Supreme Court New South Wales Medium Neutral Citation: Ossen Pty Ltd v K&S Developments Pty Ltd (Receivers and Managers Appointed); Clarke v Ossen Pty Ltd [2024] NSWSC 165 Hearing dates: 9 June 2023 Date of orders: 27 February 2024 Decision date: 27 February 2024 Jurisdiction: Equity - Real Property List Before: Richmond J Decision: Parties to bring in short minutes of order to reflect these reasons. Catchwords: EQUITY — contribution — co-ordinate liability — party named as borrower claims they are a guarantor — claim for contribution from third party as the 'true borrower' GUARANTEE AND INDEMNITY — guarantor — right of subrogation Legislation Cited: Contracts Review Act 1980 (NSW) Law Reform (Miscellaneous Provisions) Act 1965 (NSW) Cases Cited: AGC (Advances) Ltd v West (1984) 5 NSWLR 590 Barber v De Prima [2018] NSWSC 601 Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 Craythorne v Swinburne (1807) 14 VES JUN 160; 33 ER 482 Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841; [2002] NSWCA 413 Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 Global Consulting Services Pty Ltd v Gresham Property Investments Ltd [2018] NSWCA 255 Greenough v McClelland (1860) 2 El & El 429; 121 ER 162 HIH Claims Support Limited v Insurance Australia Limited (2011) 244 CLR 72 Hollier v Eyre (1842) 9 Cl & Fin 1; 8 ER 313 In the matter of Great Southern Ltd (in liq) [2017] FCA 169 Mahoney v McManus (1981) 180 CLR 370; [1981] HCA 54 Manzo v 555/255 Pitt Street Pty Ltd (1990) 21 NSWLR 7 Montevento Holdings Pty Ltd v Central City Pty Ltd [2021] WASC 154 Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 Ogilvie v Ferry [2010] NSWSC 379 Reale Bros Pty Ltd v Reale [2003] NSWSC 666 Rouse v Bradford Banking Co [1894] AC 586 Texts Cited: JD Heydon et al, Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (5th ed, Lexis Nexis, 2015) Category: Principal judgment Parties: Ossen Pty Ltd (Plaintiff/First Cross-Defendant) K & S Developments Pty Ltd (Receivers and Managers Appointed) as trustee for the Midnas Trust (First Defendant/Second Cross-Defendant) Sandra Gail Clarke (Second Defendant/Cross-Claimant) Representation: Counsel: Mr M Young SC (Plaintiff/First Cross-Defendant) Mr A Fernon SC and Ms E Keynes (Second Defendant/Cross-Claimant) Solicitors: Sunfield Chambers Solicitors & Associates (Plaintiff/First Cross-Defendant) Osborne Lawyers (Second Defendant/Cross-Claimant) File Number(s): 2021/346521 Publication restriction: Nil JUDGMENT 1. The issue raised by this case is whether a person who enters into a loan agreement with a lender as co-borrower with her husband and subsequently repays the loan in full can recover part of the amount she paid to the lender from a guarantor of that loan on the basis of equitable contribution. Procedural background 1. These proceedings were brought by Ossen Pty Ltd (Ossen) seeking declarations that it was an equitable mortgagee in respect of a property situated at Great Mackerel Beach given the folio identifier 74/10000 (the Mackerel Beach property), an order for judicial sale of that property and, an order for the distribution of the sale proceeds. The registered proprietor of the Mackerel Beach property is the first defendant, K & S Developments Pty Ltd (K&S). The judicial sale sought by Ossen was initially opposed by the second defendant, Mrs Sandra Clarke (Mrs Clarke), but was ultimately resolved by orders made by Darke J on 6 July 2022 made without the opposition of the defendants. His Honour declared that Ossen held an equitable mortgage over the Mackerel Beach property, ordered the judicial sale of the Mackerel Beach property, and granted leave for Mrs Clarke to file and serve an amended defence and a statement of cross claim against Ossen and K&S. 2. This judgment concerns the cross-claim brought by Mrs Clarke against Ossen and K&S which seeks certain orders in respect of the proceeds of the sale of the Mackerel Beach property. Ossen opposes the relief sought in the cross‑claim. K&S has filed a submitting appearance and did not take an active role in the proceedings which is explained by the fact that it is currently controlled by receivers and managers appointed by Ossen in May 2019. Facts 1. Mrs Clarke, the second defendant and cross-claimant, is married to Mr Kim Clarke (Mr Clarke). Mr Clarke operated a property development and real estate agency business from the late 1970s onwards. From 1990, this business was undertaken by a company called Xcel Property Group Pty Ltd (Xcel). 2. Mrs Clarke was a shareholder in Xcel from 1990 to 2012, when her shares were transferred to Mr Clarke and from that time he was the sole shareholder and director of the company. Mrs Clarke had previously been a director of Xcel from 7 August 1990 to 5 September 1991 and from 5 September 1994 to 19 March 1996. Mrs Clarke gave evidence which was not contested that at no time did she ever exercise any power in that position, nor did she ever take an active part in the operations or management of Xcel. 3. K&S was incorporated on 10 January 1983. At all relevant times Mr and Mrs Clarke have each held one share in the Company. Mr Clarke has been a director of the Company since 31 July 1985. Since 4 September 2006, Mrs Clarke has also been a director and they have been the sole directors since that date. It appears that the Company acts as the trustee of a trust called the Midnas Trust, but the trust deed is not in evidence. 4. In 1999, Mrs Clarke purchased a property in Bellevue Hill NSW, given the folio identifier 3/3P61759 (the Bellevue Hill property). The Bellevue Hill property was purchased for $1,225,000. 5. A mortgage over the property was registered on 7 December 1999 by Mrs Clarke as mortgagor in favour of GIO Building Society Limited (GIO) as mortgagee securing a loan of $950,000. This loan was subsequently refinanced on a number of occasions as indicated below including by the loan by Macquarie Bank Ltd (Macquarie) referred to as "Loan A" below. The underlying loan agreement entered into with GIO in 1999 cannot be located but, at the hearing, senior counsel for Mrs Clarke accepted that it should be inferred that Mrs Clarke obtained the benefit of the loan of $950,000 by GIO on the basis that it was used to pay part of the purchase price of the Bellevue Hill property. 6. In or around 2002, AMP Bank Limited (AMP) and GIO merged, and the facility was transferred to AMP. On 17 July 2002, by an agreement with AMP, the amount of the loan increased to $1,300,000 (the 2002 increase). The documentation in relation to the 2002 increase cannot be located, but Mrs Clarke's evidence, which was not contested, is that she did not receive any amount in respect of the further advance of $350,000. 7. In 2005, the loan balance was increased to $1,500,000, following an application made by Xcel (the 2005 increase). There is in evidence a letter dated 14 December 2005 from AMP to Xcel which states that Xcel is the borrower for the total amount of all facilities of $1,500,000, and Mr and Mrs Clarke are stated to be guarantors with the Bellevue Hill property provided as security. 