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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Trade Practices - misleading or deceptive conduct - materiality - viticultural investment project - loan guarantees - financier - whether loan guarantee agreement induced by misrepresentation as to timing of loans and other matters - whether breach of duty of disclosure.Contract - privity - loan guarantee agreement - viticultural investment scheme - trustee of scheme - whether able to enforce terms of multi-party loan guarantee agreement against guarantor - construction - consideration - enforceability of contract - dependency upon enforceability of primary obligation - whether primary obligation enforceable - effect of default judgment in favour of borrower declaring primary obligation unenforceable.
HEARING
PERTHCounsel for the Applicant: C.R. Einstein QC and J.T. Gleeson
Solicitors for the Applicant: Northmore Hale Davy and Leake
Counsel for the Third Respondent: J.D. Heydon QC and J.L.B. Allsop
Solicitors for the Third Respondent: Mallesons Stephen Jaques
ORDER
The Court orders that:2. It is hereby declared that MGICA Ltd is liable to pay to Permanent Trustee Australia Limited such sum of money as is equivalent to all outstanding interest owed to Mid-West Finance (ACT) Pty Ltd by borrowers from Mid-West Finance (ACT) Pty Ltd in a scheme known as The Australian Viticultural Project No. 2.
3. There be liberty to all parties to apply within 28 days by written submission if desired on the question of such further or other relief as should be ordered including interest, if any, payable on any money judgment and costs. There will also be liberty to apply in relation to the wording of the declaratory orders in paragraphs 1 and 2 of this order.
4. The costs of the application and cross-claim be reserved.Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.
DECISION
Introduction2. In 1990, elements of the Growth Industries Group encountered serious financial difficulties. Interest payments due from certain investors, including some involved in the Growth Industries Group itself were not met. Permanent appointed a partner in Moores, a firm of chartered accountants to pursue recovery of amounts owing by defaulting borrowers and to make appropriate claims against MGICA under the Guarantee Agreement. MGICA instituted these proceedings on 22 November 1990 alleging misleading or deceptive conduct and breach of fiduciary duty on the part of Growth Industries Pty Ltd and Mid-West Finance (ACT) Pty Ltd which it said induced it to accept certain specified investor loans, known as the Relevant Loans, for the purposes of the Guarantee Agreement. The company also contends that in respect of particular borrowers it is now under no obligation to make payment of interest under the Guarantee Agreement because their primary obligations have been extinguished pursuant to the terms of an agreement with the Growth Industries Group. A default judgment was obtained against Growth Industries Pty Ltd and Mid-West Finance (ACT) Pty Ltd on 15 February 1991. These proceedings have continued on between MGICA, Permanent Trustee Australia Ltd and Hambros Australia Ltd which has played no active role in them. Permanent Trustee Australia Limited cross-claims under the Guarantee Agreement seeking to enforce its terms against MGICA.
3. The case involves complex factual questions and a variety of matters
relating to alleged misrepresentation and non-disclosure
by Growth Industries
Pty Ltd and Mid-West Finance (ACT) Pty Ltd, the effect of the default
judgments, the proper construction of
the Guarantee Agreement and the effect
of arrangements made with particular borrowers by principals of the Growth
Industries Group.
The Australian Viticultural Project No. 2 - A General Description
4. On 24 May 1989, a prospectus issued for the Australian Viticultural Project No. 2. The stated objective of the project was to secure established vineyards in conjunction with land for the development of new plantings and to supply high quality grapes to a company called Australian Grape and Winebrokers Pty Ltd under a Grape Sale Agreement guaranteed by Wyndham Estate Wines Limited. The prospectus sought to raise funds by way of subscription for contracts which, it was said, would entitle investors to have grapes cultivated for them on grower's allotments. The allotments were prescribed interests regulated by a Viticultural Investment Deed. The subscription price was $10,000 per grower allotment payable in full upon application. A minimum of 5,000 growers' allotments was available for issue with a further 3,500 available for over subscriptions. The minimum acceptance level for the project to proceed was $50 million within 4 months of the issue of the prospectus. Investors who were issued with contracts were designated as Growers in the prospectus. They were entitled to elect, in their application for allotments, to receive a guaranteed minimum return. The vineyard manager would guarantee to such growers a return per allotment of not less than $2,100 for the year ended 30 June 1994 and $2,700 for the year ended 30 June 1995.
5. The vineyard manager was a company called Growth Industries Management Pty Ltd ("GIML"), a wholly owned subsidiary of Growth Industries Pty Ltd ("GIPL"). Where it is convenient to do so and unnecessary for the purposes of the judgment to distinguish between subsidiaries in the Growth group, GIPL and its subsidiaries or any of them will be referred to as "the Growth Group". The directors of GIML were David John Towey, who was Chairman and Managing Director, Vincent John Moran, John Bernard Stack, Geoffrey Denney, Francis Swain, Peter Harper, Ambrose Dunne and Peter Burrows. Perpetual Trustee Company Limited was designated as Representative of the Growers, its function being described in the prospectus as the entry into Project Agreements on behalf of the Growers and generally acting on their behalf and representing their interests in the project. The Underwriter to the issue was Benney Partners Pty Ltd whose directors were Peter Kelly, Frank Magnus and Bruce Benney. Peter Kelly was Managing Director and Chairman of that company. The auditors for the issue were Messrs Cooper and Lybrand. Other entities connected with the project were Mid-West Finance Limited, which was a wholly owned subsidiary of GIPL and Mid-West Finance (ACT) Pty Ltd ("Mid-West (ACT)") a wholly owned subsidiary of Mid-West Finance.
6. Mid-West (ACT) provided finance for persons wishing to invest in the
project as growers. It raised funds for that purpose from
institutional
investors to whom it issued promissory notes maturing on 24 October 1996 and
in respect of which interest was payable
six monthly in arrears. The
principal sums due under the notes were guaranteed by the Government Insurance
Office of New South Wales
("GIO"). Hambros Australia Limited ("Hambros")
provided a Bill Acceptance or Endorsement Facility to enable timely payment of
interest
due under the notes. Interest payments due to Mid-West (ACT) by
growers were guaranteed by MGICA Limited, a financier described by
the manager
of its Securitisation and Banking Division as a lender of last resort. GIML
was insured by Strathford Insurance Co.
under an All Risks Insurance Agreement
against the minimum return not being achieved. Permanent Trustee Australia Ltd
("Permanent")
was trustee for the noteholders under a Trust Deed dated 30 June
1989 and held various securities in trust for them. Permanent Trustee
Company
Limited guaranteed to the noteholders the performance by the Permanent of its
obligations under the Trust Deed.
Finance and Security Arrangements
7. The securities put in place to support the financing of the project were
complex and comprised a number of interlocking and overlapping
agreements. It
is convenient to set out and explain briefly the principal security
documents.
1. The Trust Deed
8. Central to the arrangements was a Trust Deed dated 30 June 1989, the parties to which were Permanent as trustee, Mid-West (ACT) as issuer of notes to the noteholders, Permanent Trustee Co. Ltd and Hambros. The Trust Deed contained declarations by Permanent that it held on trust for the noteholders and Hambros various securities relating to the interest and principal entitlements of the noteholders (cls.2.1 and 2.2). The securities referred to in relation to the interest entitlements were a guarantee to which Permanent was a party with MGICA, Mid-West (ACT) and Hambros ("the MGICA Guarantee") and a charge by Mid-West (ACT) in favour of Permanent ("the Charge"). The securities referred to in relation to the principal were a mortgage in favour of Permanent by Perpetual Trustee Company Limited, the Charge and the GIO Guarantee in favour of Permanent. In addition Permanent declared a trust of its rights under the Bill Acceptance and Endorsement Facility to which it was a party with Mid-West (ACT) and Hambros and under a management agreement to which it was a party with Mid-West, GIML, GIPL, Hambros and Mid-West (ACT).
9. The Trust Deed recited, inter alia, that Mid-West (ACT) was to issue the Charge in favour of Permanent, procure MGICA to enter into the MGICA Guarantee, the GIO to provide its guarantee and Perpetual Trustee Company Limited to execute the mortgage in favour of Permanent. Mid-West (ACT) agreed to establish an Interest Account and a Principal Account in its name (cls.6.2 and 6.3). It was required to deposit into the Interest Account all money received by it as interest on borrowings from any grower and to arrange that withdrawals could only be made by Permanent (cls.6.1(g) and 6.2(a)). It expressly authorised Permanent to withdraw money standing to the credit of the Interest Account from time to time to make interest payments to the noteholders and to pay fees to the GIO and Hambros and to pay Permanent's own fees under the terms of the Deed (cl.6.2(d)). Permanent was to keep records of money paid into the Interest Account monthly by Mid-West (ACT) and to procure that Mid-West (ACT) promptly made claims to which it was entitled under the MGICA Guarantee in relation to any interest which a borrower had failed to pay to it (cl.6.2(f)).
10. The Deed also provided that Permanent could give its consent to Mid-West (ACT) arranging for a Bill Acceptance or Endorsement Facility to enable Mid-West (ACT) to ensure that the Interest Account would have sufficient money on an Interest Calculation Date to enable Permanent to make interest payments to the holders on the next Interest Date. Mid-West (ACT)'s entitlement to drawn on the facility was to be limited to the event of a failure by a borrower to pay any interest on borrowings due to Mid-West (ACT) (6.5(a)). Its right to draw down was also to be conditioned upon the auditor certifying to Permanent that an event had occurred which entitled Mid-West (ACT) to make a claim under the MGICA Guarantee for an amount not less than the amount of the proceeds of the Bills to be accepted or endorsed by Hambros.
11. By cl.2.1 of the Trust Deed, Permanent declared and acknowledged that it
held and would hold its rights under the MGICA Guarantee
and the Charge upon
trust for and for the benefit of the holders and Hambros. Upon the occurrence
of an interest shortfall it was
required to promptly notify Mid-West (ACT)
which must in turn procure the auditor to certify to Permanent whether the
shortfall was
caused by events which entitled Mid-West (ACT) to make a claim
on MGICA under the MGICA Guarantee. If the auditor so certified then
Permanent and Mid-West (ACT) were to promptly give a draw down notice to
Hambros in accordance with the terms of the Bill Acceptance
and Endorsement
Facility requesting Hambros to make available to Permanent bills with net
proceeds at least equal to the relevant
Deficient Amount calculated under
cl.3.3(b)(ii). And on the sixtieth day after Permanent and Mid-West (ACT) had
given a draw-down
notice to Hambros, Mid-West (ACT) must give a demand in
writing to MGICA for payment to Permanent of interest payments owing but
not
made by any borrower to Mid-West (ACT) as at the date of giving such demand
(cl.2.1(b)).
2. The MGICA Guarantee
12. This document lies at the heart of the present litigation. The parties
to it were MGICA, Mid-West (ACT), Permanent and Hambros.
It recited that
Mid-West (ACT) which was called the Lender, might from time to time receive
applications for loans under loan agreements
for the purpose of enabling or
assisting the applicants to invest in the Australian Viticultural Project No.
2. Recital B said:
"MGICA acknowledges that the Lender does not intend toIn recital F it was said that in consideration of a fee and at the request of Permanent, MGICA had agreed to issue to Mid-West (ACT) a guarantee in respect of the obligations of each borrower to pay interest under the loan agreement to which the borrower is a party. By cl.2.1, Mid-West (ACT) might give MGICA applications from persons who have applied to borrow moneys (in an amount not exceeding $550 or such other figure as MGICA may in its absolute discretion agree with Mid-West (ACT)) from Mid-West (ACT) pursuant to a loan agreement.
accept any such application unless MGICA has issued to
the Lender a guarantee on the terms and subject to the
conditions herein contained."
13. Clause 2.2 provided for loan applications to follow a form annexed to the agreement. By cl.2.3 MGICA could give notice in writing to the Lender that any loan application had been provisionally accepted by it for the purposes of this agreement. Where such a Provisional Acceptance Notice was given, Mid-West (ACT) could give to MGICA a notice of its desire to make the loan the subject of a loan application specified in the notice (cl.2.4). Following receipt of such a notice MGICA was to give to Mid-West (ACT) a notice confirming that the loan application was acceptable to MGICA and specifying the fee which MGICA required to be paid to it in respect of the loan agreement relevant to that loan application (cl.2.5).
14. Clause 3.1 provided:
"Subject to the succeeding provisions of this Clause 3,Mid-West (ACT) covenanted under cl.4 that it would not, without prior written approval from MGICA, do anything to diminish the value of its rights or interests under the Loan Agreement (4.1(a)), nor vary the agreement or waive any rights (4.1(b)). It was to give written notice to MGICA of any arrears of principal or interest due by a borrower within 14 days after the day on which any such amount became 30 days in arrears and thereafter written monthly reports detailing all defaults including any further default by the relevant borrower (4.1(c)). Clause 4.1(d) provided that:
MGICA hereby undertakes that during such time as a
Loan Agreement is Sixty Days in Arrears MGICA shall
pay to the Lender:
(a) subject to paragraph (b) hereof, not later
than the second Business Day following
demand in writing from time to time by the
Lender, all Interest which is due under
that Loan Agreement as at the date on
which MGICA shall make payment pursuant to
that demand; or
(b) where the Loan Agreement is terminated by
reason of default on the part of the
Borrower and, as at any of the dates on
which Interest would, but for such
termination, have become due under that
Loan Agreement, the Lender has not been
repaid in full all principal outstanding
under that Loan Agreement, an amount equal
to so much of that Interest which would
have been payable in respect of that
portion of the principal amount which has
not been repaid to the Lender as at that
date.
3.2 Notwithstanding any provisions to the contrary
contained in this Agreement, MGICA shall not be
obliged hereunder to pay to the Lender any amount in
relation to any Loan Agreement unless at the time at
which demand is made pursuant to Clause 3.1:
(a) MGICA's Fee in respect of that Loan
Agreement has been paid in full to MGICA;
and
(b) at the time at which MGICA would otherwise
be obliged to make that payment the
agreement by the Borrower under that Loan
Agreement to repay all amounts borrowed
thereunder and to pay Interest which has
accrued or which might from time to time
accrue thereunder and the guarantee and
indemnity by the Guarantors (if any) of
the Borrower's obligations duly
enforceable in accordance with their
respective terms notwithstanding any
security created by the Loan Agreement in
favour of the Lender being invalid or
found to be invalid and the Borrower's and
Guarantor's obligations to pay or repay
moneys outstanding under the Loan
Agreement or any guarantee (as the case
may be) are not liable to be set aside or
otherwise avoided by operation of law or
otherwise other than pursuant to any rule
of law or equity arising solely by reason
of the Borrower having become Insolvent.
3.3 The Lender shall, upon giving to MGICA any notice
demanding payment of any Interest owing by any
Borrower to the Lender under any Loan Agreement, be
deemed to have warranted to MGICA that the matters
referred to in Clause 3.2 are as at the giving of the
notice and will as at the time at which MGICA is
obliged to make a payment pursuant hereto be true and
correct so far as they relate to that Loan Agreement
with the intent that if those matters or any thereof
were not true and correct as at the relevant time the
Lender shall be obliged to indemnify MGICA to the
extent of any payment made by MGICA pursuant to that
demand whether or not MGICA has or ought to have known
at the time of that payment that those matters or any
thereof were not true and correct."
"without limiting the operation of (c) hereof, theMid-West (ACT) agreed by cl.5 that, subject to any prior right of Permanent or Hambros, MGICA would be subrogated to all the rights of Mid-West (ACT) under the Loan Agreement to the extent to which MGICA had paid money owing to Mid-West (ACT) (cl.5.1)). Mid-West (ACT) was to pay MGICA an establishment fee of $20,000 upon execution of the Guarantee Agreement and a fee in respect of each Loan Agreement "on or prior to Date of Advance for that Loan Agreement". The fee payable was the product of the Principal advanced under the Loan Agreement, the interest rate payable and a factor of 0.1125 (cl.9.3). Clause 12 required MGICA to pay all amounts payable by it under cl.3 in cleared funds into a bank account maintained by Permanent in Canberra as Permanent might from time to time nominate or otherwise into a bank account opened by MGICA in the name of Permanent.
Lender will keep MGICA fully and punctually informed
of all matters or things (of) which a responsible
officer of the Lender is or hereafter becomes aware
which might reasonably be expected to have a material
effect on the ability of any Borrower or Guarantor to
satisfy any of his obligations under the Loan
Agreement to which he is a party."
15. The parties to this Deed were GIO as Guarantor and Permanent as Trustee.
GIO guaranteed the payment to Permanent for the benefit
of the Noteholders of
the Outstanding Principal Amounts defined in the Trust Deed (cl.3.1). This
term referred to the aggregate
principal amount of all Notes on issue from
time to time (Trust Deed cl.1.1). If Mid-West (ACT) did not pay or make
available to
Permanent any of the Guarantee Money on time, GIO would pay the
guaranteed money up to the Guarantee Limit to Permanent upon demand.
The Deed
contained a series of warranties by GIO including one of full disclosure to
Permanent of all facts material to the assessment
of the risk undertaken by
Permanent in entering the guarantee (cl.10.1). There was no equivalent
provision in the MGICA Guarantee.
GIO also undertook to promptly give to
Permanent information that Permanent reasonably requested from time to time
(cl.11). Permanent
undertook at all times to enforce the Trust Deed
(cl.11.2(c)). Its rights under the Guarantee were additional to and did not
merge
with or affect and were not affected by any security interest then or
later held by Permanent or any other obligation of GIO to Permanent
(cl.12).
There was no equivalent of cls. 11 or 12 in the MGICA Guarantee.
4. Hambros - Bill Acceptance or Endorsement Facility
16. This Deed, dated 30 June 1989, was executed by Mid-West (ACT), Hambros
and Permanent. By cl.2 Hambros granted Mid-West (ACT)
a Bill Acceptance or
Endorsement Facility of an amount not exceeding the Facility Limit which was
defined in cl.1.1 as "$2,500,000
as reduced by the aggregate of all
cancellations under the agreement". Hambros was under no obligation to
provide financial accommodation
unless it received a Draw-down Notice
(cl.3.3(c)) with an auditor's certificate that an event had occurred which
entitled Mid-West
(ACT) to make demand upon MGICA for payment to Permanent of
an amount at least equal to the proceeds of the Bills to be accepted
or
endorsed by Hambros (cl.4.2(f)). Mid-West (ACT) was to pay Hambros an
establishment fee of $25,000, an acceptance fee in respect
of each Bill and a
commitment fee (cl.6). Hambros was subrogated to Mid-West (ACT)'s rights to
receive payment from MGICA under the
MGICA guarantee (cl.8.1).
5. GIPL Guarantee
17. The Hambros Bill Acceptance and Endorsement Facility was supported by a
guarantee from Stack, Towey, GIML and GIPL dated 29 June
1989. They
guaranteed payment to Hambros of all amounts then or in the future payable to
it by Mid-West (ACT) in connection with
the facility (cl.3).
6. Perpetual Trustee Company Limited Mortgage
18. By a deed dated 30 June 1989, Perpetual Trustee Co. Ltd as sole
representative of the guaranteed growers who had entered Loan
Agreements with
Mid-West (ACT) mortgaged to Permanent various rights in relation to a bond
premium, mortgaged bonds and a sub-mortgage
in the bond premium account.
