New South Wales Supreme Court CITATION : GUNNERSENS P/L v. HARDING & ANOR [2000] NSWSC 385 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 1235/00 HEARING DATE(S) : 8 & 9/5/00 JUDGMENT DATE : 12 May 2000 Gunnersens Pty Ltd - Plaintiff PARTIES : Paul Harding - First Defendant Patricia Dengate - Second Defendant JUDGMENT OF : Bryson J at 1 COUNSEL : G. Burton for Plaintiff J. Needham for Second Defendant Ledlin Partners for Plaintiff SOLICITORS : Messrs White & Downey for First Defendant Legal Aid Commission for Second Defendant CATCHWORDS : REAL PROPERTY - Torrens system - equitable interest - whether oral express trust existed - whether equitable charge over property under commercial credit guarantee - decision on facts and construction of documents - plaintiff's alleged charged was not made out - second defendant's informally created trust was enforceable on estoppel principles - GUARANTEES - commercial credit guarantee - incomplete form - whether guarantee binding - whether signature of debtor and guarantor required for formation of contract of guarantee - decision on effect of document. Bankruptcy Act 1966 (Cth) Pt X LEGISLATION CITED : Conveyancing Act 1919 ss 23C, 66GT Real Property Act 1900 s 57(2)(b) Bleyer v Neville Jeffress Advertising Pty Ltd (unreported, CA (NSW) 15 December 1987) CASES CITED : Bridge Wholesale Acceptance Corp (Australia) Ltd v Burnard (1992) 27 NSWLR 415 Pan Food Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd [2000] HCA 20 Prosilis v Double Bay Newspapers Pty Ltd [2000] NSWCA 30 DECISION : See para 25 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J. Friday 12 May 2000 1235/00 Gunnersens Pty Ltd v. Paul G. Harding & Patricia Dengate. JUDGMENT 1 HIS HONOUR: The title to the house property at 1 Johnston Street Mylestom, in the Bellingen Shire, is Certificate Title Auto Consol 3794/13, and the defendants Paul Geoffrey Harding and Patricia Dengate are the registered proprietors as tenants in common in equal shares. Australia and New Zealand Banking Group Limited has a registered first mortgage. The defendants bought the house for $112,000 in or about February 1992, and to complete the purchase they borrowed $85,000 which the Bank advanced on 6 April 1992. The Bank is not a party to this litigation, which has been conducted on the basis that the Bank's priority is acknowledged. According to the Bank's records in Exhibit A the amount due on 15 March 2000 was $58,080.13. The Bank has asserted that there have been defaults and arrears, and as long ago as 27 May 1999 was threatening recovery action (Exhibit J). On 24 March 2000 the Bank directed a notice under s 57(2)(b) of the Real Property Act 1900 to the defendants, demanding payment of $57,953.84 and indicating that the Bank was putting itself into a position to exercise its power of sale. Of several expressions of opinion the view which is most reliable is that of Mr Valuer Cardow who valued the property at $148,000. That suggests that the interest of the registered proprietors is worth in the order of $90,000, and that if the property were sold, the first mortgage paid out and the proceeds divided equally, each half share would yield, at a maximum, in the order of $40,000 to $45,000. 2 The plaintiff claims that it has an equitable charge over Mr Harding's interest, and claims an order under s 66G of the Conveyancing Act 1919 appointing trustees for sale of the property, or of the half share. The claim is that Mr Harding is liable as guarantor for goods supplied to a business called Fantastic Lounge Factory; the plaintiff recovered judgment against him in the District Court for $47,318 on 22 January 1997. At that time however Mr Harding's affairs were regulated by a Deed of Arrangement under Pt X of the Bankruptcy Act 1966 dated 29 November 1996 and, while evidence does not show that he obtained a certificate and a discharge under the Deed of Arrangement, it is probable that he did so at about the time when judgment was entered or soon afterwards, and that the judgment was obtained in breach of a stay under the Bankruptcy Act. The plaintiff was unaware of the Deed of Arrangement and of the meetings and other proceedings which led to it, took no part and received no dividend. 3 The present proceedings do not relate to personal liability of Mr Harding, but to a charge which the plaintiff claims he imposed upon his interest in the house property by a written "Agreement to Guarantee and Indemnify" endorsed on the form by which Fantastic Lounge Factory applied for credit, to a limit of $30,000, in a Commercial Credit Application made to the plaintiff and dated 26 October 1995. Mr Harding signed the Commercial Credit Application as a director on behalf of Fantastic Lounge Factory. The Commercial Credit Application should be understood as an offer, and it was accepted as indicated by cl 3, titled "Binding Contract", of the Terms and Conditions of Sale endorsed on it, when goods were later supplied. The goods are shown in invoices listed in Exhibit 3 dated from 31 January 1996 to 27 March 1996, for prices totalling $43,461.04. 