8. On 23 July 2010, the loan was refinanced by a new loan from AMP on new terms which extended the term and reduced the interest rate to a fixed rate of 6.74% per annum. A letter of that date from AMP to Xcel summaries the details of the loan. While the loan agreement is not in evidence, it was not suggested that this letter did not correctly state the "details" of the loan included in it. The letter states that (a) the loan amount was $1,500,000 and Xcel was the named borrower in its capacity as trustee of "Promotions 2000 Trust" and (b) Mr and Mrs Clarke were named as the guarantors, with the secured property remaining the Bellevue Hill property. The statement of the capacity in which Xcel was acting accords with the loan application which is made. The initial mortgage referred to in [8] above was discharged, and in its place a new mortgage was registered on the title to the Bellevue Hill property by Mrs Clarke as mortgagor in favour of AMP as mortgagee. 9. The trust deed for the Promotions 2000 Trust is in evidence. It is a relatively standard discretionary trust deed, which names the discretionary objects (as to income and capital) as including Mr and Mrs Clarke (who are named as the "specified beneficiaries") and they are also the beneficiaries (by reason of being the specified beneficiaries) who will be entitled in the absence of the exercise of the trustee of its power of appointment to income at the end of each accounting period and to capital on the vesting date. 10. On 9 April 2015, the AMP facility referred to at [11] was refinanced by Macquarie. This time, Mr and Mrs Clarke were named as borrowers, and entered into a loan agreement with Macquarie Bank Ltd (Macquarie Bank) for a loan of $1,500,000 which is referred to by the parties as 'Loan A'. Macquarie Bank took a registered first-ranking mortgage over both the Bellevue Hill property and the Mackerel Beach property as security for this facility. Mrs Clarke was the mortgagor under the mortgage of the Bellevue Hill property (Bellevue Hill Mortgage). K&S was named as the guarantor and was the mortgagor of the Mackerel Beach property (Mackerel Beach Mortgage). 11. The loan agreement provides that the "customer" under the agreement is Mr Clarke and Mrs Clarke who are referred to as "you" (which in turn is defined to mean 'borrower'); the amount of the loan to be advanced is $1,500,000 (cl 1); the purpose of the loan is "to assist with the refinance of funding afforded by other financial institutions" (cl 6); Mr and Mrs Clarke are jointly required to pay interest and repay the principal of the loan in accordance with the schedule included in the loan agreement (General Conditions, cl 13); and the security for the loan is to comprise (a) a mortgage from Mrs Clarke over the Bellevue Hill property; (b) a guarantee from K&S and a mortgage from K&S over the Mackerel Beach property. 12. The guarantee which K&S gave to Macquarie was provided to the Court, at its request, after the hearing. Under this document, K&S (acting alone and as trustee of the Midnas Trust) guarantees all amounts owing at any time by Mr and Mrs Clarke to Macquarie under the loan agreement referred to in the previous paragraph. The guarantee, which was executed on behalf of K&S by both Mr and Mrs Clarke as directors, does not include a provision found in some guarantees to the effect that the lender can look to the guarantor as if the guarantor were a principal obligor (cf Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 at [90]). Consequently, K&S was liable purely as surety for the obligations of the named borrowers under the loan agreement (being Mr and Mrs Clarke). 13. The Mackerel Beach Mortgage secures the "Debt", which is defined in the registered mortgage memorandum which sets out the terms incorporated by reference into the mortgage, as being "all money actually or contingently owing by You to the Mortgagee now or in the future under the Mortgage or a Secured Arrangement". The term "Secured Arrangement" is defined to include any agreement or guarantee under which "You borrow or raise money … from, incur or owe obligations to, the Mortgagee". Consequently the Mackerel Beach Mortgage secured the obligations of K&S to Macquarie under the guarantee referred to above. Similarly, the Bellevue Hill Mortgage secures the "Debt", defined in the same way, and consequently secured the obligations of Mrs Clarke under the loan agreement referred to above. 14. On 15 April 2015 Mr and Mrs Clarke each signed a drawdown notice for the advance of $1,500,000, which stated that the amount of the advance was to be paid to an account in the name of Xcel. Given that the stated purpose of the loan was the 'refinance of funding afforded by other financial institutions' and the AMP bank statement showing that Xcel's loan account was credited with $1,500,000 on 4 May 2015 for the loan referred to at [10] above reducing the debt to nil. I infer that the funds were used to refinance the previous advance of $1,500,000 by AMP to Xcel. AMP provided a discharge of its mortgage on around 13 May 2015. 15. Around the same time that the documentation for Loan A was entered into, Macquarie Bank entered into loan agreements for two further loans, both secured by the mortgages over the Bellevue Hill property and the Mackerel Beach property referred to at [13]. These were as follows: 1. On 9 April 2015, K&S entered into a loan agreement with Macquarie for a loan of $296,400, which has been referred to by the parties as 'Loan C'. Mr and Mrs Clarke each gave guarantees for this loan. 2. On 15 April 2015, Xcel entered into a loan agreement with Macquarie Bank for a loan of $1,000,000, which has been referred to by the parties as 'Loan B'. Mr Clarke, Mrs Clarke, and K&S each gave guarantees of this loan. 1. In summary in April 2015, 1. Mr and Mrs Clarke entered into a loan agreement as joint borrowers for a loan of $1,500,000 from Macquarie (Loan A), which was paid by direction to Xcel to enable it to repay its loan from AMP; 2. Xcel entered into a loan agreement as borrower for a loan of $1,000,000 from Macquarie (Loan B), which was drawn down and paid to Xcel; 3. K&S entered into a loan agreement as borrower for a loan of $296,400 from Macquarie (Loan C) which was drawn down and paid to K&S; 4. Mr and Mrs Clarke and K&S each gave guarantees of the loans for which they were not named as borrowers; 5. Mrs Clarke gave Macquarie a registered mortgage over the Bellevue Hill property securing all monies owing by her to Macquarie; and 6. K&S gave Macquarie a registered mortgage over the Mackerel Beach property securing all monies owing by it to Macquarie. 