Lunoe v Westpac Banking Corp [1999] FCA 1001

FEDERAL COURT OF AUSTRALIA

Lunoe v Westpac Banking Corp [1999] FCA 1001

No question of principle Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 cited CTN Cash & Carry Limited v Gallaher Limited (1994) 4 All ER 714 cited Equiticorp Financial Services Ltd (NSW) v Equiticorp Financial Services Limited (NZ) (1992) 29 NSWLR 260 cited Golby v Commonwealth Bank of Australia (1996) 72 FCR 134 cited News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 cited

SOREN YDE LUNOE AND SONYA GABRIELLE LUNOE v WESTPAC BANKING CORPORATION NG 857 OF 1996

HELY J 27 JULY 1999 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 857 OF 1996

BETWEEN: SOREN YDE LUNOE AND SONYA GABRIELLE LUNOE

Applicants

AND: WESTPAC BANKING CORPORATION

Respondent

JUDGE: HELY J

DATE OF ORDER: 27 JULY 1999

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: 1. The application is dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 857 OF 1996

BETWEEN: SOREN YDE LUNOE AND SONYA GABRIELLE LUNOE

Applicants

AND: WESTPAC BANKING CORPORATION

Respondent

JUDGE: HELY J

DATE: 27 JULY 1999

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 Although Sonya Gabrielle Lunoe is named as an applicant in these proceedings, she did not appear at the hearing, nor was she represented. I was informed that Ms Lunoe was made bankrupt in about November 1996, and that her trustee in bankruptcy had elected not to pursue this action on behalf of her estate. Accordingly, the hearing of the action proceeded as if Soren Yde Lunoe ("the applicant") was the sole applicant. 2 At the time with which this litigation is concerned the applicant was a shareholder in, and a director of, Sorens Pty Ltd ("the company"). He personally guaranteed certain of the liabilities of the company. 3 The company traded from about 1971 until 10 March 1995, when an administrator was appointed. On 6 June 1995, the company was placed into liquidation. As a result of the insolvency of the company, the liability of the applicant to those of the company's creditors whose debts he had guaranteed crystallised. 4 The business of the company consisted of the retail sale of maternity clothing under the business name "The Growing Concern", the retail sale of women's clothing in the larger size ranges under the business name "Supersizes", and property development, principally the construction of three home units at 8-10 Almora Street, Balmoral. 5 For many years the respondent ("Westpac") was the company's banker. On 1 April 1985 the company gave an equitable charge (hereafter referred to interchangeably as "the charge" or "the debenture") in favour of Westpac to secure repayment of "all monies" owing by the company from time to time. The charge was a fixed charge as to certain assets – principally real estate - and a floating charge as regards all other assets of the company. The monies thereby secured were repayable on demand. 6 By letter dated 3 December 1991 Westpac confirmed the facilities which it had extended to the company. They included a bill line facility of $900,000 subsisting during Westpac's pleasure, an overdraft facility with a limit of $200,000 and a term loan facility of $300,000. The term loan facility was repayable on demand, and subject to that, by instalments of $5,000 per month over a period of about 8 years. 7 Amongst the assets of the company was a 10 percent shareholding in Pasta House Manufacturing Pty Ltd ("Pasta House"). The scrip for those shares was held by Rural & Industries Bank Limited of Western Australia ("R & I Bank"). R & I Bank financially assisted in the original acquisition by the company of the Pasta House shares. In the middle of 1992 the business of Pasta House was liquidated, and the company expected to receive a dividend and return of capital in the liquidation ("the Pasta House proceeds"), anticipated to be of the order of $600,000. 8 Perpetual Finance Corporation Ltd, a trading subsidiary of the R & I Bank (and included by me in the designation "R & I Bank") had funded the development of the Almora Street property. R & I Bank held a mortgage over the three units which comprised that development. As at 11 August 1992 the sum payable to R & I Bank was of the order of $4,000,000, consisting of outstanding principal of $3,500,000, and accrued interest of $500,000. The principal was due for payment on 11 August 1991. The company was in default in terms of its arrangement with R & I Bank, and on 11 August 1992, a notice under s 57(2)(b) of the Real Property Act 1900 was given to the company by R & I Bank. 9 In the last quarter of 1992, there were negotiations between the company and R & I Bank as to the terms on which R & I Bank would consider granting an extension of its facility. R & I Bank indicated a willingness to consider the grant of a six month extension of the facility provided the debt was reduced to $3,000,000. It was anticipated that the $1,000,000 reduction in the amount outstanding would come, as to $300,000 from part of the distribution from Pasta House, and as to the balance from the sale of Unit 3 Almora Street (expected to be $725,000). Unit 3 was in fact sold for $740,000 pursuant to a contract exchanged on 17 September 1992. No concluded agreement was reached for any extension of the R & I facility, or for the payment to R & I of all or part of the Pasta House proceeds, although from time to time in his evidence Mr Lunoe asserted that he had broken his promise to R & I Bank (eg T 273) in that regard. 10 The company maintained its accounts at the Westpac branch located at 39 Martin Place, Sydney. An internal memorandum from the Branch (5211) dated 27 October 1992 to the Manager Commercial Lending includes the following: "We fully acknowledge that this connection is now in need of urgent decisive action and intensive care to ensure protection of the Bank's asset. To fully achieve this, the Bank needs to allocate more time to manage the group. In view of fact branch is closing 29/1/93 and amalgamating with 60 Martin Place it may be appropriate to place account before the specialised Loans Management Unit, following our full report of 30/11/92." The memorandum also recommended that a request for an increase in the company's overdraft limit by $150,000, and proposed increases in certain other facilities, be declined. 