AUSTRALIAN GUARANTEE CORPORATION LTD v BENSON SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL SAMUELS AP, MAHONEY and PRIESTLY JJA 4 October 1991, 12 December 1991 [1991] NSWCA 8 Transactions set up at trial involving sale of chattels from A to B, from B to C, and lease back from C to A — Performance of leases Guaranteed by defendants APPEAL from Commercial Division — Transactions set up at trial involving sale of chattels from A to B, from B to C, and lease back from C to A — Performance of leases guaranteed by defendants — Held (1) no evidence that B had in fact taken part in transactions with A or C, therefore the leases guaranteed were not valid so as to bind the guarantors; (2) Guarantors were not estopped from denying the validity of the leases or the guarantees, by reason of the way in which the proceeding was conducted. Samuels JA I agree with Mahoney JA. Mahoney JA Australian Guarantee Corporation Limited ("AGC") has sued the defendants claiming that they guaranteed the performance of two leases of machinery by AGC to Central Drum Services Pty Limited ("Central Drum'). The defendants contended that there were no such leases and accordingly that they were not liable as guarantors. Rogers CJ CommD found for the defendants and dismissed the plaintiff's claim. AGC has appealed to this Court against his Honour's judgment. The basic facts are not now in dispute and I shall state them in summary form. Central Drum carried on a business involving the reconditioning of drums. It had for the purpose two pieces of machinery. Towards the end of 1985, it desired to borrow money and for that purpose approached Westpac Banking Corporation ("Westpac"). Mr Fleck, the manager of the relevant Westpac branch, decided that the security which could be given for a loan to Central Drum was such that it was not an appropriate transaction for Westpac. He thought it was an appropriate transaction for AGC, a wholly owned subsidiary of Westpac, and he therefore suggested that Central Drum seek financial assistance from AGC. There was some difference at the trial as to what then took place. The learned trial judge in his judgment stated the matter as follows: "Following up that suggestion, in late 1985, Mr Fleck and a representative of the plaintiff, Mr McKeown, visited the Central Drum factory and inspected an automatic indexing internal drum rinse. Apparently, Mr McKeown took the view that the proposed transaction could not proceed with the vendor of the machinery to the plaintiff being also the proposed lessee, Central Drum. According to Messrs Benson and Hayes, to overcome this difficulty, either Mr Fleck or Mr McKeown enquired whether Mr Benson could arrange for another company to raise an invoice for the machine. Mr Hayes replied in the affirmative. Thereupon, according to Mr Benson, Mr McKeown explained how the invoice should be set out. Mr McKeown is alleged to have said: 2 UNREPORTED JUDGMENTS "Because the machinery has been fabricated by yourselves could you stamp it with a model number so that it could be identified?' I agreed to do this. I said: 'The amount we require is $40,000.' He said: 'The invoice should be for that amount." The machinery the subject of the first lease was worth far more than $40,000 and replacement cost, if purchased from third parties, may have been as high as $80,000.' The lease proposal in respect of the drum rinse, signed on behalf of Central Drum, was dated 30 December 1985. The supplier was shown as Geebung. The cost price of the automatic drum rinse was shown as $40,000. Against the heading 'Insurance Company', Mr Rice, the Assistant Manager of the Bank, inserted the words 'to be obtained'. The resulting lease agreement is dated 9 January 1986." In order to understand what, on the plaintiffs case, took place it is necessary to refer to the structure of Central Drum and the companies with which it was associated. Central Drum carried on the relevant business. It had two beneficial shareholders. One was a company Brethnim Pty Limited the shares in which were owned, it would appear, beneficially by Mr and Mrs Benson; the other was Geebung Investments Pty Limited, a company the shares in which were apparently owned by a Mr Hayes and/or his family. The directors of Central Drum were, it would appear, Mr and Mrs Benson and Mr Hayes. It does not appear whether any of the directors of any of these three companies had authority other than such as would ordinarily be incident to the office of director: it was not suggested that, for example, Mr or Mrs Benson or Mr Hayes occupied an executive position with any of the companies such as would grant them authority to act individually on behalf of the relevant company. Such matters do not appear to have been explored in any detail at the