NATHAN NOMINEES PTY LTD v BOULTON SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, SHELLER and Cripps JJA 27 August 1993, 20 September 1993 [1993] NSWCA 188 CONTRACT — ESTOPPEL BY CONVENTION — A deed of charge was expressed to secure certain debts by one company to an individual. In truth the only relevant debts were owed, not to the individual, but to a company with which the individual was associated. No reliance was placed upon estoppel by convention at the trial, and it was conceded that it was too late to raise it on the appeal. HELD: in those circumstances the deed of charge was ineffectual. Greer v Kettle [1938] AC 156, Amalgamated Investment and Property Co Ltd v Texas Bank [1982] 1 QB 84 considered. Gleeson CJ The issue in this appeal concerns the meaning and effect of an instrument of charge. The information that was put before the trial judge, Brownie J, by way of explanation of some puzzling features concerning the form of the instrument was economical in the extreme. The proceedings were inappropriately constituted, in that a party having a vital interest in the issue for determination was missing. The charge contains provisions that are internally inconsistent, and there was no evidence from the persons who were responsible for its preparation. Labouring under those difficulties, Brownie J made certain declarations as to the effect of the instrument of charge, and those declarations are challenged in this appeal. The facts, insofar as they appear from the evidence, may be summarised as follows. In July 1988 Mr Robert Boulton, and a company with which he was associated, and which was suggested by some of the evidence to be controlled by him, now named Idyam Pty Ltd, sold a factoring business to interests associated with a Mr Nathan. The contract of sale was contained in an agreement dated 1 July 1988. The factoring business was owned and conducted by Idyam, but Mr Boulton owned some computer software which was associated with the business and which was also the subject of the sale. Idyam sold the goodwill of the business, the right to use the name under which the business had been conducted, and some computer hardware. Mr Boulton sold the computer software. The purchaser was a company that is now named Boulton Factors (NSW) Pty Ltd. It is now in liquidation. The sale agreement contained a provision which obliged Idyam to lend to Boulton Factors all moneys, up to a maximum of $800,000, received by Idyam pursuant to certain factoring transactions entered into by Idyam prior to completion. The agreement went on to provide for the obligations of Boulton Factors in relation to the repayment of the loan moneys to Idyam. It is unnecessary to go into the detail of those provisions. It is common ground that loan moneys were paid by Idyam to Boulton Factors pursuant to the provisions referred to above, and that at the time of the proceedings before Brownie J the amount of the indebtedness of Boulton Factors was $607,099.39. 2 UNREPORTED JUDGMENTS The next material transaction occurred on 20 September 1989. A member of the Nathan group of companies named Nathan Nominees Pty Ltd, which is now also in liquidation, agreed to make a loan to Boulton Factors. That loan was secured by a deed of charge dated 20 September 1989. The charge secured all moneys owed or to be owed by Boulton Factors to Nathan Nominees. The charge was over the whole of the assets and undertaking of Boulton Factors. Boulton Factors had the right to create other charges ranking in priority to or pari passu with or after the security created, but only with the consent in writing of Nathan Nominees. That charge was registered and has subsisted at all material times since 20 September 1989. By virtue of the charge the liquidator of Boulton Factors is obliged to make the assets of the company available to the secured creditor. Whether the unsecured creditors of the company will have anything left for them is not disclosed by the evidence. At all material times payments of interest under the loan arrangements contemplated by the original sale agreement have been made by Boulton Factors to Idyam. In November 1989 there was a meeting between Mr Nathan and Mr Boulton which was evidently arranged for the purpose of renegotiating the loan arrangements in certain respects. A memorandum of that meeting records the following: "The loan funds advanced to Boulton Factors (NSW) Pty Ltd (Boulton Factors") by Mr Boulton or his corporate entity amount to $600,000 plus accrued interest. The principal sum of $600,000 or any part thereof will not be called before June 30, 1990. After June 30, 1990, the maximum amount of principal money called in any one month will not exceed $60,000. Seven days notice will be given before each call of funds. The interest rate paid on the above deposit is to remain on the same basis, ie 90 Day Bank Bill Rate plus 2.6% pa, in consideration