7. Mid-West Finance - Management Agreement
19. Mid-West Finance, GIML, GIPL, Permanent, Hambros and Mid-West (ACT) were
all parties to a Management Agreement dated 30 June
1989 under which Mid-West
Finance as manager covenanted with Permanent and Hambros that it would procure
due and punctual performance
of Mid-West (ACT)'s obligations (cl.2.1). The
obligations were defined as all the covenants, undertakings and agreements of
Mid-West
(ACT) contained in the Trust Deed, the MGICA Guarantee and the
Hambros Facility. Permanent was given various powers in the event
of a
default by Mid-West (ACT) in the performance of its obligations under cl.6.1
of the agreement.
8. Mid-West (ACT) - Fixed Equitable Charge
20. By a charge dated 30 June 1989, Mid-West (ACT) charged in favour of
Permanent all its present and future rights, property and
undertaking. The
charge was expressed to be a fixed charge on the whole of that property
including "all rights, title and interest
of the chargor in and arising under
the MGICA Guarantee".
9. Performance Bond
21. By a deed dated 30 June 1989 GIPL guaranteed to Perpetual Trustee Co. Ltd
that GIML would so conduct the business carried on
by it in the project that
minimum returns would be achieved to the extent that they were not received
from claims under insurance.
10. Fidelity Bond
22. By a Fidelity Bond dated 29 June 1989, Strathford Insurance Co .
Ltd indemnified GIPL against all loss sustained and all
liability from time to
time incurred by GIPL under the Performance Bond.
11. Strathford Insurance Mortgage
23. Strathford Insurance Co. Ltd mortgaged the all risk insurance agreement
between itself and GIML and the Fidelity Bond in favour
of GIML and GIPL. The
mortgage was expressed to be security for Strathford Insurance's obligation to
GIML to pay net claims under
the insurance policy, its obligations to GIPL to
pay indemnities under the Fidelity Bond, its obligations to GIML and GIPL
under
the mortgage itself and its warranties to those companies under the
policy and the mortgage.
12. GIML - GIPL Mortgage
24. By a deed dated 30 June 1989, GIML and GIPL mortgaged to Perpetual
Trustee Co. Ltd their rights to receive claims from Strathford
Insurance Co.
under the policy and indemnities under the Fidelity Bond. They also mortgaged
their rights under the Strathford Insurance
Co. mortgage. Each of these was a
security for the obligation of GIML to Perpetual under the Minimum Return
Agreement, the obligations
of GIPL to Perpetual under the Performance Bonds
and their obligations to Perpetual under the mortgage itself. Permanent was
also
a party to the mortgage. Perpetual undertook that if required by
Permanent it would assign its rights under the Strathford Insurance
mortgage
to the GIO.
13. The Relevant Loans Agreement - 28 July 1989
25. The circumstances leading to the formation of this agreement and in
particular representations said to have induced MGICA to
enter into it were in
issue in these proceedings. By an agreement dated 28 July 1989 between
Mid-West (ACT), MGICA and Permanent,
MGICA agreed to approve, for the purposes
of the MGICA Guarantee, certain loans set out in a schedule and designated
"the Relevant
Loans" (cl.1). Mid-West (ACT) and MGICA were to establish an
account in their joint names to be styled the Collateral Account of
which
MGICA would be sole signatory (cl.3.). Permanent was to deposit into the
Collateral Account from time to time up to a limit
of 18.72% of the Relevant
Loans, all money constituting the surplus (as defined in the Trust Deed) being
the excess of money in the
Interest Account on an interest date over $500,000
and the aggregate of payments required to be made by Permanent on that date.
By
the agreement Mid-West (ACT) directed Permanent accordingly (cl.4). Upon
any reduction in the face value of the Relevant Loans, MGICA
was required upon
the written request of Mid-West (ACT), to distribute any difference between
the balance in the Collateral Account
and the requisite 18.72% as Mid-West
(ACT) should direct (cl.5(a)). If MGICA made any payment under the MGICA
Guarantee in respect
of a Relevant Loan, then it could withdraw an equal
amount from the Collateral Account and apply it to its own benefit (cl.6).
There
was a top-up obligation on the part of Permanent in the event of such a
withdrawal by MGICA (cl.7). The agreement was to terminate
when the whole of
the Relevant Loans were repaid and the MGICA Guarantee released and when MGICA
had no further right to draw upon
the Collateral Account (cl.10). Mid-West
(ACT) covenanted to grant to MGICA a charge over its interest in the
Collateral Account
and its right to give Permanent directions in relation to
the surplus under cl.6.2(c) of the Trust Deed and to receive payments pursuant
to that clause (cl.11). Permanent consented to Mid-West (ACT) entering into
the various obligations. A schedule of Relevant Loans
amounting to $6,725,760
comprising advances to some 36 borrowers formed part of the agreement. Among
the borrowers were the following:
Joseph Charles LearmonthThe agreement was supported by an equitable charge dated 8 September 1989 whereby Mid-West (ACT) charged in favour of MGICA its rights to the Collateral Account and its rights under cl.6.2(c) of the Trust Deed.
Duffy (NSW) Pty Ltd $2,705,460
Gifford Holdings Pty Ltd $ 60,000
Burleigh Nominees Pty Ltd $ 508,740
Pardo Pty Ltd $ 457,890
Goldfields Developments
Pty Ltd $ 508,740
Benney B. $ 457,890
Kelly P. $ 457,890
Magnus F.D. $ 457,890
26. On 15 December 1989, Mid-West (ACT), Permanent, Permanent Trustee Co. Ltd and Hambros executed an Amending Deed under which certain provisions of the Trust Deed were varied. These related to the making of demand upon MGICA in respect of interest shortfalls and the appointment of Permanent as attorney for Mid-West (ACT) to make demand in writing to MGICA for payment to Permanent of interest payments. The Amending Deed also established a Subscription Account in the name of Mid-West (ACT) and required Mid-West (ACT) to deposit into it all subscription moneys for Notes, other than moneys used to discharge a debt of Mid-West (ACT) the incurring of which had been approved by the Trustee under cl.6.1(f) of the Deed. The Amending Deed also provided for investment of money standing to the credit of the principal Account and for closing of the books during the period from and including each Interest Calculation Date up to close of business on the next succeeding Interest Date.
27. A simplified diagram of the principal features of the project is Annexure
1 to these reasons.
The Pleadings
28. The identities and corporate status of the parties pleaded in paras 1 to 6 of the Third Further Re-amended Statement of Claim are not in issue but the characterisation of GIPL as a trading and financial corporation is (para 7). The formation of the Guarantee Agreement of 30 June 1989 between MGICA on the one hand and Mid-West (ACT), Permanent and Hambros on the other, is common ground (para 8). It is not in dispute that on 28 July 1989 MGICA, Mid-West (ACT) and Permanent executed the Relevant Loans Agreement under which MGICA would approve additional scheduled loans for the purposes of the Guarantee Agreement of 30 June 1989 (para 10). It is also accepted that on several subsequent occasions until January 1990 documents were executed between MGICA, Mid-West and Permanent providing for further loans to be treated as though included in the class of loans covered by the Relevant Loans Agreement of 28 July 1989 (para 11). It is alleged, but not admitted, that certain of the Relevant Loans and their associated guarantees were not legally binding and/or that the borrowers' and guarantors' obligations were liable to be set aside or otherwise avoided (para 12). These loans and the facts relied upon to support the contentions are set out in a Schedule to the Statement of Claim. Because of this it is said that MGICA had no obligation to pay Mid-West (ACT) anything in relation to those loans (para 13).
29. Between 18 and 28 July 1989 Mid-West (ACT) and GIPL are said to have
represented to MGICA that Mid-West (ACT) had not yet entered
into certain loan
agreements with persons later included in the schedule to the 28 July
agreement (para 14). They are also said
to have represented that:
(1) borrowers would pay interest to Mid-WestThe bank authority representations are said to have been made by Mid-West (ACT) without reasonable grounds and to be deemed misleading or deceptive by virtue of s.51A of the Trade Practices Act 1974. The other representations are also said to have been false and/or misleading or deceptive (para 16). The allegations are extensively particularised. Reliance is placed on the fact of some of the Relevant Loans being entered into prior to execution of the Relevant Loans Agreement, a promise by GIPL to indemnify certain of the borrowers under their loans and an agreement by the project underwriters, Benney Partners Pty Limited, to indemnify two companies namely Burleigh Nominees Pty Ltd and Goldfield Developments Pty Ltd whose borrowings were included in the Relevant Loans. The non-disclosure by Mid-West and GIPL of the fact that they had not received bank authorities from certain of the borrowers is relied upon, as is their alleged intention that the borrowers would not pay interest on their loans at all. For these reasons, it is said, Mid-West (ACT) and GIPL engaged in conduct that was misleading or deceptive or likely to mislead or deceive (para 17).
(ACT) on monthly bank authorities;
(2) Mid-West (ACT) and GIPL intended and
believed that interest payments would be
made in that way; and
(3) there was nothing known to them which
ought reasonably to have led them to
believe that any of the borrowers would
not or could not perform their obligations
to pay interest (para 14).
30. GIPL is said to be a promoter of the viticultural project and to have owed a fiduciary duty to the applicant to exercise utmost good faith in making disclosure of all matters material to the applicant's decision to assume obligations under the project (para 19). Because of the misrepresentations earlier pleaded, it is said to have breached that duty and Mid-West (ACT) is said to have participated with knowledge in that breach (para 20). Mid-West (ACT) itself is also alleged to have owed MGICA a duty to disclose to it any unusual matters relating to the loan agreements and is said also to have breached that duty by reason of the various misrepresentations (para 21). MGICA pleads that in reliance on the representations and/or in the belief that the companies had fulfilled their duties of disclosure, it executed the 28 July 1989 agreement (para 23).
31. The representations are pleaded as continuing immediately prior to 22 August 1989 and further non-disclosures in breach of the duties of GIPL and Mid-West (ACT) are said to have occurred prior to MGICA signing a letter on 22 August 1989 accepting additional loans under the Relevant Loans Agreement (para 29). The non-disclosures pleaded related to prior entry into loan agreements with persons who were included in the schedule of relevant borrowers, Capital Hall's threat to withdraw an offer to guarantee JCLD's loan, the existence of an interest free loan to Towey, Stack and Denney and the non-payment of interest by partners and companies associated with Benney Partners. A guarantee given to Hambros by GIPL and GIML is also relied upon. Similar pleas setting up the continuing representations and others relating to the performance of certain borrowers and the reasons for non-payment of money into the Collateral Account are pleaded as misleading or deceptive conduct by Mid-West (ACT) and GIPL and breaches of their fiduciary duties (paras. 26 and 27). On the basis of this conduct, MGICA says that on 12 and 19 December 1989 and 8 January 1990 it despatched letters agreeing to the inclusion of further loans in the schedule to the agreement of 28 July 1989 (para 35).
32. It is not in dispute that on 17 September 1990, the chartered accountants, Moores purporting to act on behalf of Mid-West (ACT), demanded payment by MGICA of moneys allegedly due under the Guarantee Agreement (para 36). The demand is said to have been made without authority or to have been of no force or effect. (para 37-39). On or about 2 October 1990 MGICA paid $410,000 to Permanent under protest and now contends that the money is held as money had and received to the use of MGICA (para 40).
33. The warranty in cl.3.3 of the Guarantee Agreement that any obligations in respect of which demand is made upon MGICA are legally binding and enforceable is said to have been breached (para 42). MGICA claims that Mid-West (ACT) is obliged to indemnify it in relation to the payments so made to the extent that it related to the various loans referred to in the Relevant Loans Agreement and in a schedule to the statement of claim (para 43). Breaches of the Guarantee Agreement are alleged and an entitlement to equitable compensation asserted (para 45). In the alternative, and upon the proper construction of the Guarantee Agreement, MGICA alleges that its obligation under cl.3.1 was owed solely to Mid-West (ACT) and not to Permanent or Hambros (para 46). Alternatively it says that neither Permanent nor Hambros gave any consideration to the applicant for its promise under cl.3.1 (para 47). By reason of these matters and upon the proper construction of the Guarantee Agreement, it is not to have any effect against or in relation to Hambros or Permanent or be enforceable by Permanent against MGICA in the event that MGICA is relieved by a court of competent jurisdiction of its obligations to pay any moneys to Mid-West (ACT) under the terms of the Relevant Loans Agreement (para 48). Alternatively, it is said that on the proper construction of cl.3.2(b) MGICA was not obliged to make any payment in respect of a loan agreement once the obligation of the borrower had been extinguished by order made by a court of competent jurisdiction (para 49). Reliance is then placed in the pleading on a default judgment given by this Court in other proceedings to the effect that the indebtedness of JCLD to Mid-West (ACT) under its loan agreement had been absolutely extinguished (para 50).
34. The statement of claim goes on to allege that if MGICA establishes as against Permanent facts which had the applicant prosecuted these proceedings against Mid-West (ACT) beyond default judgment, would have entitled it to set aside, avoid or rescind the Relevant Loans Agreement, it is entitled as against Permanent to have an order setting aside, avoiding or rescinding that agreement and/or its liability to pay money under it (paras. 53 and 53A).
35. The statement of claim deals in an anticipatory manner with an allegation foreshadowed by Permanent that the Guarantee Agreement and the Relevant Loans Agreement and various letters adding further loans to the list of those covered by the Relevant Loans Agreement were contracts of insurance for the purpose of the Insurance Contracts Act 1984 (para 54). On the assumption that that allegation could be made out, it is pleaded that Mid-West (ACT) failed to comply with statutory duties of disclosure (para 59), that its failure was fraudulent (para 60), that MGICA would not have entered into the contracts on the same terms and conditions if Mid-West had not breached its duty (para 64) and that by reason of these and other matters it is entitled as against Mid-West, Permanent and Hambros to avoid the Relevant Loans Agreement and all amendments thereto under sub-s.28(2) of the Insurance Contracts Act 1984 (para 66). Alternatively, it is said that by virtue of s.28(3) of that Act the liability of MGICA under the agreement is reduced to that which would place it in the position in which it would have been if failure to disclose had not occurred or the misrepresentations alleged had not been made. That is said to be a nil liability (para 67). And the demand made by Moores on 17 September 1990 is said to have been fraudulent so far as it extended to certain of the borrowers (para 68). By reason of s.56 of the Act, MGICA says it is entitled to refuse payment of the claims (para 70). There is also an allegation of a failure to comply with the duty of utmost good faith implied under s.13 (para 71) and that and the other matters entitled MGICA to cancel the 28 July 1989 agreement and all amendments thereto under s.60 (para 72). Section 48 of the Act is invoked to support an assertion that if either of Permanent or Hambros was a party to the contract or otherwise entitled to claim under it, they have not suffered any loss which would entitle them to make any claim upon MGICA (para 73). An alternative plea is that MGICA was to be liable under the Guarantee Agreement only in respect of truly fortuitous happenings, that is matters happening by chance or accident and not caused by Mid-West (ACT) (para 74). The failure of various of the borrowers to pay interest on their loans is said to have been caused by Mid-West (ACT) and reference is made to the interest payment arrangements in respect of those borrowers (paras. 75 and 76). Mid-West (ACT) is said to have led various of the borrowers to believe they would not be required to pay interest on their loans (para 77 and 78) and their failure to do so is said not to have been a fortuitous event (para 79). MGICA says it is entitled to refuse to make payment with respect to any of Benney, Kelly, Magnus, Pardo, Burleigh and Goldfields (para 80). In the event, however, although characterisation of the agreements as insurance contracts was pleaded by Permanent, that point was abandoned in closing. MGICA nevertheless did not formally abandon the issue as pleaded on its statement of claim and asked that findings be made if appropriate.
36. The schedule to the statement of claim pleads a loan to JCLD of $2,705,460 under an agreement that as JCLD procured further contracts to be subscribed in the project or as new contracts were subscribed for other than by JCLD or other underwriters, the liability of JCLD top Mid-West (ACT) under its loan agreement would be correspondingly reduced. By November 1989 it is said that JCLD had procured new investors or alternatively new contracts had been subscribed for which were equivalent to the number of contracts subscribed for by it. Mid-West (ACT) is said to have been in breach of its agreement in failing to cancel the obligations under the loan agreement or release JCLD from them. Alternatively, it is said, the amount repayable under the loan agreement was extinguished by November 1989. By reason of these matters there was no legally binding obligation on JCLD to repay principal and interest under the loan agreement. Alternatively, it is said to be unconscionable for Mid-West (ACT) to seek to rely upon its legal rights pursuant to its contract of loan with JCLD by reason of which again the agreement did not constitute a legally binding obligation.
37. The second class of loans relied upon in the schedule are amounts of $457,890 to each of Pardo, Benney, Kelly and Magnus and loans of $508,740 to each of Burleigh Nominees and Goldfields Developments. An agreement is pleaded between each of these borrowers and Mid-West (ACT) under which Mid-West (ACT) agreed that as further contracts were subscribed for the viticultural project other than those procured by JCLD, the liability of each of the borrowers to Mid-West (ACT) under the loan agreements would be correspondingly and proportionately reduced. By September 1989 and alternatively 1989, it is said further contracts had been subscribed in the viticultural project other than those procured by JCLD in a number equivalent to the total number of contracts subscribed for by the borrowers mentioned. Mid-West (ACT) is said to have been breach of its agreement by failing to cancel the obligations of the borrowers. In the alternative, the amounts repayable are said to have been extinguished. Pleas of unconscionable conduct and estoppel in relation to these loans are also raised.
38. By its defence Permanent says that the rights of Mid-West (ACT) under the Guarantee Agreement and any moneys paid by MGICA were held in trust for Permanent (D para 4). It admits the pleaded terms of the Guarantee Agreement (D para 6) and the subsequent inclusion of additional loans (D para 7). It also admits the lodgment of the prospectus for the Australian Viticultural Project No. 2 with the Corporate Affairs Commission of New South Wales in or about May 1989 (D para 9). It asserts that Moores CA made demand on behalf of Mid-West (ACT) for payment of money due under the Guarantee Agreement (D para 11). The contention that the demand was not valid is denied (D para 13). In reference to the payment of $410,000 Permanent denies that it is held as money had and received to the use of MGICA (D para 14). In further answer to the claim for recovery of that money, Permanent says MGICA was obliged to pay it and it was paid in full knowledge of the terms of the Trust Deed which required Permanent to disburse such money to noteholders under the Deed. By reason of that matter it is said that Permanent has changed its position in such a way as to make it unconscionable for MGICA to recover the sum whether or not it was obliged to pay it (D para 17).
39. Permanent maintains that the obligation of MGICA under cl. 3.1 of the Guarantee Agreement was owed to it directly (D para 19A). Even if it did not give consideration as alleged, Permanent says the Guarantee Agreement was made between the parties to it jointly and consideration was given for MGICA's promise by Mid-West (ACT) (D para 19B).
40. In reference to the default judgment on the proceedings brought by JCLD (NSW), Permanent says that the judgment was given expressly by default of Mid-West (ACT) and GIPL and not so as to derogate from the right of Permanent to pursue any issue arising in these proceedings. Such a judgment in any event has no effect as between MGICA and Permanent (D para 19G). It was given in circumstances in which MGICA, by counsel, conceded that it had no effect upon any party other than Mid-West (ACT) and GIPL (D para 19H). The judgment is also said to have been given in conflict with s.33 of the Insurance Contracts Act 1984 and otherwise contrary to the legal rights of the parties and should be set aside (D para 19H). This latter contention was abandoned in closing as a consequence of Permanent's decision not to contest the insurance point. So far as the relief sought by MGICA is based upon the default judgment, Permanent says it should be refused upon discretionary grounds (D para 19I).