1. On or around 18 July 2017, Ossen entered into a loan deed with Langer Property Group Pty Ltd (Langer), Xcel, Mr Clarke, and Mr Howell, for a loan of $3,000,000 (Ossen Loan). As recorded in the recitals and cl 3(b), the purpose of the Ossen Loan was the development of 53 Langer Avenue, Caringbah South, NSW 2229, being the whole of the land contained in Lot 139 of Deposited Plan 6930 (Langer Avenue Property). Xcel and Langer were named as borrowers, with Mr Clarke and Mr Howell as guarantors. The sum advanced was $3,000,000. Ossen was granted an equitable mortgage over the Mackerel Beach property by K&S as security for the Ossen Loan. Ossen also obtained a registered first-ranked mortgage over the Langer Avenue Property. Ossen paid the sum under the Ossen Loan by August 2017. The repayment date specified in the Ossen Loan was 22 February 2019. 2. The parties defaulted on the Ossen Loan. On 23 May 2019, Ossen appointed receivers and managers of Xcel, K&S, and Langer. From around May 2019, Mrs Clarke began making interest payments on each of Loans A, B, and C to Macquarie Bank. 3. On 3 July 2019, Ossen commenced proceedings to recover the amount due under the Ossen Loan. On 25 September 2019, Ossen obtained default judgment in these proceedings against Xcel, K&S, and Langer for $3,750,524.43 including costs. 4. On 17 October 2019, Mr Clarke was declared bankrupt following an action by Ossen. Mr Clarke did not give evidence in the proceedings which was explained on the basis that he is suffering from aphasia and dementia. 5. On 29 July 2020, Mrs Clarke sold the Bellevue Hill property for $3,475,000. 6. On 21 August 2020, Langer (then with receivers and managers appointed) sold the Langer Avenue Property for $2,500,000. After accounting for the costs of the sale, Ossen received $2,341,922.51 in proceeds. Ossen claims, that by October 2020, K&S owed it the remainder of the judgment sum, $1,693,029.18. This sum is subject to interest accumulation. 7. On 7 October 2020, using the funds from the sale of the Bellevue Hill property, Mrs Clarke repaid each of Loans A, B and C in full. This totalled $2,795,369, comprising $1,500,252.61 in respect of Loan A, $1,001,463.29 in respect of Loan B and $293,653.50 in respect of Loan C. 8. On 19 November 2020, Mrs Clarke entered into a deed of assignment with Macquarie Bank in respect of Loans B and C (Deed). The recitals to the deed of assignment record: A. Sandra and Kim were the borrowers under Loan A. B. Loan A was secured by the Bellevue Hill Mortgage. C. Sandra was the registered proprietor of the Bellevue Hill property. D. Sandra was the mortgagor under the Bellevue Hill Mortgage. E. Kim was made bankrupt on 15 September 2019. F. Receivers and Managers were appointed to K & S Developments and Xcel on 16 April 2019. G. Loan A, Loan B and Loan C were cross collateralised and the Bellevue Hill Mortgage, the Mackerel Beach Mortgage and the Guarantees secured each of them. H. Sandra was a guarantor under the Guarantees. I. Sandra entered into a contract to sell the Bellevue Hill property and completed the sale on the Effective Date. J. On the Effective Date Sandra as borrower repaid Loan A in full and as guarantor and indemnifier pursuant to the Guarantees repaid Loan B and C in full. K. Sandra has asserted a right to subrogation, including pursuant to section 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW). L In light of Sandra's asserted right to subrogation and in consideration of Sandra paying the principal debt in respect of Loan B and Loan C to the Bank the Bank have agreed to assign all of its right title and interest in Loans B and C to Sandra on the terms of this deed. M. In light of Sandra's asserted right to subrogation, and in consideration of Sandra paying the principal debt in respect of Loan B and Loan C to the Bank the Bank have agreed to transfer all of its right title and interest in the Guarantees and the Mackerel Beach Mortgage to Sandra on the terms of this deed. 1. Under cl 2 of the Deed, Macquarie: (a) acknowledged that Mrs Clarke had repaid all amounts owing to Macquarie in respect of Loans A, B, and C (cl 2.1); (b) transferred to Mrs Clarke all of its rights, title and interest in Loans B and C (cl 2.2); (c) transferred to Mrs Clarke all of its rights, title and interest in the guarantees in respect of Loans B and C, and the Mackerel Beach Mortgage, and agreed to execute a transfer of that mortgage in registrable form (cl 2.3 and cl 2.4). 2. It is not in dispute that as a consequence of the subsequent transfer of the Mackerel Beach Mortgage to Mrs Clarke pursuant to the Deed, Mrs Clarke was subrogated to the rights of Macquarie Bank in respect of that mortgage. 3. Mrs Clarke gave evidence which was not contested, that she had no involvement in the business of Xcel, which was managed by her husband, even during the periods referred to at [5] above when she was a director. However, it is clear that she received a number of financial benefits from Xcel over the period in which the loan transactions described above occurred as summarised below: 1. In 2005 Xcel conferred a benefit on Mrs Clarke when it became the borrower under the AMP loan facility which refinanced the loan previously made by GIO to Mrs Clarke of $950,000 to fund the purchase of the Bellevue Hill property. In addition, she received a benefit from Xcel paying interest on that part of the AMP loan facility at 6.74% per annum for approximately five years until the refinancing with Macquarie in 2015, which is in the order of $320,000; 2. In the period 2006 to 2018, Xcel transferred amounts totalling $155,802.48 into Mrs Clarke's accounts, which appear to have been payments for household and family expenses; 3. In the period 2015 to 2018 Xcel paid amounts totalling $116,296.04 in respect of a loan in Xcel's name to fund the purchase of Mrs Clarke's car. 1. Mrs Clarke also gave evidence that from time to time after 2006 she made loans to her husband from between $50,000 to $100,000 from her own personal funds, but the timing and amount of these loans and when they were repaid is not clear from the evidence. There is also some evidence that payments were made to her by Xcel described as "loan repayments" in the amount of $14,151.30, which were separate from the payments to her referred to in the previous paragraph. 2. Mrs Clarke gave evidence that she could not recall why she and Mr Clarke were named as borrowers in the loan agreement for Loan A. She also said that all three loans made by Macquarie were organised by Mr Clarke. However, there is a file note of a meeting on 10 March 2015 attended by Mr Robert Pritchard of Macquarie, Mr Allan Tilley (apparently a broker acting on behalf of Mr and Mrs Clarke) and Mr and Mrs Clarke, which was produced by Macquarie in response to a subpoena which records: Group discussions with broker, Allan Tilley and Kim & Sandra Clarke. Confirming that they would like to refinance their existing three facilities – a total of $2.8m – that is to be secured by their Bellevue Hill and Mackerel Beach properties. Both Kim and Sandra reiterated that they would like to refinance as they would like to consolidate their properties into the one bank to leverage their current equity in Bellevue Hill to support their borrowings against Mackerel Beach. The reason for deciding to go with Macquarie is that they would like a higher level of service and flexibility, that a business bank can provide them over a retail offering. 