for the loan remaining Interest payment dates remain the same. The above loan funds are to be included under the existing first charge. This advance is to rank pari passu, with other first charge lenders, as to security. The first charge documentation is to be provided to Mr Boulton's solicitor for his perusal. Anthony Jackson is to be instructed to document this agreement as soon as possible, and forward the existing first charge documentation to Mr Boulton 's solicitor." It is the first paragraph of that memorandum, that has, in a sense, become the source of the present problem. The paragraph refers to loan funds advanced "by Mr Boulton or his corporate entity". As was noted above, the sale agreement provided that the loan funds would be advanced by Idyam, and it appears that they were advanced by Idyam. However, when the parties or their respective solicitors came to prepare an instrument of charge to give effect to the arrangements referred to in the memorandum, Idyam appears to have been ignored. The instrument of charge was a deed bearing date 7 February 1990. The parties to it were Mr Boulton, referred to as "the Mortgagee", Boulton Factors, Nathan Limited (which was the guarantor of the obligations of Boulton Factors) and Nathan Nominees. The deed was in the following terms. (Boulton Factors was referred to as "the Company". Another company which previously had that name is also mentioned). URJ NATHAN NOMINEES PTY LTD v BOULTON (Gleeson CJ) 3 "A, Pursuant to an Agreement ("the Sale Agreement") made the Ist day of July 1988 between the Company (then known as Barroese Pty Ltd) of the first part Boulton Factors Pty Ltd of the second part the Mortgagee of the third part and Nathans Ltd of the fourth part a true copy of which is annexed hereto marked 'A' the Mortgagee lent to the Company upon the terms and conditions in the Sale Agreement set forth the moneys therein agreed by the Mortgagee to be lent by the Mortgagee to the Company (the Loan Moneys "). B. The Company has repaid to the Mortgagee certain of the loan moneys so lent by the Mortgagee to the Company and the Mortgagee and the Company have agreed that in consideration of the execution hereof by the Company the balance of the loan moneys namely six hundred thousand dollars ($600,000) shall notwithstanding the provisions of the Sale Agreement be repaid in accordance with the provisions of CL(2) hereof. C. The Company on 20th September 1989 executed in favour of Nathan Nominees a Deed of Equitable Mortgage ("the New Charge") a copy whereof is annexed hereto marked 'B' whereby the Company charged all its assets and undertaking and its uncalled capital in favour of Nathan Nominees to secure the moneys therein referred to as secured thereby which is provisionally registered number 41803 with the Corporate Affairs Commission of New South Wales. NOW THIS DEED WITNESSETH and it is hereby agreed and declared by and between the parties as follows: 1. For the purpose of this Deed the expression 'the moneys hereby secured' shall mean such of the Loan Moneys and interest thereon as shall be owing or payable from time to time by the Company to the Mortgagee pursuant to the Sale Agreement. 2. With the consent of the Guarantor the Company and the Mortgagee covenant each with the other: [a] that notwithstanding the provisions of the Sale Agreement (which shall be deemed to be hereby amended to the extent necessary to give effect to the provisions of this para[a]) the Mortgagee will accept from the Company for the consideration aforesaid repayment of the balance of the Loan Moneys remaining unpaid namely the said sum of $600,000 by instalments not exceeding in all the sum of $50,000 in any period of one month within seven (7) days of demand made in writing from time to time for each such instalment made provided that no such demand shall be made prior to 1 July 1990. [b] that in all other respects including (without limiting the generality of the foregoing in respect of interest payable upon the Loan Moneys or such amount thereof as from time to time remains unpaid) the provisions of the Sale Agreement shall except as provided by paragraph [a] of this Clause remain in full force and effect; and [c] that the Company hereby conditionally upon the Mortgagee executing this Deed covenants with the Mortgagee in terms of the Charge Schedule hereto. 3. Notwithstanding anything in this Deed (including the said Charge Schedule) contained the Mortgagee by its execution hereof does hereby consent to the creation by the Company of the New Charge and consents to the acceptance by the Company without limitation of moneys by way of loan secured by the New Charge PROVIDED ALWAYS that the Charge hereby created shall rank in all respects pari passu with the New Charge. 