New South Wales Supreme Court CITATION : Sydney Concrete & Contracting Pty Limited & Anor v BNP Paribas Equities (Australia) Limited & Anor [2005] NSWSC 408 HEARING DATE(S) : 04.04.05; 05.04.05 JUDGMENT DATE : 29 April 2005 JUDGMENT OF : Nicholas J DECISION : Para 35 CATCHWORDS : EQUITY - appropriation - whether an appropriation of payment took place - whether appropriation communicated - whether open to creditor to change position - rule in Clayton's case Bridges v Australian Consolidated Press (1967) 70 SR NSW 52 Cory Brothers and Company v Owners of Turkish Steamship "Mecca"; the "Mecca" (1897) AC 286 Deeley v Lloyds Bank Limited [1912] AC 756 CASES CITED : Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572 Grant v Downs (1976) 135 CLR 674 Seymour v Pickett [1905] 1 KB 715 Smith v Betty [1903] 2 KB 317 Sydney Concrete & Contracting Pty Limited - First Plaintiff/First Cross-Defendant Sydney Concrete & Contracting Pty Limited as Trustee for the Sydney Concrete & Contracting Superannuation Fund - Second Plaintiff/Second Cross-Defendant PARTIES : BNP Paribas Equities (Australia) Limited - First Defendant/First Cross-Claimant BNP Paribas Equities Private (Australia) Limited - Second Defendant/Second Cross-Claimant FILE NUMBER(S) : SC 50185/01 T Hall/M Lynch - Plaintiffs/Cross-Defendants COUNSEL : R Kaye SC - Defendants/Cross-Claimants Youngs Attorneys - Plaintiffs/Cross-Defendants SOLICITORS : Piper Alderman - Defendants/Cross-Claimants LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Nicholas J 29 April 2005 50185/01 Sydney Concrete & Contracting Pty Limited & Anor v BNP Paribas Equities (Australia) Limited & Anor JUDGMENT 1 His Honour: My judgment of 25 June 2004 determined issues of liability. Questions of damages and other relief were deferred. The remaining issue for determination relevant to damages is whether the letter from BNP to Mr Morgan and SC (the cross-defendants) dated 31 August 2001 (the letter) evidenced the appropriation to the margin lending account of the proceeds of sale of SC's Telstra shares (the Telstra proceeds) on 17 August 2001 so as to reduce the balance owing thereunder to the amount of $110,462.75. Background 2 The events which resulted in the termination of the relationship between the parties on 17 August 2001 are described in the judgment (paras 140-152). Under the margin lending facility Mr and Mrs Morgan were liable to Equities as borrowers. SC was the guarantor. The account for the margin lending facility was the margin lending account. The options trading facility operated under an agreement between Private and SC. The account for this facility was the options trading account. The margin lending facility with Equities for share trading was entirely separate from the options trading facility with Private under which margin cover was provided for options trading. 3 The margin lending account was a running account which recorded transactions and balances from 26 January 1999 to 22 August 2001. It is common ground that as at 17 August 2001 the balance outstanding in this account was $598,986.26 at the time when the margin lending portfolio of 100,000 Telstra shares was sold to close out the positions of SC and Mr and Mrs Morgan. The Telstra proceeds in the sum of $490,105.80 were applied to this account thereby reducing its closing balance to $108,880.46. 4 As at 17 August 2001 the balance outstanding under the options trading account was $571,725.12. 5 The letter was sent on behalf of both Equities and Private. Its terms are as follows: "We refer to our meeting with you on 17th August, 2001. We confirm that following that meeting all of your market exposures were closed on 17th August as a consequence of the refusal to comply with the call made on 16th August for the provision of security. This call for security was necessitated, inter alia, by the deterioration in your market positions, which had occurred between 4th July, 2001 and 16th August, 2001. As at 17th August, 2001 the amount outstanding by you was $682,187.87, which is calculated as follows: Margin Lending Account $110,462.75 Options Trading Account $571,725.12 Total $682,187.87 Interest will accrue from the 17th August balance plus accrued interest at the rate of 7.6% per annum. Payment of the above amount is required within seven (7) days. Yours sincerely, OLIVER ROUSSEAU GUY HEDLEY Managing Director Managing Director BNP Paribas Equities (Australia) BNP Paribas Equities Limited Private (Australia) Limited ACN 003 307 873". 6 It is common ground that the amount of $110,462.75 said to be outstanding under the margin lending account was calculated after taking into account the proceeds of the sale of the Telstra shares. No point was taken in these proceedings about the difference between the amount of the balance in the margin lending account referred to in para 3 and the amount shown in the letter. 