RATCLIFFE v OCEANIC LIFE LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL COMMERCIAL DIVISION GLEESON CJ, MASON P and CoLe JA 10 March 1998, 10 March 1998 [1998] NSWCA 180 CONTRACT — MORTGAGE — GUARANTEE — ASSIGNMENT — following default by mortgagor a refinancing arrangement was made — for stamp duty purposes parties to refinancing decided that mortgagee would assign debt and securities to new financier — subsequent assignment of benefit of guarantee of debt — HELD — the assignments were legally effective according to their tenor and the way no warrant for disregarding the form of the contracts into which the parties entered. Gleeson CJ The issue which requires determination by this Court was only one of a number of issues decided by the learned primary judge. Because I am in complete agreement with his Honour's reasoning upon that issue, it will be possible for me to express my reasons relatively briefly. The facts are set out in detail in his Honour's careful reasons for judgment and it is necessary for present purposes to repeat only those which are essential to an understanding of what I propose to say. In July 1992, Glowtide Pty Ltd borrowed an amount of $10,000,000 from Permanent Trustee Company Ltd. Permanent Trustee Company Ltd was acting in the transaction as trustee for another entity, but that aspect of the matter is presently irrelevant. In order to secure the debt, Glowtide, as mortgagor, executed in favour of Permanent Trustee Company, as mortgagee, a mortgage over certain real estate in Queensland. The mortgage contained, in covenant 8, a covenant on the part of the mortgagor to repay to the mortgagee the amount of the debt and interest. On the same day in July 1992, the appellants, Mr Ratcliffe and Mr Tuck, together with one other person, executed an instrument of guarantee and indemnity in favour of Permanent Trustee Company Ltd. The appellants, who were directors of Glowtide, guaranteed to Permanent Trustee the due payment by Glowtide of moneys secured by the mortgage. Both the instrument of mortgage and the instrument of guarantee and indemnity contemplated the possibility of assignment to a third party of the rights and interests of Permanent Trustee Company Ltd. In the instrument of mortgage, the expression "mortgagee" was defined as including the assigns of the mortgagee. In the instrument of guarantee and indemnity, the expression "creditor" was defined as including the assigns of Permanent Trustee Company Ltd. In circumstances that require no elaboration for present purposes, there was default under the mortgage. There were protracted negotiations concerning what was described as re-financing. The evidence shows that, over a period of months during 1994, discussions took place between representatives of the respondent, Oceanic Life Ltd, and representatives of Glowtide about the matter of re-financing. 2 UNREPORTED JUDGMENTS A number of different approaches to the form of such re-financing were discussed. At one stage, for example, consideration was given to the possibility of Oceanic subscribing for equity capital in the shares of Glowtide, and thus putting Glowtide in funds to meet its obligations to Permanent. Ultimately, however, after discussions about re-financing, the representatives of Oceanic and Glowtide concentrated upon a proposed arrangement by which, according to the language they used in their communications, Oceanic would make a loan to Glowtide of the moneys necessary to enable Glowtide to repay its debt to Permanent. It was plainly contemplated by all parties to these re-financing discussions that, when the precise terms of the re-financing arrangements were worked out, they would be reflected in written documents settled by the respective solicitors for the parties. According to the evidence of Mr Ratcliffe, in late October 1994, at a time when the re-financing negotiations were coming to a head, the solicitors for Oceanic raised with Glowtide a proposal that a significant saving of stamp duty could be achieved if the re-financing were to take the form, not of a loan by Oceanic to Glowtide, but of an assignment by Permanent to Oceanic of the debt owed by Glowtide. The evidence of Mr Ratcliffe was that in his understanding, initially there was going to be a loan made by Oceanic to Glowtide, but ultimately Oceanic had asked whether Glowtide had any problem with the transaction occurring by way of assignment of mortgage. When the matter was raised with Mr Ratcliffe he said that he had no problem with that proposal. He said in his evidence: "In commercial terms Oceanic suggested that they do an assignment to save stamp duty rather than give us a new loan". On 3 November 1994, Glowtide, as mortgagor, Permanent, as assignor and, Oceanic, as assignee, executed a document entitled, "Deed of Assignment of Securities". The document recited: "The assignor has agreed to execute the Transfer of Mortgage in favour of the Assignee and, in consideration of the payment to be made pursuant thereto by the Assignee to the Assignor, the Assignor has also agreed to transfer and assign the balance of the Securities and also the Associated Rights to the Assignee upon the terms and conditions set out in this Deed." Cl3.1 of the deed provided: "3.1 Absolute Assignment In consideration of the covenants herein contained and the execution of the Transfer of Mortgage by the Assignor in favour of the Assignee, the Assignor hereby transfers and assigns to the Assignee