Texas Consolidated Pty Ltd v Sklovsky (No 2)
[2022] VCC 617
•11 May 2022
| 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 |
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JUDGE: | HIS HONOUR JUDGE WOODWARD | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 May 2022 | |
DATE OF JUDGMENT: | 11 May 2022 | |
CASE MAY BE CITED AS: | Texas Consolidated Pty Ltd v Sklovsky & Anor (No 2) | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 617 | |
REASONS FOR JUDGMENT
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Subject:GUARANTEE
Catchwords: Whether guarantee liability excluded by failure to register a charge – whether express term requiring registration – whether equitable duty to register
Legislation Cited: Corporations Act 2001 (Cth) section 444J
Cases Cited:Texas Consolidated Pty Ltd v Sklovsky [2020] VCC 1870; 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
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | P Caillard | Sackville Wilks Pty Ltd |
| For the First Defendant | In person |
HIS HONOUR:
Background
Summary judgment application
1In late 2020, this proceeding was the subject of reasons for judgment by his Honour Judge Macnamara on the plaintiff’s application for summary judgment.[1] His Honour’s reasons (“Macnamara J reasons”) included a detailed summary of the background to the proceeding and findings on a number of issues that were re-litigated before me in the course of the trial. I have therefore taken the liberty of restating parts of his Honour’s reasons where it is convenient to do so, either because I have nothing material to add to his Honour’s summary of relevant facts or law, or where his Honour’s views accord with my own.
[1] Texas Consolidated Pty Ltd v Sklovsky [2020] VCC 1870.
Outcome
2For the reasons that follow, the plaintiff’s claim against the first defendant must succeed. I will give judgment for the plaintiff against the first defendant for $791,836.61, comprising the principal sum of $600,000 plus interest to the date of judgment of $191,835.61, and costs. I set out below my preliminary view on the question of costs, but will invite further brief written submissions on that question and make final orders (including for costs) on the papers.
The “Ishka” business
3Some 50 years ago, the first defendant, Michael Sklovsky, established the “Ishka” business as a sole trader, selling handmade clothing, jewellery, furniture, homewares and gifts. In early 1978, Mr Sklovsky incorporated Michael Sklovsky Pty Ltd (“Company”) to own and operate the business. By 2010, the Company operated many Ishka retail stores throughout Australia. In around August 2010, the Company borrowed funds from a company associated with the second defendant, Toby Darvall, and over time, as part of the lending arrangement, Mr Darvall’s company secured a controlling interest in the Company, and Mr Darvall became a director and its Chief Executive Officer.
4In 2016, apparently as part of a process under which Mr Sklovsky was to transfer his remaining interest in the Ishka business and retire from the Company, Mr Darvall made arrangements for Johnathan Gelfand to become involved in the business. Relevantly, those arrangements included Mr Gelfand being appointed the Chief Operating Officer of the business and his company (the plaintiff (“Texas”)) lending money to the Company.
5The arrangements also contemplated an agreement granting Texas an option to purchase shares in the Company, in consideration for Texas progressively releasing the Company from its obligation to repay the money lent. The status of this agreement is unclear; the copy in the court book is unexecuted and no evidence was given as to its execution or operation. However, it does not form part of any defence advanced by Mr Sklovsky, so it is unnecessary to examine it further.
The loan, guarantee and default
6The loan by Texas to the Company was advanced in two tranches; $400,000 in July 2016 and a further $200,000 in August 2016. It was made pursuant to a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”), both dated on or about 19 July 2016. The Loan Agreement and Security Agreement both included provisions pursuant to which the defendants guaranteed the performance by the Company of its obligations under those agreements (“Guarantee”).
7The Company appointed voluntary administrators on 20 February 2020 and later executed a deed of company arrangement (“DOCA”). However, the DOCA failed and on 16 September 2021 the Company went into liquidation without repaying any of the loan from Texas. Texas entered judgment in default of appearance against Mr Darvall on 13 July 2020. On 21 February 2021 Mr Darvall was declared bankrupt. Texas has been unable to recover any of its claim from Mr Darvall. Thus Texas claims the full amount of the loan plus interest from Mr Sklovsky.