4 The Agreement to Guarantee and Indemnify is from its terms clearly a separate agreement to the agreement between Fantastic Lounge Factory and the plaintiff relating to supply of goods on credit. It takes the form of a communication to the plaintiff by persons referred to as "The Parties" being the Debtor, Fantastic Lounge, and the Guarantors, referring only to Mr Harding. Although printed parts of the form clearly provide for and show the contemplation of the parties that the document would be signed for and on behalf of the Debtor Fantastic Lounge and also by the Guarantor Mr Harding, it in fact was signed only by Mr Harding as the Guarantor; the space indicated for the signature for and on behalf of the Debtor is left blank, although remarkably enough Mr Wayne Gould, a person employed by the plaintiff, signed against the blank space as witness to a signature which was not there. 5 There are twelve printed clauses. The first ten are the substantive clauses and they are expressed in the plural. In cl 11 a definition establishes "(a) 'we' and 'us' shall be a reference to each of the Guarantors and the Debtor jointly and severally." Most of the clauses would impose significant liabilities on the Debtor, to the advantage of any Guarantor in that the obligations would not be borne alone; and significant obligations are wider than the already wide range of obligations incurred by the Debtor in any sale under the Commercial Credit Application. The guarantee in cl 1 extends to all obligations arising from any past, present or future dealing with the plaintiff, not limited to sales under the credit application. Clause 2 extends to indemnify the plaintiff against all losses as a result of any past, present or future dealing, again not limited to dealings under the credit application. Clause 3 is an agreement to pay amounts in dispute to a stakeholder; it would be to the advantage of a Guarantor if the Debtor joined as a party to this promise. As cl 4 is the source of the plaintiff's alleged charge I set it out in full: "WE CHARGE in Gunnersens' favour all of our estate and interest in any land in which we now have any legal or beneficial interest (or in which we later acquire any such interest) and any other asset or trust asset with payment of all monies owed to Gunnersens by the Debtor or any of us." 6 Clause 4 charges all estate and interest in any land with a payment of all moneys owed; it is to the advantage of a Guarantor that the Debtor should give this promise and in that way widen the assets potentially available as security. 7 Clause 7 is in these terms: "SEVERAL GUARANTORS: If more than one Guarantor is named or intended to sign as Guarantor we each agree to be bound even if we are the only one to sign as Guarantor." 8 There is no corresponding agreement to be bound if the Debtor does not sign. The presence of cl 7 illustrates that without it the liability of one Guarantor who signed would probably be conditional upon the signature of all named as guarantors. The presence of the provision qualifying this reading where a Guarantor does not sign strengthens the view that liability is conditional upon the Debtor signing. 9 There is no evidence dealing in detail with the manner in which the document was prepared and signed or why it takes the form it does, in which the signature of the Debtor was contemplated but was not obtained. Exhibit 5, the Statement of Wayne Gould, purports to narrate these facts but does so in such a bare way that it does not explain the absence of a signature for the Debtor. The annexed agreement is obviously unrelated to the events dealt with in the statement, so that there can be no confidence in what Mr Gould says. There is then no evidence extraneous to what can be understood from the document itself about the intention of Mr Harding with respect to whether or not he should be liable if the Debtor did not become a party to the Agreement to Guarantee and Indemnify in the manner which the form of the document clearly shows was contemplated. 