absolutely all the right, title and interest of the Assignor both legal and beneficial in and to the Securities and the Associated Rights." The expression "Associated Rights" was defined to mean all rights of the assignor against the mortgagor. Reference has already been made to the covenant for payment of the debt contained in the original instrument of mortgage. On the same day, Glowtide and Oceanic executed a document, described as a deed of variation of mortgage, which gave effect to the assignment and contained the following recitals: "A. Immediately prior to the execution of this Deed, the Mortgage was transferred from Permanent Trustee Company Ltd, ACN 000 000 993) (as mortgagee) to the Mortgagee by way of the Deed of Assignment of Securities. B. Oceanic Life Ltd is the current mortgagee under the Mortgage." URJ RATCLIFFE v OCEANIC LIFE LTD (Gleeson CJ) 3 Some time later, there was executed a deed of assignment of guarantee and indemnity to which the parties were Permanent and Oceanic. By that deed, the rights of Permanent under the instrument of guarantee and indemnity earlier referred to were assigned to Oceanic. The only issue which requires determination in this appeal is whether the effect of those instruments, and in particular the last mentioned instrument, was to produce the consequence that Mr Ratcliffe and Mr Tuck became bound to Oceanic as guarantors of the debt of Glowtide. Giles CJ CommD resolved that issue in the affirmative. In my view his Honour's decision in that respect was correct. The attempt made on behalf of the appellants to escape what appears to be the inevitable consequence of the contractual arrangements summarised above has been based upon the proposition that, notwithstanding the form of the transaction of 3 November 1994, "in truth" what occurred was what had originally been intended, that is to say, the making of a fresh loan by Oceanic to Glowtide and a repayment by Glowtide of the debt to Permanent, that being the only debt that was ever relevantly guaranteed by the appellants. It has not been argued that the instruments executed on 3 November 1994 were shams. On the contrary, it is acknowledged that the instruments took their form as a result of legal advice aimed at minimising the liability of the parties to stamp duty. One of the reasons parties to transactions of this character retain the services of lawyers is so that they may be given suitable advice as to their revenue obligations, and as to the appropriate steps that may be taken, consistently with the law, to minimise those obligations. As was pointed out recently by this Court in Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (Court of Appeal, unreported, 6 November 1997) it commonly occurs that commercial transactions can take any one of a number of different contractual forms, and liability to stamp duty is to be determined by reference to the application to the contractual instrument, properly characterised, of the provisions of the Stamp Duties Act, not be reference to considerations of economic equivalence. It may well be that if in the present case the transaction between Oceanic, Glowtide and Permanent had taken the form that was originally intended, that is to say a loan by Oceanic to Glowtide which would then be used by Glowtide to repay its debt to Permanent, there would have been substantial economic equivalence between the effect of that transaction and the effect of the transaction that was actually entered into. That may explain some of the language used by one of the officers of Oceanic in internal documents relating to the transaction both before and after 3 November 1994. That officer, I note, is by occupation a chartered accountant, not lawyer. The decision that was made by Oceanic and Glowtide and Permanent, upon legal advice, to "document" the transaction in the form taken by the contracts of 3 November 1994 was a lawful decision taken for an understandable reason. The transaction into which the parties entered is to be characterised by reference to the documents in which, pursuant to the exercise of their lawful intention, they chose to express their contractual arrangements. There is no warrant for dealing with the legal consequences of what the parties did upon the basis that there exists some kind of truth or reality external to the contracts which they executed. They contracted in a certain manner, and their contractual arrangements are to be given legal effect according to their tenor. 4 UNREPORTED JUDGMENTS The consequence of that, so far as Mr Ratcliffe and Mr Tuck are concerned, is that their obligations under their instrument of guarantee and indemnity are to be worked out upon the basis that what occurred in November 1994 was an assignment from Permanent to Oceanic of the rights of Permanent under the original instrument of the mortgage. Those rights included an obligation on the part of Glowtide to pay the debt that was the subject of the mortgage. That debt was the subject of an effective and subsisting guarantee by Mr Ratcliffe and Mr Tuck, the benefit of which was also subsequently assigned. For those reasons I consider that the appeal should be dismissed with costs. Mason P IJ agree. Cole JA I also agree. Gleeson CJ The order of the Court will be as I proposed. Appeal dismissed with costs. Counsel for the appellant: V Gray Solicitors for the appellant: Gye Associates Ltd Counsel for the respondent: J E Marshall Solicitors for the respondent: Clayton Utz