled “Option Deed”, which was part of the suite of documents executed together, stating that it granted Texas “an option to require the [borrower] company to issue and allot option shares free of any security interest for a price provided that such an issue did not dilute [Mr Darvall’s] interests below 51%.” She said this was also consistent with Mr Gelfand holding himself out as the “co‑owner” of the borrower company’s business. (Exhibit MGWS6) She said Mr Sklovsky executed the suite of documents with a view “in essence, to restructure of the shareholding and management of the [borrower] company which saw [Mr Sklovsky] and his interests held by Udaipur Lake Pty Ltd depart and Gelfand and his interests [Texas] enter.”
40 Ms Harris said that since Mr Gelfand of Texas was “a longstanding and close working colleague” of Mr Darvall, Mr Gelfand and hence Texas were “likely to know of that context and the purpose”. She said given that clear intention, the documents, in particular the Loan Agreement, should be construed in light of that intention.
41 Secondly, she said that the further advance of $200,000 provided for in Clause 3.1.2 of the Loan Agreement was subject to a condition precedent, namely to Texas’s “being satisfied with the financial performance and position of the Borrower but on the basis that [Texas] shall act reasonably in forming an opinion on these matters, and subject to Jono Gelfand being in the employ of the Borrower at the respective dates.” She said the making of the advance without satisfaction of that condition precedent discharged any guarantee liability owed by Mr Sklovsky. She referred to the joint judgment of Mason ACJ (as he then was), Wilson, Brennan and Dawson JJ in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549. It was plain that the shareholding process provided for in the “suite” had not been carried into effect, and “The duty of mutual obligation and good faith to achieve the purpose of the suite of documents required [Texas] to exercise the options, not to frustrate the purpose by [Texas] holding the benefit of the priority deed, Gelfand remaining an employee with clear insight as to the financial position of the debtor company and its management issues and [holding] himself out as a co‑owner inferring an intention to be so.”
42 She said, in summary, that Mr Sklovsky gave his guarantee “in return for the performance of [Texas’s] promise that in return for [Texas] exercising the option having gained all the benefits of the suite of documents.” [sic] She referred to Scott v Forster Pastoral Co Pty Ltd v Ors [2000] NSWCA 241 [38]. She said, “the condition precedents were conditions or innominate terms and promissory obligation under the guarantee arose only if [Texas’s] condition precedent was satisfied. It was not. The guarantee in respect of the $400,000 Advance under clause 3.1 ought not be enforceable.” The $200,000 advance ought not be covered by the guarantee because the condition precedent stated in the loan contract had not been satisfied.
43 As to the implied terms pleaded in her client’s defence, Ms Harris said that the first of them arose out of “necessity (implied by law)”. She said that the covenant in the Loan Agreement on Mr Sklovsky’s part, Clause 6.1.1, whereby he covenanted with Texas “to punctually perform and observe the Borrower’s obligations under this Agreement” imposed an obligation which was positive and was only capable of performance whilst he remained a director of the debtor company. “As the director of a minority shareholder, [Mr Sklovsky] had no ability to achieve such an obligation.” The fact that Mr Sklovsky’s company was a minority shareholder was, she said, known to Mr Gelfand, and his obligations “were rendered nugatory upon his resignation as a director. The futility of any guarantee dependent upon the guarantor having control or power over the debtor company is apparent.”
44 Since Mr Gelfand was (it was agreed by all parties) Chief Operating Officer of the borrower at the time of the mediation, he would have well known that Mr Sklovsky “resigned his directorship in the debtor company”. She said he would have known the other matters referred to in the Term Sheet agreed on at mediation.
45 As to the second implied term she said, “This is a question of construction: the guarantee itself does not [scil say that] there [is] to be any joint and several liability ... Clause 7.10 of the loan agreement refers to an obligation applying to two or more persons, binding them jointly and each of them severally.”
46 Finally, she said that entry into the Deed of Company arrangement for which Mr Gelfand voted entailed surrender of the Security Agreement, thereby an impairment of security. She said “[Mr Sklovsky] cannot prove the diminution of the value of the securities [which] will be unknown until 31 July 2023, should the operation of the DOCA continue within its terms.” Finally, she said “The consideration for entering into the security agreement formed part of the consideration under clause 2.1 of the loan agreement. In that sense, it is either past consideration or a failure of consideration and the guarantee under the security agreement is unenforceable.”
Conclusions
Implied terms
47 I reject the contention that the loan agreement is to be regarded as having an implied term that Mr Sklovsky’s liability as guarantor would terminate upon his vacating office as a director of the borrower company.