10 In my view the form of the document establishes clearly that the Guarantor did not intend that the agreement should come into effect with the signature of the Guarantor unless the Debtor also signed the document. The form of the document and the provision made in it for names of parties and their signatures show what was contemplated as the events by which the agreement would be formed. There is no other evidence establishing that Mr Harding intended to be bound whether or not the Debtor was bound. There was no agreement; the point of formation was not reached. If it had been reached, the obligations of the Guarantor under it would fail for the different reason that they are, on the meaning of the document, conditional on the obligations also being incurred by the Debtor. See Prosilis v. Double Bay Newspapers Pty Ltd [2000] NSWCA 30 at para [21] and also at para [32] in the judgment of Mason P, citing Hope JA in Bleyer v. Neville Jeffress Advertising Pty Ltd (unreported, Court of Appeal, 15 December 1987). On the continued force of authorities requiring strict reading see Kirby J in Pan Foods Co Importers & Distributors Pty Ltd v. Australia and New Zealand Banking Group Ltd [2000] HCA 20 at [11] to [14]. 11 The purported agreement is ineffectual as a charge over Mr Harding's interest in any land. 12 Evidence makes it clear that in October 1995 and at the times when goods were supplied up to March 1996 the plaintiff had no information about whatever assets Mr Harding may have owned and, in particular, did not know whether he owned any land or that he had any interest of any kind in the property at Mylestom. The plaintiff did not know of its existence. The plaintiff asked for but was not given a statement of his assets, made no title searches or inquiries, and was not influenced in any way by the state of the Torrens Register, the presence or absence of any caveat on it, or by any action or inaction of Mrs Dengate on the claim which she put forward in these proceedings that she has an equitable interest in the half share of which Mr Harding is registered proprietor. 13 During the hearing I said that I needed to consider whether the terms of cl 4 sufficiently comply with s 23C(1) of the Conveyancing Act and its requirements for creation of equitable interests in land, in view of the particular parcel of land not being identified in the writing, and not being in any way known to the plaintiff. I am satisfied having regard to counsel's references to authorities, principally Bridge Wholesale Acceptance Corporation (Australia) Ltd v. Burnard (1992) 27 NSWLR 415, that an equitable interest in land can be created by a provision such as this. I am also satisfied that the interest would extend, prima facie, to any land of which Mr Harding was the registered proprietor, without the plaintiff being under the burden of proving that he was also its beneficial owner. 14 In my opinion the Agreement to Guarantee and Indemnify, and in particular cl 4, never became binding on Mr Harding because its form and terms show that when he signed the document he intended that he should be liable only if the Debtor also signed; its form and terms also show that the plaintiff intended that both should sign and that both should be liable, and did not intend that only part of the form should be carried out and become binding although one of them did not adhere to it. 15 As the plaintiff has no equitable interest in the land, the plaintiff cannot succeed and the claim asserted by Mrs Dengate in her cross-claim that she has an equitable interest in Mr Harding's share is not a matter in which the plaintiff is concerned. However Mr Harding is also a cross-defendant to her claim. 16 When the proceedings were commenced on 31 January 2000 Mr Harding was the only defendant. At early stages in the proceedings he was represented by lawyers who attended before the Court, but his solicitor took no active part in the hearing before me and did not resist either the claim or the cross-claim. Mrs Dengate did not become a party until an Amended Summons joining her as a party was filed by leave on 30 March 2000. Until then the plaintiff's claim had included a claim for the appointment of trustees for sale of the whole of the land under s 66G of the Conveyancing Act, alternatively for sale of Mr Harding's interest only. The proceedings were not well constituted, as Mrs Dengate was a necessary party to any claim for an order for sale of the whole of the land. On 30 March 2000, in an order which also granted leave to file the Amended Summons and thereby joined Mrs Dengate as a party, the Court (Santow J) made these orders without opposition and without any statement of findings of fact: "Upon hearing the representatives for all parties and noting that there is no opposition to the making of the declaration hereinafter set out, I make the following orders and declarations: 1. Declaration in terms of paragraph 2 of the Plaintiff's Amended Summons filed in Court to-day. 2. The matter is to be adjourned so far as the remaining questions to be determined to 20 April 2000 at 10 am before the Duty Judge and I expressly note that a further application for adjournment from the Second Defendant is unlikely to find favour unless there be unforeseen circumstances that make that justified. 3. The First Defendant is excused from further attendance." 