trial. Upon the contention of AGC, the transaction which took place in respect of the first lease involved: the sale of the relevant machinery by Central Drum to Geebung Investments Pty Limited for $40,000; the sale of the machinery by Geebung Investments Pty Limited to AGC for $40,000; and the lease of the machinery by AGC to Central Drum. The purported lease was a document described as "lease agreement" and in form an offer by Central Drum to AGC to take a lease of the machinery from AGC. The document contained a form of acceptance of that offer by AGC. There was, as part of the document, a form of guarantee in the following terms: "Tn consideration of the acceptance of this offer, I/We the person(s) referred to as the Guarantor(s) in the schedule above and (where more than one jointly and severally) hereby guarantee to the company accepting this offer the due and punctual payment by the Lessee of the lease rentals and every other sum payable by the Lessee under this agreement and the due performance and observance of the terms thereof upon the further terms set out in this agreement and in particular in CL13 and CL19 hereof." This form of guarantee was signed by Mr and Mrs Benson and it is upon it that AGC now sues. The learned trial judge's findings in respect of what took place were set forth as follows: "Nothing was done to effect a sale of the machinery from Central Drum to Geebung. An invoice was raised, in the name of Geebung, addressed to the plaintiff and in the sum of $40,000. Beyond that invoice and a subsequent cheque for $40,000 from the plaintiff in favour of Geebung, nothing further was done to effect a sale from Geebung to the plaintiff. It is difficult to see what title Geebung had, that it could have passed to the plaintiff, which would then have enabled it URJ AUSTRALIAN GUARANTEE CORPORATION LTD v BENSON (Mahoney JA) 3 to enter into the lease agreement with Central Drum. Mr Benson seemed to think that at the time of the lease, Geebung was already the owner of the machinery because 'it helped finance the building of it' (p 71). The plaintiff claims to have paid $40,000 to Geebung, which then lent that amount to Central Drum. According to both Messrs Hayes and Benson, that was not the way the transaction proceeded. Their recollection was that the $40,000 never went to Geebung but the cheque from the plaintiff to Geebung was endorsed and paid straight into the bank account of Central Drum which, indeed, was opened with the deposit of that $40,000. Mr Hayes' evidence was (pp 77 and 78): 'Q. Tell me a bit if you would be kind enough, about this deal that was struck with AGC in relation to the first lease of the machine. Where did that machine come from? A. It was a machine that the company had built and we were looking for finance to continue to expand the business. Q. When you say the company, you better just be a bit more specific, Central Drum Services Pty Ltd built the machine? A. Yes. Q. And it used for that purpose, some of the money that your family company had invested one assumes? A. Yes." 'Q. Once again, this is not said critically but in a spirit of enquiry; all that happened was that you produced a piece of paper in the name of Geebung to enable the transaction to proceed? A. Yes, well I just asked them what they wanted to put down. We constructed an invoice which met their requirements for the lease back. Q. But there was no sale from Central Drum to Geebung and then from Geebung to AGC. There was just a piece of paper which was an invoice? A. Yes. Q. What about the second machine. Was the transaction the same there? A. I was not involved in the second machine. I just wasn't there on a day to day basis. Q. Is this a fair assessment, that Central Drum Services needed $40,000, so the invoice was for $40,000? A. Yes I would say that was probably what transpired, yes."" The invoice which, at the suggestion of AGC's representative Mr McKeown, was prepared was an invoice on a standard form with the heading of Geebung Investments Pty Ltd. It was addressed to "Westpac Banking Corporation as agents for AGC Windsor" and purported to be in respect of: "One only; Automatic Indexing Internal 205L Drum Rinse; Serial Number 851218 $40,000" It is accepted that the value of the particular machine at the time was of the order of $60,000: $40,000 was the amount to be provided to Central Drum by AGC. It is accepted that AGC drew a cheque in favour of Geebung Investments Pty Ltd, that that cheque was endorsed by Geebung Investments Pty Ltd to Central Drum, and that the endorsed cheque was paid to the credit of the account of Central Drum with the Westpac branch managed by Mr Fleck. The lease document contains a declaration and warranty by Central Drum inter alia that: "I/We have never had any