Supreme Court New South Wales Medium Neutral Citation: Learn & Play (Rhodes No 1) Pty Limited as Trustee for Rhodes 1 Childcare Centre Unit Trust v David John Frank Lombe [2011] NSWSC 1506 Hearing dates: 29, 30 November, 1 December 2011 Decision date: 01 December 2011 Jurisdiction: Equity Division Before: Pembroke J Decision: See [27] Catchwords: AGENCY - ostensible authority - requirement for representation - whether company held person out as having authority - no representation - no reliance ESTOPPEL - no representation - no reliance AGENCY - ratification of acts done without authority - ratification by silence, acquiescence or inactivity - requirement that principal be aware of all material facts - no knowledge of material terms - no ratification or adoption Legislation Cited: Corporations Act 2001 (Cth) Family Law Act 1975 Cases Cited: Brockway v Pando [2010] WASCA 192 Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 Pollard v Wilson [2010] NSWCA 68 Suncorp Finance & Insurance Corp v Milano Assicurazioni SpA [1993] 2 Lloyd's Rep 225 Taylor v Smith (1926) 38 CLR 48 Victorian Professional Group Management Pty Ltd v The Proprietors "Surfers Aquarius" Building Units Plan No 3881 (1987) 1 Qd R 487 Category: Principal judgment Parties: Learn & Play (Rhodes No 1) Pty Ltd - first plaintiff Learn & Play Early Learning Pty Ltd - second plaintiff Rhodes 1 Childcare Centre Pty Ltd - third plaintiff David John Frank Lombe - first defendant Bank of Western Australia Ltd - second defendant Representation: Counsel: V F Kerr - for the plaintiffs R I Bellamy - for the defendants Solicitors: Courtenay & Co - for the plaintiffs Gadens Lawyers - for the defendants File Number(s): 2011/00297373 Judgment Introduction 1The issue in this case is whether a fixed and floating charge and a guarantee and indemnity dated 17 June 2008 purportedly given by the third plaintiff (the company) in favour of Bank of Western Australia Limited (BankWest) are valid. Both documents were executed by a person who was not a director or officer of the company at the date of execution. He had no actual authority, whether expressed or implied, to execute those documents. 2The defendants contend that the documents should now be treated as if they are valid on one or more of three legal grounds - ostensible authority, estoppel and ratification. I have concluded that the factual basis for each of these defences is absent. It follows that the plaintiffs are entitled to the declarations they seek. A summary of the material facts is as follows. The Facts 3On 2 April 2008 the company was granted a licence to operate a "Centre Based Children's Service" from the premises. Ms Poche was the sole director of the company and owned or controlled all of its shares. She and Mr Ward were estranged. On 29 April 2008 BankWest offered a commercial advance facility of $1.2 million to Mr Ward to purchase the shares in the company from Ms Poche and a company which she controlled. This included $100,000 for a bank guarantee in respect of the rental bond applicable to the company's premises. 4Also on 29 April BankWest instructed Gadens to act on its behalf in relation to the offer of finance to Mr Ward. Later that day Gadens sent to Mr Ward's solicitor, Mr Christie, draft financing documents including a guarantee and charge to be executed by Ms Poche as the sole director of the company. On 6 May 2008 Gadens requested Mr Ward's solicitor to provide documents evidencing the transfer of the shares in the company from Ms Poche to Mr Ward and the resignation of Ms Poche as a director of the company. On 9 May 2008 Mr Ward's solicitor sent to Ms Poche's solicitor the guarantee and charge requiring her execution. On 13 May 2008 Ms Poche's solicitor informed Mr Ward's solicitor that Ms Poche would not sign these documents. He returned them. 5On 16 May 2008 Gadens sent to Mr Ward's solicitor revised security documents including the proposed guarantee and charge from which Ms Poche's name had been removed and substituted by Mr Ward's name as sole director of the company. Mr Ward executed the documents and dated them 16 May. On the same day a meeting of the members of the company (Ms Poche), passed a resolution pursuant to Section 260B of the Corporations Act 2001 (Cth) approving the provision of financial assistance by granting a guarantee and charge to BankWest to enable Mr Ward to acquire the shares in the company. The Explanatory Notes which accompanied the notice of meeting stated among other things: The ability of James to acquire the shares in the Company depends on James being able to (in addition to other matters) raise the finance to pay out the National Australia Bank. It is a condition to the provision of the financial accommodation under the finance facility that the Company provide: (a) ... (b) A first ranking registered fixed and floating charge in favour of BankWest over all the assets and undertakings of the Company, to fully support repayment of the finance facility and to support its liabilities under the Guarantee and Indemnity. 