Bernard Laverty v Searle [2000] NSWSC 1019

New South Wales Supreme Court

CITATION : Bernard Laverty v Searle [2000] NSWSC 1019 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50260/95 HEARING DATE(S) : 30/10/00 JUDGMENT DATE : 30 October 2000

PARTIES : Bernard Laverty Pty Limited - Plaintiff Hilton George Searle - Third defendant JUDGMENT OF : Rolfe J

COUNSEL : Mr N.A. Cotman SC - Plaintiff Ex parte SOLICITORS : Garrett Walmsley Madgwick- Plaintiff CATCHWORDS : Damages for breach of duties as trustee DECISION : Judgment for the plaintiff against the third defendant with costs.

7 THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

ROLFE J

MONDAY, 30 OCTOBER 2000

50140/97 - GORDON McNICHOL FINLAY V NATIONAL AUSTRALIA BANK LIMITED AND OTHERS 50260/95 - BERNARD LAVERTY PTY LTD V JOHN GOLDSWORTHY POYNTEN AND OTHERS

JUDGMENT - See p.22 of transcript

HIS HONOUR: 1 By a trust deed dated 30 June 1990, (Exhibit A), between Nambucca Investments Pty Ltd, ("NI"), and the third defendant, Mr Hilton George Searle, Mr Searle became the trustee for debenture holders of NI. The deed was entered into for the purpose of defining certain of rights, duties and obligations of NI and the trustee, between themselves, but for no other purposes. 2 Clause 1 provided that Mr Searle was appointed trustee for all debenture holders in the company, "both present and future" and set out the rights with which he was vested. The deed then set out the various obligations of each party and, by clause 9, Mr Searle covenanted that he would carry out a number of obligations including 9(a), which required him to: "Exercise reasonable diligence to ascertain whether or not the assets of the company and each or any of its guarantor corporations which are or may be available, whether by way of security or otherwise, are sufficient or are likely to be or become sufficient to discharge the principal debt of the debenture holders as and when it becomes due." 3 Originally on 3 June 1990, although the deed was re-dated 9 November 1990, NI and Mr Searle acknowledged that he had lent to NI $1,263,416.73 upon the terms and conditions contained in the document which is Exhibit B. Those were moneys contributed by debenture holders. A specific obligation in clause 7 of the trust deed is that NI expressly covenanted with Mr Searle that it shall not, at any one time, borrow or have borrowed, whether on a secured or unsecured basis, directly or indirectly, a total amount in excess of $2 million and the words "borrowed" and "borrowing" were deemed to include, "the incurring or undertaking of a contingent liability to pay a sum of money, whether by guarantee, deferred loan or otherwise...". 4 NI was set up to receive moneys lent by citizens in the general north coast area around Macksville and Port Macquarie and thereafter it lent money. Those moneys were lent to it by way of debentures and the debenture holders were given a first charge over NI's assets in respect of the repayment of the loans, costs, charges, interest and expenses: Clause 3 of exhibit B. 5 NI thereafter lent the money on an unsecured basis. Unfortunately, as matters turned out, it lent much of the money to its subsidiaries for the purposes of somewhat speculative commercial activities, including land development and liquor outlet acquisitions. Those companies, in turn, borrowed money from the National Australia Bank Limited, ("NAB"), on a secured basis and, ultimately, NI gave security to NAB. This gave rise to a very real problem which was that, so far as the subsidiaries were concerned, the party with the first call on the money generated by them, insofar as money was generated by them, was NAB rather than NI. 6 As at the date the third defendant took over his role as trustee, the amount invested in NI was some $1.2 million. By 23 March 1993 it had increased to some $4.3 million and thereafter loans commenced to be made by NAB. 7 On 15 December 1993 Mr Searle wrote to NAB, in his capacity as trustee of NI, in relation to borrowings by NI, "in its own right and not in its capacity as trustee of a trust." The letter also confirmed that NI was acting as guarantor to two companies against any borrowings they may undertake: Exhibit E, page 127. 8 At page 128 of that exhibit, Mr Searle made a statutory declaration dated 22 December 1993, in which he said, inter alia, that NI was not in breach of any of the terms of the trust deed and that its total borrowings, taking into account the facility to be provided, do not exceed $2 million. The evidence of Mr Humphreys, in his report of 10 July 1998, shows this statement to be clearly wrong, because by then the debenture holders' balances had risen to some $5.9 million. 9 At page 129 Mr Searle wrote to NAB advising that he was aware that it held a mortgage over property owned by NI, "and that the bank has a charge over NI." At this stage there could hardly have been any doubt but that there was a failure on the part of Mr Searle to exercise the reasonable diligence set out in clause 9(a) of the trust deed, a clause which is to be found in s1056 of the Corporations Law: Section 1(a) and for breach of which damages may be recovered: s1005. 10 On 3 November 1995 Mr Gordon Finlay was appointed the receiver and manager of the assets of NI and, on 6 November 1995, Mr John Star was appointed as its voluntary administrator. On 22 December 1995 the creditors resolved that Mr Star and Mr Finlay be appointed joint liquidators of the subsidiaries. 11 I should go back for a moment to note that Mr Searle remained as trustee until the appointment of the fourth defendant, Mr Kearns, in September 1994. He admitted, in answer to paragraph 25 of the Second Amended Summons, that by trust deeds dated 30 June 1990 and September 1994 the obligations of NI were set out clearly, although he denied that he had been in any way in breach of those obligations. NI went into liquidation on 14 November 1995. 12 The report of Mr Humphreys (Exhibit C), states that with the money raised from the debenture holders NI, in the main, did not acquire assets in its own name, but instead lent unsecured to subsidiaries and related companies, which applied the borrowed funds to acquire or improve assets standing in their own names, which they were to mortgage to NAB. He also said that NAB had taken security over those assets so that the capacity of NI to repay debenture holders was dependent upon the assets of the subsidiaries and related companies appreciating in an amount greater than the expenditure of the moneys borrowed from both the debenture holders and NAB. As matters turned out this did not eventuate and, ultimately, in the joint administrators' report to creditors, the total liabilities of the group were shown at some $12 million in circumstances where NAB had a first call on the secured assets and, in any event, it being a secured creditor, its position took priority over that of NI as lender. 13 On 25 March 1993, and this is but one example to be found in Exhibit G, Mr Searle wrote to NAB stating that he had no objection to its giving a mortgage over unencumbered property owned by it or unencumbered property owned by any subsidiary of the company, i.e. NI. 14 On the material before me there can be not a shadow of doubt that Mr Searle failed to exercise reasonable diligence as required by clause 9(a) of the deed of 30 June 1990. His deliberate conduct was to the contrary. 15 Relevantly, for present purposes, the claim is one made by the plaintiff and in his statement of 26 July 1996, Exhibit F, Mr Noel David Atkins shows the amount invested and which, by dint of the fact that NI has been unable to repay its debenture holders, Bernard Laverty Pty Limited has lost. In my opinion, there can be no doubt that this money would not have been lost if Mr Searle had fulfilled his obligations under the trust deed. 16 I am, accordingly, satisfied that the plaintiff is entitled to judgment against Mr Searle in the amount of its loss which, together with interest to today's date, is $1,312,895.50. 17 I order judgment for the plaintiff against Mr Searle in the sum of $1,312,895.50 and I order Mr Searle to pay the plaintiff's costs as against him. 18 I order that the exhibits be returned at the expiration of 28 days from the date of service on Mr Searle of a copy of these reasons and the Registrar's satisfaction of that service. ______________