17 This order has never been entered. It purported, at the same moment as Mrs Dengate was joined as a party, without her having had any opportunity to oppose the claim on any considered basis, or any proper basis, to determine the important issue whether the plaintiff had an interest in Mr Harding's share in the land, when there was a developing dispute about competition between alleged equitable interests of the plaintiff and Mrs Dengate. 18 Thereafter Mrs Dengate filed her cross-claim on 20 April 2000 and claimed that Mr Harding's interest in the property is held in trust for her absolutely. The cross-claim, in terms appropriate for a pleading, alleged that the property was purchased subject to an agreement that Mr Harding held his share on trust for her until such time as the purchase moneys jointly borrowed from ANZ Banking Group Ltd were repaid, at which time he would transfer the property into her name. The particulars show that the agreement alleged was oral and implied from conversations. It is then alleged that she is entitled to have the property transferred into her name on request, and that transfer is precluded by reason of a caveat lodged by the plaintiff. It is then alleged "6. The first cross-defendant signed on or about 26 October 1995 a document entitled 'Agreement to guarantee an indemnity' in favour of the second cross-defendant which document may have given it an equitable charge over the first cross-defendant's share in the property" and that Mrs Dengate's equitable interest takes priority. 19 Mrs Dengate's evidence in support of this claim is to the effect that she knew Mr Harding for many years while working in a number of his enterprises. In January 1991 she was on holidays in Coffs Harbour and while she was there Mr Harding in a telephone call said "While you're up there, would you look for a property I want to buy for you" or words to that effect. At the time of the purchase he said to the effect that Mrs Dengate was to pay the mortgage instalments, rates and other outgoings until her retirement, and that upon her retirement he would pay any further mortgage instalments payable and rates. He said to her to the effect that "If you contribute to the deposit, and pay the loan repayments, on your retirement I will take over the payments. The loan will be paid out in two years. Once the loan is paid off the house is all yours." She made payments from her own money of $3000 towards the holding deposit, and a further $3000 towards the full deposit. She joined in arrangements to obtain a mortgage loan from the Bank, and signed finance and mortgage documents. She paid the mortgage payments until she retired from work. Her evidence is that as well as $6000 towards deposits she has paid approximately $42,137 in mortgage payments; she has also paid about $3600 for Council rates (not being the whole of the rates, which have been in arrears) and approximately $42,398 for renovations and landscaping on the property. 20 The plaintiff's counsel pointed to a number of circumstances which it was said show that her account of the facts is incorrect. One was that the nature of the arrangement as one in which Mrs Dengate was intended to be the beneficial owner was not revealed to the ANZ Bank, which was told it was an investment property for both of them. Mrs Dengate's evidence is that she was told by Mr Harding that he joined in the borrowing because having regard to her age she was not in a position to borrow money from the bank. People do not always reveal all their business, particularly all their trustee arrangements to banks; it is not always prudent to do so. I do not regard the fact that the trustee arrangement was not revealed to the Bank as a substantial reason for disbelieving that the arrangement existed. The plaintiff's counsel also referred to arrangements which, when these proceedings were commenced, Mr Harding was making to transfer his interest in the Mylestom property to Mr Mark Douglas Coleman as indicating that Mr Harding did not regard himself as subject to any trustee arrangement. There are some difficulties about this as a factual proposition. The proposal by Mr Harding to transfer his interest in the property to another person in 1999 is not a good indication of whether or not evidence about an arrangement he made in 1992 is correct. More importantly, with the benefit of the affidavit and oral evidence of Mr Coleman it appears clearly that Mr Harding was proceeding to put Mr Coleman into the position of holding the land for the benefit of Mrs Dengate which Mr Harding had occupied, but was not in a good position to continue to occupy, because he had financial difficulties, he had made a composition with creditors and he proposed to leave Australia, and also bearing in mind Mr Coleman's readiness to undertake a protective role for Mrs Dengate, who has been known both to Mr Harding and to Mr Coleman for a long time and to whom both, in my finding, felt some responsibility to furnish care, particularly now that she has retired and is suffering from severe illness. 