48 The test for implication of terms to give business efficacy to an otherwise complete written contract was authoritatively stated by the majority of the Judicial Committee of the Privy Council (Lord Simon of Glaisdale, Viscount Dilhorne and Lord Keith of Kinkel) in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 282−3, where their Lordships said:
“Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”
49 The guarantee in question here was in fairly standard terms. It is the sort of guarantee which one natural person might give of the obligations of another natural person. Such a guarantee liability in those circumstances is recognised and enforced by the law, despite the practical inability of the guarantor to control the actions of the principal debtor due to their both enjoying personal autonomy.
50 The suggestion that a guarantee can only be recognised as effective if the guarantor is a director of the principal debtor and continues to be so whilst the guarantee obligation subsists is plainly untenable. The fact that obligations such as this are frequently undertaken in the absence of the sort of control that a director might enjoy over the affairs of a company which is the principal debtor indicates that a guarantee such as the present one can be effective without the alleged implied term. Nor would a term such as the one advocated for be “reasonable and equitable”. The Corporations Act bestows upon a director power to resign his or her office. It would not be reasonable or equitable for a creditor to have his interest under a guarantee so easily defeasible by the guarantor’s simply resigning his or her directorship. Far from being so obvious that it goes without saying, the suggested implied term is inherently implausible and somewhat incredible.
51 Their Lordships’ formulation of the test for terms implied to give business efficacy might be regarded as restrictive, but it operates in the present context where the parties have agreed by Clause 7.4 of the Loan Agreement that:
“This document contains the entire understanding between the parties with regard to its subject matter. All previous agreements, representations and warranties affecting this subject matter are superseded by this document and have no effect.”
52 The second alleged implied term is that Mr Sklovsky’s liability is to be several, only. Clause 7.10 of the Loan Agreement, under the heading “Joint and several”, states:
“If a party consists of two or more persons or an obligation applies to two or more persons, this document binds them jointly and each of them severally.”
53 The heading to the Loan Agreement shows the plaintiff company as the lender, Michael Sklovsky Pty Ltd as the borrower, and Messrs Sklovsky and Darvall as guarantor/and guarantor/Darvall respectively. The section consisting of defined terms does not refer to or define the phrase “the guarantor”. It is obvious that the references in the body of the document to “the guarantor” refer both to Mr Darvall and Mr Sklovsky, and Clause 7.10 therefore renders their liability joint and several. The alleged implied term would be inconsistent with the express terms of the document itself, which would exclude it as a possible implied term by the operation of the BP Refinery (Westernport) test. In any event, where an obligation is owed by more than one person, and no provision is made as to whether the liability is owed jointly, severally, or jointly and severally, the presumption is that it is owed jointly.
54 I reject the implied terms.
55 I also reject as constituting any sort of arguable defence the contention that the failure to carry the option agreement into effect constituted some form of breach of contract or non-fulfilment of a condition precedent as to liability. It was not suggested that there was any express term to that effect in the Loan Agreement or any other document; nor was it suggested that the option agreement, which, by its nature, empowered Texas to take up shares in the borrower company, thereby annihilating or retiring the loan obligations of the borrower and the guarantee liabilities of Mr Sklovsky, was mandatory, such that Mr Sklovsky would be discharged if the conversion did not take place. To the extent that Mr Sklovsky alleges, either by affidavit or in his defence, that he was promised that this process would occur, the promises or assurances seem to have come from Mr Darvall rather than from Mr Gelfand or Texas. The most that seems to be said is that the latter were necessarily aware of what was being represented, and this should be drawn as an inference. Even if the inference be drawn, it is not evident why a promise by one person becomes a binding obligation upon another merely because the other is aware of the promise by the first person.
Affidavit material
56 If it be the case that the supporting affidavit from Mr Gelfand is deficient in failing to disclose what recoveries, if any, have been made from Mr Darvall, against whom a default judgment has been entered, if it were otherwise appropriate to grant default judgment to the plaintiff, such judgment should be given only after supplementary affidavit material is provided disclosing those matters. Likewise, if it were regarded as necessary, the affidavit material should disclose what has been recovered from the company arrangement. There would be no ground for demanding some prediction on why it might, in the future, be recovered from that source. Were Mr Sklovsky to pay out his guarantee liability, he could be subrogated to the rights of Texas for the recovery of the guaranteed debt.