4 UNREPORTED JUDGMENTS 4. By its execution hereof the Guarantor does hereby ratify and confirm its unconditional guarantee to the Mortgagee of the strict and punctual performance and observance by the Company of all the terms and conditions more particularly set forth in the Sale Agreement as amended by this Deed as if such were fully set out therein. 5. The charge hereby created shall ipso facto become enforceable should the charge created by the New Charge become validly enforceable. 6. By its execution thereof Nathan Nominees does hereby consent to the charge hereby created ranking pari passu in all respects with the New Charge. " There was a schedule to the deed which contained the provisions of the charge referred to in it. That schedule included the following covenant: "2. (Boulton Factors) HEREBY COVENANTS with (Mr Boulton) that (Boulton Factors) will repay or pay to (Mr Boulton) the moneys hereby secured at the times and in the manner hereinafter provided... " As appears from CL1 of the deed, the expression "the moneys hereby secured " was defined to mean such of the loan moneys and interest thereon as should be owing or payable from time to time by Boulton Factors to Mr Boulton pursuant to the sale agreement. The problem is that the loan monies payable pursuant to the sale agreement were not payable by Boulton Factors to Mr Boulton but were payable to Idyam. Idyam was not a party to the deed of 7 February 1990, nor is it a party to these proceedings. The deed of 7 February 1990 annexed a copy of both the sale agreement of 1 July 1988 and the Nathan Nominees charge of 20 September 1989. How it came about that the parties to the deed of 7 February 1990 expressed themselves on the basis that the loan moneys were owing by Boulton Factors to Mr Boulton personally, rather than to Idyam, is left unexplained by the evidence. There is no suggestion that, prior to 7 February 1990, or, for that matter, since that date, Idyam assigned to Mr Boulton the debt that was owing to it by Boulton Factors. In 1992 Mr Boulton commenced these proceedings, naming as the defendants Nathan Nominees and Boulton Factors. Boulton Factors has never taken any active part in the proceedings. The proceedings have resolved themselves into a dispute between Mr Boulton and Nathan Nominees. The primary subject matter of the dispute is Mr Boulton's claim that Boulton Factors is indebted to him personally in an amount slightly in excess of $600,000 and that the debt is secured by a charge, created on 7 February 1990, which ranks pari passu with the charge in favour of Nathan Nominees. For its part, Nathan Nominees denies that Boulton Factors owes Mr Boulton anything to which the charge created on 7 February 1990 can attach. The contention of Nathan Nominees has been put in a variety of ways. It seems that one of the arguments advanced at first instance was that the deed of 7 February 1990 was never intended by the parties to have any legal affect. This contention was rightly rejected by Brownie J. Even though their intention may have miscarried, it is obvious that the parties to the deed intended to achieve something of legal consequence. On this appeal the principal argument for Nathan Nominees was that there is not and never has been any debt owing by Boulton Factors to Mr Boulton personally which falls within the definition of the loan moneys contained in the deed and which is the subject of the charge created, or purportedly created, by the deed. There are thus, in fact, no loan moneys as defined by CL1 of the deed. The charge has nothing to which it can attach. (cf Greer v Kettle [1938] AC 166 at 165). URJ NATHAN NOMINEES PTY LTD v BOULTON (Gleeson CJ) 5 It is a matter of surprise that the parties attempted to litigate this matter in the absence of Idyam. The primary question in the case is whether there is a debt owing by Boulton Factors to Mr Boulton to which the charge created by the deed of 7 February 1990 attached. There is no doubt that there are loan moneys owed by Boulton Factors pursuant to the original sale agreement, and the amount of the debt owed by that company is $607,099.39. There are only two possibilities. Either the debt is owed to Idyam or it is owed to Mr Boulton. In that respect there is no suggestion that there has been any material change in the identity of the relevant creditor since 7 February 1990, although on one possible view of the matter such a change might have occurred on that date. Brownie J made the following declarations: 1. The deed dated 7 February 1990 between (Mr Boulton) and (Nathan Nominees) is a valid and enforceable agreement. 2. The deed dated 7 February 1990 ranks pari passu with the registered charge granted in favour of (Nathan Nominees) and dated 20 September 1988. 