41. So far as MGICA's claim against Permanent is based upon an order or declaration that the 28 July 1989 agreement and amendments are void or void ab initio, Permanent says that no such relief is or can be available either under s.87 of the Trade Practices Act 1974 or otherwise. Paragraphs 14 to 35 of the statement of claim, it says, should be struck out as well as such part of para 38 as appears after the number "13" (D para 20).
42. Reference is made to the various security documents associated with the project which were executed by Permanent and the other parties (D para 21). They are set out in a schedule to the defence. MGICA, it is said, was aware that Permanent had entered the agreement as trustee for the noteholders (D para 22). The noteholders through Permanent subscribed for notes under the Trust Deed and thereby committed $45 million to the project which enabled Mid-West (ACT) to make loans to the investors. The amount invested under the notes increased to $48,200,000 as at January 1990 (D para 23). The noteholders committed funds to the project on the faith of the terms of the Guarantee Agreement. That Agreement would entitle MGICA to sue Mid-West (ACT) for damages for breach, but not to terminate or rescind it (D para 24). Permanent itself says it entered the Agreement and the noteholders committed funds on the faith of MGICA's implied representation that it would undertake diligent and thorough inquiries as to the credit worthiness of persons to whom Mid-West (ACT) made loans for the purposes of investment in the project (D para 25). These matters are relied upon to support a plea that an order against Permanent in the nature of rescission of the Guarantee Agreement or that it is void or voidable is not or should not be available as a matter of discretion (D para 26). It is said to be unconscionable for MGICA to seek such relief and it is also said that MGICA is estopped from so doing (D para 27).
43. The plea is then raised, as anticipated in the amended statement of claim, that the Guarantee Agreement and the Relevant Loans Agreement are insurance contracts for the purposes of the Insurance Contracts Act 1984. This contention was, as has already been noted, abandoned in closing.
44. In its reply to the amended defence, MGICA relies in paras. 49, 50 and 51 upon the effect of the judgment obtained by JCLD in separate proceedings, WAG 111 of 1990, and not upon the judgment obtained in these proceedings (R para 4). Alternatively, the judgment in these proceedings against Mid-West (ACT) and GIPL does not operate and is not relied upon as effecting a res judicata so far as the rights inter se of MGICA and Permanent are concerned (R para 5). Permanent, it says, has no interest in the issue whether money is owed by MGICA to Mid-West (ACT) and has no standing to be heard on that matter. There is no obligation by MGICA to Permanent at law or equity in terms of cl.3.1 of the Guarantee Agreement (R para 5). The balance of the pleadings turn on the insurance point which is no longer in issue.
45. By its amended cross-claim Permanent sues MGICA and Mid-West (ACT), inter
alia, on the Guarantee Agreement and the Relevant Loans
Agreement. It claims
a declaration that MGICA is liable to pay to it a sum of money equivalent to
all outstanding interest owed
by Mid-West (ACT) by borrowers from that company
under the Australian Viticultural Project No. 2. It claims in this respect
judgment
in the amount of $1,975,485.04 as at 11 January 1991 and orders for
payment of further amounts as may have accrued since that time
together with
interest under s.51A of the Federal Court Act. If the Relevant Loans
Agreement is to be declared void or void ab initio,
Permanent seeks an order
that MGICA refund to it all moneys received under that Agreement and its
amendments. An account or inquiry
for such purpose is also claimed.
Undertaking and Concession
46. It is convenient at this point to refer to an undertaking given to the
Court by MGICA on 7 June 1991. It was in the following
terms:
"The Applicant, by its counsel, undertakes to the CourtIn addition, MGICA formally accepted that if Permanent is ordered to pay the $410,000 plus interest in respect of moneys paid over by MGICA on 2 October 1990 there should be set off against that sum the amount of fees received by MGICA with respect to the Relevant Loans in respect of which the Court has entirely relieved MGICA of liability.
that:
(a) if the Court relieves the Applicant
entirely from liability under the
Guarantee Agreement of 30 June 1989 with
respect to all of the loans the subject of
the Agreement of 28 July 1989 and all
amendments thereto, the Applicant will
surrender any claim to the collateral
account established under the 28 July 1989
agreement;
(b) if the Court relieves the Applicant from
such liability in part, the Applicant will
accept that as a reduction pro tanto in
the face value of the Relevant Loans for
the purposes of clause 5(a) of the 28 July
1989 Agreement."
47. In 1984, MGICA conducted its business through three divisions known as the Mortgage Insurance, Financial Services and Credit Insurance Divisions respectively. In July of that year the General Manager, Mr J. Haigh, established a credit committee to approve applications for facilities in the three divisional categories exceeding the approval limits of individual product managers. Initially the committee comprised the Managing Director as Chairman and the Managers of each of the divisions. The Chairman had a right of veto. The General Manager was Alternate Chairman and the Manager Finance and Administration and the National Marketing Manager could act as alternates for the divisional managers. Sometimes other employees were invited to participate in meetings of the committee. From about mid-1988 it was normal practice for the General Manager to attend and chair the meetings.
48. From time to time there were promulgated within the company what were called "Underwriting Authority Limits". These specified the maximum loan amount and associated risk that could be approved by each nominated officer. On 14 June 1989 managers had limits of $1 million for full cover mortgage insurance, $600,000 for financial service bonds and guarantees and $1,250,000 for credit insurance. The credit committee had a limit of $5 million in mortgage insurance and $8 million in credit insurance. Above these limits approval was required by a Board sub-committee.
49. In mid-1986 responsibility for commercial mortgage insurance was
transferred from the Mortgage Insurance Division to the Financial
Services
Division which was renamed the Commercial Services Division. Mr Brian
Richardson became the manager of that division and
was a member of the credit
committee from mid-1986. At the relevant time in mid-1989, the Commercial
Services Division dealt with
commercial and pool mortgage insurance, bonds,
including contractor's performance and customs bonds and financial
guarantees.
The 1988 Projects
50. An agreement to provide financial guarantees was entered into by MGICA in 1988 in respect of three projects known as the Australian Viticultural Project No. 1 and the Australian Horticultural Project Nos. 1 and 2. The agreement was dated 25 May 1988 and the parties to it were MGICA, Mid-West Finance and the State Bank of New South Wales. Subscribers for units in these projects could fund their subscriptions by borrowing money from Mid-West Finance under standard form loan agreements guaranteed by MGICA. No application for such a loan would be accepted unless MGICA had issued a guarantee in accordance with the terms and conditions of the agreement of 25 May 1988. The Bank had on the same day provided a credit facility to GIPL which was guaranteed by Mid-West Finance and GIML. The structure of the arrangements for this project generally was set out conveniently in a diagrammatic form in an MGICA minute of 12 April 1989 which is Annexure 2 to these reasons.
51. Loan applications in respect of the 1988 projects were submitted to MGICA
until October or November of that year. A number were
declined. The
Commercial Services Division under Mr Richardson, administered MGICA's
participation in these projects. Some 800
applications were assessed and
approved and guarantees provided in respect of loans in excess of $40
million.
MGICA - GIPL - Negotiations on 1989 Project
52. In about the middle of March 1989, Richardson had a discussion with Denis Simmons who had been an officer of the State Bank of New South Wales but had since joined GIPL as its General Manager, Finance. Simmons said that he would be responsible for the documentation of new GIPL projects for 1989 including a further viticultural scheme. He wanted MGICA to provide guarantee support similar to that given to Mid-West Finance in the previous year. Richardson asked him to put his proposals in writing.
53. Simmons wrote on 23 May 1989 on GIPL letterhead seeking "a firm proposal
for a Financial Guarantee in respect of interest payments
due to our finance
company". Reference was made to proposed viticultural and prawn projects.
Applications from investors in each
would be accepted in multiples of $10,000.
A total maximum investment of $85 million in the viticultural project was
anticipated
and $90.5 million in the prawn scheme. A guaranteed minimum
return option would be available to investors. Loan finance would be
available to eligible investors who elected the guaranteed minimum return
option. The terms and conditions of the loans would be
"the same as for
existing borrowers". This was a reference to investors in the 1988 projects.
Security arrangements, processing
and audit confirmation with respect to the
loan applications would be the same. Interest would be payable monthly in
arrears. GIPL
sought "cover for the full interest obligations of borrowers
along the lines of our existing insurance arrangements with your company".
The letter went on:
"We consider that minimal if any applications will be54. Richardson replied on 4 April 1989 advising that MGICA was prepared to provide cover for borrowers approved by it. Underwriting requirements would remain as in 1988. This was a reference to MGICA's requirements set out in cl.2 of the Guarantee Agreement of 25 May 1988. That clause provided for the information to be furnished in respect of each loan application submitted for MGICA's approval. Because of an increase in reinsurance cover, interest on loans to a total of $500,000 for any one borrower could be guaranteed. Fee proposals were set out and GIPL advised that if they were acceptable MGICA would instruct its solicitors, Westgarth Middletons, to prepare an updated guarantee document. At the time, Richardson believed that the State Bank of New South Wales was to be the ultimate lender to those seeking finance to subscribe for the units. He also stated that there would be no establishment fee for the guarantee agreement and that he would require $20,000 before going ahead with the documentation.
received after 30 June 1989 with respect to the
projects.
You will appreciate that all documentation received
prior to 30 June must be processed by the end of the
financial year. To that end we are taking steps,
including computerisation of transactions, to
facilitate a smooth flow of documentation. We are
also looking to establish an operations/processing
centre at a city location. As discussed with you it
would be of considerable assistance if your company
could allocate personnel to process MGICA
documentation and provide necessary approvals at the
"operations centre"".
55. On 5 April 1989, GIPL sent MGICA a cheque for $20,000 as requested. On the same day the NSW/ACT manager of MGICA, Ian Graham, sent a letter to the Assistant Manager, Mark Anderson, referring to the 1988 projects and noting that negotiations were proceeding on a similar project to be promoted in May and June. He expected that $100 million worth of guarantees would issue and that credit approvals for those applications would be shared between the Commercial Services Division and the NSW/ACT branch office of MGICA. Paul Eagar, the Underwriter - Commercial Services Division and Steven Brown, a Senior Credit Analyst of the NSW/ACT branch would be responsible for the credit assessment and approval process. Anderson was asked to make allowance in his planning for Brown's commitment to the programme. The next day Richardson sent a memo to Graham suggesting that responsibility for the 1989 programme be passed to the NSW/ACT branch on the understanding that he would be available to provide any assistance that might be required in setting it up. Paul Eagar, he said, would be available to assist with underwriting of loan applications upon receipt.
56. At that time or shortly afterwards, Richardson telephoned Simmons and
said that before progressing further with the proposal,
he wanted to know that
there were no arrears of repayments of interest by borrowers in the 1988
project. Simmons said that there
were none and had not been any. Richardson
asked for written confirmation and on 11 April was sent a letter signed by
Stack advising
that as at 28 February 1989 Mid-West Finance had 1,075
borrowers with aggregate loans outstanding of $65,991,012, none of whom were
in default. On the same day Simmons wrote to Richardson indicating that some
investors would want to borrow more than $500,000.
He proposed that they be
submitted to MGICA for approval to cover a guarantee of interest on the first
$500,000. He added that
in the event that applications for loans in excess
of $1 million were received, he would like to be in a position to negotiate
separate
cover with MGICA and sought a proposal from Richardson in that
regard. He also suggested that MGICA's fees be re-examined to take
into
account:
1. The absence of delinquent accounts in respect of57. On 12 April, Richardson met with Anderson, Brown and Eagar of MGICA to talk about the 1989 project. They noted that it was very similar to that set up in 1988. A minute of matters discussed referred to its salient features, the contemplated audit assessment procedures and the guidelines to be applied by MGICA in deciding whether or not to approve individual borrowers for the interest guarantee. On 13 April Anderson wrote to Simmons setting out MGICA's proposals which included the following:
borrowers in the 1988 programme.
2. Predictions by market forecasters that high interest
rates would not continue for the term of the policy.
3. A likely high incidence of early loan repayment for the
provision by borrowers of Letters of Credit to secure
principle and interest obligations.
1. A general limit of $500,000 per borrowing to be58. On 14 April Richardson advised Simmons by letter that the NSW/ACT branch had assumed full responsibility for the proposed guarantee facility. The State Manager, Ian Graham, would have ultimate responsibility for ensuring its efficient handling but Anderson would be the co-ordinator. Richardson said he would be "watching progress with interest" and would "provide guidance if necessary".
guaranteed subject to risk sharing on a pari-passu basis
for borrowers exceeding $500,000 provided MGICA's
exposure would not exceed $500,000 (the latter should no
doubt be read as a shorthand reference to the limit of
MGICA's liability to guarantee interest repayments in
respect of any borrowed amount exceeding $500,000).
2. A fee rate for the facility set at 0.375% per annum.
3. MGICA would assume a rate of 18% for each loan in
determining its fee. Mid-West (ACT) would advise MGICA
quarterly of the new interest rate. The difference
between the fee paid on assumed interest of 18% and the
nominal fee would be calculated based on actual interest
charged over the year. A compensating adjustment to the
fee paid could be made.
59. On 17 April, Stack telephoned Simmons and asked if MGICA would extend the limit on its guarantees to interest on loans of up to $550,000. This higher limit was sought because investors were to be given the opportunity to borrow to cover their loan costs as well as the principal. Richardson said that MGICA would probably meet the request. Simmons also put to him that in the 1988 programme there had been some excellent borrowers seeking loans of up to $2 million. He asked if MGICA would provide a guarantee of borrowers seeking these large loans in special circumstances. Richardson said it was unlikely it could do so but each application would be considered on a case by case basis. Mr Carne of GIML sent a fax to Richardson on the same day referring to his conversation with Stack and confirming the information that would be required from applicants for loans of up to $55,000, $55,001 to $210,000 and $210,001 to $550,000. For companies and trusts the requirement would be as for individuals plus personal guarantees of at least two directors with appropriate statements of financial position and provision of a charge of the interest over the assets of the relevant entity.
60. On 27 April, Richardson was informed by Mr Alan Booth of the State Bank of New South Wales that the Bank would not be funding the 1989 Growth Projects. The Board of the Bank considered it had sufficient exposure to the Growth Group. Stack told Richardson at that time that GIPL had entered discussions with various lenders with a view to financing the project. Richardson agreed that such lenders could contact him regarding MGICA's involvement. The previous day Anderson had been telephoned by O'Sullivan of Hambros who told him that Growth was looking to Hambros to provide funding.
61. There was correspondence about this time between a sub-underwriter to the project, Davey and Associates, and GIPL about guidelines for loan approvals. A copy was sent to Richardson who wrote to GIPL on 3 May confirming the guidelines previously agreed. The correspondence was tendered over objection to demonstrate that MGICA controlled the guidelines, a fact said to be relevant to the question whether the Guarantee Agreement ultimately executed was in truth a contract of insurance.
62. On 9 May 1989, Anderson wrote to Thomson of GIPL setting out criteria by
which MGICA would assess applications under the guarantee
facility. Ability
to repay a loan was paramount and MGICA applied no formula or hard and fast
rules but would assess each application
on its merits. Reference was made to
the need for a clear credit history and a stable employment record.
Supporting documentation
requirements were specified for various loan
categories. The letter said:
"In summary, MGICA adopts a flexible and commerciallyAt a meeting on 10 May 1989, Messrs Carney, Simmons, McCloy, Thompson and Guthrie from the Growth Group met with Anderson and Brown of MGICA. A number of matters were discussed including a requirement that the broker for the project should only accept periodical payment arrangements from investors using one of a list of participating banks. In an internal MGICA memorandum of 15 May, Anderson asked Richardson to clarify "the underwriting criteria which you would like to see applied for all applications under this programme". Richardson replied by handwritten endorsement on the memo:
prudent approach to all applications."
"Prudential underwriting standards one would expect to63. On 18 May, Simmons told Anderson that GIPL proposed to finance the loans to investors in the project by a note issue underwritten by Hambros. Anderson confirmed this advice by letter dated 19 May. The proposed alteration to the financing arrangements, he said, would have to be documented, explained and acceptable to MGICA. On 22 May, GIPL sent by fax to Anderson a proposed format for the standard loan application form for investors who wished to borrow from Mid-West (ACT). On 24 May 1989, the prospectus for the project was issued. The general description of the project as contained in that prospectus has been set out earlier in these reasons.
see from an experienced lender providing unsecured
accommodation."
64. On 14 June 1989, Anderson signed a memorandum to the MGICA credit
committee, recommending that MGICA provide guarantees of investors'
loans in
respect of the project subject to the agreement being satisfactory to MGICA
and its legal advisors. He explained the structure
of financing and security
arrangements for the project. The roles of the various entities involved were
also set out. He wrote
of the proposed guarantee facility in the following
terms:
"The Guarantee to be provided by MGICA will provideThe borrowers' capacity to service the loans was to be assessed by MGICA on an individual basis. Credit checks were to be provided and to be satisfactory to MGICA. Discussing the risk to MGICA, Anderson wrote:
protection to Mid-West in the event that a Borrower
defaults in the payment of interest due on the loan.
In this event, MGICA will pay to Mid-West the interest
due but unpaid. The Guarantee will be in favour of
Mid-West and will be assigned to Permanent Trustee.
The Guarantee Agreement has been prepared by John
Munton of Westgarth Middletons. The main features of
the Guarantee are:
* MGICA will pay arrears of interest due on the loan
when it is 60 days in arrears.
* Mid-West must advise MGICA within 21 days of a loan
becoming 30 days in arrears.
* The maximum loan to be included under the Guarantee
will be $550,000.
* MGICA has agreed to include loans over $550,000
provided that any additional exposure is borne by
Growth on a pari-passu basis.
* MGICA will retain full rights of subrogation under
the loan agreement.
* MGICA will not be on risk until the Guarantee Fee
relating to the individual loan has been paid."
"Whilst MGICA's total exposure may be up to $50M, theHe referred to MGICA's positive experience with the 1988 projects which had generated fee income totalling $708,000. He noted the advice that there were at that time no arrears on the guaranteed 1988 loans and that all had been well conducted. Although some applications had been rejected, the majority were acceptable and the calibre of the applicants was generally as originally envisaged "i.e. high net worth individuals, usually professionals, with a satisfactory credit history and a high income level to justify their investment in the Projects in the first place".
risk entity in each case is limited to a maximum
exposure of $550,000.
MGICA's risk is therefore the ability and willingness
of each Borrower to pay the loan interest as and when
it falls due.
MGICA will underwrite each application and is
therefore in a position to apply its usual
underwriting and risk assessment procedures to
minimise the risk involved."