7 BNP's defence filed 21 March 2002 included the following: "25 As to paragraph C12 of the Summons: 25.1 It is admitted that on 17 August 2000 the Defendants sold all shares and closed out all options positions of Sydney Concrete; 25.2 The Defendants and/or BNP Paribas Equities was entitled to take the action referred to in subparagraph (a) pursuant to the terms of the Agreements, having regard (inter alia) to the matters pleaded in paragraphs C20 to C24 above; 25.3 Upon applying the proceeds realised from the said sales and closing out of options positions to the balance due from the Plaintiffs and/or Mr and Mrs Morgan to the Defendants pursuant to the terms of the Agreements was $682,187.87; Particulars 25.3.1 Amount due under the Facility $110,462.75 25.3.2 Amount due under the Options Trading account 571,725.12 $682,187.87 25.4 Despite demands, the Plaintiffs and/or Mr and Mrs Morgan have resued and failed to pay to the Defendants the sum of $682,187.87, on which sum interest continues to accrue; Particulars The Defendants refer to their letter to Mr Morgan dated 31 August 2000. 25.5 Save as pleaded, paragraph C12 is denied. … 28 If, which is denied, the Defendants or either of them are liable to the Plaintiffs as alleged or at all, then the Defendants are entitled to set off against such liability the sum of $682,187.87, together with interest accruing thereon, due to them as pleaded in paragraph C25 above and in the Cross Claim herein". 8 BNP's amended cross-claim filed 18 October 2002 included para 29 which was in the same terms as para 25.3 of the defence. It also included para 30 as follows: "30 Despite demands, Sydney Concrete and/or Mr and Mrs Morgan have refused and failed to pay to the Cross Claimants the sum of $682,187.87, on which sum interest continues to accrue;". 9 After judgment was delivered the parties gave consideration to the further conduct of the matter including the terms of the orders to be made. By their letter of 1 July 2004 the cross-defendants' solicitors sought clarification from BNP's solicitors of the case to be made against their clients on damages. Relevantly, it said: "As to the appropriate orders on the Amended Cross Claim, it appears to us to be necessary for some clarity as to the basis upon which your clients will contend that Sydney Concrete on the one hand and Mrs and Mrs (sic) Morgan on the other hand were indebted to each of Private and Equities in respect of the margin lending account and the options trading account. In other words, we say that it should be specified whether Mr and Mrs Morgan are liable for a particular sum on a particular account as either principals or guarantor and likewise with Sydney Concrete". 10 BNP's solicitors replied by letter the same day. Relevantly, they said: "2. Liability is determined on the basis of findings that: 2.1 Sydney Concrete is liable to BNP Paribas Private (Aust) Ltd as principal on the Options Trading facility. 2.2 Mr and Mrs Morgan are liable to BNP Paribas Equities (Aust) Ltd as borrowers on the Margin Lending facility. 2.3 Sydney Concrete is liable to BNP Paribas Equities (Aust) Ltd as guarantor of liabilities of Mr and Mrs Morgan on the Margin Lending facility under the Guarantee & Indemnity Agreement. 2.4 By reason of the Agreements referred to in sub points 2.2 and 2.3 herein Mr and Mrs Morgan and Sydney Concrete are jointly and severally liable in relation to liabilities under the Margin Lending facility. 2.5 By reason of the dual pledge arrangement the BNP entities are entitled to elect as against which facility to apply the security held as at 17 August 2001 and have elected to allocate the value of the realised security as against monies due by Sydney Concrete under the Options Trading facility". Principles 11 The applicable principle was stated by Lord Macnaghten in Cory Brothers and Company v Owners of Turkish Steamship "Mecca"; the "Mecca" (1897) AC 286 at pp 293-294: ". When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor. In 1816, when Clayton's Case was decided, there seems to have been authority for saying that the creditor was bound to make his election at once according to the rule of the civil law, or at any rate, within a reasonable time, whatever that expression in such a connection may be taken to mean. But it has long been held and it is now quite settled that the creditor has the right of election "up to the very last moment," and he is not bound to declare his election in express terms. He may declare it by bringing an action or in any other way that makes his meaning and intention plain. Where the election is with the creditor, it is always his intention expressed or implied or presumed, and not any rigid rule of law that governs the application of the money. The presumed intention of the creditor may no doubt be gathered from a statement of account, or anything else which indicates an intention one way or the other and is communicated to the debtor, provided there are no circumstances pointing in an opposite direction". 12 Earlier (p 292) Lord Herschell said: "The question to be determined is what was the effect of the transmission to the respondents of the statement of account of August 22. It is clear that if the appellants had merely entered in their own books an account such as was transmitted, it would not have amounted to any appropriation by them, and they would still have been at liberty to appropriate the payment as they pleased. It is equally clear, however, that when once they had made an appropriation and communicated it to their debtors, they would have no right to appropriate it otherwise". 