property or interest whatsoever in the goods". That was, of course, to the knowledge of all concerned not correct. There was no evidence to establish that Geebung Investments Pty Ltd entered into a transaction with Central Drum or with AGC, in the sense that it was party formally to either of these transactions. Mr Hayes was, it may be, aware of the arrangements for obtaining money from AGC but the evidence does not establish that, by its board of directors or otherwise, Geebung Investments Pty Ltd entered into any such transaction as is now alleged by AGC. The claim of AGC is, as I 4 UNREPORTED JUDGMENTS shall indicate, that by what was done, in the provision of an invoice and the participation of Mr Hayes and Mr Benson in the overall transaction, the relevant transactions between AGC, Geebung Investments Pty Ltd and Central Drum are to be inferred to have taken place. Subsequently, in or about April 1986, a similar transaction took place. Central Drum desired to have a further $60,000. His Honour found that Mr Fleck once more suggested to Mr Benson that he talk to AGC. By this time Mr Neubauer had taken over from Mr McKeown as the plaintiff's finance manager. The equipment proposed to be the subject of the transaction was a different machine. A proposal for lease in respect of the new machine was prepared and dated 24 April 1986. The name of the supplier was left blank and the cost price was shown as $60,000. As in the first instance, the documentation was prepared by AGC or its associates. An invoice was prepared. On this occasion it was an invoice purporting to be from Brethnim Pty Ltd to Westpac Banking Corporation as agents for AGC. It was dated April 23, 1986. Under the heading "Description" it referred to the machine as: "Manufactured to your specifications: one only degreasing plant as per your O/N 1075 Dated 18 Feb 1986 including...". Again $60,000 was the amount borrowed and not the true value of the machine. It had, of course, not been manufactured to the specification of Westpac Banking Corporation or AGC and this was known to all parties. Again, the cheque was made out for $60,000 in favour of Brethnim Pty Ltd, was endorsed to Central Drum, and was banked to the account of that company. The lease document was mutatis mutandis in the same form as that in respect of the first transaction and the guarantee was executed by Mr and Mrs Benson in the same form. Subsequently, both machines were destroyed by vandals. Contrary to the requirements of the documents, they were not insured. The purported leases were not performed by Central Drum, the transactions were terminated by AGC, and AGC thereupon sued Mr and Mrs Benson on the respective guarantees. At the trial, the defence was initially one relating to, as the defendants claimed, a promise by AGC itself to arrange insurance. This was found against the defendants. However, during the proceeding, no doubt as the nature of the suggested transactions emerged, the defendants set up as a defence the contention that they were not liable on the guarantees because there had in fact been no such transactions by way of lease or otherwise, as formed the basis of the plaintiff's claim. It was this contention which the learned trial judge accepted. In his judgment his Honour said that "it was basic to the transaction between the plaintiff and Central Drum that the plaintiff should have acquired title to the machinery the subject of the two leasing agreements". His Honour held that that had not occurred. He said: "The plaintiff purportedly acquired the two pieces of machinery from Geebung and Brethnim respectively. The purchases from the two companies were evidenced by the invoice from the two companies respectively to the plaintiff and the cheque for the purchase price from the plaintiff in favour of the drawer of the invoice. The difficulty lies in the fact that, at the relevant time, neither of the two companies had title to the goods. Nothing was done in order to effect a transfer of title from Central Drum to either Geebung or Brethnim." His Honour rejected the plaintiff's submission that Mr and Mrs Benson were estopped from contending that the two intervening companies "did not pass title to the plaintiff and that at the time of entering into the leasing agreements the plaintiff had no title". His Honour said: URJ AUSTRALIAN GUARANTEE CORPORATION LTD v BENSON (Mahoney JA) 5 "The transactions were structured in the way they were as a result of the directions of the two officers of the plaintiff, Messrs McKeown and Neubauer, who negotiated it with Central Drum. As I have earlier outlined, Mr McKeown was responsible for bringing into existence what, to all intents and purposes, was a fictitious invoice from Geebung in respect of the sale of the machinery. On