Wygoda, H. v Pacanowski, D

Re: HARRY WYGODA
And: DAVID PACANOWSKI (also known as David Peters) and OFFICIAL TRUSTEE IN
BANKRUPTCY
No. N B1744 of 1989
FED No. 740
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Bankruptcy - expungement of proof of debt - partnership or joint venture - payment by one partner of total amount under joint and several guarantee to lender - right of contribution as between co-sureties - modification or exclusion of right of contribution - construction of guarantees and indemnities.

Bankruptcy Act 1966 sections 99(1), 154(1)(b)

Ankar Pty Limited v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549

A.G.C. (Advances) Ltd v West (unreported, Supreme Court (NSW), Hodgson J., 12 July 1984).

HEARING

SYDNEY

#DATE 28:11:1991

Counsel and solicitor Mr A.J. Sullivan QC instructed by
for the applicant

Counsel and solicitor Mr R.W. Tregenza instructed by
for the first respondent Kaplin Reeves and Co

Counsel and solicitor Mr B.J. Skinner instructed by the
for the second respondent Australian Government Solicitor

ORDER

Respondent's proof of debt in the sum of $181,661.20 is expunged.

Respondent to pay applicant's and Official Trustee's costs of the application under section 99(1) of the Bankruptcy Act.
NOTE: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.

JUDGE1

There are before the Court two applications. The first asks that a proof of debt in the sum of $181,661.20 lodged on 12 November 1990 by Mr David Pacanowski, the first respondent (the respondent), be expunged, pursuant to section 99(1) of the Bankruptcy Act 1966. The second is that the bankruptcy of Mr Harry Wygoda, the applicant, be annulled under section 154(1)(b) of the Act. The applicant was made bankrupt on 8 November 1989.

The annulment of the bankruptcy is dependent in the first instance upon the removal of the proof of the respondent's debt. If that proof goes, all of the applicant's creditors will apparently have been paid in full, the Court having been told that the other three creditors were paid out in October 1990. The question to be determined on the first application is whether or not there is a valid debt underlying the respondent's proof.
The applicant is an electrician by trade who, prior to 1986, had been in the practice of buying and renovating properties for the purpose of re-sale. The respondent was a businessman of some financial substance with assets in property and a manufacturing business that made bathroom vanity units. In early 1986 the applicant and his wife purchased a property in Maroubra with a view to demolishing the house and re-building on the land. Between October and December 1986 the applicant and the respondent discussed the establishment of a corporate partnership for similar such ventures, through which they would purchase, re-develop and sell property. The following subsequent facts do not appear to be in dispute:
1. In January 1987 a meeting took place between the applicant, the

respondent and Mr Bernard Edelstein, previously the respondent's accountant. At this meeting it was agreed that a company would be formed to carry out the business of the venture, that the shareholders would be the applicant and the respondent in equal shares, and that they would be the sole directors. This meeting is important for other reasons as well to which I shall come.

Galite Holdings Pty Limited (Galite) was acquired and opened a

bank account at the Botany branch of the Commonwealth Bank. This branch had been the respondent's banker for some time previously.

On 27 April 1987 both the applicant and the respondent signed a

deed of guarantee in favour of the Commonwealth Bank for any loans by the bank to Galite. By this guarantee, each of the parties became personally liable for the total amount of Galite's borrowings from time to time.

Between April 1987 and February 1988 Galite purchased and

re-sold several properties in Coogee and Maroubra. The money for these purchases came entirely or in large measure from the Commonwealth Bank by way of loans to Galite. For various reasons not now relevant, the ventures were not profitable.

On 14 October 1987 and again on 11 March 1988 the applicant signed

letters of acknowledgment of his personal liability as a guarantor pursuant to the deed of 27 April 1987. The first was for an amount of $550,000; the second was for $1.42 million. It is not clear whether they overlapped or were cumulative.

In November 1990 Galite was indebted to the Commonwealth Bank in

the sum of $363,3 22.40 as a result of its activies.

On 12 November 1990 the respondent lodged his proof of debt in the

bankrupt estate for half that sum. This was admitted by the Official Trustee on 13 February 1991.

On 4 December 1990 the respondent paid the whole amount owing to

the bank by Galite.

