Supreme Court New South Wales Medium Neutral Citation: BNY Trust Company of Australia Limited v Banksia Finance and Leasing Co Pty Ltd [2013] NSWSC 1776 Hearing dates: 4 September 2013 Decision date: 03 December 2013 Jurisdiction: Common Law Before: Hall J Decision: (1) Grant leave to the second to fifth defendants to file the Amended Defence dated 6 June 2013. (2) Pursuant to Rule 16.3 of the Uniform Civil Procedure Rules 2005, default judgment is entered for the plaintiffs against the First Defendant. (3) Pursuant to Part 13, Rule 13.1 of the Uniform Civil Procedure Rules 2005, that judgment be entered for the plaintiffs against the Second, Third, Fourth and Fifth Defendants. (4) The proceedings are re-listed for the purpose of: (a) the making of final orders to give effect to this judgment (b) the making of any ancillary orders including orders as to interest and costs. Catchwords: PROCEDURE - DEFAULT JUDGMENT - Part 16 of the UCPR - plaintiffs loaned money to first defendant under a loan facility with debt owed guaranteed by second, third, fourth and fifth defendants - second defendant sole director of the third, fourth and fifth defendant companies - terms of loan facility and guarantees varied by two deeds of forbearance entered into by the parties and executed by second defendant - under the deeds of forbearance parties acknowledged their respective rights and obligations under the loan facility and guarantees - parties agreed to extend time for payment of all monies due pursuant to the terms of the deeds of forbearance - first defendant defaulted - guarantor demands were made to the second, third, fourth and fifth defendants - application by plaintiffs pursuant to rule 16.3 of the UCPR seeking default judgment against first defendant for debt owing under the loan facility - first defendant served - no defence filed by first defendant - plaintiff entitled to judgment against first defendant for debt owed under loan facility PROCEDURE - SUMMARY DISMISSAL - Part 13 of the UCPR - application by plaintiffs pursuant to rule 13.1 of the UCPR seeking summary judgment against second, third, fourth and fifth defendants for debt guaranteed - whether no real question to be tried - third, fourth, fifth defendants submit guarantees and deeds of forbearance not duly executed pursuant to sections 127 and 129 of the Corporations Act 2001 (Cth) as documents do not state that the party executing the document is relying upon provisions of s 127 - third, fourth, fifth defendants submit that where documents do make such a reference, no evidence of declaration in terms of s 238B(2) of the Corporations Act 2001 (Cth) provided - documents complied with s 127 of the Corporations Act 2001 (Cth) - pleaded defence on basis of s 127 does not raise any viable defence of fact or law - fifth defendant pleads plaintiffs accessories to breaches of trustee fiduciary obligations - leave granted to fifth defendant to amend pleadings on foot in order to plead matters to support allegations that there was a breach of fiduciary duties and plaintiffs had knowledge of any breach - fifth defendant chose not to amend pleadings - applying principle in General Steel Industries; pleadings do not raise any arguable defence - summary judgment entered in favour of plaintiff Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Hill Equipment & Refrigeration Co Pty Ltd v Nuco Pty Ltd (1992) 110 FLR 25 National Australia Bank v McKay (1995) ATPR 41-409 Rural Bank Limited v Merriba Pty Ltd [2012] NSWSC 498 Spencer v The Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118 Uniform Civil Procedure Rules, r 13.1 Category: Interlocutory applications Parties: BNY Trust Company of Australia Ltd as trustee for the AMW Warehouse Trust No. 1 (First Plaintiff) Ashe Morgan Lending Pty Ltd (Second Plaintiff) Banksia Finance and Leasing Co Pty Limited (Receivers Managers Appointed (First Defendant) Peter Faeghi (Second Defendant) Peter Faeghi Group Pty Ltd (Third Defendant) Sadri Holdings Pty Ltd (Fourth Defendant) Faeghi Holdings Pty Ltd (Fifth Defendant) Representation: Counsel: P Newton (Plaintiffs) DKL Raphael (Second to Fifth Defendants) No Appearance (First Defendant) Solicitors: Bridges Lawyers (Plaintiff) No Appearance (First Defendant) Penhall & Co (Second to Fifth Defendants) File Number(s): 2012/328545 Judgment The Proceedings 1The plaintiffs, BNY Trust Company of Australia Ltd ("BNY" formerly known as JP Morgan Trust Australia Limited) and Ashe Morgan Lending Pty Ltd commenced proceedings against the following defendants: First Defendant - Banksia Finance & Leasing Co Pty Ltd - Receivers and Managers Appointed ("Banksia") Second Defendant - Peter Faeghi Third Defendant - Peter Faeghi Group Pty Ltd Fourth Defendant - Sadri Holdings Pty Ltd Fifth Defendant - Faeghi Holdings Pty Ltd 2The defendants are all associated entities controlled by the second defendant. 3The proceedings were commenced by way of Statement of Claim filed on 22 October 2012. The relief claimed against the first to fifth defendants was in the following terms: 1. Judgment for the sum of $1,515,212.70 2. Interest on the sum referred to in the preceding paragraph in accordance with the provisions of the First Loan Facility (as varied by the First Deed of Forbearance and the Second Deed of Forbearance) from 4 October 2012 until the date of payment. 3. In the alternative, interest. 4. Charges and expenses in accordance with the First Loan Facility (as varied by the First Deed of Forbearance and the Second Deed of Forbearance). 5. Costs. 6. Such other orders as this Honourable Court deems fit. 4In paragraphs [1] to [38] of the Statement of Claim the plaintiffs, inter alia, pleaded as facts in support of the claim, the making of certain loan facilities and guarantees, the granting of a fixed and floating charge in favour of the plaintiff BNY, and securities entered into by way of mortgages in respect of three specified properties. 