Consideration
57 According to Clause 6.1, Mr Sklovsky undertook the guaranteed obligations in consideration of Texas entering into the Loan Agreement. That is, the obligations undertaken by Texas under the Loan Agreement were undertaken as coordinate obligations with Mr Sklovsky’s obligations as guarantor, in the same way as the obligation of a vendor of real estate is a coordinate obligation with the purchaser’s promise to pay the price for the sale of that real estate. I reject the contention that there is any operation for the maxim “past consideration is no consideration”.
Security Agreement
58 There is, however, substance in the issues raised by Ms Harris on behalf of Mr Sklovsky relative to the Security Agreement. Her contentions proceeded upon the assumption that the Security Agreement was effective but was discharged as part of the process of entry into the Deed of Company arrangement.
59 Mr Glick QC clarified that matter in the course of argument before me, advising that the Security Agreement had never been perfected by registration under the personal property security arrangements. As a result, it was void as a security in the borrower company’s insolvency. Clause 2.1 of the agreement provided that Texas was not required to make the advance unless the borrower company entered into the Security Agreement. The issue of perfecting that security by registration was not expressly adverted to. The principles as to implication of terms to give business efficacy referred to above, however, would seem, at least arguably, to lead to the conclusion that there should be an implication that the guarantor’s liability should be conditional either as a condition precedent to performance or, perhaps more plausibly, as a condition subsequent to perfection of the Security Agreement so that it would stand as such in the borrower’s insolvency. In their work The Modern Contract of Guarantee (3rd edition), Professors O’Donovan and Phillips state:
“It is clear that the creditor [claiming under a guarantee] is under an equitable duty to perfect any securities obtained from the principal debtor to secure the guaranteed debt. The majority of instances involve a neglect to register an instrument or to serve notice of an instrument when this is necessary to make it effective or to secure priority. Examples include a failure to register a bill of sale or chattel mortgage.”
60 One of the authorities cited was a decision of the Federal Court, Re Kwan; ex parte Hastings Deering (Solomon Islands) Ltd (1987) 15 FCR 264, a judgment of Pincus J. The effect of his Honour’s determination is summarised in the headnote, which states:
“Where a guarantee had been given on the express stipulation that there should be a bill of sale, there was an implied condition that the security of the bill should be perfected. If it was not, the guarantor was pro tanto exonerated.”
61 His Honour referred to the judgment of Brennan J (as he then was) in Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654, 675, where, speaking of such an eventuality, his Honour said:
“The surety is entitled in equity to be credited with the deficiency in reduction of his liability.”
62 That is, breach of the duty by failure to perfect, as appears to have occurred here, does not simply discharge the guarantor; rather, it diminishes his or her liability to the extent of the value lost by the failure to perfect the security. In the present case there is no evidence as to the value of what has been forgone. The report to creditors by the administrator might suggest the value would have been minimal. As a defence, it may be that the burden of proof lies ultimately upon a guarantor seeking the advantage of a credit under the doctrine. In Re Kwan, his Honour had an affidavit on behalf of the guarantor to the effect that, had the security been effective, the guaranteed debt could have been discharged by recourse to it. His Honour was sceptical as to the accuracy of this view, but felt it appropriate to act upon this affidavit and set aside a bankruptcy notice against the guarantor where the creditor had failed to take up an opportunity available to it to put on contradicting material.
63 Similarly in the present case, Mr Glick’s written outline does not deal with this matter at all. In oral submissions he asserted without elaboration that non-registration of the Security Agreement did not constitute an impairment of security.
64 The effect in the present instance is to leave an uncertainty as to what the outcome should be in light of the non-perfection of the Security Agreement. If I were considering this matter at trial, the result would seem to be that the lack of proof as to value would go to the disadvantage of the guarantor: that is, the guarantor would be given no credit for any value referable to a security impaired or not perfected. In the present case, at the summary judgment stage, since nothing less than near certainty or satisfaction that any contention to the contrary is no more than fanciful will be sufficient, the disadvantage of the uncertainty must fall on the plaintiff, whose summons for summary judgment must be dismissed.
Condition precedent re further advance
65 Given the conclusion that I have expressed relative to the non-perfection of the Security Agreement as a security, it is unnecessary for me to express any view as to the argument advanced relative to there being a condition precedent to the guarantor’s liability for the further advance of $200,000.
Disposition
66 I will direct the parties to bring in short minutes to give effect to these reasons. Presumably the primary order will be the dismissal of the summons, but there will be necessary consequential orders to bring the matter through to trial.
Costs
67 I have heard no submissions on the question of costs, and so I will reserve them.
9
0