The Loan and Security Agreements
8The Loan Agreement relevantly provided in effect as follows:
(a) Texas is not required to make the $400,000 “Advance” under the Loan Agreement unless the following conditions are satisfied (“Conditions”):
(i)the Company enters into the Security Agreement; and
(ii)the parties enter into various other agreements (clause 2.1);
(b) the Company, Texas and Mr Sklovsky each use their best endeavours to satisfy the Conditions (clause 2.2);
(c) the Conditions may only be effectively waived if waived by Texas (clause 2.3);
(d) Texas agrees to make a further loan of $200,000 to the Company on or before 30 June 2017 subject to Texas being satisfied with the financial performance and position of the Company, but on the basis that Texas shall act reasonably in forming an opinion on these matters (clause 3.1.2);
(e) the Company must pay interest at the Interest Rate (being 10% per annum or, if the Company fails to repay the loan on the repayment date of 31 January 2022, the rate prescribed pursuant to s2 of the Penalty Interest Rates Act plus 4%) (clause 3.6);
(f) the Company agrees to enter into the Security Agreement to secure Texas’s rights under the Loan Agreement (clause 3.7);
(g) unless repayment is required earlier in accordance with the Loan Agreement, the Company must repay the loan on 22 January 2022 (clause 4.1);
(h) Texas may elect to treat the loan as payable automatically and immediately if the Company 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 (clause 4.4.5);
(i) the Company indemnifies Texas against, and must pay to Texas on demand the amount of all losses, liabilities, costs and expenses (including, without limitation, legal expenses on a full indemnity basis) in connection with the enforcement or attempted enforcement or preservation or attempted preservation of any rights under the Loan Agreement (clause 5.2);
(j) in consideration of Texas, at the request of Mr Sklovsky, entering into the Loan Agreement, Mr Sklovsky:
(i)covenants with Texas to punctually perform and observe the Company’s obligations under the Loan Agreement and to pay to Texas any amounts due under the Loan Agreement and the amount of any loss, damage, cost, charge or expense recoverable against the Company; and
(ii)indemnifies Texas against any loss arising from the Company’s failure to perform and observe the Company’s obligations under the Loan Agreement (clause 6.1);
(k) the liability of Mr Sklovsky will not be affected by Texas granting time or any other indulgence to, or agreeing not to sue, the Company or any Guarantor (clause 6.2.1);
(l) the Loan Agreement 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 the Loan Agreement and have no effect (clause 7.4); and
(m) 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 (clause 7.10).
9Many of the provisions of the Loan Agreement are repeated in the Security Agreement. In particular, the Security Agreement essentially repeats the clauses of the Loan Agreement creating the Guarantee (clause 5 of the Security Agreement). However, the Security Agreement also includes provisions charging the Company’s assets in favour of Texas, and it is these provisions that give rise to the argument that led Judge Macnamara to refuse the application for summary judgment, and are relied on by Mr Sklovsky before me. Those provisions are to the effect as follows:
(a) the Company, as the beneficial owner and absolutely entitled to grant the Security Interest, hereby charges in favour of Texas all its personal property present and future and wheresoever situated including uncalled capital with the payment to Texas of all monies secured by the Security Agreement (clause 4.1); and
(b) the Company at its own cost will at Texas’s request execute, stamp and register such further Security Interests and assurances of such property, goodwill, book debts, plant fixtures and fittings containing such covenants and provisions as Texas deems necessary (clause 4.2.1).
Notice to admit
10On 16 March 2022, Texas’s solicitors served on Mr Sklovsky a notice to admit. Mr Sklovsky failed to serve a notice of dispute in respect of any of the facts and documents in the notice to admit within 14 days after service, or at all. In the circumstances, he was taken to admit the facts and documents.
11Most of the facts and documents in the notice to admit were uncontroversial, and included matters such as execution of the Loan Agreement and Security Agreement, the making of the advances totalling $600,000, the obligation to pay interest, confirmation that the Company has not made any payment of interest since January 2019, the appointments of the voluntary administrators, liquidators and Mr Darvall’s bankruptcy and confirmation that Texas has not been paid any of the principal or interest owing under the Loan Agreement.
12However, there were two matters in the notice to admit that were relevant to Mr Sklovsky’s substantive defences, namely:
(a) “[t]he Loan became automatically and immediately payable upon the appointment of the Administrators”; and
(b) “[i]t would have made no difference to the amount that would have been recovered by the Plaintiff from the Borrower had the security been registered as provided for in the Security Agreement”.