1. Mrs Clarke could not recall a meeting with Mr Pritchard, but she did recall attending a meeting with Mr Tilley at his office, prior to which Mr Clarke said to her words to the effect: "At this meeting, I'm going to arrange a refinance of Xcel loans so that they are all in one facility, to put them all into one package. You need to come along as your name is on the title of the Bellevue Hill property." 2. In the absence of evidence from Mr Clarke or Mr Tilley, I accept the file note produced by Macquarie as evidence that a meeting did occur between Mr and Mrs Clarke and Mr Pritchard of Macquarie and that the best evidence of what was discussed at that meeting in Mrs Clarke's presence is the file note. These proceedings 1. The present proceedings were commenced by a statement of claim filed by Ossen on 6 December 2021. 2. On 18 January 2023, pursuant to the orders of Darke J, the Mackerel Beach property was sold. The net proceeds of that sale were $2,553,328.21. Court records indicate that Ossen paid into Court $2,362,428.68, which it says followed the making of the following deductions: 1. costs of sale in the amount of $97,831.30; and 2. Ossen's costs of the proceedings up until 6 July 2022 (the date of Darke J's orders) of $89,082.53. The second deduction reflected Order 12 made by Darke J on 8 July 2022 which required the surplus of the proceeds of sale after various deductions to be paid into Court, and one of the specified deductions was "the plaintiff's costs of the proceedings to date". It may be noted that the deduction was provisional only, as the amount ultimately payable in respect of Ossen's costs payable by Mrs Clarke pursuant to Darke J's orders will only be determined once assessed or agreed. 1. On 3 March 2023, by consent, the following amounts were distributed from the funds held in Court: 1. $794,385.13 to Mrs Clarke; and 2. $350,000.00 to Ossen. 1. The balance has been held in Court pending further orders. 2. By her cross-claim filed on 10 October 2023, Mrs Clarke seeks the following primary relief: 1. A declaration that Xcel Property Group Pty Ltd received the benefit of the Loan A (as defined herein) and was thereby the true borrower of such loan. 2. A declaration that Mrs Clarke received no benefit from the Loan A (as defined herein) and was thereby a true guarantor of such loan together with K&S Developments Pty Ltd (K&S). 3. A declaration that K&S is liable to pay to Mrs Clarke one half of monies paid by her to satisfy Loan A and Loan B and all the monies she paid to satisfy Loan C (each of the Loans being defined herein) and that such liability is secured by the Mackerel Beach Mortgage (as defined herein) in priority to the interests of Ossen Pty Ltd (Ossen) and K&S Developments Pty Ltd in the Mackerel Beach property (as defined herein). 4. An order that Ossen and K&S pay to Mrs Clarke: (a) $750,126.30 (b) $500,731.64; and (c) $293,653.50 together with interest thereon from the proceeds of sale of the Mackerel Beach property in priority to any claim by Ossen or K&S. Issues 1. The parties agree that, in respect of each of Loans B and C, Mrs Clarke has been subrogated to the rights of Macquarie Bank through the deed of assignment and is entitled to contribution for half of the repayment amounts from K&S. This accords with the amounts sought in prayer 4(b) and (c) respectively. As can be seen, the amount ordered to be paid out of the funds in Court on 3 March 2023 outlined at [37] was calculated by adding the two amounts sought in relation to prayer 4(b) and (c), which corresponds to the principal amount of Loans B and C. 2. Therefore, the issues that remain for resolution are: 1. The extent to which Mrs Clarke is entitled to contribution from, or to enforce a statutory right of subrogation against, K&S in respect of the amount paid to discharge Loan A. Ossen accepts that if K&S owes money to Mrs Clarke in relation to Loan A, that amount is secured by the Mackerel Beach Mortgage which has priority to Ossen's equitable mortgage. 2. Mrs Clarke's claim that she is entitled to be paid contributions on the interest payments that she made to service the loans. Submissions Cross-claimant's submissions 1. Mrs Clarke relies upon the general equitable principle that a co-surety is entitled to contribution from others in the same position to share equitably in the burden imposed by their common obligation: Mahoney v McManus (1981) 180 CLR 370 at 376; [1981] HCA 54. She also submits that she has a statutory right of subrogation created by s 3(1)(b) of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW). The statutory right of subrogation co-exists with the entitlement to contribution: Barber v De Prima [2018] NSWSC 601 at [123]–[124]. For the purposes of these claims, any potential claim against Mr Clarke is discounted due to his bankruptcy: Barber v De Prima at [203]; Mahoney v McManus (1981) 180 CLR 370 at 376. 2. The essence of Mrs Clarke's submission on both causes of action is that she is entitled to contribution from, or to exercise her statutory right against, K&S in respect of the amount paid to discharge Loan A as they were co-sureties for the loan. This is despite Mrs Clarke being named as a borrower on the loan documents. Mrs Clarke submitted that equity looks behind the distinctions drawn in the contract to see the 'true' position of the parties to the transaction and the true borrower of the funds for Loan A was Xcel, which was the entity which benefited from the loan. 3. Initially, in the pleadings, it was submitted that Mrs Clarke obtained no benefit from Loan A. At the commencement of the hearing, senior counsel for Mrs Clarke conceded that she had obtained a benefit from the initial advance of money in 1999 in the sum of $950,000 and that this advance had been refinanced by the subsequent loan by AMP to Xcel. However, it was submitted that the benefit of the sums advanced under the 2002 and 2005 loan increases went solely to Xcel. 4. In support of the proposition that equity will intervene to ascertain the 'true' role of the parties to a loan agreement, Mrs Clarke relied on the decision of Bryson J in Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 at 127 and the subsequent observations in Re Jones; in the matter of Great Southern Ltd [2017] FCA 169 at [51] and Montevento Holdings Pty Ltd v Central City Pty Ltd [2021] WASC 154 at [194]. In Re Jones at [51], Gilmour J relied on Citibank for the proposition that in a case involving equitable contribution between co-obligors, the Court "may look beyond the terms of documents to identify the true relationship between parties". In Montevento, Allanson J relied on both of those decisions for the same proposition. 