Westpac Banking Corporation v Stevenson (Aka Jenette Honey Steveson)
[2005] WADC 210
•11 NOVEMBER 2005
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS
LOCATION: PERTH
CITATION: WESTPAC BANKING CORPORATION -v- STEVENSON (AKA JENETTE HONEY STEVESON) [2005] WADC 210
CORAM: MULLER DCJ
HEARD: 28 OCTOBER 2005
DELIVERED : 11 NOVEMBER 2005
FILE NO/S: CIV 2794 of 2004
BETWEEN: WESTPAC BANKING CORPORATION (ABN 33 007 457 141)
Plaintiff
AND
JENETTE HONEY STEVENSON (AKA JENETTE HONEY STEVESON)
Defendant
Catchwords:
Default judgment - Application to set aside - Guarantee by daughter of bank loan made to company operated by father -Alleged undue influence by father - Failure by bank to explain guarantee or ensure independent advice given - Whether enforcement of guarantee unconscionable
Legislation:
Australian Securities and Investments Commission Act 2001 (Cth)
Trade Practices Act 1974 (Cth)
Result:
Judgment set aside
Representation:
Counsel:
Plaintiff: Mr C S Gough
Defendant: Mr M J Feutrill
Solicitors:
Plaintiff: Minter Ellison
Defendant: Tang Lawyers
Case(s) referred to in judgment(s):
Garcia v National Australia Bank Ltd (1998) 194 CLR 395
Parker v Transfield Pty Ltd [2000] WASCA 382
The Commercial Bank of Australia Ltd v Amadio & Anor (1982) 151 CLR 447
Yerkey v Jones (1939) 63 CLR 649
Case(s) also cited:
Alpine Bulk Transport Co Inc v Saudi Eagle Shipping Co Inc [1986] 2 Lloyds Rep 221
Bank of New South Wales v Rogers (1941) 65 CLR 42
Evans v Bartlam [1937] AC 473
Palmer v Prince [1980] WAR 61
MULLER DCJ: This is an application by the defendant to set aside a default judgment entered against her on 16 June 2005. The judgment was for an amount of $243,656 being the amount of a loan made by Westpac Banking Corporation (the plaintiff) to a company named Machinery Export Group Pty Ltd. The defendant was the sole director of this company and the guarantor of the loan made by the bank to the company.
Grounds upon which application to set aside based
In her affidavit sworn on 17 August 2005 the defendant described how her parents' home was in jeopardy of being repossessed by the mortgagee which led to her father persuading her to become the sole director of a shelf company he had acquired and which he explained would borrow the necessary funds to discharge the mortgage. The defendant said she agreed and signed a number of documents which she was told by her father simply recorded the transfer of the family home to the shelf company. The name of the shelf company was Machinery Export Group Pty Ltd.
In May 2002 the defendant said she signed additional documents at her father's request believing them to relate to the acquisition by the company of certain equipment which she was told by her father the company would hire out and use the proceeds to pay both the mortgage over the family home and the purchase price of the equipment itself.
The defendant said in her affidavit she did not know anything about the daily operations or management of the company which was left entirely to her father to run.
She explained in her affidavit how towards the end of 2002 her parents separated and she became concerned about her position. She alleged that she spoke to her father who agreed to her relinquishing her position as a director and shareholder of the company upon certain conditions. She then signed an agreement dated 30 January 2003, a copy of which was annexed to her affidavit, in which she agreed to transfer her shares in the company together with other shares to her father and another person and resign as director of the company. This agreement was signed on 30 January 2003. On what must have been the same day she was asked by her father to sign other documents which he claimed related to a loan for the purchase of machinery by the company from the United States of America. She asserted in her affidavit that the document she believed related to the loan for the purchase of equipment from the United States was, in fact, the loan agreement with the plaintiff, but that she never read it at the time she signed it and her father never explained it to her.
In her affidavit the defendant asserted that she did not appreciate what her role as director of the company involved and never took any part in the daily affairs of the company. She believed the company was a vehicle for her father's business and she claimed he never explained to her that she was signing a document guaranteeing the debts of the company or that she would be personally liable for those debts under the loan agreement with the bank. She emphasised in her affidavit that she had never met any representative of the plaintiff before signing the guarantee and that all the dealings between the plaintiff and the company were, to the best of her knowledge, conducted by her father with the bank itself or one of its employees or agents.
After her father's death on 5 December 2003, the defendant and other members of her family attempted to maintain the loan repayments under the contract with the plaintiff, but, as time went by, found the burden too great and had to appoint a liquidator to the company.
The defendant has asserted that she agreed to be surety under the loan agreement with the plaintiff as a consequence of undue influence having been exerted over her by her father. She said she was persuaded to sign the guarantee in circumstances where she did not understand what she was signing and never had it explained to her, either by her father, the plaintiff or its agent.