13 What is "the very last moment" must depend upon the circumstances of the particular case. In Seymour v Pickett [1905] 1 KB 715 at p 727 Stirling, LJ gave meaning to the expression when he said: "… I think means until something has happened which prevents the creditor from exercising his right - some such event as, for instance, if the creditor has already made an appropriation and has communicated it to the debtor. By bringing an action the creditor may in fact shew that he has made an appropriation, and the very form of the writ may shew a communication of the appropriation to the debtor. And the same result may arise in other ways. In Friend v. Young (2), for instance, it was held that the form of a proof in bankruptcy by a creditor shewed that an appropriation had been made by him and amounted to a communication of it to the debtor". (See also: Smith v Betty [1903] 2 KB 317 at pp 323-324). 14 In Deeley v Lloyds Bank Limited [1912] AC 756 at p 783 Lord Shaw of Dunfermline expressed his understanding of the principle in Clayton's Case (1 Mer 572) in the following terms: "According to the law of England, the person paying the money has the primary right to say to what account it shall be appropriated; the creditor, if the debtor makes no appropriation, has the right to appropriate; and if neither of them exercises the right, then one can look on the matter as a matter of account and see how the creditor has dealt with the payment, in order to ascertain how he did in fact appropriate it. And if there is nothing more than this, that there is a current account kept by the creditor, or a particular account kept by the creditor, and he carries the money to that particular account, then the Court concludes that the appropriation has been made; and having been made, it is made once for all, and it does not lie in the mouth of the creditor afterwards to seek to vary that appropriation." This is substantially the view taken by the learned Master of the Rolls in his clear opinion in this case, and I respectfully agree with that opinion". The submissions 15 It is common ground that there was no appropriation by either Mr and Mrs Morgan or SC and that the right to do so fell upon BNP. 16 Mr Hall, counsel for the cross-defendants, did not contest that BNP had the right to appropriate the proceeds of sale to whichever account it chose. He contended that the issue is whether, in fact, that right had been exercised and an appropriation had been made to the margin lending account. 17 He submitted that BNP made an appropriation of the Telstra proceeds to the margin lending account and that fact was communicated to them by the letter and the pleadings. He put that the documents evidence the fact that such appropriation was made with the result that the amount outstanding under the margin lending account has been reduced to $110,462.75, and the total amount outstanding under both it and the options trading account is $682,187.87. He argued that as BNP had exercised their right to appropriate it was not open to them to change their position. 18 He also submitted that had there been no intention to appropriate it was open to BNP to deposit the Telstra proceeds in a suspense account pending the exercise of the right, but they chose not to do so. That they in fact applied these monies to the particular account in the circumstances constituted an appropriation which binds them. 19 On behalf of the cross-defendants no issues of estoppel, waiver, or election were raised. It was not contended that they had acted in reliance upon, or to their detriment as a result of receiving, the letter. 20 Mr Kaye SC, senior counsel for BNP, submitted that no appropriation had been made at the time the letter was sent. He submitted that upon its proper construction the letter is a demand for the payment of a specified sum with reference to the account balances by which it was calculated, and did not deal with the question as to the parties against which those balances could be claimed and enforced. With regard to the pleadings, he submitted they are substantially repetitive of the contents of the letter and would not be reasonably understood as indicating appropriation of the Telstra proceeds to the margin lending account. He argued that the pleadings should be understood as stating BNP's defence and claim against the cross-defendants for the total outstanding amount of $682,187.87, and do not show there had been an appropriation. 21 He accepted (T p 95) that what happened and what can be inferred is that the Telstra proceeds were applied to reduce the margin lending account balance to the amount of $110,462.75 as stated in the letter. 22 Mr Kaye SC submitted that it was not until after the issues of liability were determined that consideration was given to the question of appropriation. He put that it was then decided to appropriate the Telstra proceeds to the options trading account for which SC was liable, and that the cross-defendants' solicitors were informed of that decision in the letter from BNP's solicitors of 1 July 2004. 