5. Mrs Clarke also relied on Santow JA's observations in Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841; [2002] NSWCA 413 at [90]–[91]. Although not a case concerning equitable contribution, but rather unconscionable conduct, his Honour made the following observations regarding the circumstances in which a borrower may be regarded as a volunteer only as to part of the moneys lent to a husband and wife: Guarantees of that classic sort typically provided that the lender might look to the guarantor as if the guarantor were a principal obligor. It was thus a short step for lenders to make loans on terms which eliminated that already elided distinction between principal obligor and guarantor. This was done by making, or deeming, the loan to be to both and rendering each primarily liable for the same obligation. This was so, even if, as here, the loan in reality was for the business purposes of only one of the two obligors though the house portion was for the benefit of both. Thus the lender would not usually concern itself as to who was the true borrower. Both obligors were rendered jointly and severally liable as principal debtors, or more accurately, co-principal debtors. That indeed was the case here, the loan being in form a joint loan, and jointly secured. However, the evidence shows that, as to the part of the loan not applied to the refinance of their house purchase, only the husband was the true borrower. In reality he borrowed for what was his business, not a jointly-owned business enterprise. Because, as regards the family home, the part borrowed for its re-finance was truly borrowed by both husband and wife, the wife was not a volunteer as to that portion. Thus if one considered the loan globally, the wife was not a volunteer. If one split the loan between its two applications, the wife here was a volunteer as to the business portion, but not the house portion, yet the loan was in each case expressed to be to both husband and wife. There is nothing in the evidence to indicate one way or the other whether the lender knew the husband wholly owned the business, though an enquiry as to that would be expected. 1. Mrs Clarke submitted that the objective circumstances of Loan A tend towards the conclusion that the true debtor under Loan A was Xcel. Mrs Clarke drew this conclusion from the fact that the monies were directed to Xcel immediately upon receipt in 2015, presumably to pay off the extant AMP liability. Looking at the history of the two loan balance increases in 2002 and 2005, both were for the benefit of Xcel, and it was only the refinance in 2015 that resulted in Mrs Clarke being named a borrower rather than a guarantor. In the 2005 loan increase application, Xcel was named as the borrower. The subsequent increases in 2002 and 2005 were the subject of separate applications and were just added to the same facility as that was the most convenient course. 2. Even if the initial advance of $950,000 was applied for Mrs Clarke's benefit, as she now accepts, that does not mean that she ought to be regarded as the borrower for the additional $550,000. Mrs Clarke submits that this is an appropriate case for equity to intervene in circumstances where she drew no benefit from the advance of the $550,000 and it was used by Xcel in furtherance of its business interests. Mrs Clarke was in the same position as the borrower referred to in Santow JA's analysis above, a volunteer to moneys used by her husband's entity for business activities. To the extent that she acceded to Macquarie's requirement that natural persons be nominated as borrowers, this is of no consequence in ascertaining the true liabilities that the parties had taken on in the transaction. 3. To the extent that the cross-defendant relies upon evidence of payments from Xcel to Mrs Clarke, there is no contest that those payments were made, however they were part of the general arrangement between Mr and Mrs Clarke for the sharing of household expenses. At all times Xcel was controlled by Mr Clarke and at no point did Mrs Clarke ever have any meaningful involvement in Xcel's activities. The payments were made to repay loans that she likely made out of her inheritance from 2006 onwards. In support of this proposition the cross claimant identified payments from Xcel to Mrs Clarke in the amount of $14,151.30, some of which were described in bank statements as 'loan repayments'. Cross-defendant's submissions 1. Ossen submits the only parties the two agreements with Macquarie for Loan A are Mr and Mrs Clarke as borrower and K&S as guarantor. Ossen submits that there is no case where equity has intervened to make a third party liable for a debt under a contract. The limit of equity's intervention has been to disregard the form of the contract and look to the substance of the transaction. Whether there is another action available for Mrs Clarke against Xcel is irrelevant. To the extent that the cross-claimant has relied upon previous authority, those cases all involve a named co-borrower claiming against a named guarantor: eg. In the matter of Great Southern Ltd (in liq) [2017] FCA 169 and Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116. 2. The statutory right of subrogation requires Mrs Clarke to point to some liability of K&S to her in relation to Loan A that makes it 'justly liable' to her. The only liability pointed to by the cross-claimant is the alleged liability of two co-sureties, which cannot be made out in the circumstances. Mrs Clarke is not in a position analogous to Ogilvie v Ferry [2010] NSWSC 379 where a co-guarantor that did not benefit from a loan was permitted to claim full recoupment from those guarantors who did benefit from the loan. 3. In any event, Mrs Clarke, on Ossen's submission, gained the lion's share of the benefit of Loan A in the initial advance of $950,000 and remained the true borrower from 1999 onwards. It is irrelevant that Xcel had the benefit of some of the money as a borrower in relation to the 2002 and 2005 loan increases. Ultimately, that does not change the position of Mrs Clarke as borrower under the Loan A agreement. 4. This position is reflected in the designation of parties in the Loan A agreement in 2015, where Mr and Mrs Clarke are accurately described as borrowers. Even if it is assumed that Mrs Clarke did not obtain any of the benefit of the 2002 and 2005 loan increases, then it must be accepted that almost two-thirds of the advance went to her direct benefit. Furthermore, the fact that Xcel was listed as the borrower in the 2005 increase does not change the analysis. Utilising Mrs Clarke's logic, in substance she remained the true borrower in 2005. By reverting to the previous position in 2015, Mrs Clarke was bringing to an end the inequitable position whereby Xcel had relieved her of her principal obligation to repay the money that she had borrowed from GIO initially. 