65. The credit committee met on 15 June 1989. Richardson was overseas at the
time. Present at the meeting were the General Manager
of MGICA, Mr Haigh, and
Messrs Bradford, Anderson, Graham and Hillis, the latter being the Assistant
Manager of the Credit Services
Division. The minutes record that Anderson
tabled his memorandum. Specific note was made of the fact that no defaults
had occurred
in the loans subject to the guarantee given by MGICA in 1988 and
that while some changes had been made to the scheme the fundamentals
were the
same. The minutes recorded that:
"It was agreed that the guarantee facility for the66. Development of the terms of the Guarantee Agreement proceeded with the involvement of solicitors for the parties and on or about 30 June 1989 the settled version was executed. Messrs Haigh and Graham signed for MGICA. Other documents already referred to which embodied the financing, trust and security arrangements supporting the project were also executed at this time.
Viticulture (sic) Project No. 2 be approved..."
67. Criteria to be applied by MGICA to loan applications for which its
guarantees were sought were discussed at a meeting on 16 June
between Messrs
Graham, Anderson, Eagar and Brown and "basic parameters" were agreed. These
comprised:
1. A clear credit history.The criteria were to be used as a guide only. Certain applications might be thought to warrant approval or rejection dependent upon the circumstances whether or not they complied with the guidelines. Richardson saw the criteria so agreed when he returned from overseas. He accepted that they were reasonable parameters to consider. Had he thought otherwise he could have spoken to Graham, Eagar, Brown or Anderson about them. There was, so far as he recalled, no change in the parameters between June 1989 and January 1990. Where a corporate borrower was involved MGICA would require guarantees for directors to be given and would assess such applications according to the joint capacity of the company and its directors to service the debt.
2. Capacity to service the loan to be assessed individually.
3. Borrowers to be well established professional people.
4. Net tangible assets to be at least 1.5 times total
exposure.
5. Age - applications from persons over 60 to be closely
examined.
68. He regarded the information required by the form of loan application used by Mid-West (ACT) as conforming to MGICA's requirements. MGICA had indicated to Mid-West (ACT) the nature of the information required in assessing loan applications for the purposes of the Guarantee Agreement. If there were any more information needed in a given case, then an officer of MGICA could have asked Mid-West (ACT) for it. He also agreed in cross-examination that if he had not been happy with Mid-West (ACT)'s form of application he was in a position to say: "meet our requirements or go away".
69. The form of application for loan used by Mid-West (ACT) required the applicant to provide, in addition to details of identity, address and occupation, the name of its bank and account name, a statement of income and a statement of assets and liabilities. Applications made by corporations or trustees required disclosure of floating or other charges on assets. Provision was also made for a statement by a financial advisor or licensed dealer's representative that the applicant was a client of the advisor or representative and well and favourably known to him "as a person of substance". Confirmation of the information provided in the application was also required from that person. Alternatively, financial statements were to be provided. For loans from $50,0001 to $200,000 the previous year's income tax return was to be attached. For loans from $200,001 to $500,000 returns for the previous 3 years were required. Where the applicant was a corporation there were additional forms to be filled out by guarantors which required financial information of a kind similar to that provided by the borrower.
70. The terms and conditions of the loan were attached to the application
form. They included, in item 12 of a schedule to the conditions,
the
requirement that:
"Payments shall be made to MID WEST FINANCE (ACT.)In a lot of instances, according to Richardson, credit assessment is a "gut feel". MGICA would be looking at the information provided and trying to assess whether it made sense and whether the debt could be serviced. It was Mid-West (ACT)'s practice to submit credit reference checks to MGICA along with applications. These checks were carried out with the Credit Reference Association of Australia. They would show any judgments against an applicant and information about other credit applications.
PTY LIMITED in terms of direct debit authorities
provided by the borrower."
71. It does not appear that, apart from criteria set out in the memos to
which reference has been made, and in some correspondence,
there was any
manual of internal guidelines for processing applications for the use of
MGICA's facilities. Richardson said he had
developed a procedures manual but
was not sure whether it had come into existence in January 1990 or earlier.
In any event, it does
not appear that any formalised statement of guidelines
played any role in the applications in relation to the Australian Viticultural
Project No. 2.
The Relevant Loans Agreement - Pre-contractual Discussions
72. Shortly after the execution of the Guarantee Agreement on the evening of Friday, 30 June, Anderson was working back assessing a large number of loan applications for MGICA interest guarantees. Simmons and Stack had told him that it was important that the greatest possible number of applications be processed by the end of June. At that time some $22 million worth of applications had been approved by MGICA. At about 9pm he received a telephone call from Alan O'Sullivan of Hambros who explained that he was calling to check on the progress of the applications. Anderson said that MGICA had approved about $20 million worth of applications and that he understood more were on their way from Growth. O'Sullivan was shocked by this information and said he was in difficulty as he had authorised payment of funds to Mid-West on behalf of the noteholders whom he represented which significantly exceeded that amount. He mentioned a sum of $30 million in this connection. He told Anderson that he had authorised the drawdown on the basis of statements made to him by Growth directors that the loans had been approved by MGICA for the amounts drawn down when in fact the amount referred to was the total of all applications submitted to MGICA. Anderson reminded him that MGICA was issuing written approvals for each loan and that he had simply to sight those approvals for verification. Anderson told Richardson of this conversation on Monday, 3 July.
73. Richardson said in cross-examination that he did not think it likely that $8 million worth of loans unapproved by MGICA had in fact been made. He said it was his understanding that loans could not be advanced without being signed off by Coopers and Lybrand. He did not get in touch with O'Sullivan about his conversation with Anderson. Nor did he raise the issue with Stack, Towey or Denney. The explanation for his inaction was his reliance upon the check provided by Coopers and Lybrand. That explanation does not sit well with his evidence that MGICA would not approve guarantees for any pre-existing loans and the unswerving adherence to that principle which he displayed in cross-examination. That adherence, for reasons I refer to later, was unconvincing. In my opinion the possibility that loans may have been approved by Mid-West prior to MGICA's approval of them, did not strike him as a critical factor. If it had, I am satisfied there would have been some further investigation on his part of what O'Sullivan was reported to have said.
74. On the same day, Richardson received a call from Stack who expressed concern that MGICA had declined a number of applications and asked whether they could be reconsidered if he obtained a bank guarantee for the amount of the exposure. When asked by Richardson what bank, he said the State Bank of New South Wales. Richardson told him that if he could obtain a State Bank guarantee he would have another look at the applications which had been declined. Richardson subsequently discussed the matter with Anderson who wrote to Stack on the same day an undated letter stating that MGICA would be prepared to consider applications previously declined on the basis that the State Bank of New South Wales provide a guarantee to MGICA for the full extent of interest under each loan. He also confirmed an earlier agreement with Simmons of GIPL that MGICA would consider applications in excess of a $500,000 base loan, provided a like guarantee were provided in respect of interest due under such loans by the State Bank. Anderson wrote to Stack on 4 July attaching a proposed form of guarantee for execution by the State Bank. Following this he had discussions with Stack about the possibility of MGICA accepting a guarantee from Capital Hall Ltd instead of a State Bank guarantee. He told Stack that this request could be considered subject to the provision of financial statements.
75. On or about 6 July, Richardson sighted a loan application from Joseph Charles Learmonth Duffy proposing Capital Hall as guarantor instead of the State Bank. He noted at the time on the covering sheet of a fax from Benney Partners Pty Ltd sent to him by Anderson that while he was not particularly concerned about Capital Hall's guarantee, the requirement for a Bank guarantee had been set not only for MGICA's comfort but also as a measure of comfort to its reinsurers. In the circumstances he concluded, the proffered guarantee must be rejected. The JCLD application was for a base loan of $2,660,000 which when fees, stamp duties and legal costs were added, came to $2,705,460.
76. The loan application for JCLD was accompanied by applications from Messrs Peter Kelly, Frank Magnus and Bruce Benney, the directors of stockbroker, Benney Partners Pty Ltd, the underwriter to the project. Their applications were for base loan amounts of $450,000 each ($455,055 inclusive of fees, duty and legal costs). An application for the same amount by Pardo Pty Ltd was also enclosed. Messrs Kelly, Magnus and Benney were directors of that company which they used, in Mr Kelly's words "as an investment vehicle". Two other applications were enclosed with the JCLD application. They were for base loans of $500,000 ($508,740 inclusive of fees, duty and legal costs) in favour of Goldfields Developments Pty Ltd and Burleigh Nominees Pty Ltd. The directors of each of these companies were Mr Russell Smith and Mr Douglas Wood. Their applications, as will be seen later, were made following conversations between Kelly and Smith. Anderson recalled having a discussion about the Benney Partners' directors' applications with Ian Graham and Richardson. He told Graham that he did not feel comfortable with applications from the underwriters. MGICA, he suggested, should not have any exposure to any person involved in the promotion of the viticultural project. Graham agreed that the applications should not proceed. Richardson also agreed. Because the Goldfields and Burleigh applications had accompanied those from JCLD, Kelly, Magnus, Benney and Pardo, and were for what Anderson regarded as unusually high loan amounts, he considered them to be in the same category. Although these various applications were declined at that time because they were or were associated with underwriters of the project, Anderson had carried out credit assessments of Benney, Kelly, Magnus and Pardo. Credit Reference Association inquiries with respect to Goldfield Developments and Burleigh were made on 14 July and found to be clear with respect to both companies.
77. On 4 July, Anderson had been sent a list of borrowers in printout form by Growth Industries. The list agreed substantially with the list of loans approved by MGICA to that date. There were about 545 approved borrowers for loans totalling $27,190,220. Correspondence about loans declined for guarantee by MGICA ensued on 6 and 7 July 1989. On or about 11 July, Stack telephoned Richardson and reminded him that MGICA had declined a number of loan applications in respect of the 1988 project. Although MGICA had not provided a guarantee, Mid-West Finance had made an arrangement with the State Bank under which the loans had been able to proceed. This had required lodgment of significant sums of money with the Bank as security. None of the borrowers had defaulted. He asked whether MGICA would reconsider its position in relation to those loans in light of that fact so that funds held by the Bank could be released. Richardson said in evidence-in-chief, that he told Stack that MGICA had a great deal of difficulty providing facilities in respect of pre-existing debts. He would need to refer the matter to MGICA's re-insurers before giving consideration to providing a guarantee on loans already made. He told Stack, however, that this did not prevent him from submitting the applications and that he could do so if he wished. On the same day Stack sent Richardson a fax enclosing a form of undertaking executed by Mid-West Finance and Mallesons Stephen Jaques in favour of the State Bank of New South Wales. This was the document underpinning the arrangements with the State Bank referred to in Stack's conversation with Richardson. Also enclosed with the fax were lists of the relevant borrowers under annexures designated A, B, and C. Richardson made a handwritten note on the coversheet of the fax that he had agreed to have "another look" at the application, but that the mechanics of advising re-insurers of a proposal to accept, under treaty, loans already settled would be so unwieldy as to make the exercise worthless. "In the circumstances", he wrote "the request is declined". It was suggested in closing address by counsel for Permanent that the note and the response in cross-examination indicated that Richardson had only spoken to Stack in terms of the difficulty of advising re-insurers. Given the restricted propositions put in cross-examination and the general thrust of the note, I do not consider either was inconsistent with Richardson's evidence-in-chief about this conversation, which evidence I accept. Specifically I accept that he told Stack that there were difficulties in providing facilities in relation to pre-existing loans and that the question would have to be referred to MGICA's re-insurers.
78. On 14 July, Richardson wrote to Stack confirming the oral advice that MGICA was restricted by its re-insurance treaty and that in light of the guidelines laid down as to acceptable business it was not in a position to accept the "1988 declinals".
79. On 18 July, Stack phoned again expressing disappointment that MGICA had
declined to reconsider the 1988 loan applications previously
refused.
Richardson said to him:
"John, it's our policy that we don't guarantee existingStack then asked whether MGICA would be prepared to provide guarantees for 1989 loans refused by it if it were provided with security. He explained that Mid-West (ACT) received interest from borrowers monthly in arrears which was payable to noteholders six monthly in arrears. Pending payment to noteholders, the money was deposited in an interest bearing account under the control of the trustee, Permanent. (See clauses 6.1(g) and 6.2 of the Trust Deed). Mid-West (ACT) was prepared to provide what Stack called a collateral note over its profit margin which was the difference between the interest paid by the borrowers, about 18.5%, and the interest paid to the noteholders which was about 16%. The security to MGICA would therefore be represented by 2.5% of the value of all loans guaranteed by it. That security would not be limited to interest derived from loans reconsidered by MGICA under the proposal. The interest difference of 2.5% would be enhanced by interest earned on the interest paid by the borrowers pending payment to noteholders. Stack explained that the collateral notes could be issued under the terms of the Trust Deed for specific purposes. They could only be drawn upon after payments to the primary noteholders had been satisfied. Richardson asked Stack to put his proposal in writing and to send him a copy of the trust deed. Stack emphasised that the security was being offered only in relation to loans previously declined. It did not extend to loans that would be guaranteed under the agreement of 30 June 1989. When this conversation took place, Richardson assumed that Mid-West (ACT) had not made any of the loans in respect of which the MGICA guarantees were now being sought. He believed it was necessary for Coopers and Lybrand to "sign off on the loans" before advances could be made. By the expression "sign off" he meant a process in which Coopers and Lybrand perused the documentation including the MGICA approval and ensured that any conditions imposed by MGICA on its approval had been met before the loan money was advanced.
debt... even though these loans may have a history of
good conduct we are precluded by our policy from
guaranteeing them now."
80. On that day Stack sent Richardson a fax with a handwritten outline of his
proposal. This was followed by a typed version of
the same document in the
form of a letter dated 19 July 1989. The letter was addressed to Richardson
and was in the following terms:
"Dear Brian81. Richardson prepared a file note dated 19 July for the benefit of MGICA's credit committee. In it he explained the nature of the collateral notes which Mid-West (ACT) proposed to issue and the mechanism for the collection and disbursement of borrowers' interest payments by Permanent as follows:
The arrangement proposed is:
A. Mid-West Finance (ACT) will issue to MGICA
Collateral Notes under the Trust Deed for
which Permanent Trustees are Trustee.
B. All interest payments are made by Mid-West
Borrowers to the Trust by means of direct
debit authorities on their accounts.
C. The Trust is capital guaranteed by
Semi-Government Bonds and interest payments at
at 18.51% (average) are guaranteed by MGICA.
D. MGICA have approved $30.9 million loans (A
loans) which are monthly in arrears at
18.51%.
E. The noteholders have first claim on the
funds at 16.1% pa payable six monthly in
arrears.
F. Because Mid-West Finance collects monthly
and pays six monthly there is a profit or
margin in Mid-West Finance of about
$900,000 pa guaranteed by MGICA.
G. Our experience with last year's borrowers
which MGICA declined (details supplied to
you) when we loaned $6.5 million and have
yet to miss a single interest payment on
any loan leads us to wish to make loans to
those you have declined to insure so far.
(B Loans).
H. The $900,000 margin is available to the
collateral noteholders after the
noteholders have been satisfied.
I. It is proposed that Mid-West Finance (ACT)
issue collateral notes to MGICA allowing
them to draw any interest shortfall on B
Loans against that margin.
J. This is equivalent to about $4.5 million
face value of loans at 16.1% pa semi
annually.
K. Since, in our experience, these loans do
get paid and many are backed by
substantial assets and/or income streams
it would seem reasonable that the maximum
exposure might be to one third or one half
of the bonus enabling MGICA to insure 2 to
3 times the absolute cover at $4.5
million; say $8 to $12 million.
L. These loans themselves if MGICA approved,
and if paid by the borrower increase the
margin available to MGICA, at say, $8
million by a further $240,000 pa giving a
total coverage of say $1.14 million.
Thanks you for your help."
"1. The borrowers have provided direct debit authorities toHe pointed out that the proposal advanced by Mid-West (ACT) was for MGICA to provide cover for an additional $8 million to $12 million worth of loans (existing declinals including "proposed loans to certain underwriters") against this security. He described the security offered as substantial in relation to the risk. The underwriter loans related to placements they had been unable to fulfil. It was proposed that they continue with their selling efforts and as they placed funds would be reducing their own exposure. By this he meant that as the underwriters found further investors to take up the shortfall in subscriptions which had to be funded by their own borrowings, their exposure would be reduced accordingly. MGICA had been asked to reduce the level of its own security cover as the proportion of otherwise unacceptable loans was reduced. He was reluctant to agree to this aspect of the proposal so he recommended that the proposition be approved in a modified form. He concluded the memo by observing:
Midwest in relation to their interest obligations which
are payable monthly in arrears at an average rate of
18.51% p.a.
2. Upon activation of the direct debit the proceeds are
lodged directly to a trust account under the control of
the Trustee.
3. The Trustee invests the money in to short term investment
pending the due date for payment of interest to the
investors which is payable six monthly in arrears at an
average rate of 16.1% p.a.
4. The interest differential of 2.41% p.a. (vis 18.51% -
16.1%) plus the reinvestment earnings would then be
available to us to cover any claims against (the MGICA)
guarantee as a result of default by the specified
borrowers."
"Our overriding comfort in such a proposal is that82. Also on 19 July Richardson wrote to Stack setting out his modified proposal subject to consideration by the credit committee. It was in the following terms:
because Growth Industries would be putting the whole
of their profit in the trust on the loan as security
for the facility they would do everything in their
power to collect any defaults."
"1. MGICA will provide its guarantee in respect of theRichardson asked Stack to confirm that the proposal, if accepted by MGICA and its re-insurers, was acceptable to him.
investors proportion of the interest obligations of
certain borrowers who upon re-evaluation are accepted by
MGICA ("specified loans"), having been previously
rejected for unsecured cover by MGICA for the 1989
Viticultural Trust. The specified loans will not exceed
$8M in aggregate.
2. In support of the additional guarantee Midwest Finance
(ACT) Pty Limited will provide MGICA Limited with
collateral notes, or such other security as our
solicitors may advise, which will entitle MGICA Ltd to
the full interest margin from all guaranteed loans.
Interest margin would be the amount paid by the borrowers
less the amount due to the primary note holders, plus all
reinvestment income generated including that earned
through the arrangement whereby the borrowers interest is
paid monthly in arrears and payment of investor interest
is six monthly in arrears. The aggregate of these
amounts at the end of the first 12 months must be not
less than 2.5% of the entire portfolio of guaranteed
loans or the annual exposure of MGICA to the specified
loans whichever is the lesser. These funds are to be
maintained in an investment account controlled by the
trustee, nominated by the trustee/Mid-West and agreed to
by MGICA.
3. Subject to the above, at the end of the first year MGICA
will review its risk and may agree to the release of
subsequent earnings less an amount equivalent to any
payments claimed from MGICA in respect of the specified
loans in year one or any of the subsequent periods. In
effect this will mean that at all times after the end of
year one the amount retained by the Trustee to cover
MGICA's security will remain at an amount not less than
2.5% of the total of loans guaranteed in that year plus
the earnings thereon or the annual exposure of MGICA in
respect of the specified loans whichever is the lesser."