13I explained to Mr Sklovsky the effect of the notice to admit and raised with him the possibility of an application to withdraw any of the admissions and, more particularly, the two matters relevant to his substantive defence. I noted in respect of the first matter that it was arguably a matter of law and not fact. I also said that it appeared from the opening by counsel for Texas that the second matter would be the subject of evidence in any event. Regardless, Mr Sklovsky did not seek to resile from any of the admissions in the notice to admit.
Issues and analysis
14On the day before the hearing, I arranged to send to the parties a draft list of issues that I considered could be distilled from the pleadings, assisted by the Macnamara J reasons. This went further than the list provided by Texas as part of the pre-trial material. Texas’s list appeared to me to overlook both a matter that Macnamara J noted he was not required to decide, and the amendments to Mr Sklovsky’s defence made after the Macnamara J reasons.
15Counsel for Texas was content to adopt my draft list. Mr Sklovsky was likewise content with my draft list as far as it went, but raised a number of additional matters that he considered were relevant to Texas’s claim, and important for me to consider in order to do justice between the parties. These included some of the matters referred to in paragraph 21 and following of his affidavit dated 4 November 2020 in opposition to the summary judgment application, as well as matters concerning Mr Gelfand’s role in propounding the DOCA.
16It was clear from Mr Sklovsky’s description of these matters that they sprang from a deeply held grievance about what Mr Sklovsky saw as the role of both Mr Darvall and (to a lesser extent) Mr Gelfand, in the demise of a business that he had nurtured over decades and was clearly very dear to his heart. I have no doubt that Mr Sklovsky’s views about these matters were genuinely held and, it seems, have been vindicated (at least in part) as against Mr Darvall, by Mr Sklovsky’s success in an oppression proceeding against him in the Supreme Court.
17However, as I endeavoured to explain to Mr Sklovsky, none of the matters he raised seem to me to translate to further sustainable grounds of defence or a counterclaim in this proceeding, which was essentially a simple claim under a contract of guarantee. I noted that his amended defence has been prepared, apparently with some care, at a time when he was represented by solicitors and counsel. It was likely that they had considered and rejected all possible defences based on the matters referred to in his affidavit dated 4 November 2020.
18I would add that it seems that the amendments to the defence (and notably the deletion of a number of defences advanced in the first version of the defence) have been made in the light of the Macnamara J reasons. Those reasons confirm that his Honour considered and rejected a number of possible defences based on these matters, which appears to have prompted those then advising Mr Sklovsky to abandon those arguments in the amended defence.
19Finally, I explained to Mr Sklovsky (in substance) that he could only raise these matters if he first made an application to further amend his defence. Any such application was unlikely to succeed for at least three reasons. First, (as I had already observed) none of the matters raised appeared to amount to sustainable grounds for a defence or counterclaim. Second, it was made very late. And, third, it was likely to cause serious prejudice to Texas.
20Ultimately, no such application was made by Mr Sklovsky and in the circumstances, I indicated to Mr Sklovsky that the trial would proceed on the basis that the issues I had to decide were those set out in the draft list of issues, to the effect as follows:
(a) Was there an express term of the Loan Agreement that Mr Sklovsky’s agreement to provide a guarantee was subject to a condition that Texas would register a security over the Company under the Personal Property Securities Act 2009 (Cth) (“PPSA”)? [Clauses 2.1, 2.2 and 3.7 of the Loan Agreement].
(b) If so, did Texas breach that term and what is the consequence of any breach?
(c) Was there an express term of the Loan Agreement that before advancing a further $200,000 Texas would satisfy itself as to the financial performance of the Company? [Clause 3.1.2 and recital G of the Loan Agreement].
(d) If so, did Texas breach that term and what is the consequence of any breach?
(e) Was Texas under an equitable duty (by reason of any alleged implied term or at law) to perfect the security under the Security Agreement by registering a security interest constituted by the charge over the Company under the PPSA?
(f) If so, is the consequence of its failure to do so:
(i)that the Guarantee is discharged; or
(ii)that Mr Sklovsky’s liability is diminished to the extent of the value lost by the failure to perfect the security?
(g) If the consequence is that stated in sub-paragraph (f)(ii) above:
(i)who bears the onus of establishing that value has been lost; and
(ii)what is the evidence that there has been a loss of value?
