New South Wales Supreme Court CITATION : Jones v Khera [2002] NSWSC 69 CURRENT JURISDICTION: Common Law Division FILE NUMBER(S) : SC 11858/01 HEARING DATE(S) : 15 February 2002 JUDGMENT DATE : 20 February 2002 PARTIES : Ian Robert Durston Jones (Plaintiff) Gita Khera (Defendant) JUDGMENT OF : Studdert J LOWER COURT Local Court JURISDICTION : LOWER COURT 10280/93 FILE NUMBER(S) : LOWER COURT Stapleton LCM, Cloran LCM JUDICIAL OFFICER : COUNSEL : A. Lo Surdo (Plaintiff) M.R. Lawson (Defendant) SOLICITORS : Ian R.D. Jones (Plaintiff) Browne & Associates (Defendant) CATCHWORDS : Appeal from decision of Local Court - action against two debtors following loan - security documents and their construction - whether lender's action following bankruptcy of one debtor released the other debtor - whether error of law by magistrate. LEGISLATION CITED : Local Courts (Civil Claims) Act Bankruptcy Act DECISION : See para 37 IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION STUDDERT J Wednesday 20 February 2002 11858/01 IAN ROBERT DURSTON JONES v GITA KHERA JUDGMENT 1 HIS HONOUR: This is an appeal by way of summons from a decision in the Local Court. The plaintiff on the summons was the defendant in proceedings in the Local Court in which the claim for the recovery of an alleged loan was pleaded thus: "1. On the 7th December 1992 at the request of the defendants the plaintiff advanced to the said defendants the sum of $15,000.000 on loan. 2. On the 4th March 1993 the defendants executed a Deed of Mortgage and Personal Guarantees to secure the monies so advanced. 3. Under the terms of the said mortgage the monies so advanced was due to be repaid to the plaintiff on the 6th June 1993 together with interest thereon calculated at the rate of 12 per centum per annum (to be varied according to any variations in the indicator lending rate of the Westpac Banking Corporation). 4. Despite various written demands made by the plaintiff on the defendants, the said defendants have neglected or refused to pay and accordingly the plaintiff now claims from them the sum of $15,000.00 together with the sum of $1082.46 interest for debt. 5. The plaintiff also claims continuing interest on the said sum of $15,000.00 at the rate of 12 per centum per annum until judgment or payment which ever be the sooner." 2 The defendants' claim was successful and hence the current appeal, which, under s 69 of the Local Courts (Civil Claims) Act 1970 is an appeal available for error of law (s 69(2)). 3 The plaintiff is a solicitor of this court who was carrying on practice in partnership with Jaswant Khera. Gita Khera allegedly advanced $15,000 to the partnership practice on 7 December 1992, and subsequently, on 4 March 1993, the partnership members executed two documents: (a) a mortgage document described as "Mortgage of Professional Man's Practice"; (b) a guarantee. 4 I will return to a consideration of these documents shortly. 5 The learned magistrate who heard the claim found in favour of the plaintiff in that court (the defendant in this Court). Judgment was entered for the plaintiff in the sum of $15,868.05, and there was also an order for interest which it is unnecessary for me to fully record. Moreover, an order for costs was made following the event. 6 The summons originally filed expressed grounds of appeal which were not pursued on hearing. On the hearing an amended summons was presented expressing five grounds, only one of which was pursued. The ground is expressed thus: "1. This appeal is from the whole of the decision in the Sydney Local Court. 2. The learned magistrate erred in holding that the abandonment did not constitute a release under clause 6 of the guarantee." 7 Mr Lo Surdo, in his able and comprehensive written submissions, addressed what was really the only error of law for which the plaintiff ultimately contended, and this concerned the finding by the magistrate of abandonment. 8 By way of background, it appears that the plaintiff's partner, Jaswant Khera, became bankrupt in June 1996 and that in December 1996 the defendant (that is the defendant to the summons) wrote to the trustee in bankruptcy in these terms: "I understand that Mr Khera has provided you with the following documents: 1. Mortgage of Professional man's practice between Jawant (Jess) Khera and Ian Robert Durstan Jones on the one hand and Gita Khera on the other hand dated 4 March 1993; and 2. Deed of Guarantee between Jaswant (Jess) Khera and Ian Robert Durstan Jones on the one hand and Gita Khera on the other hand dated 4 March 1993. Please advise what other document, if any, do you require from me. As to the proof of debt I rely on the same which was completed at the time of Mr Khera's creditor's meeting in relation to his part x and assume that you have a copy