However, the parties do not seem to agree on any other relevant facts in this case. The first point of disagreement is the substance of one or more conversations that took place in late 1986. The applicant alleged that in December 1986 he had two conversations with the respondent in the coffee lounge of the Trade Winds Motel at Maroubra. He stated that the first was a general conversation during which it was agreed that they should meet again to organise a joint venture. At the second meeting an express agreement was allegedly reached between them that the applicant would be responsible for undertaking any building work and that any money or finance required for the joint venture would be provided by, and be the sole responsibility of, the respondent.
The respondent denied two meetings. He said that at a single meeting it was agreed that a company would be established, that the profits and liabilities would be split equally, and that the parties would both personally guarantee any loans incurred by Galite. The respondent was to provide, not money or finance, but security for any loans incurred during the arrangement.
There were several additional points of contention between the parties relating to discussions of the terms of the agreement at a number of subsequent meetings. In order to make findings regarding this conflicting evidence, it is necessary to decide whose version of the facts is the more credible, bearing in mind the evidence given by the two men, by Mrs Wygoda and by the apparently independent witnesses who were also present at these meetings.
The first of these meetings took place in January 1987 at the office of Mr Edelstein. As previously noted, the first and perhaps main purpose of this meeting was to obtain advice on the most appropriate vehicle to carry out the proposed venture. According to the applicant, it was clearly said at this meeting that he would build the houses and that the respondent would "put up the money". In cross-examination he admitted that the words "put up the finance" may also have been used. He further stated that there was a discussion about his receiving a building fee. The fee was to be a sum equivalent to any interest that the respondent would have obtained on the money he personally invested, calculated at what the applicant described as the "current bank rate". There was no actual quantification of this interest rate. Any profits were to be divided equally between them but there was no obligation on the applicant to share any losses. The respondent was to bear all the monetary responsibility; all that the applicant risked in the project was his time.
The respondent on the other hand said that the discussion was only about him providing the security for bank finance, not that he was to be responsible for all outgoings and losses. His version of the agreement was that he would provide or look after the "security" or "finance". In cross-examination, the respondent said that the question of the building fee merely came up in conversation but that no agreement was reached for its provision. He stated that the issue did not arise again until after the first building was finished.
Mr Edelstein's account of the meeting was generally corroborative of the respondent's evidence in relation to the financing aspect of the matter. He also did not recall the discussion about the building fee in the context of offsetting an amount that would have accrued as interest on the money personally invested by the respondent.
It is a little surprising that Mr Edelstein's evidence on these matters did not appear in his affidavit, in effect his evidence in chief, but as aspects of it did appear in the file notes taken during the respondent's solicitor's conference with him prior to the drafting of the affidavit, this seems to have been more an oversight than an indication of late invention. It is of no little significance that the file notes report Mr Edelstein as saying that the respondent "would assist with finance" which is different to "providing security" but is still short of the applicant's account. More importantly, Mr Edelstein's evidence does not advance the question of whether there was ever a discussion about what would happen if the company incurred losses. This and the solicitor's file notes of his interview with Mr Edelstein tend to support the fact, contrary to the applicant's assertion, that there was no discussion as to who would be responsible for losses because nobody anticipated any losses - everyone thought only of profits.
A second independent witness, Mr Max Vidler, also gave evidence. Mr Vidler is an architectural engineer. On 18 March 1987 there was a meeting at his office attended by the applicant, the applicant's wife and the respondent to discuss certain drawings being prepared for Galite. Mr Vidler deposed at the trial to the respondent saying "I'm cashed up" and using words to the effect that there would be "no problems with obtaining money from the bank as they always did whatever he told them to do". This is corroborative of the recollections of both Mr and Mrs Wygoda.
During cross-examination, Mr Vidler omitted the words of the respondent "Harry will do all the building and I'm putting all the money in" to which he had deposed in his affidavit. It appeared that Mr Vidler had no direct recollection of the conversation. Coupled with the fact that the affidavits of Mr and Mrs Wygoda and Mr Vidler are identical in this respect, this led to a submission for the respondent that the evidence of all three persons should be rejected on this issue.
The third meeting involving an independent witness occurred in early 1988 at the office of Mr Wygoda's accountant, Mr Peter Agoston. The meeting was allegedly called by the applicant to discuss the building fee. Mr Agoston's recollection of the conversation was too vague to be of much assistance, although in cross-examination he was positive that there was no discussion about losses or the respective liabilities of the two parties. This corroborates Mr Edelstein's evidence that there was no consideration of losses.
The guarantee was not signed on bank premises and the signatures were not witnessed. The applicant said that this document was placed before him by the respondent who asked him to sign it. He alleges that he did not read the document and that he did not know what he was signing. The two signed letters of acknowledgment of the guarantee are identical apart from the amounts, which were typed in, the dates and the witnesses. I have earlier dealt with the amounts and the dates. With regard to the witnessing, the first letter bears the distinct signature of one 'Wakerman' as witness, although in evidence he was identified as Simon Wakeman, an architect who was known to the parties. He was not called as a witness in the case. The applicant's signature on the second letter was witnessed by the respondent. Once again, as with the deed of guarantee, the applicant denied reading these documents before signing them and alleged that he did not sign either of them in the presence of the witness. The fact remains that he signed all three documents.
Further, there was a letter of 16 March 1990 from the respondent to the applicant which referred to the fact that both parties had given their personal guarantees to the bank to cover Galite's liability. Despite sighting all of these documents, the applicant stated in cross-examination that he was not aware that he was a guarantor to the bank until advised by his legal representatives in November or December 1990.
There are few matters which are clear in this case. There is no doubt that a joint venture was undertaken and that the vehicle for putting that enterprise into effect was a company in which the shares were equally held by both the respondent and the applicant. There is also no doubt that in general terms the applicant was to be responsible for the building work and the respondent for the financing side of the operation. It is further clear that the operation was largely funded by loans from the bank arranged and substantially if not wholly secured by the respondent. Beyond that there appears to have been a somewhat spectacular failure or neglect by the parties and their accountants to crystallise the details of the partnership including what would happen in the event of any losses incurred by or net liabilities of the company.
There are two critical issues to be resolved. First is whether the relevant conversations between the parties prior to and after the commencement of the venture amounted to a contractually binding agreement relating to the sharing of losses. The finding on this issue must be made almost solely on credit. Because neither party was entirely truthful, and the corroboration was at best patchy, this is not a simple task. The second issue is whether the agreement amounted to an indemnity of the applicant by the respondent so as to alter the respondent's normal right to a half contribution by the applicant towards the losses which occurred or whether the applicant's signature on the deed of guarantee represented or manifested an agreement or a variation of the agreement with the respondent to pay a half share of the losses.
As a matter of express terminology, I find that in all probability the parties did not expressly turn their minds to the possibility of any losses and, consequently, that they did not discuss who would be liable for them. There was in my opinion no express agreement that the applicant would have any or any significant monetary responsibilities in the venture. This dispute arises in part from their different perceptions of what was intended and implied.
The respondent's cause of action is a right of contribution as between co-sureties. In the authoritative Australian text, O'Donovan: The Modern Contract of Guarantee, the basis of the right to contribution is set out at page 471:

The doctrine of contribution recognises that guarantors for the same principal debtor and for the same debt or obligation have a common interest and a common burden. Accordingly, if one guarantor who is directly liable to the creditor pays the principal debt, he can claim contribution from his co-sureties because he has discharged their obligations to the creditor. The common burden of the suretyship should be borne equitably so that no guarantor can be required, as between himself and his co-sureties, to pay more than his due share.

The applicant submitted that an agreement to indemnify him or alter the right of contribution can be inferred from the fact that the applicant was risking both his time and a lack of reward for his services as compensation for the other party bearing the risk of any losses. This was another way of expressing the position that even though the applicant signed the guarantee to the bank, the right to contribution is excluded because the respondent had by clear implication agreed himself to bear all the financial responsibilites of the venture including any losses without recourse to the applicant. The respondent says that such an inference runs headlong into the terms of the guarantee itself and the letters of acknowledgment. The 'lack of reward' assertion appears to conflict with the applicant's contention of an agreement that he receive a building fee. I do not accept that there was any such agreement.
The principle of modification or exclusion of the right to contribution is discussed by O'Donovan at page 472:

Whatever the basis of the doctrine, it is clear that a guarantor can, by an express agreement with his co-sureties, modify or exclude his right to contribution.

While in theory a right to contribution can also be impliedly excluded, the courts are reluctant to draw such an inference: see A.G.C. (Advances) Ltd v West (unreported, Supreme Court (NSW), Hodgson J., 12 July 1984).
The courts construe guarantees strictly in favour of the surety. In Ankar Pty Limited v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 the High Court set out the applicable principles in this connection. Mason A.C.J. and Wilson, Brennan and Dawson JJ stated at 561:

However, the fundamental question still remains: Is the rule of strict construction, derived from the equitable rule which protects the surety from any alteration in its liability, subsumed in the general principles of the law of contract so that the surety may treat itself as discharged from liability if, but only if, the breach is such as to entitle the surety at law to rescind the contract? In truth there is no difference between the equitable rule and the legal rule, as Lord Selbourne L.C. pointed out in In re Sherry; London and County Banking Co. v Terry (1884) 25 Ch D 692 at 703. There, in a passage accepted by the Privy Council in National Bank of Nigeria Ltd. v Awolesi (1964) 1 WLR 1311 at 1316, his Lordship said: "A surety is undoubtedly and not unjustly the object of some favour both at law and in equity, and I do not know that the rules of law and equity differ on the subject." At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety.