(h) Is Texas precluded from enforcing its claim against Mr Sklovsky in whole or in part by reason of its election to delay making a demand on the Company for repayment of the loan before the Company appointed voluntary administrators?
(i) Is Texas precluded from enforcing its claim against Mr Sklovsky by reason of it being a participating creditor in the DOCA?
(j) Did Mr Darvall make the “Representation” [amended defence para 22(e)] alleged?
(k) If so, is Mr Sklovsky entitled to contribution from Mr Darvall in relation to the claims made by Texas against Mr Sklovsky?
(l) If Mr Sklovsky is liable to the plaintiff under the Guarantee, what is the quantum of that liability?
Was there an express term obliging Texas to register its charge?
21This is an issue raised for the first time by Mr Sklovsky’s amended defence and therefore is not dealt with in the Macnamara J reasons. The effect of the pleading is that clauses 2.1, 2.2 and 3.7 of the Loan Agreement read together provide expressly that liability under the Guarantee is conditional on Texas registering its charge over the Company under the PPSA. In the course of submissions, Mr Sklovsky argued that this is particularly apparent from clause 2.1, which clearly extends obligations to “the parties” generally.
22I also understood Mr Sklovsky to be seeking to argue that the Loan Agreement should be construed in the context of the broader transaction involving Texas converting the loan to equity in the Company, and related allegations referred to in his affidavit of 4 November 2020. I took his submission to be that, so construed, the Loan Agreement contemplated that the registration of the charge was part of a package of interdependent commitments, including his agreement to give the Guarantee.
23On this issue, counsel for Texas submitted in substance that:
(a) clause 6 of the Loan Agreement and clause 5 of the Security Agreement (which both constitute the Guarantee) make no mention of any conditions precedent to liability under the Guarantee;
(b) by its terms, the first clause relied on by Mr Sklovsky as giving rise to the alleged condition (clause 2.1) is plainly for Texas’s benefit as lender – it conditions only Texas’s obligation to make the Advance, not Mr Sklovsky’s liability under the Guarantee once the Advance is made;
(c) this construction of clause 2.1 is reinforced by clause 2.3, which expressly provides that only Texas can waive the Conditions in clause 2.1, thus confirming both that the Conditions are for the benefit of Texas, the only party that can waive the Conditions;
(d) the second clause relied on by Mr Sklovsky (clause 2.2) providing that the parties must use their best endeavours to satisfy the Conditions must be read in the context of clauses 2.1 and 2.3;
(e) further, read objectively, clause 2.2 does not impose a condition on liability under the Guarantee; and
(f) similarly, clause 3.7 provides only that the Company enter into the Security Agreement (which occurred) – it says nothing about registration of the charge and does not by its terms operate as a condition to liability under the Guarantee.
24I agree with counsel for Texas that there is no express term obliging Texas to register its charge, essentially for the reasons he gave. In my view, the “Conditions” listed in clause 2 of the Loan Agreement are primarily for the benefit of Texas – as a precondition to making the “Advance”. They do not by their terms operate as a condition to liability under Guarantee, and nor is there anything in the Guarantee provision in clause 6 to support Mr Sklovsky’s submission. To the extent there might otherwise have been any doubt, this is put to rest by clause 2.3, which confers on Texas an express and exclusive power to waive the Conditions.
25Further, I discuss below the question of whether the Security Agreement should be construed as imposing an obligation on Texas to register its charge over the Company. In my view, it does not. Accordingly, even if it could be argued that execution of the Security Agreement by Texas was a condition to liability under the Guarantee, it does not follow that such a condition extends to registration of the charge. Thus the better view is that if such a condition was imposed under the Loan Agreement, it was not breached. The parties did execute the Security Agreement.
26Finally, there is no substance in the suggestion that construing the Loan Agreement against the background of the broader arrangements between the parties could lead to a different result. A similar argument (albeit in a different context) was advanced by counsel for Mr Sklovsky in the summary judgment application. She submitted that proper adjudication of this issue 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. She relied on a decision of the Court of Appeal, Adaz Nominees Pty Ltd v Castleway Pty Ltd.[2]
[2] [2020] VSCA 201 at [70]−[71], [106]−[119], [142].
27On the other hand, she conceded that while 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. She nevertheless argued that the Loan Agreement should be construed in the light of the intention that Texas would replace Mr Sklovsky’s interests in the ownership and operation of the Company.