83. Stack telephoned Richardson later that day and said that the letter covered the situation. He noted, however, that Richardson was only seeking credit committee approval for loans of up to $8 million. Mid-West (ACT) wanted to make loans to the underwriters in relation to their unfulfilled obligations. These were for amounts in excess of MGICA's maximum loan limit but the underwriter was going to "sell down their units" and as they did so their loans would be "novated". He asked Richardson to lift the request to the credit committee from $8 million to $12 million. Richardson asked how the underwriters could take out their loans given that the financial year had ended. Stack said the situation was complex but they had had lengthy discussions with their solicitors, Mallesons, who had indicated that the tax benefits could be obtained. Richardson said he did not understand how this could be but if Stack were firmly of the belief that it could be done and that was the advice he had received then he could see no reason why he couldn't ask the credit committee to look at bringing in the underwriter loans as well. Richardson said in examination-in-chief that it was his understanding that there were no loans made at that time to the underwriters because loans could not be made without Coopers and Lybrand's approval. He never even gave it a thought that they would have been or may have been made. In cross-examination Richardson said that in the case of the underwriters, Stack had mentioned that their proposed loans were for amounts in excess of what MGICA would normally be prepared to guarantee i.e. $500,000.
84. Richardson thought it unlikely that all the additional borrowers for whom cover was being sought would default. He regarded the level of security offered as substantial in relation to the risk assumed. It was a source of comfort to him that because the Growth Industries Group would be putting their profit in the Trust at risk (that is the difference between the 18.5% paid to them and the 16% paid to the noteholders), they would do everything in their power to collect on defaults. Following his discussion with Stack about guaranteeing interest due on the underwriters' loans he altered his memorandum to the credit committee to meet the possibility of extending the total amount of additional loans so covered to $12 million. On 20 July, Stack wrote to Richardson for Mid-West (ACT) confirming that the proposal outlined in Richardson's letter of 19 July was acceptable.
85. A meeting of the credit committee was held on 21 July. The committee decided to approve the additional guarantees and this was reflected in the minutes by the note "APPROVED in principle" under the heading "Growth Industries Pty Ltd". It appears from a later memo of 21 August from Anderson to Richardson that the committee only approved guarantees under the collateral note arrangement to the extent of $8 million. Following the meeting Richardson called O'Sullivan of Hambros to confirm with him that the collateral notes proposed by Stack were available as security. He told O'Sullivan that Mid-West (ACT)'s profit margin was between 2.5% and 2.6% of the total loans guaranteed. O'Sullivan pointed out that the margin was more like 2.1% to 2.2% because there were fees related to the project that had to be paid on a regular basis. He also told Richardson that Stack's proposal was achievable and said he would prepare an appropriate document. O'Sullivan did not at that time say anything to Richardson to indicate that the underwriters' loans had been settled before 30 June 1989, nor that they had been settled from the proceeds of an overdraft or bridging facility provided by Hambros.
86. After the meeting of the credit committee Richardson had sent a copy of
his memorandum of 19 July to Anderson. Anderson was
aware that the committee
had approved the proposal. On 24 July, Richardson received a draft form of
collateral note from O'Sullivan
which he sent to MGICA's solicitors,
Westgarths. On 27 July, Anderson received a list of previously declined loans
from Simmons
for inclusion in what was to become known as the relevant loans
agreement. He wrote to Simmons that day setting out the schedule
of loans
which MGICA was prepared to include in the guarantee agreement subject to
receiving security by way of the collateral notes.
The Relevant Loans Agreement - Execution
87. On 28 July a meeting was held at the office of Westgarth Middleton. Richardson attended with Simmons, Towey and Ms Steer. Also present were representatives of Permanent. An agreement had been prepared to reflect the new arrangement. Towey was pressing those present to sign the agreement immediately. He said that the loans had to be processed that weekend or there was a chance that the whole project would collapse. He said he had people standing by at his office to process the loans as soon as they received word that the documents had been signed. O'Sullivan supported Towey's urgings. At one stage the Permanent representatives left the room to discuss it. Eventually all parties signed. Richardson had satisfied himself that the loans to be included in the agreement were acceptable to Anderson. They included, as noted earlier in these reasons, JCLD (NSW) for $2,705,460, Goldfields Developments and Burleigh Nominees for $508,750 each and Benney, Kelly, Magnus and Pardo for $457,890 each. Richardson was, it seems, aware that Benney, Kelly and Magnus had a connection with the underwriters, Benney Partners Pty Ltd. He knew nothing of Goldfields Developments or Burleigh Nominees and did not know that Pardo was connected with Benney Partners. He identified JCLD (NSW) as an underwriter because consistent with the conversation he had had with Stack on 19 July, it was borrowing considerably in excess of the MGICA limit of $500,000. He accepted in cross-examination that he knew by the end of the day on 28 July that someone connected with Benney Partners was going on the list of Relevant Loans.
88. Late in July Anderson received loan applications for Towey, Stack and
Denney in respect of base loans of $500,000 ($508,740 when
fees, duties and
legal costs were included). He initially declined to cover them on the basis
that the borrowers were associated
with Growth Industries. Simmons telephoned
him about this time and told him the proposed loans were "part of a bonus
scheme for
senior executives" and Growth wanted them included in the relevant
loans. On 31 July, Anderson wrote to Stack saying that guarantees
could be
given for these loans subject to provision of security by way of collateral
note or some other security acceptable to MGICA.
On 3 August he confirmed
that MGICA was "prepared to include the loans for Towey, Stack and Denney upon
completion of documentary
formalities required for their inclusion in the
collateral note secured facility". He sought written confirmation that
Simmons wanted
the three loans to be included as "Relevant Loans" under the
agreement of 28 July. Certain further loan applications were rejected.
Additional Relevant Loans
89. On 18 August, Anderson received a faxed list of additional loans for
inclusion in the Relevant Loans Agreement. That agreement
could accommodate
them as those set out in its schedule amounted to only $6,725,760 against the
$8 million which the credit committee
had been prepared to approve. By 21
August the number of loans brought under the agreement amounted to 39,
representing $8,251,980.
In a memo to Richardson of that date Anderson said:
"You will recall that MGICA had previously agreed toHe said that Westgarth Middletons advised that the additional loans could be included by an exchange of correspondence and the trustee's consent. He asked Richardson if the proposal to include the additional loans was acceptable. Richardson endorsed the memorandum with the word "Agree".
the sum of $8M being the total available under this
facility, however the inclusion of three loans to
directors of Growth totalling some $1,526,220 resulted
in the limit being exceeded, and the loans contained
in the attached schedule being omitted."
90. On 22 August, Permanent sent by facsimile to Anderson a copy of a letter addressed to him by Stack referring to recent discussions and asking for some 11 borrowers totalling $2,412,990 to be included in the loans covered by the Relevant Loans Agreement. The copy letter also bore a signature of J.T. Hall on behalf of Permanent which I infer indicated Permanent's consent to the proposal. The borrowers included Towey, Stack and Denney at $508,740 each. Anderson wrote back on the same day and advised that subject to receipt of the guarantee fees calculated in accordance with the guarantee agreement of 30 June 1989, MGICA agreed that the loans be relevant loans for the purposes of the agreement of 28 July 1989. A letter enclosing a cheque for $24,693.04 by way of guarantee fees, was sent to MGICA by return.
91. On 24 August, Simmons of Mid-West (ACT) wrote to Anderson advising that Growth and Mid-West (ACT) had taken "a commercial decision" to vary some of the financing arrangements associated with the project. This would give borrowers an option of an interest free loan from Mid-West (ACT) to be repaid from a guaranteed minimum return. A consequential change in documentation was necessary. Anderson sent a memo to Richardson who agreed that MGICA could proceed under the Relevant Loans Agreement.
92. On 8 December 1989, Simmons wrote to Brown of MGICA setting out a further
list of 16 borrowers totalling $826,410 to be dealt
with under the Relevant
Loans Agreement. Brown sent a copy of the letter to Richardson. In his
covering memo which was also dated
8 December, he noted that some of the
applications listed in Simmons letter bore asterisks to indicate that they
might be deleted
from the schedule of Relevant Loans if further information
led to them being approved by MGICA as main stream loans under the Guarantee
Agreement. Richardson endorsed the memo in handwriting as follows:
"Loans are to be underwritten in the normal course.93. On 12 December Brown advised Stack that, subject to receipt of its fee, MGICA agreed that the loans could be treated as Relevant Loans. In doing this he appears to have mistakenly referred to the date of the Mid-West (ACT) letter as 12 December instead of 8 December 1989.
All necessary guarantees and securities (to conform
with our minimum requirements) are to be in place.
Acceptance of loans is to be in terms of Mark
Anderson's memo of 21/8."
94. On 18 December, Stack wrote to Brown again and after referring to "recent discussions" sought the inclusion of two further borrowers for $61,550 in total. The letter was endorsed by an officer of Permanent. On 20 December, Simmons wrote to Richardson confirming the telephone advice that the directors of GIPL had approved an Executive Incentive Scheme. It was proposed that each of the Growth Group companies being GIPL, GIML, Growth Industries Marketing Pty Ltd, Bexuta Pty Ltd and Bewofi Pty Ltd, should acquire 40 allotments financed by Mid-West (ACT). The letter asked that the proposed loans be included as Relevant Loans under the agreement of 28 July 1989. Richardson asked Brown to investigate the proposal for him. He came back to Richardson having spoken to Simmons and, according to Richardson's evidence-in- chief, told him that for 5 or 6 months Benney Partners (a reference to the directors of that company) had not been paying interest on their loans but that GIPL had been paying it on their behalf. It was put to Richardson in cross-examination that what Brown had reported to him was Simmons advice that GIPL would assume responsibility for interest payments which had not been paid for 5 or 6 months by Benney Partners and others. Richardson did not recall the reported reference to Benney Partners and others. He was not so confident in his recollection that he would be prepared to reject that suggestion. He said, however, that he had been told that GIPL had been meeting interest payments. He was shown a handwritten memorandum prepared by Brown and exhibited to an interrogatory directed to MGICA, the answer to which was received in evidence. The memorandum referred to the conversation between Brown and Simmons and set out the "names of those concerned" which comprised Benney, Burleigh Nominees, Goldfields Developments, Kelly, Magnus, Pardo and JCLD in that order. Benney and Kelly were described in the memo as "bankrupt". The memorandum and the text of the conversation as recounted in MGICA's answer to the interrogatory made no reference to Growth having paid interest on the loans. Generally speaking the conversation which appeared in the answer to the interrogatory, was in substantially the terms put to Richardson in cross-examination. Richardson was shown the memo but was not prepared to change his testimony. In my opinion his recollection of what Brown said to him in this regard cannot be relied upon and the more likely account of the conversation between Brown and Simmons is that admitted by MGICA in its answer to interrogatory 12.
95. Brown also reported to Richardson that there was no money in the
Collateral Account. He said, after speaking again with Simmons,
that Simmons
told him there had been a number of establishment fees in relation to the
project that had to be paid out of the funds
received into the interest
account, but these had all been paid and MGICA could expect to see its full
entitlement in the account
at the next half yearly interest date, which was
the following April. Richardson was upset by this information. He contacted
O'Sullivan
of Hambros and asked him whether the "establishment fees" were paid
once only or whether there would be recurrent payments. O'Sullivan
said there
were guaranteed fees to GIO, trustee's fees and a small fee to Hambros which
had to be paid regularly. These, he explained,
were what brought the profit
in the account down from the 2.5% that Stack had been speaking about to the
2.1 to 2.2% which he had
previously indicated. Richardson made a note on
Simmons' letter of 20 December which reflected the result of the inquiries:
"The previously understood arrangement whereby 18.72%The reference to the Escrow Account was a reference to the Collateral Account established under the Relevant Loans Agreement. Richardson communicated his decision to Brown. On 2 January 1990, Brown wrote to Simmons advising that the proposal of 20 December was declined.
of the provision $800,000 (approx) has not been placed
in the Escrow account and there is no intention of
placing anything in it in respect of this proposal.
In the circumstances the proposal is declined."
96. On 3 January, Richardson and possibly Steven Brown, met Towey and Simmons and told Simmons that at no stage in the negotiations of the Relevant Loans Agreement had anyone mentioned that establishment fees were to be paid out of funds to be allocated for the Escrow account. Towey said the full amount would be received in April. Richardson asked if there were any arrears and was told that Benney Partners had not been paying interest for some time. Simmons, he said, told him that "Growth" considered their units to be a very valuable asset and had been paying the interest themselves and intended to acquire the units from Benney Partners. Richardson was told that there was otherwise one borrower who was experiencing financial difficulty, but it was expected he would bring his loan up to date after he had sold a property. Richardson asked for a default report as required by the Guarantee Agreement. Towey asked if he wanted a report on Benney Partners. Richardson said he told them that if the interest was up to date then there was no default. He said he believed on the strength of the financial statements from GIPL provided on 20 December that the company would have been able to meet the Benney Partners' interest obligations with ease. He also believed that it was able to service the proposed Executive Scheme loans. Having regard to the view I have already formed of his evidence on the question of GIPL's support for the Benney Partners' loans, as allegedly reported by Brown, I cannot be satisfied that Richardson was told on this occasion that the interest on the Benney Partners loans had been paid up to date. Nor am I satisfied that the reference here was only to Benney Partners as distinct from the other companies and persons listed in Brown's memo. It is quite possible that having been told that GIPL would assume the Benney Partners and associates' obligations, Richardson formed the belief that having regard to GIPL's apparent financial strength it would be able to meet those obligations.
97. Richardson then told Towey that the decision whether or not to guarantee the Executive Loan Scheme would have to be taken by the credit committee. He was not prepared to put a proposal to that committee unless $400,000 were deposited to the credit of the collateral account. Towey protested, but said that if that amount were deposited he wanted Richardson's assurance that MGICA would refund all or part of the money if the expected figure was received into the account in April. After the meeting Simmons telephoned Richardson to tell him that the defaulting borrower was one of those who had taken out loans under the 1988 project. The 1989 loans, he said, were all clear. The position of the 1988 borrower was confirmed in a letter of 5 January from Simmons to Brown.
98. On 4 January, Richardson wrote to Simmons and said that MGICA was prepared to consider the request outlined in the letter of 20 December subject to a security deposit of $400,000 in the collateral account. On distribution of the surplus expected in April 1989, a once only adjustment would be made either by way of refunds from MGICA or a top-up by the Growth Group. Richardson's calculation of a pro-rata refund or top-up was based upon an assumed accumulation of $2.5 million in the account over two years from April 1990. On 5 January Simmons replied for Mid-West (ACT) saying that the arrangements outlined in the letter of 4 January accorded with the company's understanding of the proposed transaction. Brown prepared a memo dated 5 January 1990 for the credit committee meeting seeking approval to "cover interest payments on five loans totalling $2,035,200 from Midwest Finance Pty Limited (Holding company) and its four wholly owned subsidiaries". The credit committee met on 8 January and the proposed cover was approved. Brown notified Towey by letter on 8 January that MGICA had given its approval conditional upon the security deposit of $400,000 into the collateral account and the provision of joint and several guarantees by the borrowing companies. On 10 January 1990, a sum of $400,000 was deposited into the collateral account by Permanent. Richardson, in his evidence, said this happened in April, but I am satisfied he was in error in so saying. A further deposit of $400,000 was made on 24 May.
99. As at 31 May 1990, MGICA had approved loans totalling $12,061,920 under
the Relevant Loans Agreement and had received fees amounting
to $971,688.85.
At this time apart from advice that Benney Partners' interest was being paid
by the Growth Group, Richardson had
received no advice of any default under
the 1989 project.
The Underwriting Arrangements
100. It is necessary at this stage to go back to May 1989 in order to review the involvement in the project of its underwriters, Benney Partners Pty Ltd, and the sub-underwriters, Joseph Charles Learmonth Duffy Pty Ltd. Benney Partners was originally a stockbroking partnership comprising Messrs Peter Kelly, Frank Magnus and Bruce Benney. They were in partnership from 1970 until 1 July 1987 when the company Benney Partners Pty Ltd was established with the former partners as directors. The company operated in divisions. Kelly, who was its chairman and managing director, was responsible for the underwriting, short term money market and research divisions. Benney was responsible for the dealings division and Magnus for office management. Tony Grist, an associate director, carried out day to day activities in relation to the underwriting such as preparation of the prospectus and marketing.
101. Prior to executing an underwriting agreement with GIPL, Benney Partners had been arranging for sub-underwriters to the proposed issue. One of these was Joseph Charles Learmonth Duffy Pty Ltd ("JCLD"). On 4 May, Bruce Fielding its managing director, sent Kelly a sub-underwriting agreement executed by JCLD under which that company was to sub-underwrite the issue of 500 units. At that time it appears to have been contemplated that Benney Partners would be joint underwriters for 5,000 units and therefore in substance responsible for 2,500. Fielding had been a director of a company called Capital Hall Ltd, which in February 1987 acquired all the shares in JCLD. JCLD also had a wholly owned subsidiary company called Joseph Charles Learmonth Duffy (NSW) Pty Ltd ("JCLD (NSW") of which Fielding was also a director. On 24 May 1989, Benney Partners executed an underwriting agreement with GIPL. Under its terms the company agreed to underwrite the issue to the extent of 5,000 units of $10,000 each. The closing date for the issue was 23 June or otherwise as agreed. Opening date was 29 May. Benney Partners had also entered into sub-underwriting agreements with, among others, D. and A. Financial Services Pty Ltd known as Davey and Associates and Camon Management Pty Ltd.
102. On 8 June 1989, JCLD wrote to Grist confirming its intention to extend
the sub-underwriting commitment to a total of 750 units.
In his letter,
Fielding asked in respect of the additional 250 units that "over subscriptions
be applied in diminution of our obligation".
At about this time Fielding had
a conversation with Kelly in relation to JCLD further extending its commitment
to 1,000 units which
it subsequently did. Also on 8 June, Towey wrote to
Kelly on GIPL letterhead confirming that company's intention to take a firm
250 units in the project. On the same day Kelly gave Fielding a handwritten
letter advising that Benney Partners would accept the
foreshadowed commitment
of GIPL in diminution of JCLD's sub-underwriting commitment of 1,000 units. A
typed version of his letter
was sent much later on 11 August 1989.
The Benney Partners' Contracts
103. Towards the end of June 1989, Kelly was telephoned by either Towey or Stack who said to him that a large quantity of applications had been received in the last few days of the issue and it was impossible for all of them to be processed by 30 June. The caller asked Kelly if the principals of Benney Partners or other people and entities related to them would make applications for large numbers of units and associated finance "so this logjam could be broken". These applications would be replaced by others as they were processed. GIPL would indemnify the Benney Partners and associated entities for all their liabilities and interest payments. It was suggested that in respect of such applications the applicants associated with Benney Partners would have no liabilities. Kelly proposed that other parties could make applications under a similar indemnity to be provided by Benney Partners. This was agreed. He mentioned two entities, Goldfields Developments Pty Ltd and Burleigh Nominees Pty Ltd. Both were connected with Camon Management Pty Ltd and had a common director in Mr Russell Smith.