of same. Please advise if you need additional copy of same." 9 It was the plaintiff's contention in this Court that by lodging a proof of debt the defendant released the plaintiff from any claim she might otherwise have had against him. The reasons for this contention I will examine shortly, but I propose to refer firstly to those parts of the magistrate's reasons for judgment which the plaintiff relies upon to develop the submission that the judgment was flawed by error of law. 10 The learned magistrate said this (at p 1-2): "On 14 December 1995, under s 188 of the Bankruptcy Act the first defendant authorised his solicitor to call a meeting of his creditors. That meeting was fixed for 24 June 1996. I have been told that the first defendant was made bankrupt on 4 June 1996 and it is for this reason that the first defendant is not participating in these proceedings. On 23 December 1996 the plaintiff wrote to Richard Bryan whom I apprehend was the first defendant's trustee in bankruptcy. That letter is in response to a query from Mr Bryan. That query from Mr Bryan is not in evidence in the case. I conclude from the letter that the plaintiff had attended the meeting of creditors in January 1996 and that she lodged a proof of debt at that meeting. In the letter, the plaintiff says that she understands that the first defendant has provided a copy of the mortgage and guarantee to Mr Bryan. She offers to provide him with copies of any documents he may require. I conclude from the letter that Mr Bryan knew that the plaintiff had claimed she was a creditor in the first defendant's bankruptcy in respect of the loan of $15,000 guaranteed by the first defendant and that he was seeking documents to support the plaintiff's claim as a creditor in the first defendant's estate. I conclude from the letter that the plaintiff had included in her proof of debt a claim as a creditor in respect of the $15,000 loan and that she had been told by the first defendant that he had given a copy of the mortgage and the guarantee to Mr Bryan." And then (at p 5): "It was also argued by the second defendant that by not proceeding to enforce the mortgage and by proving in the bankruptcy the first defendant had abandoned her security, the mortgage. I accept that there was an abandonment of the security by conduct. This often occurs when a security is of little or no value to a creditor. However, in the absence of authority and none was cited to me by the second defendant at any stage in argument, I do not characterise that abandonment as a release of the borrowers from liability under the mortgage as set out in clause 6 of the deed. A release is an entirely different matter. The abandonment is a recognition that the security was of no realisable value to the plaintiff. I WILL ENTER JUDGMENT FOR THE PLAINTIFF." 11 Mr Lo Surdo submitted that the magistrate, having found that the defendant had abandoned her security, intended to convey thereby a finding that the defendant had released both lenders from their obligations under the security documents and it followed from this that the defendant ought not to have succeeded in the Local Court. 12 Consideration of this submission involves consideration of the mortgage and of the guarantee which were entered into between the defendant as lender and by the plaintiff and his former partner as borrowers. The mortgage 13 The mortgage document, which I observed earlier was dated 4 March 1993, recited the loan by the defendant (referred to in the document as the lender) to the plaintiff and his former partner (referred to in the document as the borrowers) "upon condition that the repayment of the principal sum of $15,000 with interest be secured". The document contained a covenant for repayment of the principal sum on 6 June 1993 "with interest thereon from 7 December 1992" (at a rate specified). The mortgage contained an assignment provision: "The Borrowers hereby assign to the Lender ALL THAT goodwill, interest, work in progress, and connections of and in the said practice, TO HOLD the same for herself subject only to the proviso for redemption hereinafter contained. The Borrowers warrant that they have full power to convey and assure the property hereby mortgaged in the manner in which the same is expressed to be assigned herein." The guarantee 14 The guarantee was executed by each of the lenders described in the mortgage on the same day as the mortgage and recited that each guarantor had agreed to guarantee his obligations as borrower concerning the loan of $15,000. The document is a curious one in many respects and contained, inter alia, the following provisions: "2.1 The Guarantors jointly and severally unconditionally and irrevocably guarantee to the Lender the due and punctual payment and performance