5. In any event, Ossen submits that is inaccurate to say that Mrs Clarke obtained no benefit from the funds being advanced to Xcel, and the additional funds above the initial $950,000 advance. She also received the benefit of the amounts referred to at [30(b) and 30(c)] above during the period up to 2018, totalling $272,098.52. Consideration Equitable contribution 1. The doctrine of equitable contribution requires that where two or more persons are under co-ordinate liabilities to make good the one loss, then they should as between themselves contribute proportionately to the satisfaction of the loss: Mahoney v McManus (1981) 180 CLR 370 at 378, 385; Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [38]-[41]; HIH Claims Support Limited v Insurance Australia Limited (2011) 244 CLR 72 at [36]-[47]. It is based on the principle of natural justice that the common burden of the obligors should not be disturbed by the accident or chance that the creditor has selected one or some of the obligors for recovery rather than all: Friend v Brooker at [38]. 2. For liabilities to be "coordinate" it is necessary that they are "of the same nature and to the same extent": Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [15] and [38]; Friend v Brooker at [40]-[41]. It is not sufficient that obligations are merely owed to the same party and related to the same transaction or otherwise connected in time or circumstance: Friend v Brooker at [48]. 3. Examples of relationships which commonly give rise to coordinate liabilities are co-sureties, co-insurers, co-owners, partners, trustees and other fiduciaries, but the categories are not closed: JD Heydon et al, Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (5th Ed Lexis Nexis 2015) at [10-005] and [10-505]. 4. In determining whether two or more obligors share co-ordinate liabilities, in the sense of liabilities of the same nature and to the same extent, the Court is not limited to a consideration of the contractual obligations of the parties. A number of cases indicate that extrinsic evidence is admissible to determine who, as between the obligors, is in substance the principal debtor and which is or are merely sureties for the principal debtor: Craythorne v Swinburne (1807) 14 Ves Jun 160; 33 ER 482; AGC (Advances) Ltd v West (1984) 5 NSWLR 590; Reale Bros Pty Ltd v Reale [2003] NSWSC 666. 5. In Craythorne v Swinburne a bank advanced money on two bonds, one the joint and several bond given by S as principal and the plaintiff as surety, and the other by the defendant, expressed to be subject to a condition that it would be void if S or the plaintiff paid the amount due on the first bond. The plaintiff was not aware of the defendant's bond at the time he entered into the bond to which he was a party. After the death of S, the plaintiff paid the principal sum to the bank and sought contribution from the defendant. Lord Eldon held that no contribution was payable because the defendant was not a co-surety for the debt of S, but rather a surety for the plaintiff if he did not pay. Lord Eldon took into account evidence of a conversation between the defendant and a director of the bank to the effect that because it did not trust the security of S and the plaintiff, the bank would only advance the money to S if the defendant gave security to the bank that he would pay the debt if they did not. 6. Lord Eldon accepted that extrinsic evidence was admissible to determine who as between the plaintiff and the defendant was the principal debtor for the purposes of determining whether the plaintiff could seek contribution from the defendant as co-surety. In this case, the extrinsic evidence confirmed what the bond given by the defendant expressly provided, which was that, as between the plaintiff and the defendant, the plaintiff was to be treated as a principal debtor and consequently no contribution was available. Lord Eldon said (at 170): But it is clear upon the parole evidence; and why is not that competent evidence? Evidence is admitted to shew, who is the principal, and who the surety; and in order to determine that, to shew, to whom the money was advanced; and why is it not to be admitted to shew, to whom the money was advanced as between [the defendant] and the others. But this goes farther; for the evidence is, not in contradiction to, but in support of, the instrument; and, whether the demand is founded upon the equity only, or upon the implied contract, why should not the evidence be admitted to shew, that the equity ought not to be applied, and the contract ought not to be inferred? 1. The last sentence is a reference to the question Lord Eldon raised earlier at 169, which is whether the right of contribution by a co-surety was founded on an implied contract or equitable principles, as to which he preferred the latter view. The correctness of that approach has been confirmed in later cases: Bourke v LFOT Pty Ltd at [38]. 2. In AGC (Advances) Ltd v West, the defendant was the borrower under a deed of loan and guarantee and gave a mortgage over her home to secure the loan. Her obligations were guaranteed by her husband, as well as a company (The World of Quiche Pty Ltd) and three directors of the company. Mrs West gave a direction to the lender for the disbursement of the loan funds of which approximately $30,000 was paid to discharge an existing mortgage on her home and the balance was paid to a bank account of the company. Hodgson J found (at 602) on the evidence that there was an agreement between Mrs West and the company whereby in consideration of the company receiving approximately $38,000 from the proceeds of the advance, the company would make all payments due under the deed. In addition, his Honour found that based on extrinsic evidence as to the intention of the guarantors, coupled with the fact that 4/7th of the loan was received by the company, that as between Mrs West and the guarantors, the company was the principal borrower and each of the other obligors, including Mrs West who was the named borrower, were co-sureties with coordinate liabilities. His Honour said (at 602–603): In my view, the matter goes beyond the mere existence of that contract [between Mrs West and Quiche]. I am satisfied that all parties to the deed of loan and guarantee intended that the obligations of the borrower under that deed be performed by Quiche and in no other manner, so that in the event of Quiche not performing the obligations of that deed there would, ipso facto, be a default under that deed by the borrower. Such a failure by Quiche, and its associated default under the deed by the borrower, would thus give rise to a liability of all the guarantors under the deed, and would also at the same time expose Mrs West to the possibility of remedies being sought against her under the mortgage. When these considerations are coupled with the consideration that as intended by all parties, Quiche received approximately four-sevenths of the advance which was being made, I think it is correct to say that, in substance, Quiche was the principal borrower under the transaction, and in substance the liabilities of the other parties under the transaction were co-ordinate liabilities as substantial guarantors. I say that the liabilities of Mrs West and of the guarantors under the agreement (apart from Quiche), were co-ordinate for the reasons (as I stated above) that in substance they arose and were anticipated to arise in the event of a failure by Quiche to perform the obligations which everyone intended it would perform, and which it was bound to perform by its agreement with Mrs West to which I have referred. 