The respondent submitted that the same principles apply to indemnities. Because of the absence of a clear contractual term here, the respondent said that an agreement to indemnify cannot be inferred and the application must fail as a matter of law.
In my view, the parties' clear overriding intention that the respondent would be the financier and the applicant the builder implied that if there was a need for money, such as to provide any outgoings or make good any losses, the respondent would provide it either directly or through loan arrangements with his bank backed by security provided by him. This in turn meant that if the venture failed and the security was called on, the respondent would have to bear the loss of or under the security. I find that the parties agreed that the applicant was not to bear any liability in such eventuality.
The next question is what if any effect on that conclusion is wrought by the applicant's guarantee to the bank. The applicant's evidence in this regard is much less persuasive. Although I do not particularly doubt his statement that he did not read the document, I cannot accept his version of having signed the guarantee in ignorance of what he was doing. He had significant previous commercial experience and dealings with banks. He signed the guarantee immediately above the appellation "Guarantor" and affixed his signature to it no less than four times. The document was compact and bore the printed words "guarantee/guarantor" and "the Commonwealth Bank/Bank" several times. His signature on the two letters of acknowledgment of the guarantee were affixed immediately above the printed words "Mortgagor/Guarantor". The word "guarantee" appears another four times in each of those letters. This is not the stuff of ignorance.

Not that the respondent gave a convincing or in the ultimate entirely truthful account of the circumstances surrounding the presentation to the applicant of the guarantee and his signing of it. The respondent must have known that the applicant was not a man of substantial financial resources and that the applicant's capacity to honour a guarantee of almost $1.5 million or more was entirely or largely dependant on the success of the venture. The respondent thus undoubtedly recognised as a fact that any shortfall would be his responsibility. My suspicion, derived from hearing and observing his evidence, was that there was more than a degree of vindictiveness in the respondent's approach to this application, not least because of his attribution to the applicant of blame for the loss sustained.
Nevertheless, the nature of the guarantee and of the two letters of acknowledgment, and the unsatisfactory features of the applicant's oral evidence, lead me to believe that the applicant knew quite well not only that he was signing a guarantee to the bank, but that he fully or at least relevantly understood what a bank guarantee was and what obligations he was, at least in theory, undertaking. There can be little doubt of the result of an action by the bank against the applicant on the guarantee.
The Official Trustee raised the question of whether the Commonwealth Bank had in fact required the two co-directors of the company to give their personal guarantees. Only evidence or inferences of a hearsay nature are available on this question so I can make no finding on it. It is common ground that the applicant signed the guarantee at the respondent's request and initiative and that nothing was said at the time by either man to qualify or modify the arrangement between them as to their respective obligations that had earlier been set up and agreed. There is certainly nothing to suggest that the applicant volunteered his signature on the guarantee. It is as possible as it is common that the bank required the signatures of both directors and the company as a matter of course, or perhaps because the respondent suggested to the bank that it might be helpful to his relationship with the applicant if it were required. The respondent was, it seems, an apparently well regarded customer of the bank whom he may well, as he claimed, have been able to influence in a significant way.
However, in my opinion, the applicant's guarantee did nothing to alter the position as between applicant and respondent. It was after all not an agreement between the applicant and respondent. Its terms did not obligate the applicant to share equally with the respondent any losses incurred to the bank. By his guarantee signed, as I find, as part of his agreement with the respondent, the applicant contracted to pay the bank all of what was owing when called on. As I see it, what the applicant did, in relation to the respondent, by signing the guarantee was to facilitate and permit the carrying out by the respondent of his obligation to the partnership of providing the necessary finance to enable the company to operate and pay its debts. In other words, the guarantee did not constitute or evidence an agreement between the applicant and respondent to restore an entitlement in the respondent to an equal share of the losses which he had earlier agreed to waive or indemnify. It merely satisfied the bank's need or desire for security for its advances, probably only in a formal sense because there is no evidence that the bank knew or sought details of the applicant's financial situation or had any belief in his capacity to honour the guarantee in any way.
The application under section 99(1) is upheld and I order that the respondent's proof of debt be expunged. The respondent will pay the applicant's and Official Trustee's costs of that application. To permit the parties to consider these reasons for judgment and, if appropriate, for the applicant to establish his solvency by evidence and deal with any relevant discretionary matters concerning annulment, the application for annulment of the bankruptcy will be adjourned to a date to be fixed after consultation. This will also permit the Official Trustee to seek any order needed to protect its position, especially in relation to the costs of the administration of the estate.

[1991] FCA 740

28 NOVEMBER 1991