6On 22 May 2008 Mr Ward's solicitor returned to Gadens executed financing documents, including the guarantee and charge purportedly executed by Mr Ward as the sole director of the company. On 6 June 2008 Mr Ward's solicitor sent to Gadens a draft Financial Agreement under Section 90C of the Family Law Act 1975 . It stated that the business loan was the loan advance of $1.2 million by BankWest to Mr Ward. Clause 12 provided as follows: 12 DIVISION OF PROPERTY: (a) Christine shall transfer her two (2) shares in the Company held by her to James. (b) Christine shall do all things necessary to effect a transfer to James of the one (1) share in the Company held by an entity she solely controls being VALACAR PTY LIMITED (CAN 072 458 523) (as trustee or otherwise). (c) On settlement, Christine shall resign as director and secretary of the Company and James shall accept appointment as to the same. ... (f) James covenants and agrees that he will not further encumber or impede the operation of L&P(R) other than for the amount of $1,200,000 being the monies provided to him by Bank of Western Australia Limited ("BankWest"). 7Clause 13 dealt with Ms Poche's reversionary interest. It provided: 13 REVERSIONARY INTEREST Always subject to the interest of BankWest whose interest shall take priority: (a) The parties agree that the entire legal and equitable ownership of Shares shall revert to Christine ("the reversionary Interest") if at any time one or more of the following events occur: I the BankWest Business Loan as set out herein is repaid; or II Christine (either herself and/or a third party) can refinance the balance of the BankWest Business Loan as set out herein. (b) Upon transfer of the Shares in clause 13(a), Christine shall withdraw her caveat in clause 12(d). (c) James shall ensure that the Shares, the lease of the business premises, any licence relating to the premises, are preserved to the full extent and are not dealt with or encumbered in any way and that the legal and equitable ownership of the Shares remains with James strictly in accordance with this agreement. (d) James shall ensure that in the event he is a party to a defacto or marital relationship, a binding agreement as prescribed by the Property (Relationships) Act 1984 and the Family Law Act 1975 respectively is entered into to acknowledge and preserve Christine's reversionary interest herein. 8Also on 6 June Ms Poche's solicitor sent to Gadens an ASIC notification relating to the resolution of the company to provide financial assistance to Mr Ward. The email stated that Ms Poche would not execute the certificate of solvency furnished by Mr Ward's solicitor. On 17 June 2008 Ms Poche and Mr Ward executed the Financial Agreement and a Supplementary Financial Agreement. Ms Poche also executed the transfer of shares in the company in favour of Mr Ward. For reasons that were never explained, Mr Ward took no steps to register the transfer of shares in his favour or to obtain appointment as a director of the company. Later on 17 June BankWest settled the financing to Mr Ward and disbursed the commercial advance facility of $1.2 million in accordance with his directions. Mr Cormack 9Mr Cormack was the solicitor for BankWest. He made clear that he was well aware that Mr Ward was not a director or officer of the company at the time of execution of the guarantee and charge. He took a calculated risk on behalf of BankWest but assumed, not entirely unreasonably, that in accordance with the apparent intention of Ms Poche and Mr Ward, Mr Ward would become a director of the company on or shortly after 17 June 2008. 10I should add that to some degree Mr Cormack only has himself to blame. As I have observed, on 6 May 2008, an employed solicitor working under his supervision prudently informed the solicitor for Mr Ward that she required copies of the documents evidencing the transfer of shares and the resignation of director, the minutes of the meeting and the ASIC 484 forms. Settlement of the BankWest loan occurred on 17 June 2008 but the bank's solicitors did not continue to insist upon, and did not receive, these documents at or prior to settlement. Mr Cormack was simply content to receive the guarantee and charge executed by Mr Ward on behalf of the company in escrow. In other words, he knew that they were ineffective unless and until Mr Ward became the sole shareholder and director and caused the company to ratify them. The Representation Case 11The ostensible authority and estoppel defences both depend on proof of a relevant representation by or on behalf of the company as to Mr Ward's authority to execute the guarantee and charge. It is not good enough to show that there was a representation that Mr Ward was authorised to execute documents of the same or similar kind. In fact there was no such representation but the point is that what must be demonstrated is that Mr Ward was held out by the company to BankWest as having authority to execute the documents in question. 