3. An amount of $607,099.39 is owing to (Mr Boulton) from (Boulton Factors) and secured by the deed dated 7 February 1990. It is the third of those declarations that gives rise to the primary question in this appeal. If that declaration be correct, then I see no difficulty about the first two declarations. Before coming to the process of reasoning by which his Honour reached the conclusion expressed in the third declaration it is necessary to make some observations about the way in which the plaintiffs case was put at first instance. There has never been any claim for rectification of the deed of 7 February 1990. It might be thought that if all that occurred was that the parties to the deed mistakenly overlooked the fact, which is obvious enough from the annexures to the deed, that the loan moneys under the original sale agreement were owed to Idyam rather than to Mr Boulton, but it was nevertheless their intention that, for the future, Mr Boulton should replace Idyam as the creditor, then they could have achieved that result by joining Idyam as a party to the deed and assigning the debt to Mr Boulton. Nor was the case fought on the basis of estoppel by convention (cf Amalgamated Investment and Property Co Ltd v Texas Bank [1982] 1 QB 84). If that had been done there might have been more evidence as to the facts and circumstances surrounding the transaction. I shall return to this matter below. It is not easy to understand why there was no claim for rectification of the deed, and no case based on estoppel by convention. For that matter, it is not easy to understand why Mr Boulton has apparently never attempted to cure the problem by taking from Idyam an assignment of the debt owed by Boulton Factors. The case has been argued on behalf of Mr Boulton as though the primary issue is one of the construction of the deed. This, however, misses the point. There is no doubt about the intention of the parties to the deed, as reflected in the instrument which they executed. The puzzle is as to why they should have entertained such an intention. The deed was framed upon the assumption that the loan moneys under the sale agreement were owed to Mr Boulton personally, and, upon that basis, the terms of the loan were altered in certain respects, some favourable to the creditor and some favourable to the debtor, and security was given to Mr Boulton for what was assumed to be the debt owing to him. The case for the appellant is, simply, that the assumption was erroneous and that, in consequence, the deed has no relevant effect. The reasoning of Brownie J, which resulted in the above declarations, and, in particular, the third declaration, was expressed as follows: 6 UNREPORTED JUDGMENTS "Considering the Sale Agreement and the deed of 7 February 1990 by themselves, (the appellant's argument) is a powerful argument, but since acceptance of it would be to deprive the deed of any effective operation, and since I think that, more likely than not, the parties intended it to have legal effect, I conclude, rather doubtfully, that the point should be determined in favour of the plaintiff. Perhaps the confusion of the interests of the plaintiff and of Idyam was only another manifestation of the general lack of concentrated thought connected with the transaction generally. However,...., I conclude that the parties to the deed should be taken to have intended to enter into a legally binding agreement, and to that extent, to have intended, as between themselves, to have amended the Sale Agreement, so as to make the plaintiff rather than Idyam the creditor of (Boulton Factors), and so as to create in favour of the plaintiff a charge, in consideration of the giving to (Boulton Factors) of further time to pay the debt." His Honour considered, and rejected, an argument advanced on behalf of Mr Boulton to the effect that by reason of the recitals to the deed Nathan Nominees was estopped from denying that Mr Boulton was in truth the creditor of Boulton Factors. In this respect his Honour applied the principle that recitals to a deed cannot work an estoppel if the true facts appear from the remainder of the deed. His Honour said that the sale agreement which was annexed to the deed made it clear that it was Idyam that lent Boulton Factors the money in question. For that reason the recitals did not result in estoppel. No attempt has been made on this appeal to challenge that part of his Honour's reasoning, which was adverse to the respondent. No Notice of Contention was filed. It is a matter of concern that the subject of estoppel by convention appears to have been overlooked. During the course of argument on the appeal the bench drew attention to the case of Amalgamated Investment and Property Co Ltd v Texas Bank, and we were informed that the line of reasoning in that case had not been relied upon at first instance, and it was acknowledged that it was too late to rely on it now. Although the paucity of evidence in the present case makes it difficult to be sure, there appear to be close similarities between that case and the present. A company gave a guarantee expressed to secure a debt owed by its subsidiary to a bank