21 The plaintiff's counsel also pointed out that the words attributed to Mr Harding in Mrs Dengate's evidence are not highly appropriate to the constitution of a trust. In particular he contended that the words used show an intention that no interest should arise until the Bank loan was paid out. Counsel contended that this conclusion should be drawn from the following words attributed to Mr Harding: "If you contribute to the deposit, and pay the loan repayments, on your retirement I'll take over the payments. The loan will be paid out in two years. Once the loan is paid off the house is all yours." In my opinion these words show a contemplation that the benefits of ownership would be qualified while there was a bank loan, and would be enhanced when there was not. To my mind it is most unlikely that it was intended to create some interest in the house which would only come into existence at a future time after payment of the mortgage. I cannot see any comprehensible scheme which an arrangement like that would serve. Few members of the community have any real understanding of trusts or of the creation of beneficial interests, and when ordinary language and later behaviour show an intention to create what, in substance, is a beneficial interest in land it is not appropriate to scrutinise the words used closely and to consider whether a well-informed lawyer would have used them, or would have done better. 22 In my finding Mrs Dengate's evidence of the expressions used by Mr Harding about the interest she was to have in the land is true, and the expressions show that, in the intention of both and particularly of Mr Harding, his interest was to be held beneficially for her. As the arrangements were not made in writing and the provision of s 23C(1) with respect to the creation of equitable interests were not satisfied the arrangement was not enforceable as formed, but in view of the pattern of action on the basis of the arrangement over a number of years since then, in which Mrs Dengate has made significant payments in reliance on the assumption that the house is hers, it would not be possible for Mr Harding to depart from those arrangements now; he is estopped from so doing. He does not oppose the cross-claim or seek to depart from the arrangement. As Mrs Dengate's case depends on an estoppel after the imperfect constitution of a trust she would be in a poor position in any conflict of equitable priorities with any rival claimant who was able to show a properly constituted equitable interest, even though that interest was created later in time than the events out of which Mrs Dengate's interest arises. However she is not in such a competition, as the plaintiff does not have any equitable interest. 23 Now that the plaintiff has offered its proofs in a context of opposition by Mrs Dengate it is clear that the declaration of 30 March 2000 was wrong. That declaration was not intended to dispose finally of her claim, was made in circumstances in which she was not accorded procedural justice or any opportunity to debate it and the deficiency in the document with respect to the Debtor's not having signed it was not pointed out to Santow J by the plaintiff's counsel. The order has not been entered and I have to act on what is plainly the true position and vacate it. Justice would be defeated if Mrs Dengate were treated as bound by a declaration which the facts, when examined, show plainly to have been wrong. 24 Pleadings were obviously required by the complexity of the issues in a case about competing equitable claims, and the drafting of pleadings could well have brought attention to bear on contract formation at an earlier and more appropriate time. As so often happens, the attempt to conduct complex litigation on disputed facts on Summons has obscured the issues. The issues were probably made more obscure by the haste with which the proceedings have been conducted, notwithstanding the absence of any discernible urgency to enforce a claim which the plaintiff expressed in a caveat in 1996, but did not proceed to enforce for three years and five months. Time spent drafting a pleading and stating, when alleging on agreement, the facts by which it was formed would have been time well spent; the litigation, or the hearing, should have been averted. 25 Orders: (1) Vacate the Declaration in the order of 30 March 2000. (2) Give judgment for the Cross-claimant with costs. (3) Dismiss the Amended Summons with costs. Last Modified: 09/25/2000 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.