in accordance with the provisions of the Mortgage of all moneys and obligations expressed to be payable or to be performed by the Borrower to the Lender under, or in relation to the Deed of Mortgage. ………………… 2.4 Each Guarantor agrees that his obligations under this Deed shall be unconditional and that the Guarantor shall be fully liable irrespective of the validity, regularity, legality or enforceability against the Borrowers of, or of any defence or counter-claim whatsoever available to the Borrowers in relation to, their obligations under the Deed of Mortgage, whether or not any action has been taken to enforce the same or any judgment obtained against the Borrowers, whether or not any time or indulgence has been granted to the Borrowers by or on behalf of the Lender, whether or not there have been any dealings or transactions between the Borrowers and the Lender, whether or not the Borrowers have been bankrupted or other such event has occurred to them, and whether or not any other circumstance has occurred which might otherwise constitute a legal or equitable discharge of or defence to a guarantor. Accordingly the validity of this Deed shall not be affected by reason of any invalidity or irregularity in the obligations of the Borrowers under the Mortgage and this Deed shall not be discharged nor shall the liability of each Guarantor under this Deed be affected by any act, thing, omission or means whatever whereby his liability would have been discharged if he had been principally liable under the Mortgage. …………………. 2.6 Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a Court in the event of bankruptcy, or such other event of the Borrowers, any right to require proceedings first against the Borrowers and all demands whatsoever and hereby covenants that this Deed shall be a continuing guarantee which will not be discharged except by complete performance of the obligations contained in this Deed." 15 Then there was what is described as an indemnity provision: "If any of the moneys payable by the Borrowers to the Lender under the Mortgage (or any moneys which, if recoverable, would have formed part of such moneys) are or may be irrecoverable from the Borrowers, whether by reason of any legal limitation, disability or incapacity of or affecting the Borrowers, whether or not any of the relevant matters or facts were or ought to have been within the knowledge of the Lender, whether the transactions or any of them relating to such moneys were void or illegal or have been subsequently avoided, and whether by reason of any other fact or circumstances whatsoever any such moneys are not recoverable from any Guarantor by the Lender on the footing of a guarantee, then and in each such case: (a) each Guarantor as a separate and additional liability indemnifies the Lender in respect of such moneys; (b) each Guarantor as a principal debtor shall pay for the account of the Lender upon demand a sum equal to the amount of such moneys; and (c) for the purposes of this indemnity this Clause shall be construed as if such moneys were recoverable." 16 It is clause 6 of the guarantee document which assumes central importance in the submissions advanced by Mr Lo Surdo: "Notwithstanding any other provision in this Deed, if the Borrowers are released at any time from any liability ('the Liability') under the Mortgage, then each Guarantor shall thereafter cease to be liable under this Deed in respect of the Liability but this Deed shall otherwise continue in full force and effect." 17 Mr Lo Surdo submitted that having found that the defendant had abandoned her security, namely the mortgage, the magistrate ought inevitably to have concluded as a matter of law, and having regard to clause 6 of the guarantee, that the plaintiff was released from any liability under the mortgage. Abandonment has a technical meaning and Mr Lo Surdo referred to Stroud's Judicial Dictionary and by reference to it submitted that abandonment amounted to a waiver or abandonment of a right. Hence it was argued the finding of abandonment expressed by the magistrate entitled the plaintiff to verdict and judgment in the Local Court. 18 I do not accept that submission for a number of reasons. 19 Firstly, it seems to me, contrary to the submissions of Mr Lo Surdo, that the defendant was not limited in the pursuit of her claim by the mortgage and by the guarantee. Mr Lawson drew attention to the following findings made by the magistrate, as expressed on p 1 of the judgment: "…at the request of the first defendant in December 1992 the plaintiff loaned the $15,000 to the defendants… The loan was due to be repaid on 6 June 1993 together with interest. The defendants defaulted." 