The law to be applied
Counsel for the defendant submitted that the default judgment ought to be set aside on one or more of three grounds: firstly, on the ground of undue influence on the part of the father and the absence of any endeavour by the plaintiff bank to ensure that the defendant received independent advice as to the meaning of the document she was signing and her obligations under that contract; second, in the absence of proof of undue influence, that the defendant had an inadequate understanding of the nature of the transaction to which she had become a party, and, given the bank's knowledge of the relationship between father and daughter, it would be unconscionable to allow the contract to stand when the lender did not take any steps to explain the transaction to the defendant, or ensure that it had been explained to her by someone else; and thirdly, that the transaction was unconscionable in all the circumstances for the purposes of s 51AB or s 51AC of the Trade Practices Act or, alternatively, s 12CB or s 12CC of the ASIC Act.
In support of his submissions counsel for the defendant relied on the decision of the High Court in Garcia v National Australia Bank Ltd (1998) 194 CLR 395. In that case a guarantee signed by a married woman in respect of a business debt owed by her husband, whom she subsequently divorced, was set aside on the basis that the enforcement of the contract against the woman would be unconscionable. After referring to the decision in Yerkey v Jones (1939) 63 CLR 649, Mason J summarised the two kinds of case in which unconscionable conduct may arise. At pp 406 – 407 he said:
"Thus, Dixon J was dealing with two kinds of case. In the former, the case of actual undue influence, as Dixon J says, explaining the effect of the document to the surety will not protect the creditor and '[n]othing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice' (54). In the latter, '[i]f the creditor takes adequate steps to inform [the wife] and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing' (55) cannot give her an equity to set the instrument aside."
Mason J expanded on the second type of case at pp 408 – 409 where he said:
"The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer; a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."
Reliance is also placed by counsel on the decision of the High Court in The Commercial Bank of Australia Ltd v Amadio & Anor (1982) 151 CLR 447. In that case, the facts of which are distinguishable from the present case, Mason J explained how relief on the ground of unconscionable conduct is limited to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of the other party who suffers from some special disability or is placed in some special situation of disadvantage. Counsel submitted that the defendant fell into this category. It was submitted that the defendant entered into the guarantee as a consequence of undue influence brought to bear on her by her father. The special relationship of trust and confidence which existed between father and daughter, and the defendant's inexperience in commercial matters, placed the defendant in what is said to be a position of special disadvantage in her dealings with any third party. It was submitted that in this situation the purport and effect of the guarantee was never explained to her, either by her father or the plaintiff, or any agent on the plaintiff's behalf. In these circumstances it was submitted that it would be unconscionable for the bank to enforce the guarantee.
Defendant's alleged knowledge of relationship between father and daughter
If the application to set aside the judgment is to succeed on the ground of undue influence by the father over his daughter it will be incumbent on the defendant to prove that at the time of taking the guarantee the bank knew that the surety was the daughter of the person conducting the business in the company's name: Garcia v National Australia Bank Ltd (supra). It was conceded that the decision in Garcia was based upon a relationship of husband and wife. Given the reasoning of the High Court, however, I see no reason why the relationship of father and daughter should not fall into the same category. A paternal relationship, like marriage, is based on trust and confidence and, in a business context, may lead to decisions being made by one party with little or no consultation with the other. In her affidavit the defendant asserted that she had nothing to do with the daily business affairs of the company and simply signed documents that her father asked her to sign in ignorance of what she was actually signing. As I have already said, she wanted to extricate herself from the position she was in and reached an agreement with her father to resign her directorship of the company. This agreement, which I have already referred to, was signed by the parties on 30 January 2003. It is significant that the loan agreement with the plaintiff and the accompanying guarantee were signed by the defendant on the same date. I agree with the submission made by counsel for the defendant that the defendant's conduct in signing the agreement purporting to divest her of her interest in the company on the same date as the loan agreement and the accompanying guarantee is consistent with her assertion in her affidavit that she wanted to sever all links with the company and signed the loan document in the belief that, as her father allegedly told her, it related to a loan from the bank to the company to purchase the item of equipment her father intended importing from the United States. In my view, the fact that she signed the contract purporting to divest herself of all interests in the company on the same day as the loan agreement and the guarantee lends support to her assertion that she believed the signing of the loan agreement was the last act she would have to do as a director of the company.
In an application of this nature, based as it is upon evidence on affidavit, the court has to rely heavily on what has been sworn to in the material on affidavit. In this case, however, there is also documentary evidence of other actions undertaken by the defendant which, on one interpretation, may point towards her having been an active participant in the business being conducted by the company. This evidence, if accepted by the court, may negate the defendant's assertion that she had been unduly influenced by her father or required to sign a document she knew nothing about and gained no benefit from. Counsel for the plaintiff analysed a series of documents annexed to the affidavit of John David Murphy sworn on 28 September 2005. The significance of some of those documents may not be particularly great because they were signed on 30 January 2003, which was the same date on which the contract of loan and guarantee was signed. Other documents, however, were signed by the defendant in her capacity as a director of the company on earlier dates. On 29 May 2002, for example, the defendant signed a commercial loan agreement and guarantee with the plaintiff bank as sole director of the company. On the same date she signed a chattel mortgage with the bank relating to that same loan. She also signed a document creating a charge on the company's assets. On 8 February 2002, she signed a hire purchase contract on behalf of the company and also a personal guarantee in relation to the same contract. On 30 May 2002, she again signed a hire purchase contract on behalf of the company. Counsel for the plaintiff submitted that the defendant's acts in signing this series of documents, particularly in instances where some of the documents contained a simple explanation as to what they purported to be, was clear evidence of her personal involvement in the day to day affairs of the company over a relatively substantial period of time. This evidence, it was submitted, tended to contradict her assertion in her affidavit that she was unduly influenced into signing the loan agreement or did so at the direction of her father with no knowledge of its contents.