whereas in truth the relevant debt was owed, not to the bank, but to a subsidiary of the bank. The English Court of Appeal concluded that the guarantor was estopped from denying that the debt was owed to the bank, which was therefore entitled to sue on the guarantee. The decision was based on estoppel by convention. The relevant principle was stated in the following passage from Spencer Bower and Turner, Estoppel by Representation 3rd Ed (1977) at 157 to 160: "This form of estoppel is founded, not on a representation of fact made by a representor and believed by a representee, but on an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter. When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped as against the other from questioning the truth of the statement of facts so assumed. " URJ NATHAN NOMINEES PTY LTD v BOULTON (Cripps JA) 7 As was noted, Brownie J rejected an argument apparently based on estoppel by deed and this aspect of his decision has not been challenged by the respondent. However the language in which his Honour expressed his reasons appears to be an amalgamation of a concept very like estoppel by convention, and a conclusion that the sale agreement had been varied. He spoke of the parties to the deed intending "as between themselves" to amend the sale agreement. In the Texas Bank case Lord Denning MR ([1982] 1 QB at 121), referring to the adoption by parties in their dealings of a conventional basis for the governance of their dealings, said that he did not care whether the point was expressed as an agreed variation of a contract or as a species of estoppel. In that case, it is to be noted, the true creditor was not a party to any agreed contractual variation. The court gave effect to agreed basis (contrary to the true fact) on which the guarantor and the bank had dealt with each other. Brandon LJ (at 131) saw the case, as did Robert Goff J at first instance, as a classic example of estoppel by convention. However, the appellant asserts, and the respondent appears to concede, that is not now open to the respondent to resist the appeal on that basis. The pleadings cover the point; in its reply the respondent plaintiff simply asserted that the appellant was estopped from denying that the loan moneys were owed to Mr Boulton personally. If the true basis of the applicable estoppel had been adverted to, the fact that the sale agreement, a copy of which was annexed to the deed of charge, showed Idyam as the creditor would have been seen as irrelevant. By the deed the parties were contracting on an agreed conventional basis, and it would not matter that such basis was contrary to the true facts. The fact (if it be the fact) that the parties to the deed agreed as they did by mistake or inadvertence would also provide no answer to the estoppel. The same thing happened in the Texas Bank case. The problem lies in the state of the evidence. As was noted earlier there was no attempt to explain how the deed of charge came to be in the form it took. Counsel for the appellant says that if estoppel by convention had been raised there may well have been a different approach to the calling of evidence; senior counsel for the respondent accepts this as a possibility. With considerable regret, therefore, I put estoppel by convention to one side. What is there left? Only, I fear, an unanswerable argument for the appellant. The charge secures loan moneys as defined in the deed. They are defined as moneys owning by Boulton Factors to Mr Boulton. There are, however, no such moneys. The relevant debt was owed to Idyam. Idyam was not a party to the deed of charge, and there is no evidence that there was any novation of the sale agreement, or assignment of the debt by Idyam to Mr Boulton. There is no evidence of any act in the law by which the debt came to be owed to Mr Boulton. Thus, there is no debt secured by the charge. The appeal should be allowed. The declarations and orders made by Brownie J should be set aside. The action should be dismissed. The first respondent should pay the appellant's costs of the proceedings at first instance and of the appeal. The first respondent, if otherwise entitled, should have a certificate under the Suitors Fund Act. Sheller JA I have had the benefit of reading the judgment of the Chief Justiceand agree with it and the orders therein proposed. Cripps JA I agree with Gleeson CJ. 8 UNREPORTED JUDGMENTS The appeal should be allowed. The declarations and orders made by Brownie J should be set aside. The action should be dismissed. The first respondent should pay the appellant's costs of the proceedings at first instance and of the appeal. The first respondent, if otherwise entitled, should have a certificate under the Suitors Fund Act. Counsel for the Appellant: P Brereton Instructed by: Clayton Utz Counsel for the Respondent: A Sullivan QC / D Robinson Instructed by: Abbott Tout Russell Kennedy