20 There was no challenge to those findings and in the absence of such challenge this Court should not infer that those findings were not open to the magistrate. Indeed, the mortgage recited the advance three months before the mortgage was executed and the mortgage also recited the due payment date. This Court ought not to infer that a loan with an expressed repayment date had not been agreed to before the execution of the mortgage. 21 Secondly, even if the defendant had been limited in the proof of the loan and in the entitlement to recovery by the terms of the mortgage and of the guarantee, I am not persuaded that the content of those documents stood in the way of the judgment entered in favour of the defendant. It does not seem to me that the magistrate's use of the word "abandonment" ought to be viewed as having been used in a technical sense. Rather, it seems to me, the magistrate was doing no more than to indicate that the defendant was seeking to prove her debt in the bankruptcy proceedings without electing to afford either debtor any release from the obligations expressed in the mortgage and in the guarantee. 22 Indeed, it seems to me, there was no evidence upon which the magistrate could have found that there was an abandonment in the technical sense involving release of either debtor from the obligations undertaken in the documents considered above. 23 Whilst the evidence before the magistrate was not placed before this Court, it was agreed that the defendant's evidence in that court was in affidavit form only, and the affidavit did not advert to any question of abandonment or release. The only documents before the magistrate concerning the action taken by the defendant in the bankruptcy proceedings were the letter to which I referred earlier as written to the Trustee in Bankruptcy on 23 December 1996 and some earlier documents relating to a meeting under s 188 of the Bankruptcy Act and statements of secured and unsecured creditors in the estate of Jaswant Khera. The defendant, of course, had no role in the preparation of any of these documents other than the letter which she wrote on 23 December 1996. The evidence in the Local Court would not have supported a finding by the magistrate that the defendant had made an unequivocal election to pursue recovery of the debt only by the lodgement of a proof of debt in the Khera estate. True it is that s 90 of the Bankruptcy Act contemplates that a secured creditor may prove for the whole of a debt where the secured creditor surrenders her security to the trustee for the benefit of creditors. However, the evidence simply would not have supported a finding that this is what the defendant did in the present case. 24 In my opinion, there was no finding by the magistrate such as would have enlivened the release provision in clause 6 of the guarantee and there was no evidence before the magistrate such as would have supported such a finding had it been made. 25 Error of law in the court below has not been established by the plaintiff and for the reasons expressed, this appeal must be dismissed. The cross claim 26 The defendant has pursued a cross claim which was filed on 19 July 2001. This cross claim relates to an interlocutory order for costs made in the Local Court. The cross claim is filed out of time and leave is therefore required for the pursuit of it. Moreover, since what is sought to be challenged is an interlocutory order of the Local Court, leave is required to mount a challenge in any event. 27 The order for costs about which the defendant now seeks to complain is an order that was made in her favour by a magistrate on 13 April 2000. The defendant, as plaintiff in the Local Court, had earlier entered default judgment against the plaintiff as the defendant in that court. There followed an application to set aside that default judgment and it was encumbent upon the defendant on that application to prove an arguable case on the merits and a satisfactory explanation for the delay. This he apparently did. So it was that the magistrate set aside the default judgment and allowed the defendant in the Local Court proceedings in to defend. 28 Mr Lawson made an application for costs in the proceedings to set aside judgment and, indeed, he sought costs on an indemnity basis. The magistrate refused to award costs on an indemnity basis but awarded costs in a sum which he then fixed in the amount of $500. 29 Mr Lawson submitted that the circumstances in which such costs were awarded constituted a miscarriage of justice because he was not heard on quantum of costs before that sum was fixed. It was submitted that the figure was simply "plucked out of the air". Mr Lawson submitted that leave to pursue the appeal against the interlocutory order ought to be granted and, in lieu of the order made by the magistrate that costs be paid in the sum of $500, this Court should now make an order that costs should be paid in an amount to be determined by assessment. 