28In my view, even if it were necessary to have regard to relevant surrounding circumstances to construe the Loan Agreement (which is doubtful), nothing in those circumstances supports the construction contended for by Mr Sklovsky. There is no part of the arrangements contemplated by the “suite of documents” that would support a conclusion that registration of the charge was a precondition to liability under the Guarantee. In any event, for the reasons above, such a construction is contrary to the plain words of the Loan Agreement.
Did Texas breach the express term relating to the further advance of $200,000?
29This issue too was part of the submissions by counsel for Mr Sklovsky during the summary judgment application. She submitted 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’ “being satisfied with the financial performance and position of the [Company] 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) and Wilson, Brennan and Dawson JJ in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd.[3]
[3] (1987) 162 CLR 549.
30Mr Sklovsky did not advance any further or different submissions on this issue before me, except in relation to the evidence as discussed below.
31Unsurprisingly, given the plain words of clause 3.1.2, counsel for Texas accepted that there was an express term as alleged. It is perhaps arguable that a failure to satisfy the condition would not have rendered the second $200,000 advance unrecoverable, but Texas did not advance that argument. Rather, it noted that the payment of the $200,000 was made very soon after the first advance of $400,000, and adduced evidence from Mr Gelfand for Texas that he was so satisfied.
32The effect of that evidence was that Texas advanced the further $200,000 only around six weeks after he had started with the Company as Chief Operating Officer, looking after marketing and store operations. He said that he had seen great potential at that time and felt comfortable that a further loan of $200,000 would greatly assist the Company in preparation for the forthcoming Christmas season. Mr Gelfand also gave evidence that he considered the monthly sales reports and the Company’s financial position. He said the sales were very strong and he felt making the advance was the right decision at the time. Finally, Mr Gelfand said that he believed at that time that the Company would be able to repay the loan. He had already had his first payment of interest on the existing advance and the interest payments did not cease until February 2019.
33Mr Sklovsky did not seek to gainsay Mr Gelfand’s evidence on this issue. Indeed, he did the opposite. When I asked Mr Sklovsky if he wanted to put anything to Mr Gelfand about his assessment of the financial performance of the Company in August 2016, he commented that “the financial records showed $2.3 million profit, it was a good company”.
34In the circumstances, I am satisfied that Texas did not breach the express term that it would satisfy itself as to the financial performance of the Company before advancing the $200,000 tranche. In particular, I accept that Mr Gelfand (a director of Texas) reviewed the Company’s financial performance at the time and was satisfied that sales were strong and the Company would be able to repay the loan.
Was Texas under an equitable duty to register its charge?
35This is the issue that led Judge Macnamara to refuse Texas’s application for summary judgment. His Honour considered that there was substance in the issues raised by counsel for Mr Sklovsky in relation to the Security Agreement. She had argued that the Security Agreement had never been perfected by registration under the PPSA. It was therefore void as a security in the Company’s insolvency.
36His Honour noted that clause 2.1 of the Loan Agreement provided that Texas was not required to make the advance unless the Company entered into the Security Agreement. He said that the issue of perfecting that security (the charge) by registration was not expressly adverted to. However, the principles as to implication of terms to give business efficacy 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.
37His Honour noted that in The Modern Contract of Guarantee (3rd edition), 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.”
38One of the authorities cited for that proposition was a decision of the Federal Court, Re Kwan; ex parte Hastings Deering (Solomon Islands) Ltd (“Re Kwan”),[4] a judgment of Pincus J. The effect of his Honour’s determination is summarised in the headnote, which states:
“Where a guarantee has been given on the express stipulation that there should be a bill of sale, there is an implied condition that the security of the bill shall be perfected. If it is not, the guarantor is pro tanto exonerated.”
[4] (1987) 15 FCR 264.
39Pincus J had in turn referred to the judgment of Brennan J (as he then was) in Buckeridge v Mercantile Credits Ltd[5] (“Buckeridge”) 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.”[6]
[5] (1981) 147 CLR 654.
[6] Buckeridge at 675.
40In the Macnamara J reasons, his Honour continued:
“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.”[7]
[7] Macnamara J reasons at [62].
41After then noting that Texas’s written outline on the summary judgment application did not deal with the matter at all and that oral submissions constituted assertion without elaboration, Macnamara J held as follows:
“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.”[8]
[8] Macnamara J reasons at [64].