1. After referring to the cases of Hollier v Eyre (1842) 9 Cl & Fin 1; 8 ER 313; Greenough v McClelland (1860) 2 El & El 429; 121 ER 162 and Rouse v Bradford Banking Co [1894] AC 586, Hodgson J continued: If that is the position which holds as between persons who are purportedly principal debtors and the creditor, then a fortiori it can be established by extrinsic evidence that, as between the debtors themselves, some are principal debtors and some sureties only. The circumstances in this case go, perhaps, a little further, in that what is sought to be established is that the person who according to the instrument is the principal debtor, was a surety only, while one of the persons who according to the instrument was a guarantor, was in fact the principal debtor. In my view, this difference does not prevent the application of the principles stated in those cases; and I have already given the reasons why I think the extrinsic evidence in this case does establish that Quiche was the principal borrower and Mrs West merely a guarantor. 1. It is apparent that an important factor in his Honour's conclusion that, as between all the obligors, Mrs West was a co-surety rather than a principal debtor, was that she was a volunteer as to 4/7th of the advance made by the lender. Ultimately, his Honour concluded that the four individual guarantors and Mrs West should contribute equally as between themselves because this reflected the benefits each received from the loan: see 604­–605. 2. Hodgson J's decision went on appeal to the Court of Appeal, but only on the question whether his Honour was correct to refuse Mrs West relief under the Contracts Review Act 1980 (NSW). The appeal was dismissed by majority without any suggestion that his Honour's approach to the equitable contribution issue was incorrect. 3. Hodgson J returned to the matter in Manzo v 555/255 Pitt Street Pty Ltd (1990) 21 NSWLR 7 where he said that "It is established that extrinsic evidence is admissible to show, in cases concerning guarantees, who is in substance a guarantor, and who is in substance a principle debtor", referring to his earlier decision in AGC (Advances) Ltd v West. 4. In Reale Bros Pty Ltd v Reale, Young CJ in Eq referred to both West and Manzo with approval, and stated at [51] that "it is clear that as between the persons named as grantor and guarantors inter se, extrinsic evidence may be admitted to show that there were equities which enabled a court of equity to decree inter se the real and substantive position between them." 5. Bryson J's decision in The Official Trustee in Bankruptcy v Citibank (1995) 38 NSWLR 116, on which Mrs Clarke relied, was concerned with a slightly different issue. In that case, a loan facility was advanced to a company, and its sole shareholders, a husband and wife, gave guarantees to the lender and a mortgage over their home. In addition, the husband's parents also gave a third-party mortgage over their home to the lender. The plaintiff was the trustee in bankruptcy of the husband and wife and having sold their home and used the proceeds of sale to repay the lender, he sought contribution from the husband's parents. 6. Bryson J held that the claim for contribution should fail for two alternative reasons. First, as the parents had given the guarantee to the lender at the request and for the benefit of the husband and wife, they were entitled to an indemnity from the husband and wife which negated the asserted right of contribution (at 119). The second and alternative reason was that in determining whether the guarantors had a common liability for the purpose of a claim for equitable contribution, the Court was not limited to a consideration of the terms of the documents which created the obligations of the guarantors to the bank. His Honour said (at 119): However, their characterisation as co-sureties with a common liability is only established prima facie by the terms of the documents, and, as ever with equitable relief, relief must be based on the substance of transactions, which is not established solely by the terms of those documents. It is a commonplace of cases relating to contribution that, although persons appear on the face of a document to have entered into a liability as sureties on the same basis, agreements or understandings among them or the circumstances in which they acted may establish that their true relationship is otherwise. In particular it may be established that as between them, one has primary liability and another has a liability to be resorted to only if resort to the first is insufficient. The remedy sought in this case is wholly equitable. There is no express or implied contractual undertaking that the second defendants would pay contribution. Underlying any decision to order contribution as an equitable remedy is a characterisation by the Court of the parties as in positions of equality so that equality of outcome is appropriate. The relationship among the persons concerned may of itself show that it is just that the primary liability should fall on one of them, so that remedies securing equality of outcome are not appropriate; or it may show that it is just that if the liability fall wholly on one of them that person should be indemnified, or it may show that he should have no remedy. The Court is not enforcing contractual or other legal rights of the parties, but is intervening, as a court of conscience, to secure a just outcome. Ordinarily equality produces a just outcome, but circumstances may show otherwise. There are many authorities in which it has been acknowledged that it may be shown by extrinsic evidence that a person stands in a different relation to other persons involved than the terms of their documents would show. In most cases the true relationship is shown by some express arrangement among those concerned, but there is no reason in principle why it may not appear clearly from the circumstances of the parties that they did not stand in an equal relationship with each other as sureties. An intention which is common to them, and an intention held by one of them at the time of becoming a surety, have been relied on to show that they are not in an equal relationship, and in principle there is no reason why it should not be held that their circumstances make their relationship sufficiently clear without any arrangement or objective expression of intention. Indeed, the case where it is most obvious that one is not entitled to contribution from another is the case where there is least likely to be express advertence to contribution. 