30 What the Local Court transcript of proceedings reveals of the reasons of the magistrate for the order that he did make and of his refusal to hear Mr Lawson any further is as follows: "BENCH: As in most of these cases there is merit in what both sides have put to me but at the very root of the matter is that the defendant did not comply with the Court's order made by Mr Brack. That led to default judgment being entered and this application before the Court and on that basis I propose to make an order for costs in favour of the plaintiff and that the setting aside of the judgment will be conditional on the payment of those costs. However, I do not feel that it is an appropriate matter for indemnity costs. It is a matter where I am very strongly of the view that the Court make up its own mind as to how much costs should be paid bearing in mind the amount of time that the matter has taken and the position taken by the parties. The defendant is to pay the plaintiff's costs of $500 of this motion by 5 May 2001. The full order of the Court is that the application to set aside judgment is granted on condition: (1) That the notice of grounds of defence be filed by 5 May 2001. (2) That the defendant pay the plaintiff's costs of 500 by 5 May 2001. LAWSON: Would your Worship hear me in relation to quantum? BENCH: No. LAWSON: Well, your Worship, just briefly BENCH: No. LAWSON: Well, in my submission, your Worship, I'm entitled to make submissions on the question of quantum. BENCH: No, I have made my order. I'm functus so far as I'm concerned, Mr Lawson. LAWSON: Well, for the record, your Worship, might it be recorded that I sought to make submissions on the question of quantum but was refused. BENCH: Certainly. LAWSON: Thank you, your Worship." 31 Whilst it would have been desirable for the magistrate to have allowed Mr Lawson the opportunity of being heard further before he fixed the sum of $500 by way of costs, I am not persuaded that leave to pursue the cross claim ought to be granted. There are a number of reasons for this. 32 The first of these reasons is that there was considerable delay in the pursuit of the cross claim. In his affidavit of 8 February 2002, Mr Browne deposed that he did file an application to state a case on 16 May 2000 which was a little over a month after the interlocutory order was pronounced. Mr Browne was unaware at that time that he should have filed an application in this court, but that does not fully explain the delay, and it is significant in my opinion that the cross claim was not filed until fourteen months had elapsed from the time the interlocutory order was made. There was no necessity for the cross claim to be deferred until the principal appeal was heard. 33 There is a further consideration which influences me in deciding whether or not leave should be granted. There is no evidence before me as to whether the sum of $500 was within the range of what would be appropriate for costs of an application of the type the magistrate had determined. I simply do not know whether the figure set by the magistrate was inside or outside the range and I would not assume it was unreasonably low. I must bear in mind that the magistrate was presumably experienced in what was involved in such an application in his court and that he would have been familiar with the sort of costs orders that were made on such applications. 34 Accordingly, I have decided that leave to pursue this cross claim should be refused. Costs 35 In my opinion, the appropriate order as to costs on the unsuccessful appeal brought by the plaintiff is that the plaintiff should pay the defendant's costs thereof. The costs of the cross claim which the defendant has been refused leave to pursue should be borne by the defendant. 36 It is to be hoped that the necessity will be avoided for any assessor to become involved in determining the quantum of costs to be attracted by the orders I have made but, should it become necessary, I express the following by way of guidance. No more than thirty minutes of the Court's time was occupied on the application for leave to pursue the cross claim. Most of the day was occupied in considering the unsuccessful appeal by the plaintiff against the final judgment of the Local Court. Formal orders 37 1. The plaintiff's summons is dismissed. 2. I order the plaintiff to pay the defendant's costs of that summons. 3. Leave to appeal against the interlocutory order of the Local Court is refused. 4. I order the defendant to pay the plaintiff's costs of that cross claim, and of the application for leave in relation thereto. ********** Last Modified: 02/20/2002 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.