42Mr Sklovsky did not add anything of substance on this issue to the arguments advanced by his counsel on the summary judgment application, and the observations by Judge Macnamara.
43Counsel for Texas did not cavil with Judge Macnamara’s conclusion that the issue was arguable, but submitted that the argument should fail. Counsel noted that the decision of Re Kwan cited by Judge Macnamara, was a case involving a bill of sale which, under the law of the Solomon Islands, had to be registered before it could have effect against a liquidator or creditors. As Pincus J noted in the passage cited above, there was an express stipulation that there should be a bill of sale, and the failure to register the bill of sale meant that it was void against the liquidator and creditors.
44I am not sure that the distinction between the facts in this case and those in Re Kwan is as clear as counsel for Texas suggested. In both cases, there was provision for the relevant security interest and the failure to register effectively meant that the security was void as against the liquidator. However, I agree that it is more difficult in this case to imply a condition that the relevant security (in this case, the charge) should be perfected.
45As Judge Macnamara observed, the test for implication of terms to give business efficacy to an otherwise complete written contract was authoritatively stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings[9] as follows:
“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.”
[9] (1977) 180 CLR 266 at 282−3.
46In this case, although there was provision for the charge, the better view is that the relevant provisions fell short of being an “express stipulation” for the security, as in Re Kwan. As discussed above, clause 2.1 of the Loan Agreement (particularly when read with clause 2.3) entitles Texas to decline to make the advance if the Company does not enter into the Security Agreement, but also expressly empowers Texas to waive that Condition. Thus, the implication of a term requiring entry into the Security Agreement (let alone registration of the charge granted under that agreement), is not necessary to give business efficacy, nor is it so obvious that it goes without saying.
47Further, in my view, the express terms of the relevant contract (in this instance, the Security Agreement) contradict the implication of a term requiring registration. Clause 4.2.1 of that agreement expressly provides that the Company “at its own cost will at the Secured Party’s [that is, Texas’s] request” register the charge. I agree with counsel for Texas that this clause is permissive, not prescriptive. By choosing not to make the request, Texas is in effect electing to be satisfied with an unregistered charge, in which case, there is nothing to “perfect” in the sense used in Re Kwan.
48For these reasons, I agree with Judge Macnamara that this issue is arguable, but consider on balance that Texas was not under an equitable duty to register the charge.
What are the consequences of any breach of that duty?
49Given my answer to the previous issue, it is unnecessary for me to consider this question. However, even if I am wrong on the previous issue, I am satisfied that there would be no consequences to Texas of any breach.
50Unlike Judge Macnamara, I am considering this matter at trial, unconstrained by the test applicable on an application for summary judgment. As his Honour noted, the lack of proof as to value goes to the disadvantage of Mr Sklovsky as guarantor; that is, Mr Sklovsky is given no credit for any value referable to a security impaired or not perfected. This is because Mr Sklovsky bears the onus of establishing any deficiency occasioned by any failure by Texas to perfect the security.[10]
[10] Buckeridge at 676.
51The question then is what is the evidence establishing that there has been a loss of value because of a failure to register the charge? The answer is that there is none – indeed, the evidence points to there being no loss of value. In particular, the reports to creditors from each of the administrators and the liquidators (both admitted by Mr Sklovsky) show a shortfall in the millions to the first charge holder, National Australia Bank Ltd and no return to unsecured creditors after paying priority liabilities (which would also have been paid in priority to any second charge holder).
52I also note, in any event, that Mr Sklovsky has by the notice to admit expressly admitted that it would have made no difference to the amount that would have been recovered by Texas from the Company had the charge been registered.
Does Mr Sklovsky have a defence based on delay in claiming under the guarantee or based on Texas being a participating creditor under DOCA?
53On the issue of delay, I agree with counsel for Texas that any defence based on delay is excluded by clause 6.2.1 of the Loan Agreement, which expressly provides that the liability of the guarantor is not affected by Texas granting time or any other indulgence to the Company. Further, there is no evidence that, had Texas moved more quickly against the Company, that the prospect of recovery from the Company would have been any different.
54Moving to the DOCA, the Macnamara J reasons record that at the hearing of the summary judgment application, counsel for Mr Sklovsky submitted that entry into the DOCA 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”. Since then, the DOCA has failed and the Company is in liquidation. There is therefore now no question (as I have found) that the charge was worthless, regardless of registration.