12This has a practical relevance in this case because unknown to Ms Poche, the documents as executed gave BankWest a legal right to have the charge secure up to $5 million against the assets and undertaking of the company. Ms Poche's expectation was that the charge would only ever secure $1.2 million. This was a matter of vital interest to her because of her reversionary interest in the company to which she was entitled pursuant to the Financial Agreement. 13None of this actually matters very much because the effect of Mr Cormack's evidence is that he knew that Mr Ward was not authorised to execute the documents on behalf of the company. No officer of BankWest gave evidence. Mr Cormack's position, as I have explained, was that he held the documents in escrow pending the anticipated resignation of Ms Poche and the appointment of Mr Ward as the director of the company in her place. 14Given that evidence, it is obvious that even if the representation contended for were made, BankWest did not rely on it. Mr Cormack, on behalf of BankWest knew the true facts but assumed that the absence of authority would be cured. BankWest, through Mr Cormack, did not therefore rely on any representation that Mr Ward had authority to execute the documents on behalf of the company. It knew he did not have authority at the time that they were executed. 15At the hearing, the defendants' representation case shifted. They contended for a representation that was not pleaded. The representation was said to be to the effect that Ms Poche, on behalf the company, agreed to the form of the documents that were executed on 17 June 2008 other than the identity of the person who was to sign them on behalf of the company. This did not make a lot of sense and hardly seemed sufficient to give authority to Mr Ward, even if such a representation were made to BankWest. But for the reasons that follow it was not established at a factual level. Four Communications 16Four events and their associated communications are relied upon: 13 May 2008 (a) On 13 May 2008 Ms Poche's solicitor informed Mr Ward's solicitor that she did not agree to sign the guarantee and charge documents on behalf of the company. They were then returned as requested. Nothing arises from these events and communications . First, the communications were between the solicitors for Ms Poche and Mr Ward. It is impossible to construct out of them a representation on behalf the company to BankWest. Second, it is equally impossible to see how, by any rational process of inference, a representation can be inferred to the effect that Ms Poche, on behalf of the company, approved the content of the documents other than the identity of the person who was to sign them. She simply refused to sign them and returned them. She did not, by doing so, approve their content. She had no obligation even to read them. 28 May 2008 (b) On or about 28 May 2008 Ms Poche's solicitor had a number of communications with Mr Ward's solicitor about whether Ms Poche would sign, as a director of the company, a solvency certificate in connection with the proposed financial assistance to Mr Ward. She refused to do so. Among other things, her solicitor sought confirmation that the loan repayments, so far as the company was concerned: Will be the amounts in the loan agreement you forwarded earlier to us (and we returned to you) and that [the company] is not liable to BankWest (or any other lender) for any other debt in relation to this transaction. Mr Ward's solicitor replied by saying that the company had given a charge over its assets to a maximum of $5 million. There was no explanation of this statement and no response. Once again, this was a communication between the solicitors for Ms Poche and Mr Ward. It could not, on any view, amount to a representation on behalf of the company to BankWest. Furthermore, it is difficult to see what relevant representation Ms Poche, let alone the company, could possibly be regarded as having made on the basis of those communications. Her solicitor simply asked for a confirmation that he did not get. The bald statement by Mr Ward's solicitor about the charge and the absence of a response does not give the communications a character which they do not bear. They do not constitute a representation by the company to BankWest. 6 June 2008 (c) On 6 June 2008 Ms Poche's solicitor informed Mr Cormack that Ms Poche did not wish to execute the solvency certificate to which I referred in the preceding paragraph and which had been provided by Mr Ward's solicitor. In the same email he attached the ASIC notification and minutes of the meeting of the company that had been signed by Ms Poche on 16 May 2008. From Ms Poche's perspective, the documents signed by her were predicated on the provision of security to BankWest over the assets and undertaking of the company to secure the proposed business loan of $1.2 million to Mr Ward. This email to Mr Cormack does not amount to a representation to BankWest by or on behalf of the company that Mr Ward was authorised to execute the guarantee and charge documents on behalf of the company. That is not the subject matter of the email and no such inference is indirectly available. Nor for the same reason could it be construed as representing that Ms Poche agreed to the form of guarantee and charge documents that were proposed to be executed, save as to the identity of the person who would sign on behalf of the company. 