1. His Honour concluded that while there was no express agreement or arrangement between the guarantors, having regard to all the circumstances as between the guarantors the true relationship was that the husband's parents were sureties for the husband and wife and consequently the plaintiff was not entitled to equitable contribution from the husband's parents. The relevant circumstances included the representations made by the husband and wife as to the order in which the properties would be sold to meet the debt and that the husband and wife received all the benefit from the loan and the husband's parents received none (which would produce the same result even if the representations had not been made), so that the "intention of the parties and agreements and arrangements between them" meant that they could not be allocated to the same rank: Citibank at 135. The parents' obligation was tertiary to that of the husband and wife, and therefore there was no right to contribution. His Honour concluded at 136: This could be expressed by saying that in equity [the husband and wife] should be ranked in substance as principal borrowers and [the parents] should be ranked as sureties; or by saying that [the company] should be ranked as the principal borrower, [the husband and wife] should be ranked as primary sureties and [the parents] should be ranked as subsequent sureties. 1. Although Bryson J expressed some reluctance at 135E in stating the reasoning in terms of an imputed intention, Bryson J's approach can be seen as involving the imputing of an intention to the parties from all the circumstances that two of the co-sureties ranked ahead of the other two: Global Consulting Services Pty Ltd v Gresham Property Investments Ltd [2018] NSWCA 255 at [65]-[67] per Leeming JA. 2. Citibank is distinguishable from the present case because it concerned persons who were at law under a common liability as guarantors for the same debt and hence subject to coordinate liabilities. The issue was whether the right to equitable contribution which would otherwise arise for two of those co-sureties was lost, because due to circumstances falling short of an agreement between them, they should be regarded in equity as primary obligors and the other two sureties as sureties for them. 3. In the present case, Mrs Clarke is a primary obligor and K&S is a surety. In order for Mrs Clarke to claim equitable contribution from K&S, she must establish that, based on extrinsic evidence, as between herself and K&S, the relationship in substance is that both were sureties for the same debt. 4. There is no evidence of any agreement or understanding or representation by or between any of Mr and Mrs Clarke and K&S that Xcel or for that matter Mr Clarke, would (as between themselves) be treated as the real borrower or primary obligor for Loan A. Nor can it be inferred from the circumstances of the transaction that Mrs Clarke was intended to be a co-surety with K&S for Loan A. The basis for the contention that Mrs Clarke was in substance a co-surety with K&S is that she was a volunteer in respect of all or part of the debt arising from the advance by Macquarie under Loan A, and the true borrower was Xcel. However, in my view the evidence does not establish that she was a volunteer in respect of any part of Loan A. Part of that loan refinanced the original borrowing of $950,000 for the purchase of her home and she received financial benefits from Xcel after 2005, which were at least equal to the amounts in [30] above, which in aggregate exceed $550,000. Further, it is not correct to say that Xcel was a vehicle for her husband's business, as it was the trustee of a discretionary trust of which she was a discretionary object and consequently she stood to benefit from its activities and did so through the payments referred to at [30] above. 5. A further difficulty with viewing Xcel as the real borrower as against Mr and Mrs Clarke is that they would not have coordinate liabilities with K&S as the debt for which K&S is a surety in respect of Loan A cannot be a debt owing by Xcel. K&S has no liability for the failure of Xcel to repay Mr and Mrs Clarke. This issue could be overcome if the transaction could be shown to be in substance, as between Mr and Mrs Clarke and K&S, a loan by Macquarie to Mr Clarke with Mrs Clarke and K&S acting as co-sureties for Mr Clarke. However, this fails for the same reason given in the previous paragraph which is that Mrs Clarke is not in substance a volunteer in respect of Loan A and there is no reason in equity to look behind the form of the transaction to find its true substance for the purposes of the principles of equitable contribution as being different from the form reflected by the agreements entered into. Interest payments made by Mrs Clarke 1. Mrs Clarke submits that in relation to Loans A, B, and C she is entitled to contribution from K&S in relation to the interest repayments she made in relation to those loans as well as the repayments of principal. Ossen submits that the cross claim does not seek relief in relation to the interest payments made in relation to Loans A, B or C. 2. It is true that prayer 4 of the cross-claim refers only to the principal amount of each loan. However, prayer 3 is not limited to repayments of principal and refers more generally to the moneys paid by Mrs Clarke "to satisfy" each loan. A payment of interest by a borrower or a guarantor to the lender (at least under loan agreements of the kind entered into with Macquarie in this case) is properly characterised as an amount paid to satisfy the loan because it is an amount due in respect of the loan and if it is not paid the borrower will be in default giving rise to the entire principal sum together with accrued interest becoming due. 3. Mrs Clarke is not entitled to contribution in respect of the interest on Loan A for the reasons given above. It is not in dispute that Mrs Clarke is entitled to contribution from K&S for one half of the principal amount of Loan B (where she and Ossen are co-sureties) and an indemnity for the whole of the principal amount of Loan C (where Ossen is the principal debtor and she is surety). In my view, she is also entitled to the same relief in respect of the interest she paid on Loans B and C. Conclusion 1. For the above reasons, Mrs Clarke is not entitled to contribution from K&S in respect of any amounts paid by her to Macquarie in respect of Loan A. However, she is entitled to contribution in respect of one half of the interest and principal paid by her to Macquarie in respect of Loan B, and all of the interest and principal paid by her to Macquarie in respect of Loan C. 2. The parties were in agreement that the calculation of the amounts payable as between Ossen and Mrs Clarke would need to be determined once the Court published its reasons on the issues in dispute. I will direct the parties to consult and bring in short minutes of order to give effect to these reasons and also for the making of submissions on costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 February 2024