11 The memorandum recorded a belief on the part of the Martin Place branch that at least part of the Pasta House proceeds would be directed to Westpac. However: "We now find that Soren's interest – approx $600 is to be disbursed as follows: - $300 Debt reduction in Balmoral Development funding with R & I Bank. - Remainder is to be used in business as working capital namely, pay supply creditors to attain purchase discount." The recommendation that the account be transferred to the Loans Management Unit ("LMU") was approved, and the memorandum was endorsed with a notation that the disbursement of the Pasta House proceeds needed to be settled quickly, and a check made as to whether those funds were bypassing Westpac in favour of R & I Bank. It was implicit in the endorsement that Westpac's security position in relation to the Pasta House proceeds should be checked. 12 On 2 November 1992 Westpac advised the company that its accounts had been transferred to the control of Mr Peter Surtees, Manager LMU. The reason given for this transfer was the poor trading position of the company. The function of the LMU was to supervise and manage loans or facilities which Westpac perceived to be troublesome or difficult. It was not simply a recovery section, as there were occasions on which the customer was "managed through their troubled times", and then returned to the normal banking system. 13 On 3 November 1992 a meeting took place between Mr Lunoe and Mr Surtees at which the disposition of the Pasta House proceeds was discussed. Mr Lunoe indicated that he had promised some of the funds to R & I Bank, and that he needed the rest for working capital. Mr Surtees responded that the proceeds should come to Westpac rather than to the R & I Bank, and that he would like to see the proceeds come to Westpac in permanent debt reduction (T p 167). He said that if an acceptable commercial proposal was put up, Westpac would consider giving an advance equal to 50 percent of the proceeds (T p 168). Mr Lunoe knew at this time that as Westpac had not issued a demand under the charge, it had no power to direct where the proceeds of the Pasta House shares should go. Mr Surtees appears to have been independently conscious of the same problem, because his diary note of 4 November 1992 (9009) records that: "We may need to fix our floating charge in respect of the shares." 14 On 4 November 1992 Westpac wrote to the company (9012) by way of confirmation of the matters discussed on 3 November. The letter contained the following in relation to Pasta House: "1. Pasta House The shares in Pasta House are an asset of the company. The company has charged all of its assets to the Bank as security. The funds from the sale of the shares must come to the Bank and in normal circumstances would be used for debt reduction. However, we acknowledge your concerns for the working capital needs of the company and will bear this in mind as we consider the Bank's position." The letter also stated that Westpac required the overdraft to be operated below the limit. The Bank had been flexible in the past, and for the present at least, that flexibility would continue within reason. The limit was $200,000, and should the Bank's attitude change, the company might be required to operate below the limit at a moment's notice. 15 On 6 November 1992, at Mr Lunoe's request, there was a discussion between Mr Surtees and Mr Roach of the R & I Bank (9016). During the course of that discussion Mr Surtees indicated his concern that as Westpac had a first debenture, he believed that the Pasta House proceeds should accrue to Westpac, and that if $300,000 was paid to R & I Bank it may jeopardise the company's future by leaving it short of working capital. 16 On 23 November 1992 the applicant, on behalf of the company, wrote to Westpac (5268): "Please make an hour available for me to discuss distribution of the Pasta Hse Settlement as W.A. [R & I Bank] would like your determination. Whilst it would be desirable to effect a reduction in debt on the property loan [a reference to the R & I Bank's loan on Almora Street], it would probably be more productive to have an increase in working capital available to the Growing Concern, with better buying power as a consequence! The delays in repayment from Pasta Hse has caused some deterioration to our standing with our suppliers, it would be good to do a few repairs in that regard!" 17 There is a file note made by Mr Roach on 26 November 1992 (9045) of a conversation which he had with Mr Lunoe that morning. The points discussed are recorded. The diary note includes the following: "Westpac have still not given him [Mr Lunoe] a definitive decision on what they are going to do. He is meeting with Peter Surtees tomorrow and is hopeful that the matter will be resolved. Westpac wish him to pay all the funds into the account and they will then decide what to do with them. Soren is not prepared to do this until he has a written agreement from Westpac that they will allow the $300,000 to be withdrawn and placed in credit of our account." The note also includes the following: "Westpac appear to be in some sort of bind as to what they do with the account. They appear reluctant to Issue Demand but are trying to cajole Sorens into giving them a voluntary reduction from the Pasta House proceeds. Sorens appears to be well briefed on the legal stance (ie that Westpac need to issue demand before they can act under the securities covered by their debenture) but is also mindful that negotiation is the best to bring it to some harmonious conclusion. He is also very adamant that he made the commitment to reduce our debt by $300,000 and is keen to stand by that commitment." 18 On 27 November 1992 a meeting took place between Messrs Lunoe and Surtees. It is that meeting which is at the forefront of the applicant's case in these proceedings. According to Mr Lunoe: Ÿ Mr Surtees requested the meeting.