17 June 2008 (d) On 17 June 2008 Ms Poche signed the Financial Agreement and the transfer of shares. This could not amount to a relevant representation on which BankWest could rely. In reality, as I have explained, Mr Cormack actually knew, at the time of execution of the guarantee and charge, that Mr Ward was not authorised on behalf of the company and was not its director. In any event, the Financial Agreement was inconsistent with the form of guarantee and charge that were executed. The Financial Agreement prohibited security being given over the company's assets to BankWest in the amount set out in the executed charge and guarantee. It recorded that Mr Ward was borrowing $1.2 million from BankWest for the purpose of acquiring all the shares in the company. By clause 12(f), Mr Ward covenanted that he would not encumber the operation of the company's business, "other than for the amount of $1.2 million being the monies provided to him by [BankWest]". The executed guarantee and charge in fact encumbered the company's business in a far more substantial manner than was permitted by clause 12(f). 17There are some further features of the Financial Agreement that I should mention. The agreement contemplated that security would only be given over the company's assets while ever Mr Ward was the sole shareholder and director of the company. It contemplated that Mr Ward would replace Ms Poche as the sole director and shareholder of the company; that while the company was in Mr Ward's control, its operations might be encumbered to BankWest for up to $1.2 million; and that control of the company would revert to Ms Poche when the business loan was repaid. While the company was in the control of Ms Poche, it was to be unencumbered to BankWest. But while it was in the control of Mr Ward, it was permitted to be encumbered to BankWest for no more than $1.2 million. That is antithetical to the proposition that Ms Poche, on behalf of the company, impliedly authorised Mr Ward to cause the company to grant security to BankWest to secure the sum of $5 million that was in fact covered by the charge that Mr Ward executed. 18There is a further problem. The Financial Agreement was executed on 17 June 2008, approximately one month after Mr Ward executed the charge and guarantee. To be effective, actual authority must be conferred on an agent, whether expressed or implied, before the agent purports to exercise that authority. Ms Poche's Credit 19I should return to one factual matter to which I adverted earlier. I accept Ms Poche's evidence in relation to her belief and understanding. She said that she was not a party to any discussion or agreement with any person that included any suggestion that BankWest would be given either a fixed and floating charge to secure an amount of up to $5 million or an unlimited guarantee and indemnity in relation to all monies which Mr Ward owed or may in the future owe to BankWest. She said she would never have agreed to any charge or guarantee and indemnity securing such amounts being given. She said that until late August 2011, she had no knowledge that Mr Ward had attempted to bind the company in relation to a guarantee and indemnity of all monies which Mr Ward owed or would owe to BankWest or that the charge secured an amount of up to $5 million. Although she was aware from June 2008 that a charge had been purportedly given by the company to BankWest she had never seen a copy of it. Nor had she seen the guarantee signed by Mr Ward. 20I saw no reason to doubt Ms Poche's credibility on these matters. This is notwithstanding the email sent from Mr Ward's solicitor on 28 May 2008. Unadorned and unexplained, and addressed only to her solicitor, it is not enough to cause me to doubt the truthfulness of her evidence as to her expectation of the amount which the charge to BankWest could secure. What is apparent is that BankWest relied on its own expectation as to what would happen, not any representation as to Mr Ward's authority made by or on behalf of the company through Ms Poche or her solicitor. For those reasons, there is no factual foundation for the defences based on equitable estoppel and ostensible authority. Ratification 21Ratification may be expressed or implied. It will be implied whenever the conduct of the person in whose name a transaction has been entered into is such as to show that the person adopts the transaction. Silence, acquiescence or inactivity may be sufficient to demonstrate implied ratification: Taylor v Smith (1926) 38 CLR 48 at 54 (Knox CJ); Suncorp Finance & Insurance Corp v Milano Assicurazioni SpA [1993] 2 Lloyd's Rep 225 at 234; Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 at [53] - [61] (Young CJ in Eq); Pollard v Wilson [2010] NSWCA 68 at [121]; Victorian Professional Group Management Pty Ltd v The Proprietors "Surfers Aquarius" Building Units Plan No. 3881 (1987) 1 Qd R 487 at 496 (Connolly J); Brockway v Pando [2010] WASCA 192 at [1116] - [117]. If the principal is aware of all the material facts, takes no steps to disown the transaction within a reasonable time, or adopts no means of asserting his rights at the earliest opportunity, that may, in certain circumstances, amount to sufficient evidence of ratification. 