23 He submitted that BNP were entitled to defer exercising the right of appropriation until the very last moment, so that it was open to them to wait until judgment on liability before doing so. 24 It follows, he argued, that Equities is entitled to recover under the margin lending facility from all of the cross-defendants the amount outstanding under the margin lending account at the time the positions were closed out, an amount which is presently calculated to be $612,553.32. Consistently, it was put, Private is entitled to recover under the options trading facility from SC the amount outstanding under the options trading account, which, after crediting the Telstra proceeds of $490,105.80, is presently calculated to be the sum of $81,619.32. Discussion 25 As it is accepted that BNP were entitled to exercise the right, the only question is whether, as a matter of fact, an appropriation was made and communicated to the cross-defendants by the letter and the pleadings. 26 In the first instance it is necessary to determine whether the effect of the letter was to show that there had been an appropriation or whether there are "circumstances pointing in an opposite direction" (the "Mecca" p 294). 27 The evidence is that on 17 August 2001 the Telstra proceeds were credited to the margin lending account and reduced the balance outstanding to $110,462.75. Prima facie, the application of those monies to that account supports the finding that an appropriation had been made. (the "Mecca" p 294; Deeley p 783). 28 The letter is dated 31 August 2001 and is under the hand of the managing director of each of Equities and Private and identifies the account in which each had an interest. Its purpose is obvious on its face (cf: e.g., Grant v Downs (1976) 135 CLR 674 at p 689; Bridges v Australian Consolidated Press (1967) 70 SR NSW 52). The letter in unequivocal terms informs Mr Morgan of the status of each account as a result of the application of the Telstra proceeds. The total amount for which payment is demanded is shown to be calculated by reference to the amounts stated to be then outstanding in each separate account after the Telstra proceeds have been applied. 29 It is reasonable to infer that reference to the status of each account was deliberate because BNP may be taken to have been aware that the parties to the underlying agreement in respect of one were different to those to the agreement in respect of the other. It may also be inferred that had BNP been called upon to demonstrate that the amount outstanding under each account was correctly calculated they would have disclosed the application of the Telstra proceeds in reduction of the margin lending account. The letter shows that as a component of the total amount claimed BNP intended to, and in fact did, rely upon the balance in that account after application of the Telstra proceeds. 30 In my opinion the letter effectively communicated to the cross-defendants that BNP intended to appropriate the Telstra proceeds to the margin lending account on 17 August 2001, and had in fact done so. I find that there were no circumstances pointing in the opposite direction. It follows that I reject the submission that the letter evidences nothing more than the making of a demand for the total sum claimed. 31 I turn now to the pleadings, the issue being whether they, too, effectively communicate the appropriation to the cross-defendants. It is sufficient to refer to the terms of para 25.3 of the defence and to para 29 of the amended cross-claim which are in identical terms, and are set out in para 7 above. These paragraphs claim that under the margin lending facility the amount of $110,462.75 is due, and under the option trading account the amount of $571,725.12 is due, the total being the amount of $682,187.87. It is also alleged that these amounts are calculated upon applying the Telstra proceeds. 32 In my opinion these paragraphs, taken alone or in context in their respective pleadings, effectively communicate the fact of appropriation and confirm the effect of the letter. 33 Accordingly, I find that on 17 August 2001 the Telstra proceeds were appropriated to the margin lending account with the result that the amount then outstanding under it was $110,462.75. The communication of that appropriation having been made by the letter and the pleadings it was not open to BNP to change its position, and they had no right to appropriate it otherwise. 34 It may be accepted that BNP had up to the very last moment to exercise its right. They claimed to do this in their letter of 1 July 2004 by stating their election to apply the Telstra proceeds to the option trading account. However, by then the moment had passed. They had determined their choice on 17 August 2001 and no longer had a right to exercise. Conclusion 35 At the conclusion of submissions the parties agreed upon the orders to be made if it was found that there had been an appropriation. I therefore make orders in accordance with the terms of the orders contained in the document entitled "Orders", initialled by me, dated today, and placed in the file. 36 The question of costs has been reserved. Failing agreement, the parties should have the opportunity to address me on that issue. Arrangements should be made with my Associate by 10 May 2005 to re-list the matter. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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