55I confirm that Mr Sklovsky also raised the question of whether Mr Gelfand’s alleged role in propounding the DOCA might somehow have prejudiced Texas’s entitlement to claim under the Guarantee. As I said to Mr Sklovsky in the course of submissions, I could see no basis upon which he could construct a defence or counterclaim to Texas’s claim under the Guarantee on this basis, even if his allegations about Mr Gelfand’s role were accepted. Further, it was too late to seek to advance such a radical new defence or counterclaim.
56In so far as Mr Sklovsky was relying in his amended defence on Texas’s role as a participating creditor, s444J of the Corporations Act 2001 (Cth) is a complete answer to any such defence. It provides in effect that any release of debts under a DOCA does not affect a creditor’s rights under a guarantee or indemnity.[11]
[11] City of Swan v Lehmann Brothers Australia Ltd [2009] FCAFC 130 at [77].
Does Mr Sklovsky have a defence based on the alleged representations by Mr Darvall?
57I am satisfied that Mr Sklovsky also has no defence as against Texas based on the alleged representations made by Mr Darvall. I accept Mr Gelfand’s evidence that while some of the matters comprising the alleged representations are accurate statements of fact (for example, that he was to be appointed COO and was to lend money to the Company), he was unaware the representations had been made by Mr Darvall to Mr Sklovsky, and did not authorise Mr Darvall to make them.
58Thus there is no basis for advancing a claim directly against Texas relying on the alleged representations and, in fairness to Mr Sklovsky, he does not (by his pleadings or otherwise) appear to seek to advance such a claim. Rather, it appears that those advising him at the time were intending to rely on the representations as the basis for a claim for contribution against Mr Darvall. There is also the difficulty that Mr Darvall was not called by Mr Sklovsky to give evidence about the representations and Mr Sklovsky’s own evidence about each of the representations was equivocal, at best.
59However, even if there was evidence to establish that the representations were made and the other elements of a claim for misleading and deceptive conduct under s18 of the Australian Consumer Law were made out, it would not avail Mr Sklovsky in diminishing Texas’s claim against him. As counsel for Texas submitted, both the Loan Agreement and the Security Agreement expressly provide that liability under the Guarantee is joint and several. The effect of this is that, with Mr Darvall declared bankrupt, Mr Sklovsky must carry the entire burden of Texas’s claim under the Guarantee.
What is the quantum of Mr Sklovsky’s liability under the Guarantee?
60I am satisfied that no part of the principal advance by Texas under the Loan Agreement has been paid and Texas is therefore entitled to judgment comprising the principal sum of $600,000, plus interest on that sum. Texas has disclaimed any default rate of interest and nor is there any evidence of Texas electing to capitalise interest at any point. The evidence is that the last payment of interest was made in arrears for the month of January 2019, so the interest claimed by Texas runs from (and including) February 2019 to the date of judgment at 10% per annum. The Loan Agreement provides that interest is calculated daily.
61On my calculations (which I will ask the parties to confirm), the interest accrued up to and including the date of these reasons (11 May 2022), is $180,000 for the three years up to and including February 2022, plus 72 days at $164.38 per day ($11,835.61), giving a total of $191,835.61. There will therefore be judgment for Texas against Mr Sklovsky in the sum of $791,836.61, comprising the principal sum of $600,000 plus interest to the date of judgment of $191,835.61, and costs.
62On the question of costs, I agree with counsel for Texas that clause 5.2 of Loan Agreement entitles Texas to an order for its reasonable costs on an indemnity basis. To save the parties the expense of a taxation, I am willing to consider fixing those costs, if Texas is able to provide me (and Mr Sklovsky) with submissions comprising:
(a) a brief submission as to why I should fix the costs; and
(b) a breakdown of the costs incurred, including appropriate discounts for any costs that might be considered unreasonable.
63Mr Sklovsky will then have an opportunity to provide a brief written response to Texas’s submission and I will decide on the papers the question of whether to fix the costs and, if so, in what amount.
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Certificate
I certify that these 22 pages are a true copy of the judgment of His Honour Judge Woodward delivered on 11 May 2022.
Dated: 11 May 2022
Lyn Nguyen
Associate to His Honour Judge Woodward
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