22What is crucial however in any ratification is that it is necessary that the principal have full knowledge of all the material circumstances in which the transaction was purportedly entered into and its material features. There may be circumstances, probably rare, in which the principal should be taken as having intended to ratify and take the risk of the transaction, whatever the circumstances may have been: Suncorp Finance & Insurance Corp v Milano Assicurazioni SpA (supra) at 234. This is not one of those cases. 23I should also observe that ratification has objective as well as subjective features. It is not open to a principal who, by his conduct, appears to the outside world to have adopted a transaction, to be able to prove subjectively that he did not intend to approve it. A principal is not entitled to prove subjectively that he did not intend to adopt a transaction when he has done an unequivocal act to adopt it with full knowledge of its terms and features: Suncorp Finance & Insurance Corp v Milano Assicurazioni SpA (supra) at 235. 24On the other hand, the subjective knowledge and understanding of the principal is also relevant. It must be shown that the principal was aware of the material terms and features of the transaction which he is said to have adopted and ratified. Without such full knowledge, there will not be ratification according to law. I doubt very much whether a principal, who was aware of the material terms, could successfully contend that he lacked the relevant knowledge because of his own obtuseness, neglect or failure for some other reason to appreciate the significance of those terms. However I need not decide that question in this case. 25I have already explained that Ms Poche was not a party to any discussions with BankWest about the company giving BankWest either an unlimited guarantee to secure all of the debts of Mr Ward to BankWest or a charge to secure those debts up to an amount of $5 million. And I have found that she would not have agreed to the company entering into such obligations. She was unaware that Mr Ward had purported to do so until late August 2011. That is sufficient to dispose of the ratification defence. There was not the requisite knowledge of all the material facts. Nonetheless, I should set out the subsequent conduct relied upon and explain why that conduct does not amount to notification: (a) On 17 June 2008 Ms Poche entered into two agreements with Mr Ward, the Financial Agreement and the Supplementary Financial Agreement. The Financial Agreement recorded that Mr Ward was borrowing $1.2 million from BankWest. This comprised a commercial advance facility of $1.1 million and a bank guarantee amount of $100,000 provided by BankWest to Mr Ward referred to in the facility documents. (b) The Financial Agreement and the Supplementary Financial Agreement then provided for two relevant matters. First, Mr Ward on lent $1.1 million from the BankWest facility to Ms Poche. Second, the future proceeds of the company's childcare business, after payment of ordinary business expenses, were to be applied in reduction of the BankWest facilities. (c) After 17 June 2008, Ms Poche caused the company to pay $575,235 to BankWest referable to the BankWest facilities. Those monies consisted of $272,735 attributable to interest and $327,500 attributable to principal on the commercial advance. 26The fact that Ms Poche caused the company to pay interest to BankWest in conformity with her obligations under the Financial Agreement and the Supplementary Financial Agreement says nothing about whether or not the company adopted the obligations purportedly imposed by the guarantee or the charge. Even if the payment of interest in conformity with the obligations imposed by the Financial Agreement was a sufficiently unequivocal act as to ratify other transactions contemplated by the Financial Agreement, which it is not, it could not ratify obligations which are contrary to those contemplated by the Financial Agreement. Orders 27For those reasons, the plaintiff is entitled to the declarations and orders set out in prayers 9 to 15 inclusive of the amended statement of claim. I will stand over the proceedings before me on Friday 9 December for the finalisation of orders and costs. ********** 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. Decision last updated: 08 December 2011