the second occasion, Mr Neubauer, rejected the first invoice prepared by Mr Benson and the transaction proceeded only when Mr Benson brought into existence another invoice from Brethnim which apparently met Mr Neubauer's requirements. In other words, there was never any matter or fact relating to the true nature of the transaction which was not known to the plaintiff's officers. In those circumstances, it does not appear to me that there is any unconscionability involved in eliciting the true legal consequences from the facts known to all the parties. To put it in colloquial terms, it was known to all that the two invoices from Geebung and Brethnim, respectively, were fictitious invoices and if the plaintiff, through its officers was content to accept a fictitious invoice, it can hardly now complain if, as a result, title did not pass to it." His Honour then added: "Although I can visualise other ways of approaching this question of title, the plaintiff put it on no basis other than the ones I have dealt with already. In the absence of argument, it is unnecessary and inappropriate that I should deal with other matters." It was on this basis that the matter proceeded below. Before this Court, the argument has been based essentially upon two grounds: that there were in fact the two series of transactions which the plaintiff has set up; and that (if there were not) the defendants are estopped from denying that there were. I shall consider these two contentions in turn. 1. The actual transactions: It was submitted for AGC that the parties intended the transactions to be those to which I have referred: in each case the sale of the machinery from Central Drum to the intervening company; the sale by the intervening company to AGC; and the lease by AGC to Central Drum. The submission suggested that, with appropriate qualifications, the transactions which took place should be inferred to be those which were so intended. In general, the importance of intention may be accepted. If all of the parties concerned in a transaction intend that the title to goods is to pass in a particular way and if what is done is appropriate to achieve that, the law should endeavour to give effect to what was intended. The fact that formalities which, in legal conveyancing, would be appropriate have not been followed should not, in general, prevent the court giving effect to the parties' intentions. In the present case, two questions arise. First, it may be asked whether the parties in fact intended that there should be the tripartite transaction to which I have referred or whether what was done was merely a sham for the purpose, for example, of creating the appearance for those concerned within AGC that the policy that there be no "sale and lease back" had been complied with. The learned judge did not in terms make a finding upon this matter. He referred to the invoices as "fictitious" but it is not clear whether by this his Honour intended a finding that the transactions in question were not real but sham. That matter is not completely clear. On the one hand, the parties, by the form of payment through which they went, acted as if the tripartite transaction had taken place. On the other hand, it was said by one of the officers of AGC that, although the policy was that the company should not participate in "sale and lease back" 6 UNREPORTED JUDGMENTS transactions, it was done "all the time". I shall assume in favour of AGC that it was the tripartite transactions which the parties intended. The second question is that which the trial judge considered and to which argument was addressed in this Court, namely, whether there were deficiencies in what was done such as would prevent the court concluding that the tripartite transactions in fact took place. The learned judge's conclusion was that neither of the two intervening companies entered into any transaction. It was necessary that they be parties to the purchase and sale of the machinery. He concluded that they were not. That conclusion, if it be correct, establishes that there were no tripartite transactions as claimed. On the face of the material which is before this Court, there is in my opinion substance in his Honour's view. Transactions of the present kind may take place mainly in three ways: there may be a formal transaction, effected by a board resolution or the like; there may be a transaction effected by an agent duly authorised by the corporation in question; or it may be inferred from what was said and done that the transaction must have in some way taken place. There was no formal act of either company, eg, as on a resolution of its directors, to effect such a purchase and resale. It was not suggested that there was. Nothing was done to establish the authority of