104. On 6 July 1989, Kelly received a faxed copy of a letter dated 29 June
1989 signed by Towey and Stack on GIPL letterhead addressed
to "The Director,
Benney Partners Pty Ltd" which letter was in the following terms:
"Growth Industries Pty Ltd hereby irrevocably agrees105. Loan agreement applications for the three directors for $450,000 each were signed at about this time and passed to the Growth Group on or about 30 June 1989. Magnus was out of Australia on holiday and did not return until 20 July. Before leaving the country he had given a power of attorney to Greg Ledger the company secretary of Benney Partners Pty Ltd. The application for units and the associated loan application were made using the power of attorney and were dated 29 June 1989. It was only when he returned from overseas that Magnus learnt of them. Kelly explained to him what had happened, showed him the GIPL indemnity of 29 June 1989 and told him it would be necessary for him to sign the loan contract. Kelly added that the units taken up would be "taken out" by applications which were then in hand but had not been processed as to finance. Kelly said there was no risk or exposure. On these assurances Magnus signed a loan contract with Mid-West (ACT). An application was also made in the name of Pardo Pty Ltd whose directors were Kelly, Benney and Magnus. Loan contracts were eventually signed by all directors and Pardo.
that should Peter Campbell Bowden Kelly, Frank Douglas
Magnus, Bruce Stanley Benney and/or Pardo Pty Limited
be called upon under the terms and conditions of the
Applications for Growers Allotments in the Australian
Viticultural Project No. 2 together with the loan
applications to Mid West Finance (ACT) Pty Limited
then Growth Industries Pty Limited will indemnify in
full the above mentioned entities for the equivalent
amount and will further pay that amount to the
abovementioned companies and/or individuals within the
time specified by the above applications."
106. The proposition was advanced in closing submissions that the agreement
between the Benney Partners' principals and Towey and
Stack did not involve
Mid-West (ACT). The promise made by Towey or Stack was to "replace" the
contracts taken up under this agreement
by new contracts with other investors
as they were processed. It was necessary to its efficacy that Mid-West (ACT)
progressively
released the Benney Partners borrowers from their financial
obligations as new units were sold. Towey and Stack as directors of
Mid-West
(ACT) were in a position to make such a promise contractually binding upon
that company. The same was true of the promise
extended to Goldfields
Developments and Burleigh Nominees.
The Goldfields Developments and Burleigh Nominees Contracts
107. On or about 29 June, Kelly had a conversation with Russell Smith of Camon Management Pty Ltd in which he asked that Smith make application for units in the project. Smith said he would only do so if he were indemnified by Benney Partners Pty Ltd. In the event, Goldfields Developments and Burleigh Nominees each made applications for base loans of $500,000 mentioned elsewhere in these reasons. This followed discussions between Smith and his co-director in Goldfields Developments and Burleigh Nominees, Douglas Wood. Wood recalled Smith telling him that Kelly "wanted us to put up two applications and we will get an indemnity from Benney so we will not be liable for any principal or interest and we will get a fee of $90,000 for doing nothing". Kelly spoke to Stack or Towey about this time and indicated that Goldfields Developments and Burleigh Nominees would be making application under the same set of circumstances extended to Benney Partners by the letter of indemnity received from GIPL. Towey or Stack he said "agreed to that set of circumstances".
108. On 29 June, a letter issued from Benney Partners addressed to "The
Directors, Camon Management Pty Ltd" which was in the following
terms:
"Dear Sirs,A statement by Wood was received in evidence. He said that so far as he knew no interest was paid by Goldfields or Burleigh and neither signed any direct debit authority authorising their banks to automatically pay interest to Mid-West (ACT) under the loan. This part of the statement was received to prove Woods' state of knowledge but not as direct evidence of the truth of its contents. Neither Goldfields nor Burleigh was indemnified by Growth, a security which Wood had suggested to Smith ought to be obtained. So far as Wood knew and until a demand for repayment of principal and interest was received from Mid-West (ACT) in October 1989, no request was made of Goldfields or Burleigh for payment of any interest due under the loan agreements. Again, the latter element of that evidence was limited to proving his state of knowledge. At the time of trial, records of Goldfields and Burleigh relating to the transaction no longer existed, Smith had left the country and both companies were insolvent, Goldfields being in liquidation and Burleigh about to be wound up.
Benney Partners Pty Ltd hereby irrevocably agrees that
should Viener Pty Ltd, Burleigh Nominees Pty Ltd and
or Goldfield Developments Pty Ltd be called upon under
the terms and conditions of the Applications for
Growers Allotments in the Australian Viticultural
Project No. 2 together with the Loan Applications to
Mid-West finance (ACT) Pty Limited dated the day of
June 1989 then Benney Partners Pty Ltd will indemnify
in full the abovementioned companies for the
equivalent amount and will further pay that amount to
the abovementioned companies within the time specified
by the above applications."
109. The arrangements between Growth Industries and Benney Partners including "various associated companies" were later confirmed in a letter dated 20 November 1989 signed by Towey.
110. As appears from a Summary of Coopers and Lybrand Audit Certificates
covering certificates issued between 30 June 1989 and 27
November 1989, total
applications over that period amounted to $57,610,000 which, after subtraction
of the $50 million minimum subscription,
still left enough to allow
cancellation of the units acquired by Kelly, Benney, Magnus, Pardo, Goldfields
Developments and Burleigh
Nominees, as well as the 266 units taken up by JCLD
(NSW).
The JCLD (NSW) Contract
111. In the meantime the sub-underwriter JCLD was experiencing difficulties. It had committed itself to sub-underwrite the issue of 1,000 units. 250 of these were to be taken up by GIPL and 484 had been sold to clients of JCLD as at 30 June 1989, leaving a shortfall of 266 units. Fielding discussed the matter with Glen Wheeler, a director of JCLD and chairman of its holding company, Capital Hall Ltd. They decided to meet with Kelly to try to reach some suitable arrangement. At that time JCLD was not in a position to pay the $2,660,000 necessary to acquire the outstanding units. Sometime early in July they met with Kelly at the Capital Hall boardroom. At the meeting Kelly said he did not see any particular difficulty in resolving the shortfall question. Mid-West (ACT) could provide finance for JCLD to subscribe to the units. A further marketing drive would be undertaken by Growth Industries and any new investments obtained could be by way of "replacement" of the JCLD investment. Kelly said that in order that new investors could obtain the requisite tax benefits they would have to subscribe for new units and those issued to JCLD would be cancelled. The word "sell-down" was used by Kelly at one stage. He also used the word "novation" to describe the process. That word was subsequently adopted by Fielding. Some telephone discussions ensued subsequently between Wheeler and Kelly in which Wheeler said that JCLD did not have the capacity to take up the investment in its own right and that Capital Hall was reluctant to take on a guarantee commitment without a similar guarantee from Growth Industries. He told Kelly that if a deal could not be arranged, Capital Hall would allow JCLD to fail.
112. Over the next few days Fielding had further telephone discussions with Kelly and another meeting. While he could not separate out individual conversations in his evidence, their general effect was that Kelly sought a signed application for the shortfall from JCLD while Fielding wanted an assurance in writing from Mid-West (ACT) that as new units were subscribed for replacing units taken up by JCLD, Mid-West (ACT) would "cancel proportionately the finance that was being provided to (JCLD) to take up these units". Kelly said he would get the assurance. Fielding also wanted confirmation that Growth Industries would co-guarantee JCLD's performance under the loan contract. He was subsequently informed by Kelly that these things had been discussed with Towey and agreed. Fielding also told Kelly that he wanted the shortfall to be taken up by JCLD (NSW). JCLD would be a guarantor to JCLD (NSW). Kelly wanted Capital Hall to guarantee JCLD's performance of its obligations, but Capital Hall would only do that if Growth Industries also guaranteed that performance. Fielding's reason for using JCLD (NSW) as the subscriber was that JCLD was a licensed dealer in securities subject to certain prudential requirements with respect to assets and liquid capital. The units would not be considered a liquid asset, but the loan would be considered a liability. If the investment were put into a subsidiary it would not be taken into account in calculating JCLD's prudential requirements.
113. On 5 July 1989, Stack wrote to Kelly on GIML letterhead saying that
Growth Industries would assist JCLD to obtain finance if
asked by way of
guarantee. He pointed out, however, that MGICA would only consider the
application if Capital Hall guaranteed the
interest stream of about $50,000
per month. That guarantee would be forgiven when new units were sold. On 6
July 1989, Stack wrote
to JCLD under the letterhead of Mid-West (ACT) in the
following terms:
"This is to confirm that new units sold which novateOn that day, Kelly wrote to JCLD advising that unless a formal application for the shortfall were received at his office with finance application if necessary and with associated documentation it would be necessary to commence legal proceedings. It was at least on the face of it a response to pressure from GIPL for the letter concluded:
the units subscribed for today (266 or 271) will also
remove the obligations under our finance agreement
with you and your guarantors."
"Whilst we regret such an action, our principals,114. On 7 July, Fielding, writing as a director of Capital Hall, sent a letter to Kelly enclosing an application for 266 units and base loan finance in the sum of $2,660,000 on behalf of JCLD (NSW). The total amount to be borrowed was $2,705,460. A guarantee by Capital Hall was also enclosed. The letter went on:
Growth Industries Ltd have placed us in a position
where such action cannot be avoided."
"This guarantee is provided and conditional on our115. On 28 July 1989, GIML acknowledged to JCLD (NSW) that it had received payment of $26,600 which was the security fee for the 266 Growers Allotments applied for. A direct debit bank authority had been enclosed with the application for units and finance. A bank statement for an account styled "The Directors Joseph Charles Learmonth Duffy Ltd" at the Perth Branch of the R. and I. Bank showed a payment of $42,227.72 in favour of Mid-West (ACT) on 1 August 1989. This was an interest payment made in respect of the obligation of JCLD (NSW) under its loan contract with Mid-West (ACT). On 11 August, Benney Partners advised JCLD that it would accept investment by Growth Industries in diminution of JCLD's sub-writing obligation. On 15 August, Kelly wrote to JCLD confirming that underwriting fees earned by that company at 30 June 1989 was $315,400.
understanding of the following:
1. Acceptance of the subscription is in full
discharge of Joseph Charles Learmonth
Duffy Ltd's sub-underwriting obligation.
2. All applications for units in AVP#2
presented by JCLD will be in novation of
units subscribed now by JCLD.
3. All applications received by Growth
Industries into AVP#2 (other than those
submitted by another sub-underwriter in
novation of his subscription) will be
applied proportionately in reduction of
the sub-underwriter's subscription. You
have confirmed that the only other
sub-underwriter in subscription is for
an amount of approximately 50 units
($500,000).
4. Growth Industries will assist in securing
the finance by providing a joint guarantee
of the interest payments with Capital Hall
Ltd."
116. On 17 August, Fielding, writing on Capital Hall letterhead, wrote to Mid-West (ACT) noting that there had been no notice of acceptance of the application for finance by JCLD (NSW) made on 7 July. He referred to advice from representatives of Mid-West (ACT) that the loan had not been approved at that time because of terms imposed by MGICA. He pointed out that commission due to JCLD remained unpaid. If it remained unpaid as at 24 August then the offer of guarantee by Capital Hall would be unconditionally withdrawn. On the same day he sent a letter to GIML advising that the application for 266 units was unconditionally withdrawn. He also wrote to Mid-West (ACT) withholding the application for finance. Notwithstanding this, the application proceeded.
117. On 4 September, Fielding wrote to Towey saying he had been trying to contact him for a week to follow up earlier discussions but to no avail. The September interest payment to Mid-West (ACT) had not been met but that could be rectified as soon as the position concerning commission was known. By a follow-up letter of 13 September he said JCLD would meet all of its obligations including payment of interest. Robert Evers, the company secretary of Capital Hall, said in a written statement of his evidence that on 9 October 1989 he had received a fax from Mid-West (ACT) requesting that outstanding interest for August and September be paid. On that day a cheque for $84,706.83 was paid by JCLD to Mid-West (ACT). On 31 October a further payment of $43,037.57 was made. At that time JCLD (NSW) was up to date on interest payments under the loan.
118. On 20 November 1989, Towey, on GIPL letterhead, wrote to the receiver
and manager then appointed for Benney Partners and put
his company's position
on the issue of the sell down of units thus:
"On the issue of sell downs of the product we wouldThe JCLD Sell Down
like to make the following points.
1. At the 30th June Benney Partners were
short of the underwritten minimum
subscription.
2. This short fall was satisfied by
applications lodged by Joseph Charles
Learmonth Duffy (JCLD) and Benney Partners
(through the Partners and various
associated companies).
3. For these applications finance was sought
through Mid-West Finance (rejected by
MGICA) Chase AMP and various banks. The
applications for finance were all
rejected.
4. Growth Industries Pty Limited through its
own resources financed the applications on
the following conditions:
a) That all parties would
actively pursue a defined
marketing and sales strategy
in an attempt to sell a total
of 8,500 units prior to the
close of the prospectus in
November 1989.
b) That Growth Industries Pty
Limited would attempt to
provide an improved finance
package.
c) That JCLD and Benney Partners
could "sell down" their
exposure.
d) That Growth Industries Pty
Limited would allow sales made
by parties other than JCLD and
Benney Partners to offset
their obligations under a
formula to be determined by
Benney Partners.
e) That at the close of the
prospectus any units held by
Benney Partners or JCLD would
have to be refinanced and that
Growth Industries was to be
paid out.
f) No commission would be paid on
the JCLD or Benney Partners
units until the "sell down"
was completed. This was done
in order to ensure that the
commission was paid to the
organisations that ultimately
effected the sale.
During the development of the above agreement I spoke
with Peter Kelly, Tony Grist and Bruce Fielding
(JCLD). The ultimate agreement was struck with Peter
Kelly who in turn communicated with JCLD."
119. Evers gave evidence of JCLD's efforts to make up the shortfall and sell down the units acquired by JCLD (NSW). On 6 October JCLD's investment managers met with him and two other officers, Stewart Finch and Mark Cardaci. A memo to Wheeler prepared by Evers indicated that each investment manager committed himself to a target, the sum of the targets being $1,920,000 worth of loans. The memo referred to the "need to make a concentrated effort to sell down the $2.66 million of units we currently hold". By 7 November, a total of 104 units had been sold. Another 200 were "definites" in the sense of signed applications waiting on a cheque. Denney told Evers about this time that if JCLD wrote $2 million then the total liability of $2.66 million would be extinguished based upon the businesses being written by others. From 10 November until 28 November 1989, JCLD sent to Growth Industries applications for 174 units. They were acknowledged by letters of 10, 14, 17, 24 and 28 November. The value of units sold which were so acknowledged was $1,740,000. Subscription for a further 92 units necessary to meet the target figure of 266 were obtained by the end of November 1989. Beyond that it appeared from Evers' evidence that JCLD introduced subscriptions in excess of the 266 shortfall.
120. On 3 January Evers wrote to Towey referring to the "clear understanding
supported by written information from Growth Industries,
that new units sold
would novate the original units taken up and in so doing would remove
obligations under the financing arrangements
with Mid-West Finance". Evers
proposed that Growth Industries pay commission on the basis of 8% of
$2,660,000 split 50-50 between
Benney Partners and JCLD. JCLD would forego
commission on the first 266 of the 275 new units it had sold, leaving a
balance of $6,300
payable. On this basis, and giving credit for $53,200
already received, he claimed $59,500. Noting that an interest payment to
Mid-West
(ACT) of $41,649.26 was overdue, he suggested a set off. A few weeks
later, not long before 16 February, Towey told Evers that there
might be
complications with the novation procedure. If so, he said, GIPL would acquire
the units to quit JCLD's existing debt.
Evers wrote to Towey on 16 February
1990 requesting written confirmation of Growth Industries' position. By 20
February Evers noted
a report that Growth Industries might be going into
receivership. He spoke to Towey asking him to confirm or deny it. He also
asked
for confirmation of Growth's position regarding the cancellation of 266
units taken up for JCLD (NSW). Towey replied on 22 February
saying that terms
had been settled but no agreement then formulated with the receiver/manager of
Benney Partners. He said that when
the agreement was forfeited GIPL would be
in a position to cancel or reassign the 266 units. He went on:
"We fully understand the fact that you are caught up inFurther correspondence ensued but no conclusion was reached with respect to the cancellation of the units taken up by JCLD (NSW) or its liabilities.
the matter, but we are not in a position to take any
action until such time as the agreement is finalised.
We are both exposed to the interest payments until
that time."
121. On 13 June 1990, Denney telephoned Richardson and told him that a number
of the 1989 loans were in default. The borrowers involved
were mainly those
covered by the Relevant Loans Agreement. They included the Growth directors
that is Towey, Stack and himself,
and the underwriters. Richardson replied
that he was shocked and disappointed at the position and would be seeking
immediate recovery
action by Mid-West (ACT) against all those in default,
including the directors, to the point of bankruptcy if necessary. Denney
said
he had been told by his fellow directors before he signed the loan documents
that he would not have to make any payments. He
claimed that he had been told
that MGICA would make the payments out of the income of Mid-West (ACT) which
it controlled. Richardson
acknowledged that MGICA did have control over the
income to cover defaults which might arise in the course of specific loans,
but
said there was no agreement to waive the obligations of any borrowers.
MGICA would be looking to Mid-West (ACT) to commence action
immediately. It
is to be noted that senior counsel for Permanent objected to the evidence
given by Richardson in relation to this
conversation in so far as it might be
relied upon as evidence of the truth of the statements made by Denney (T 519).
Whether or not
it could be received as evidence against Permanent of an
agreement between Denney and his fellow directors, I am not satisfied that
it
would be safe to place reliance upon a self serving statement of this kind
made in the context of the threat of recovery proceedings
and possible
bankruptcy action. Further, the categorical nature of Denney's assertion that
he would not have to make any payments
contrasts with the qualified responses
of Towey and Stack in letters they wrote on 7 and 15 September 1990 to which
reference is
made later.
Mid-West (ACT) Claims Against MGICA
122. On the same day that Denney rang Richardson, Marilyn Steer, the company
secretary of Mid-West (ACT), sent him a letter formally
notifying MGICA under
cl.4.1(c) of the guarantee agreement "of interest payment defaults amounting
to $936,302". Enclosed with the
letter were a loan portfolio summary of
Mid-West (ACT) and a portfolio performance summary detailing interest arrears
to May 31,
1990 by loan category. In each case of default, Mid-West (ACT) was
issuing (subject to discussions with Mallesons Stephen Jaques)
a letter of
demand upon the borrowers in default. The loan portfolio summary identified
372 "standard loans" amounting to $16,514,740,
39 relevant loans under the
agreement of 28 July 1989 amounting to $8,251,800, 243 loans called "Davey's
clients loans" amounting
to $14,125,460 and 165 special loans amounting to
$8,567,140. They represented a total of 819 loans amounting to $47,459,140.
Loan
defaulters as at 31 May 1990 were set out in the second document by
reference to the first three categories. Category 1 showed out
of 8 borrowers
a total of $8,085.05 overdue for 4 months, $734.07 overdue 3 months, $812.72
overdue 2 months and $7,833.84 overdue
1 month. There were 10 Category 2 or
"Relevant Loan" borrowers in arrears for a total of $468,683.10 overdue for 4
months, $105,092.41
overdue for 3 months, $111,827.91 overdue for 2 months and
$109,582.77 overdue for 1 month. Category 3 loans were 3 in number.
$8,736.05
was overdue 4 months. On 26 June, Mid-West Finance Pty Ltd wrote to
MGICA claiming the amount of "$936,302 in interest arrears as
detailed in the
portfolio performance summary". The claim was made by Mid-West Finance "as
Manager of Mid-West Finance (ACT) Pty
Ltd under clause 4.1(c) of the Guarantee
Agreement".