I agree there may be substance in the argument put forward by counsel for the plaintiff. The history of the defendant's involvement with the business affairs of the company, as evidenced by the various documents she signed over the period of time I have referred to, may tend to suggest she must have played an active role in the daily business of the company and knew far more than she is now prepared to admit she knew. But the material relied upon by the plaintiff does not displace the defendant's assertion that she signed the loan agreement and guarantee as a consequence of undue influence being brought to bear on her. The documents relied upon by the plaintiff do not, in my view, lend themselves to the more probable inference that the defendant did play an active role in the daily business of the company and must have known what she was signing, and what her obligations as surety were, on 30 January 2003. It is equally probable that the defendant signed these documents in the circumstances in which she said she did, that is, at the request of her father, without reading them or having them explained to her. While I agree that the documents reflecting the defendant's earlier dealings on behalf of the company may be significant evidence of her involvement in the company's affairs, and may tend to show that she played an active role in the business being conducted by the company, I am not prepared to infer, for the purposes of this application, that her previous dealings on behalf of the company point to her having known what she signed on 30 January 2003. It is an issue which, my view, will have to be resolved by evidence. For the purposes of this application I am prepared to accept the plaintiff's assertion that she was unduly influenced by her father at the time she signed the loan agreement, or, at the very least, signed it in circumstances where she did not know what she was signing, and was never told by her father, or anyone else, of the obligations she was undertaking.
The fact that the defendant may have signed the loan agreement and guarantee while subject to her father's undue influence, or, alternatively, in ignorance of what she was signing or her obligations under the agreement, does not mean the contract can be set aside because it will be unconscionable to enforce it. There is a second step that needs to be established. The second step relates to proof of the knowledge of the plaintiff bank of the special relationship between the father, as the person behind the company, and his daughter. In this regard counsel for the defendant relied upon a document sent to the plaintiff by a broker named Noel Creevey Finance Pty Ltd trading as Encee Finance. The documents annexed to the affidavit of John David Murphy sworn on 28 September 2005 contain what appears to be an earlier application for a loan from the plaintiff bank by Machinery Export Group Pty Ltd. This application appears to have been made on 29 May 2002 through the broker, Noel Creevey Finance Pty Ltd. Accompanying the material sent by the broker to the plaintiff bank in relation to this loan application was a document describing the defendant's background. It referred to her position as a director of the company seeking the loan and stated that she had operated a jewellery store for three years, with the business trading "quite comfortably". The document went on to refer to her father's earth moving machinery business and asserted that he sent machinery to Australia where a company incorporated by his daughter received the machinery and arranged for its disposal. The document went on to elaborate on the role played by the daughter, and asserted that she co‑ordinated letters of credit and controlled the company's bank account in Australia. While this document, together with the others I have referred to earlier, tend to suggest that the defendant played a more active role in the daily affairs of the company than she has admitted in her affidavit, its real significance is that it shows the bank was given advance notice of the relationship between the defendant and her father. The bank knew this as early as May 2002. Given the defendant's assertion in her affidavit that she never had any dealings with the bank or any of its employees or agents, it can be inferred that the bank most probably dealt exclusively with her father and must have known that he was the principal operator of the business conducted by the company. Given this probable knowledge, and the fact that it had never dealt with the defendant in person, it is certainly arguable the bank should have ensured that the defendant received independent advice before signing the loan agreement or guarantee, or at least took steps itself to inform her of what she was signing and the consequences of her doing so. The amount of the loan was substantial. The guarantor's potential liability was a significant one. Once it knew of the special relationship between father and daughter, I believe it is open to find that the plaintiff ought to have taken steps to ensure the defendant received independent advice, or at least gave her advice itself, before accepting her signature, particularly as all its dealings in the past had been with the father and never with the daughter.
A lot of argument was directed towards the question of whether Encee Finance was an agent of the bank or the borrower. In my view nothing turns on that issue. The only question is whether the bank knew of the relationship through the material it received from Encee Finance.
Principles applicable to the application
A judgment entered in default should not be set aside unless the court is satisfied that there is a defence on the merits and there is an adequate explanation for the delay. I do not believe the delay is significant and I am satisfied that the defendant would have a real prospect of success: Parker v Transfield Pty Ltd [2000] WASCA 382. Her defence, if accepted by the court would, in my view, satisfy one or both criteria in Garcia v National Australia Bank Ltd and make it unconscionable to enforce the guarantee.
I have not considered what the position might be under the Trade Practices Act or other legislation. Given my findings I do not believe it is necessary to go further than I have.
I would allow the application and set aside the default judgment.
0
3
2