Mr Benson or Mr Hayes to bind either company. The fact that one or other of them was a director of an intervening company or that, if asked to do so, they might have arranged for the relevant company to buy and sell in the contemplated manner does not mean that it should be concluded that in the present case they did so. They were not asked to do so and gave no attention to doing so. In some circumstances, a company which has not been proved to have entered formally into a transaction or to have authorised an agent to do so on its behalf may be held to have entered into the transaction. Thus, what the company has been proved to have done may be sufficient to justify and to warrant the court in holding that it did in fact enter into the transaction alleged; or, though it did not in fact enter into the transaction, it may be held to have done so because, for example, it has taken benefits as if it had. In a different context, reference was made to the second of these in Naas v Westminster Bank Limited (1940) AC 366. In the present case, I have assumed that AGC, Central Drum, and Mr Benson and Mr Hayes, insofar as they thought about what was to be done, intended that the tripartite transactions should take place and accordingly intended that the intervening companies should buy and sell the machines. No conveyancing formality is required to pass the title to chattels; I shall assume that the extent to which the machines were affixed to the freehold or otherwise placed in the factory did not require that formal documents be executed to effect the purchase and resale of them. And, as I have said, cheques were drawn, endorsed and banked as if the tripartite transactions had taken place. The court does not know precisely how this was effected: it does not appear, for example, how the endorsement of the cheque from AGC to the intervening company was effected so that the title to it passed to Central Drum. But, however that be, in some circumstances there may be warrant for the inference that the transactions alleged did take place. However, in the present case, the matter is not left to inference. The court knows that in fact the intervening companies did not take part in the alleged transactions and that there was no person who had authority to involve them in them. If the court knows these things, it is, in my opinion, not proper to URJ AUSTRALIAN GUARANTEE CORPORATION LTD v BENSON (Mahoney JA) 7 infer that the transactions took place: it is wrong to infer that a transaction took place which the court knows did not take place. Nor did the intervening companies take benefits which, in the relevant sense, would justify the imposition of such transactions upon them. The assumed form of the tripartite transactions envisaged that, at the end of each of them, the two companies would neither gain nor lose. I see nothing in what took place which requires that they be held to have been involved in the tripartite transactions. Therefore the fact, as I have assumed, that AGC, Central Drum, and Mr Benson and Mr Hayes intended that the title to the machines pass in the relevant fashion does not produce the result that it did because, as they were each aware, the intervening companies did not participate in the transaction and therefore the steps which it was intended they should take were not in fact taken. 2. Estoppel and similar matters: Mr Bathurst QC, for AGC, submitted that, if the tripartite transactions did not in fact take place, that did not affect the validity of the guarantees given by Mr and Mrs Benson. His submission was to the effect that Mr Benson knew what had taken place, that he acted for Mrs Benson, and that in the circumstances, by virtue of the principle of estoppel or otherwise, Mr and Mrs Benson could not deny that the tripartite transactions had taken place as intended. The principles regulating estoppels and the like have recently been considered by the High Court of Australia in Commonwealth v Verwayen (1990) 170 CLR 394. It is not, in my opinion, necessary to review the judgments given in that case. In the end, the effect of the argument for AGC in this regard is that Mr and Mrs Benson are prevented from contending that the tripartite transactions did not take place and in particular from contending that the sales from Central Drum to the intervening companies and from them to AGC did not take place. But, as I understand the learned trial judge to have found, AGC and Central Drum knew in fact what had happened: indeed, it was AGC which created the appearance of sales which, to its knowledge, did not take place. He concluded that the principles of estoppel did not operate to prevent Mr and Mrs Benson denying the relevant sales when all parties knew that they did not take place. If the matter be