Permanent Appoints Moores - 24 July 1990
123. On 24 July 1990, Permanent sent a notice to Mid-West Finance Pty Ltd
pursuant to cl.6 of the Management Agreement dated 30 June
1989 requiring it
to:
"appoint JOHN MOORE, of Moores, Chartered AccountantsMid-West Finance responded by writing to Moores on 25 July 1990 stating that "...As required by the subject "Notice", Mid-West Finance Pty Limited hereby appoints Moores C.A. to undertake the following....". What followed were the four requirements set out in the Permanent notice.
of Level 1, 34-36 Chandos Street, St. Leonards.
. to procure the due and punctual observance
by Mid-West Finance Pty Limited of its
obligations in respect of the management
of Mid-West Finance (ACT) Pty Limited
("the Company");
. to keep all records and books of account
of the Company up to date in respect of
the loan agreements the subject of the
Charge by the Company to Permanent Trustee
Australia Limited;
. to follow up all loan payments due to the
Company and to pursue outstanding
accounts;
. to report to MGICA Limited, Hambros
Australia Limited and Permanent Trustee
Australia Limited as required by the MGICA
Guarantee, the Facility and other
documentation entered into by the Company
with Permanent Trustee Australia Ltd."
124. On 2 August 1990, Eagar, for MGICA wrote to Moores referring to a
meeting of 31 July 1990 and confirming that MGICA would be
prepared to
undertake recovery action under the loan agreements on behalf of "Mid-West
Finance" (sic). Towey and Denney replied
on behalf of Mid-West (ACT) on 13
August accepting MGICA's offer and noting that it extended to other loans that
might fall into
arrears. Letters of demand having issued on 20 August, Magnus
of Benney Partners sent a fax to Moores on 5 September 1990 saying
that it was
his understanding that he had taken up units with his fellow directors and
others on the basis that they would "be replaced
by applications which were
received after 30th June and such applications would not attract interest
payable by the applicant and
any contingent liability would be indemnified by
either Mid-West or Growth Industries Management". He pointed out that Benney
Partners
Pty Ltd was in receivership and its directors then in the various
processes of entering bankruptcy or arrangements with their creditors
under
Part X of the Bankruptcy Act. He added that he had no recollection of making
the application personally and asked for a copy
of it. The following day he
forwarded to Moores by fax a copy of the letter of indemnity by GIPL dated 29
June 1989 which had been
signed by Towey and Stack.
Towey and Stack Question their Liability
125. On 7 September 1990, Towey wrote to Mid-West (ACT) care of Moores,
referring to a letter of demand for payment of outstanding
interest on his
loan. He expressed surprise that such a demand had been made as it was his
strict understanding that all interest
on his account was to be paid from the
margin available on the MGICA insured interest streams. It was, he wrote, his
further understanding
that MGICA would not insure the interest unless it was
provided out of the interest margin. In order to ascertain his position,
he
said, he had asked for a detailed analysis of the cashflows through Moores and
Ferrier Hodgson. His letter went on:
"If this analysis indicates that my understanding is126. Stack in a letter dated 15 September 1990 also expressed surprise at the receipt of a letter of demand and said that:
flawed then I am prepared to make arrangements to meet
the demand. In to order achieve this I would require
some time to do so." (sic)
"(a) the loan was indemnified by GrowthHe went on to say that he would be grateful to review the documentation to assess his liability. He would have to seek suitable time and arrangements to meet any such liability.
Industries Pty Ltd; and to institute
security for that indemnity
(b) Growth assigned to MGICA security by way
of "Collateral notes" which had the effect
of assuring the interest obligations due
under the loan would be met." (sic)
127. On 12 September, Moores wrote to MGICA giving notice that interest payment defaults guaranteed by MGICA amounted to $1,449,005.07 as at 31 August 1990. This amount comprised two elements. The first, $1,374,932.74 represented debtors' payments 60 days or more in arrears as at 31 August 1990. That was the amount of the claim then being made against MGICA by Moores. The second element comprised $74,072.33, being represented by debtors whose payments were 30 days in arrears as at 31 August 1990. The letter referred to the previous claim of $936,300 notified by Permanent on 13 June 1990 and noted that the amount of $1,374,932.74 now claimed might include amounts previously claimed, but as yet unpaid. The letter concluded by seeking MGICA's confirmation that payment of the amount claimed would be made under cl.3.1 of the Guarantee Agreement to the bank account nominated for the purpose by the Trustee. On 26 September, Moores wrote again noting that payment should have been made by 14 September 1990 and alleging that MGICA was in breach of the Guarantee Agreement. On behalf of Mid-West (ACT) which it said was "suffering significant damage by the delay in payment of the claim", Moores requested payment of the moneys forthwith. Legal action was threatened in the event that payment or details of any disputed claim were not received by 27 September.
128. On 2 October, Richardson wrote to Mid-West (ACT) referring to the correspondence from Moores and questioning the authority of that firm to issue its notice on behalf of Mid-West (ACT). He said that the notice from Permanent of 24 July 1990 had requested John Moore to be appointed whereas the letter from Mid-West (ACT) purported to appoint the firm, Moores. He also said he had not seen any authority from Mid-West (ACT) as distinct from the purported grant of authority from Mid-West Finance Pty Ltd. MGICA was unable to accept anything in the letter of 12 September from Moores as binding on Mid-West (ACT). Without prejudice to these contentions, Richardson's letter annexed two schedules. The first, Schedule A, set out a list of borrowers in respect of which MGICA intended to perform its obligations under the Guarantee Agreement. A cheque for $40,781.31 was sent to the Trustee in relation to those borrowers. Schedule B included the various "relevant loans". He invoked cl.3.2(b) of the Guarantee Agreement and contended, in any event, that any obligation it might have had with respect to those loans should be set aside by reason of breaches of s.52 of the Trade Practices Act 1974 by Mid-West (ACT) inter alia. Without prejudice, however, to its claimed entitlement to repayment, MGICA, he said, was remitting the sum of $410,000 to Permanent. Richardson gave notice that it would be seeking a court declaration of its entitlement to that money. He also gave notice that MGICA was handing back responsibility for recovery of all relevant loans to Mid-West (ACT). A letter was sent by MGICA to Permanent on the same day enclosing a copy of the letter to Mid-West (ACT). Permanent was informed by MGICA that its obligation in respect of loans outside the relevant loans category would be honoured "where the claims are bona fide and clause 3.2 of the agreement cannot be invoked".
129. In relation to the Relevant Loans, MGICA said there were substantial misrepresentations which led it to enter into the agreement of 28 July 1989 particulars of which would be set out in a statement of claim then to be filed. A copy of a writ of summons in the Supreme Court of Western Australia was enclosed. At the time proceedings had already been commenced by JCLD (NSW) Pty Ltd, Capital Hall Ltd and JCLD Ltd in No. 2080 in the Supreme Court of Western Australia. A cheque for $40,781.31 in respect of the Schedule A borrowers was enclosed with this letter. As was confirmed by Eagar in a fax sent on 4 October to Mr S. de Silva of Permanent that amount represented payment of claims on loans not covered by the Relevant Loans facility.
130. On 15 October, Mr R.J. Donnelly a partner of Moores, signing for that firm as agents for Mid-West (ACT) sent to MGICA a claim for $1,543,201.09 under the Guarantee Agreement which was said to represent all interest due on loans details in an annexure but not previously paid by MGICA. The claim was said to have been made under cl.3.1 of the Guarantee Agreement and the loans subject to the claim were said to be 60 days or more in arrears. A schedule of loans for which interest payments were more than 30 days in arrears was also included. In a fax sent the following day, Moores, again acting as agents for Mid-West (ACT) informed MGICA that the claim had been lodged "for and on behalf of Mid-West Finance (ACT) Pty Ltd and signed by our firm as agents acting for Mid-West Finance (ACT) Pty Ltd pursuant to certain authorities, copies of which have previously been provided to your company". On 19 October 1989, Mid-West (ACT) sent a letter of demand to Burleigh Nominees seeking payment of $23,861.20 representing interest payments due for July, August and September.
131. On 7 November, Permanent wrote to MGICA in reply to its letter of 2
October and took issue with MGICA's contention that Moores
lacked authority to
act in relation to the outstanding claims. It concluded by reference to
Mid-West Finance's letter of appointment
that it had in fact appointed Mr John
Moore of Moores and that he had authority to undertake the tasks specified in
the notice. Further
claims for interest payments under the Guarantee Agreement
and the Relevant Loans Agreement were made against MGICA on 16 November
1990,
11 January 1991 and 14 February 1991.
Effect of Certain Information on MGICA's Decision-Making Process
132. Evidence was led from Richardson to establish that at the time he had supported and agreed to the Relevant Loans Agreement and the inclusion of additional loans in that Agreement in August 1989 and January 1990, he was not aware of a number of material matters. The effect of his evidence in this regard was that he believed at all material times that the loan applications the subject of the Relevant Loans Agreement, had neither been granted nor the loans advanced before the Relevant Loans Agreement was executed and in the case of later Relevant Loans, before those loans were approved by MGICA. He believed that arrangements were in place in each case for interest payments to be made by direct debit bank authorities on individual borrower accounts. He believed interest would be paid on the loan. He did not know, during the time between July 1989 and January 1990, of the indemnity provided to the Benney Partners' principals by GIPL on 6 July 1989 (albeit dated 29 June 1989). Nor was he aware of the indemnity provided to Goldfields Developments and Burleigh Nominees.
133. In speaking of the importance of these matters to the MGICA
decision-making process in relation to the Relevant Loans, he said
that his
company is in a position where it is called upon to take risks for a fee or
premium depending on the type of risk undertaken.
These risks are greater
than those undertaken by normal lenders. He said in this regard:
"We have to be extremely careful when we're looking atHis evidence-in-chief was to the effect that he would not have written the memo that he did to the credit committee, nor endorsed the inclusion of additional loans in August 1989 and January 1990 if he had known of these various matters.
such risks that everything is true and above board and
exactly the way it's portrayed. We can get ourselves
into too much trouble and it can cost the company too
much money. So unless everything was exactly the way
it was portrayed to me and I had no reason to believe
otherwise then I certainly would not have ever
contemplated entering into any type of agreement that
was outside the normal arrangements that we had."
134. Richardson was cross-examined about his approach to the Relevant Loans and the criteria that were of importance to their acceptance. His negative attitude to guaranteeing pre-existing loans was, he said, based upon a prudential underwriting criterion. The company had always adopted the policy that it would not insure loans that had already been made. The Relevant Loans had already been made and had he been aware of that fact, he would not have approved the agreement of 28 July 1989. Asked to elaborate the rationale of this policy, he said that it was a matter of history "that lenders try to obtain cover in one form or another from us and invariably where such loans have got through without our being aware we have found the reason that they seek cover is because they are in trouble - something that the're not going to tell us about and we have had to draw a cheque to pay a claim". He pointed out that MGICA does not interview the borrowers themselves. It has to be very trusting of what people tell it and if they do not "tell us everything perfectly", MGICA is exposed. This, it must be said, was not a rationale for a policy against approving guarantees for pre-existing loans. It was an exposition of the risks associated with giving cover to lenders who did not disclose that a loan had already been advanced or a commitment made.
135. Richardson's enunciation of his approach to pre-existing loans was even
less convincing in the context of the Relevant Loans.
It was put to him that
the pre-existing relationship between Mid-West (ACT) and the "relevant"
borrowers in the period covered by
the negotiations was one that had only
lasted for a matter of days. It was put to him that this was not the type of
case to which
MGICA's prudential thinking might be directed. Richardson said
in response that:
"If we were asked to put in place a guarantee on 29It was his understanding on 28 July that the loans were going to be processed that weekend. Asked what practical difference it could have made in that context had the loans been advanced on Thursday instead of Saturday, he said:
July, or 28 July, to fix up a mistake that somebody
had made in the past, I don't believe in fixing other
people's mistakes by putting (us) at risk."
"The very thing that I said, I don't believe in fixing136. After considering this evidence, I am not satisfied that the fact that there had been a commitment to the relevant loans before the agreement of 28 July 1989 was executed would have made any difference to MGICA's decision to execute it. I have come to that view in the light of the cross-examination referred to and related cross-examination of Richardson, the evidence of his reaction to the information from Anderson that O'Sullivan of Hambros claimed to have drawn down $8 million more than MGICA had approved as at 30 June 1989, and the essentially pragmatic and substantive written criteria adopted by MGICA to its approval process. In my opinion the decision to execute the Relevant Loans Agreement was largely affected by the additional security of the Collateral Account offered by Stack.
other people's mistakes with an MGICA guarantee."
137. In relation to direct debit authorities, Richardson had read Stack's faxed letter of 19 July 1989 as promising, in para B, the provision of direct debit authorities as the mechanism by which interest would be paid on the Relevant Loans. The proposition was put to him, which he rejected, that the paragraph in question related to the way in which interest payments were currently being made on loans approved under the Guarantee Agreement. In my opinion, despite some grammatical infelicity in the language used in the letter, that is the sensible and correct construction of that paragraph. Richardson's memo of 19 July for the credit committee made reference to direct debit authorities in the like sense of an explanation of the way in which interest payments for pre-existing loans were collected. He agreed in cross-examination that nowhere in that document did he reveal a belief that direct debit authorities would be provided in relation to the Relevant Loans if the credit committee approved Stack's proposal. He said he did not think it was necessary. He also agreed that he was the only point of contact in these negotiations between Stack and MGICA. Richardson was unable to advance any substantial prudential considerations to support the proposition that the provision of direct debit authorities in relation to the Relevant Loans was a matter of any significance to MGICA's decision-making process. Indeed he conceded that his company would not ordinarily have been concerned about the general concept of direct debit authorities but having been made, as he saw it, an element of the proposal "it then assumed some significance". I do not accept that the provision of direct debit authorities in relation to the Relevant Loans was a matter of any significance to MGICA's decision to enter into the Relevant Loans Agreement.
138. In relation to the GIPL indemnity in favour of Kelly, Benney, Magnus and
Pardo, it was Richardson's evidence that quite apart
from the fact that their
loans pre-dated the agreement, knowledge of the indemnity would have caused
him to refuse to sign the agreement.
It was put to him that the provision of
the additional security was a matter of some advantage to MGICA. As to that
he said:
"I can't see how an organisation associated with theHe accepted that financially it could be advantageous to MGICA, but as a concept it was "foreign" to him. He accepted nevertheless that inter company guarantees are a common form of security. Generally speaking, Richardson's attitude to the Benney Partners' indemnity in favour of Goldfields Developments and Burleigh Nominees was similar.
lender who is requiring somebody to take up a loan,
can given an indemnity, so there would be something
terribly suspicious in my mind regarding an
organisation involved in the whole procedure providing
an indemnity, so it's not so much the value of Growth,
but it's the concept."
139. On the question of non-payment of interest by the Benney Partners' principals and others, Richardson's complaint seems to have been not that this happened and had some effect, but that he was not told of it. I have already found, in the light of his cross-examination and the answer by MGICA to interrogatory 12, that his recollection cannot be relied upon in this area. However, to the extent that there is a complaint of non-disclosure as distinct from mis-statement by Simmons to Brown and later to Richardson, it is not a matter which if disclosed would have affected subsequent conduct in relation to the approval of loan guarantees. Richardson's attitude to prospective borrowers was affected by his assessment of their "character, capacity and capital in that order". If the borrower were untruthful, he would not be given any assistance. But to say that is not to say that a timely disclosure would have made any difference to subsequent transactions. I am not satisfied therefore that to the extent there was a failure to disclose that certain interest payments had not been met by some borrowers it would have made any difference to the approach to subsequent Relevant Loans particularly having regard to the security of the Collateral Account.
140. Another area of alleged non-disclosure upon which Richardson was cross-examined related to the dispute between JCLD as to payment of interest and receipt of commission and in particular its letter of 17 August 1989 purporting to withdraw the application for a loan. He agreed that at that time MGICA was not being asked to approve any further loans to JCLD. And so far as there was alleged non-disclosure of the Capital Hall letter threatening withdrawal of its guarantee, he accepted that there had never been a question of any loan being made to that company.
141. Richardson agreed with a summary of his general position in relation to
the alleged misrepresentations and non-disclosures put
to him by senior
counsel for Permanent:
"...while... at various times you have been somewhatTo which question Richardson answered:
irritated by the way you have been dealt with by
various people from the first and second respondent,
in truth, if disclosures had been made to you, what
you would have done would have been the sort of
process you have described several times this morning,
namely to seek further information; to weigh it with
other information that you had and then make a
decision, perhaps of an absolute rejection type,
perhaps of a complete acceptance type or perhaps to
reject, for example, Mr Towey and Mr Stack in relation
to the news about their guarantee?"
"I certainly wouldn't have thrown it out automaticallyHe accepted that he would have brought some discretion to bear on the particular circumstances and said:
without checking, no, that's correct."
"About the only thing ... that I would not haveAs I have already indicated, while Richardson may have persuaded himself to that view at the time of trial, I do not accept that was in fact his attitude at 28 July 1989.
entertained would have been the prior advancing of
loans."
142. In light of the pleading of default judgments made in February 1991, it is desirable to refer briefly to certain aspects of the history of these and related proceedings.
143. On 17 October 1990, JCLD (NSW), Capital Hall Ltd and JCLD instituted
proceedings in this Court in No. WA G111 of 1990 against
Mid-West (ACT) and
GIML claiming, inter alia, a declaration that JCLD (NSW)'s indebtedness to
Mid-West (ACT) under the loan agreement
made in July 1989 was extinguished.
Also claimed was a declaration that GIML "novate or cancel" (sic) the 266
contracts held by
the JCLD (NSW) in the Australian Viticultural Project No. 2
and an order that GIML indemnify JCLD (NSW) in respect of any indebtedness
to
Mid-West (ACT) in respect of the loan. Claims were also made for damages for
breach of contract and under s.82 of the Trade Practices Act. Mid-West (ACT)
and GIML filed a joint appearance on 9 November 1990 and programming of
directions were given on 15 November 1990.
A defence was filed on 10 December
1990. In the meantime the present proceedings were instituted on 22 November
1990. Mid-West
(ACT) and GIPL filed appearances on 13 December 1990, as did
Permanent on 18 December 1990. Programming orders were made on 19 December
when an amended statement of claim was filed. On Friday, 1 February 1991, both
applications came on for directions. Counsel for Mid-West
(ACT) and GIPL in
No. 111 and No. 134 indicated that those respondents would be taking no
further part in the proceedings. Motions
for judgment against them were
adjourned to 5 February 1991. Argument was heard on the motions and on 15
February the following
orders were made. First, in WA G111 of 1990:
"1. It be declared that the first applicant'sThen in WA G134 of 1990:
indebtedness to the first respondent in
respect of a loan of $2,705,460 made in or
about July 1989 by the first respondent to
the first applicant and relating to the
Australian Viticultural Project No. 2 has
been and is absolutely extinguished, both
as to the first applicant's liability to
repay the principal amount of the said sum
and interest thereon.
2. It be declared that the second applicant's
liability to the first respondent under a
written guarantee given by the second
applicant in or about July 1989
guaranteeing the obligations of the first
applicant to the first respondent in
respect of a loan of approximately
$2,705,460 made by the first respondent to
the first applicant and relating to the
Australian Viticultural Project No. 2, has
been and is absolutely extinguished and
further declared that the said guarantee
has been and is discharged.