considered by reference only to what, at earlier times, was the basis of common law estoppel by representation, his Honour's conclusion was correct. AGC could not claim that it relied upon a representation that the tripartite transactions had taken place when, through its agents Mr McKeown and Mr Neubauer, it knew that they had not. But, I think, Mr Bathurst QC put the matter upon a different basis. The effect of his argument was, in part at least, that the existence of the tripartite transactions was a state of affairs which, in the circumstances, Mr and Mrs Benson could not deny without unconscionability of the kind referred to in the Verwayen case. There is, of course, force in this contention. Mr and Mrs Benson knew that the giving of the relevant guarantees by them was essential if AGC was to advance the two sums of $40,000 and $60,000 to Central Drum. Central Drum was a company in which one at least of them was interested and, in that sense, they benefited from those advances. But the matter did not end there. What was set up by Mr McKeown and Mr Neubauer was a false transaction, created in a fashion known to be false and supported by statements known to be false. It is, in my opinion, not unconscionable for Mr and Mrs Benson to deny that such a transaction took place. 8 UNREPORTED JUDGMENTS There are, of course, circumstances in which an estoppel may arise from an assumed or conventional understanding. It may be that an estoppel in the broad sense contemplated by the judgments in Verwayen can exist notwithstanding that the state of facts which is to be assumed or not denied is not known to be true or, perhaps, positively known to be false. But in this case, as I have indicated, the invoices were knowingly created on a false basis: the so called price of the goods was not a true sale price and statements made in the invoices were knowingly false. The warranty contained in the lease documents, to the effect that Central Drum had not had an interest in the goods, knowingly created a false appearance. And, as I have indicated, this was done so that those in AGC who were concerned with such matters would either believe that the transactions were other than they were or would be accommodated by the false appearance which was given to them. I do not think that, whatever presently be the basis of the law of estoppel, it operates to prevent Mr and Mrs Benson denying that a transaction set up and executed in that way in fact took place. In my opinion, therefore, the case advanced by AGC in support of estoppel should not succeed. I am conscious that, in form, the guarantees given by Mr and Mrs Benson make no reference in their terms to the circumstance in which AGC acquired, or is said to have acquired, the title to the machinery which, in the two transactions, it purported to lease to Central Drum. I am conscious also that, as between AGC and Central Drum, estoppels might have been invoked by AGC to prevent Central Drum denying the title of AGC to the machinery leased. It may be that AGC could have advanced a case based on a sale by Central Drum to AGC and a lease of the machinery back to Central Drum. But that, I think, was not the basis on which the case was argued before the learned judge. As I have indicated, his Honour referred to "other ways of approaching this question of title" and noted that they had not been argued. If the matter had been put in that way, it may be that, at the trial, different issues would have arisen or different evidence would have been brought. I do not think that it is open to AGC at this stage to seek to support the overall transaction guaranteed by Mr and Mrs Benson in a manner other than that advanced before the trial judge. Iam conscious also that, Mr Benson and, I shall assume Mrs Benson through him, knew at least in general terms what had taken place and accordingly the defective nature of the transactions. Such matters are relevant at least in determining whether what they now set up is unconscionable. And it may be that there are other bases on which claims against them or their companies can be made. But Central Drum is now in liquidation. The contests which may arise between it and its creditors on the one hand and its shareholders on the other should not be complicated by speculation of this kind. It is, in my opinion, appropriate to deal with this matter upon the basis that it was put at the trial. In my opinion, therefore, the appeal should be dismissed with costs. Priestley JA I agree with Mahoney JA. Appeal dismissed with costs. Counsel for Appellant: T Bathurst QC with DR Conti Solicitors for Appellant: Clayton Utz Counsel for Respondent: C Birch URJ AUSTRALIAN GUARANTEE CORPORATION LTD v BENSON (Priestley JA) Solicitors for Respondent: Helliars Solicitors