3. It be declared that the third applicant's
liability to the first respondent under a
written guarantee given by the third
applicant and contained in a document
addressed to the first respondent dated 7
July 1989, guaranteeing the obligations of
the first applicant to pay interest to the
first respondent in respect of a loan of
approximately $2,705,460 made by the first
respondent to the first applicant and
relating to the Australian Viticultural
Project No.2 has been and is absolutely
extinguished and further declared that the
said guarantee has been and is discharged.
4. The first respondent and the second
respondent do pay the first applicant's,
second applicant's and third applicant's
costs of the application to be taxed.
5. The solicitors for the first and second
respondents have leave to withdraw from
the record."
"By default of the first and second respondents against144. The latter order was varied on 25 February 1991 by adding at the end of para 1 the words "and any further loans approved pursuant to the agreement of 28 July 1989 and any subsequent occasions referred to in paragraph 11 of the amended statement of claim".
only the first and second respondents and not so as to
derogate from the rights of the third and fourth
respondents to pursue any issue arising in the
proceedings THE COURT ORDERS:
1. That it be declared that the applicant is
not obliged under the Guarantee Agreement
between the applicant and the first, third
and fourth respondents dated 30 June 1989
to pay to the first respondent any amount
in relation to the loan agreements entered
into between the first respondent and
certain borrowers, full particulars of
which loan agreements are contained in
Schedule A to the amended statement of
claim.
2. That there be judgment against the first
respondent in the sum of $433,869.86
inclusive of pre-judgment interest.
3. That the first and second respondents pay
the applicant's costs.
4. The solicitors for the first and second
respondents have leave to withdraw from
the record.
5. There be liberty to the applicant to apply
for leave to enforce this judgment as
against the second respondent."
145. It is appropriate at this point, by reference to the statement of claim as it now stands, to set out my findings on the various matters of alleged misleading or deceptive conduct and non-disclosure of which MGICA complains. In large part these are extracted from the general factual history which has preceded.
146. The allegation is made in para 14(a) that between 18 and 28 July 1989 Mid-West (ACT) and GIPL represented to MGICA that loan agreements to be included in the Relevant Loans Agreement had not yet been entered. The allegation was pleaded as an express representation and reliance placed in part upon para G of Stack's letter of 19 July 1989. There was no such express representation in that paragraph, but it was accepted by senior counsel for Permanent, and I find, that there was an implied representation to that effect. I am satisfied also that it was incorrect, at least to the extent that it suggested that no loan agreements had been made in respect of the loans to be included in the Relevant Loans Agreement. For reasons I have already set out in discussion of Richardson's evidence on this point, I am not satisfied that this representation had any relevant effect upon the decision-making processes of MGICA.
147. The allegation is made in para 14(b) that by paras. B, D and F of the letter of 19 July 1989, GIPL and Mid-West (ACT) expressly represented to MGICA that all borrowers under the Relevant Loans Agreement would pay interest to GIPL monthly in arrears by means of authorities granted or to be granted by such borrowers for the money to be directly transferred from their respective bank accounts to an account of Permanent. As already indicated, I find that the letter does not bear that construction and if it did it was of no relevance to MGICA's decision-making. A related allegation is made in para 14(c) that GIPL and Mid-West (ACT) represented that they intended and believed that interest payable would be made by borrowers in the manner represented as alleged in para 14(b). In light of the preceding finding, I find no such representation was made and if it were, it was immaterial.
148. The allegation is made in para 14(d) that GIPL and Mid-West (ACT) impliedly represented that there were no matters known to them which led or ought reasonably to have led them to believe that any of the borrowers would not or could not perform their obligations to pay interest under the loan agreements. This implication was said to arise from the fact that they had previously requested MGICA to guarantee loans to such borrowers and that it had declined the request because of the risk. The facts relating to the willingness and ability of the borrowers to perform their obligations were said to be essentially within the knowledge of GIPL and Mid-West (ACT). In addition, facts pleaded to support the characterisation of Mid-West (ACT) as a promoter of the project, owing a fiduciary duty to MGICA among others, were relied upon. I am satisfied as a matter of inference from the context of the request for a guarantee of the Relevant Loans and specifically the matters referred to in sub-paragraphs (d)(i), (ii) and (iii) of the particulars to para 14, that there was an implied representation that GIPL and Mid-West (ACT) knew of no matters which led them to believe that any of the borrowers' obligations could not or would not be performed. I do not go so far as to say that it was to be inferred from the circumstances of the case that they represented there were no matters known to them which ought reasonably to have led to the belief that the borrowers would not or could not perform. No do I consider that it is necessarily to be implied that the borrowers would personally perform the obligations they had undertaken. The implication is that there is a belief that the obligations will be performed. The precise mechanism of their performance is not to be implied. The representation pleaded is said to be falsified by the indemnity arrangements made by GIPL with Kelly, Benney, Magnus and Pardo on the one hand, and between Benney Partners and Goldfields Developments and Burleigh Nominees on the other. A further oral agreement is alleged that GIPL's indemnity would extend to the latter two companies. In my opinion, the provision of the indemnities and the agreement by GIPL to meet interest payments neither falsified the representation pleaded nor that which I have found.
149. On the basis of the preceding findings, I conclude that in respect of the matters pleaded in paras. 14(b), (c) and (d) there was no misrepresentation and therefore no misleading or deceptive conduct as alleged in para 17. In respect of the pre-existing loans representation in para 14(a), I find that there was a misrepresentation, but that it had no affect upon the decision by MGICA to enter into the Relevant Loans Agreement.
150. Paragraph 18 of the statement of claim sets up various matters relied upon to support a plea that Mid-West (ACT) was a promoter of the viticultural project and owed a fiduciary duty to MGICA to "exercise the utmost good faith in making disclosure of all matters material to its decision to assume obligations under the project". It is said to have breached that duty by reason of the various mis-representations pleaded in para 14. So far as the breach of duty relies upon those pleaded misrepresentations, it must fail. Only one was made out as a misrepresentation and found to have had no impact upon the decision. The case of breach of fiduciary duty resting, as it does, upon the pleas of misrepresentation must in that respect fail.
151. It is separately pleaded in para 21 that Mid-West (ACT) owed a duty to
MGICA to disclose to it any unusual matters relating
to any loan agreements
entered or to be entered by persons with Mid-West (ACT) which loan agreements
Mid-West (ACT) sought at any
time to have brought under the Guarantee
Agreement. Mid-West (ACT) is said to have breached that duty. The breach
relied upon in
para 22 is said to arise from:
(i) The absence, pleaded in para 15, of reasonable groundsThe breach of duty alleged is only of significance in light of the pleading in para 23(b) that, in the belief that Mid-West (ACT) and GIPL had fulfilled their duties to MGICA, MGICA executed the 28 July 1989 agreement. I am not satisfied, however, that the disclosure of the various matters referred to in para 16 would have had any effect upon the decision to execute that agreement. The item referred to in 16(g) relating to a bridging facility allegedly provided by Hambros was not, in the end, relied upon by MGICA.
for making the direct debit authority representation in
para 14(b).
(ii) The various matters set out in para 16 which are said to
falsify the representations pleaded in paras.14(a), (c)
and (d).
152. It is then alleged in para 24 that immediately prior to 22 August 1989, the para 14 representations continued in force and applied also to subsequent loan agreements. Additional matters are pleaded in para 25 to falsify those representations. So far as they relate to the pre-existence of loan agreements, I am not satisfied they had any effect upon MGICA's decision-making. Reliance was also placed, in para 25(c), upon the letters dated 17 August 1989 from Capital Hall and JCLD withdrawing the guarantee of JCLD and JCLD's application for units unconditionally. There was at the time no proposal to grant any further loan to JCLD or any loan to Capital Hall. In my opinion, these matters were not the subject of a duty of disclosure that was relevant to the decision to bring additional loans into the Relevant Loans Agreement.
153. The failure by Mid-West (ACT) to disclose that a decision had been made that Towey, Stack and Denney would not be liable to pay interest on their loans was also pleaded in para 25(e). As to that, I am not satisfied that the evidence, in particular the conversation between Denney and Richardson on 13 June 1990 and the letters from Towey and Stack to Mid-West (ACT) of 7 and 15 September 1990, established that any such decision was made. The failure to pay interest does not of itself establish a lack of intention to meet the relevant obligations. I am not satisfied therefore that the non-disclosure pleaded in para 25(e) is made out.
154. Paragraph 25(f) alleges a failure by GIPL and Mid-West (ACT) to disclose that none of Kelly, Benney, Magnus, Pardo, Goldfields Developments or Burleigh Nominees had paid interest for the month of July. But as senior counsel for Permanent pointed out, they were not being brought into the Relevant Loans Agreement as at August 1989. They were already in it. The alleged non-disclosures were neither representational nor material in the circumstances.
155. Paragraph 25(g) alleges that GIPL and Mid-West (ACT) knew that Stack and Towey had given a guarantee to Hambros with respect to any amount payable to Hambros by Mid-West (ACT) under the Bill Endorsement Facility. This was allegedly not disclosed. It was pointed out on behalf of Permanent that there had been effective disclosure of this arrangement in Item 1 of Schedule 1 of the Bill Endorsement Facility. That item referred to a security by way of guarantee and indemnity provided by GIML, GIPL, Stack and Towey, "to the financier on or about the date of the agreement". The facility was expressly referred to in the Guarantee Agreement. In my opinion, the allegation of non-disclosure is not made out. In any event, I am not satisfied that it was a matter which would have been material to the decision-making process of MGICA in August 1989.
156. For these reasons I am not satisfied that the case of misleading or deceptive conduct or breach of duty alleged in respect of the August loans is made out.
157. Paragraph 30 of the statement of claim sets up the para 14 representations and those pleaded in para 24. It adds the allegation in para 30(b)(i) that on and prior to 8 January 1990, Mid-West (ACT) and GIPL represented that all interest had been paid when due with respect to all loans from Mid-West (ACT). Paragraph 30(b)(ii) alleges that it was represented that loans to Kelly, Benney and Magnus and Pardo were strictly in default but because GIPL considered that the contracts they held were valuable assets, interest was being paid by GIPL pending a formal arrangement to take over the contracts. These representations were said to have been made to Richardson by Towey and Simmons on 3 July 1990. Having regard to the discussion of this conversation earlier in these reasons, I am not satisfied that the alleged representations were made.
158. Paragraph 30(b)(iii) alleges that it was represented that the reason that moneys had not been paid into the Collateral Account in October 1989 was that they had been required to be spent on establishment expenses. But this representation is not falsified on the pleadings.
159. For the preceding reasons generally MGICA's case in misleading or
deceptive conduct and breach of duty fails.
Permanent's Standing to Sue
160. MGICA contends in para 46 of the amended statement of claim that upon the proper construction of the Guarantee Agreement its obligation under cl.3.1 was owed solely to Mid-West (ACT) and not to Permanent or Hambros. Alternatively it is pleaded that neither Permanent nor Hambros gave any consideration to MGICA for the promise under cl.3.1. For these reasons, it is said, upon the proper construction of the Guarantee Agreement and the Relevant Loans Agreement the latter is not enforceable by Permanent against MGICA. Permanent says that in the context of the Trust Deed MGICA's obligation under cl.3.1 of the Agreement is owed to it directly. It denies the allegation of want of consideration and refers to its joint involvement in the Guarantee Agreement as sufficient to support the promise in cl.3.1.
161. In my opinion, on the proper construction of the Guarantee Agreement,
Permanent does have the right to enforce MGICA's obligations
under it. It is
proper in approaching the construction of the agreement to bear in mind the
central role of Permanent as protector
of the noteholders' interests. This is
reflected in both the Guarantee Agreement and the Trust Deed. The stage is
set in that regard
by recitals C to F in the Guarantee Agreement. They are in
the following terms:
"C. The Lender may from time to time hereafterIt is apparent from these recitals and particularly recital F that the agreement contemplates a direct interest on the part of the Trustee in MGICA's performance of its obligations.
issue Notes in accordance with the Trust
Deed.
D. The Financier has agreed to provide to
the Lender the Facility to assist the
Lender to make timely payment pursuant to
the Trust Deed.
E. The obligations of the Lender to make
payments in respect of Notes are secured
by the Charge and the Mortgage and its
obligations to make payments in respect of
the Facility are secured by the remainder
of the Securities.
F. In consideration of the Lender agreeing to
pay to MGICA the fee calculated as
hereinafter provided and at the request of
the Trustee (which request is evidenced by
the Trustee's execution hereof) MGICA has
agreed to issue to the Lender upon the
terms and subject to the conditions
hereinafter contained a guarantee in
respect of the obligation of each Borrower
(as hereinafter defined) to pay Interest
(as hereinafter defined) pursuant to the
Loan Agreement to which the Borrower is a
party."
162. In cl.1.1 the term "Trust Deed" is defined thus:
""Trust Deed" means the trust deed to be made between163. Clause 1.8 involves an acknowledgement by both Mid-West (ACT) and Permanent that MGICA has a broad discretion in deciding whether or not to approve particular loans. It is in the following terms:
the Lender, the Trustee, Permanent Trustee Company
Limited and the Financier providing for the holding of
the Charge, the Mortgage, the Guarantee (as therein
defined), a management agreement and this Guarantee
and Indemnity for the benefit of holders of promissory
notes issued by the Lender."
"The Lender and the Trustee hereby expresslyClause 3.1 of the agreement was set out earlier in these reasons and imposes the obligation on MGICA to "pay to the Lender" interest due under a loan agreement which is sixty days in arrears. The term "pay the Lender" is given content by cl.12 which provides:
acknowledge that notwithstanding any agreement,
arrangement, understanding, undertaking or
representation (whether oral or in writing) to the
contrary, in deciding whether or not to accept a Loan
Application pursuant to Clause 2 or to exercise any
other power or discretion contained herein then,
except as expressly provided herein, there shall be no
requirement on MGICA that such decision be reasonable
or bona fide or that in making that decision MGICA act
reasonably or bona fide nor shall MGICA be obliged to
take into account or not take into account any
particular fact or circumstance or to abide by the
rules of natural justice."
"12. PAYMENTSAlthough at first blush able to be described as only a mechanism for the discharge of MGICA's obligations, this clause, when viewed in the light of Permanent's wider role in the project does, in my opinion, confer upon it the right to enforce payment.
12.1 MGICA shall pay all amounts payable by it
pursuant to Clause 3 hereof in cleared
funds into such bank account maintained by
the Trustee in Canberra as the Trustee may
from time to time nominate or, failing any
such nomination by the Trustee, into a
bank account opened by MGICA in the name
of the Trustee.
12.2 Upon payment by MGICA of any amounts
payable by it pursuant to Clause 3 hereof
in accordance with Clause 12.1 or upon
payment by any Borrower of any amounts
pursuant to any Loan Agreement the amount
outstanding under the Trust Deed or the
Facility shall, as against MGICA (but not
necessarily as against the Lender) be
deemed to have been reduced by the amount
of such payment.
12.3 Each of the Trustee and the Financier
hereby respectively warrant to and
covenant with MGICA that the only moneys
and/or obligations secured by the
Securities will be, in the case of the
Mortgage and the Charge, moneys from time
to time owing in respect of Notes and,
costs, charges, expenses and fees payable
or reimbursable pursuant to the Trust Deed
or the Securities and, in the case of the
other Securities, moneys from time to time
owing in respect of the Facility."
164. The Trust Deed itself contemplates that Permanent has rights under the
Guarantee Agreement. In its recital B it says:
"The Trustee has agreed to hold the Guarantee, theIt defines the "MGICA Guarantee" as:
Charge and the Mortgage and its rights under the
Management Agreement, the MGICA Guarantee and the
Facility as trustee for the benefit of the Holders on
the terms and conditions set out in this deed."
"... the agreement to be made between MGICA, theThe above definition is consistent with a construction of cl.12.1 of the Guarantee Agreement which treats it not merely as creating an obligation to pay into a bank account nominated by the Trustee, but to pay the Trustee the amounts payable under cl.3 of the Agreement.
Trustee, the Issuer and the Facility Provider pursuant
to which MGICA will undertake to pay to the Trustee at
the direction of the Issuer an amount equal to any
interest on borrowings which any Borrower fails to pay
to the Issuer on the terms of the proforma document
attached to this deed as Annexure D."
165. If there is any doubt that the Trustee has enforceable rights under the
Guarantee Agreement, they are dispelled by cl.2.1 of
the Trust Deed which
provides, inter alia:
"The Trustee hereby declares and acknowledges that it166. I am satisfied that the Trustee, Permanent, may enforce MGICA's obligations under the Guarantee Agreement and that its right in this respect extends to loans brought under the Guarantee Agreement by virtue of the Relevant Loans Agreement. On the question of consideration, I accept that there are covenants by the Trustee in the Guarantee Agreement, see e.g. cl.5.2 and 12.3. There are also a number of express promises by the Trustee in the Relevant Loans Agreement especially in relation to the deposit and distribution of funds in the Collateral Account (see cls.4, 6, 7, 9 and 12).
holds and will hold its rights under the MGICA
Guarantee and the Charge upon trust for and for the
benefit of the Holders and the Facility Provider...."
167. In para 12 of the amended statement of claim it is alleged that in relation to certain of the Relevant Loans the borrower's agreements to repay principal and interest do not constitute legally binding obligations enforceable in accordance with their terms. For this reason it is said that by virtue of cl.3.2(b) of the Guarantee Agreement MGICA presently has no obligations under that agreement to pay to Mid-West (ACT) any amount in relation to such loan agreement and by virtue of that proposition it would follow no obligation to pay to Permanent. The Relevant Loans referred to are set out in the schedule to the amended statement of claim, along with the facts relied upon to establish their unenforceability. In each case it is said in effect that there was an agreement whereby obligations incurred by these borrowers would be extinguished or discharged upon the sale of units to other investors of units in the project up to the numbers held by these borrowers.
168. The borrowers associated with Benney Partners form a discrete group in this regard, comprising Messrs Kelly, Benney, Magnus, Pardo Pty Ltd, Goldfields Developments and Burleigh Nominees. As indicated earlier, I am satisfied that the agreements pleaded in the schedule were made and that the requisite sell down was achieved, releasing these parties from their obligations to Mid-West (ACT). By virtue therefore of cl.3.2(b) of the Guarantee Agreement, MGICA was not obliged to pay Mid-West (ACT) or Permanent interest in relation to those loan agreements.
169. I am satisfied also that this is the case with respect to the units
taken up by JCLD (NSW) having regard to the facts found
earlier in relation to
the "novation agreement" between that investor and Mid-West (ACT). And if I
am wrong in that respect then
the default judgment in WA G111 of 1990 has the
effect that there was no obligation under the loan agreement between JCLD
(NSW) and
Mid-West (ACT) and therefore no liability on the part of MGICA to
make payment of interest in relation to that loan.
Conclusion
170. Having regard to my conclusions it is not necessary to determine whether the sum of $410,000 was paid over to Permanent under an unauthorised demand by Moores. The entitlement to that money can be determined in the light of Permanent's residual entitlement after exclusion of the Relevant Loans referred to in the schedule to the amended statement of claim. If any further orders are necessary there will be liberty to apply accordingly.
171. In my opinion, the orders made at this stage should be limited to declarations on the application and cross-claim which give effect to my conclusions. The parties will have liberty to apply on the question of any money judgement that results and interest thereon as well as on the question of costs and any other necessary orders.
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/1992/229.html