5Banksia is the borrower under the First Loan Facility and is a guarantor in relation to the Second Loan Facility. 6The second defendant, Mr Faeghi, is the borrower under the Second Loan Facility. He is also a guarantor in relation to the First Loan Facility. 7In paragraphs [27] to [30] of the Statement of Claim, the facts concerning advances made by the plaintiffs to the defendants are set out. 8In paragraphs [31] to [33] of the Statement of Claim, the facts concerning certain deeds, namely, the First and Second Deeds of Forbearance are pleaded. 9In paragraphs [34] to [38] of the Statement of Claim, the terms of the following transactions are set out: First Loan Facility, the First Guarantee, the Second Guarantee and the Deeds of Forbearance are pleaded. 10In paragraphs [39] to [42] of the Statement of Claim, the plaintiffs plead the facts concerning alleged defaults in relation to repayments said to be required by the terms of the abovementioned transactions. 11In paragraphs [43] to [46] of the Statement of Claim, the plaintiffs plead the facts concerning the sale of specified properties and the appointment of Receivers and Managers in respect of the undertaking, property and assets of Banksia. 12In paragraphs [47] to [57] of the Statement of Claim, the facts relied upon in respect of demands made by the plaintiffs upon the defendants and the claimed failure by them to pay the plaintiffs as demanded are pleaded. The Application 13The plaintiffs by Notice of Motion filed on 1 August 2013, seek default judgment against the first defendant and summary judgment against the second, third, fourth and fifth defendants as follows: "1. Pursuant to rule 16.3 of the Uniform Civil Procedure Rules 2005 (NSW), default judgment be entered for the Plaintiffs against the First Defendant in the sum of $1,298,564.79 plus interests and costs accrued thereon until date of judgment. 2. Pursuant to rule 13.1 of the Uniform Civil Procedure Rules 2005 (NSW) judgment be entered for the Plaintiffs against the Second, Third, Fourth and Fifth Defendants in the sum of $1,298,564.79 plus interests and costs accrued thereon until date of judgment. 3. In the alternative to 2, pursuant to rule 14.28 of the Uniform Civil Procedure Rules 2005 (NSW), the Defence filed for the Second, Third, Fourth and Fifth Defendants be struck out." 14The Statement of Claim was served on the first defendant, Banksia, on 28 October 2012. No defence has been filed by that defendant. On that basis, it has been submitted that in relation to the claim against Banksia, all the allegations made in the Statement of Claim against it are to be taken as admitted and the plaintiffs are entitled to default judgment: Plaintiff's Outline of Submissions at [18]. 15The principles to be applied on an application for summary judgment are well known. Summary disposal of proceedings is only available where there is no real question to be tried. It is not a power to be exercised without caution: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 128-9. See also Spencer v The Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118 at [24] per French CJ and Gummow J. 16Accordingly, in the present proceedings it is necessary to determine whether there is any real question, either of fact or law, upon which the rights of the parties depend. If there is, then summary judgment is not available to the plaintiffs. The Plaintiffs 17The first plaintiff, BNY is the trustee of the AMW Warehouse Trust No 1. 18Ashe Morgan Lending Pty Ltd, the second plaintiff, is the manager of the AMW Warehouse Trust No 1, acting on behalf of BNY as trustee of the AMW Warehouse Trust No 1. The Relevant Transactions (a) The Loan Facilities 19The plaintiffs seek recovery of amounts loaned to the first defendant and to the second defendant under a loan facility made on 10 November 2006 ("the First Loan Facility"). 20A second loan facility was made on 6 March 2007 ("the Second Loan Facility"). Both the first and the second facilities were secured by fixed and floating charges, guarantees and mortgages over a number of properties. (b) The Guarantees 21The plaintiffs, in particular, also seek recovery of the amounts owing by the defendants under their respective guarantees (which are pleaded in paragraphs [16] and [18] of the Statement of Claim and referred to as the First Guarantee and the Second Guarantee). Factual Background 22The term of the first loan facility was two years from the initial advance made on 24 November 2006. 23The term of the Second Loan Facility was two years from the date of the initial advance, 17 April 2007. 24Defaults were committed in relation to each loan facility, amongst other things, by the failure to repay the loan facilities on the expiry of the term of each facility. 25The parties entered into the first of two deeds of forbearance. Under the Deed of Forbearance made on 22 October 2009, the parties acknowledged their respective rights and obligations under the Loan Facilities and Guarantees and pursuant to which the plaintiffs agreed to effectively extend the time for payment of all monies due to the plaintiffs until 1 October 2010. This deed is referred to in the Statement of Claim as the First Deed of Forbearance. 26The defendants did not pay all monies due to the plaintiff by 1 October 2010. 27On 31 August 2011, the parties entered into a second Deed of Forbearance under which the parties acknowledge their respective rights and obligations under the Loan Facilities and Guarantees. Pursuant to it the parties agreed to effectively extend the time for payment of all monies due to the plaintiffs until either the date of termination or 25 September 2011. This is referred to in the Statement of Claim as the Second Deed of Forbearance. The Defendants 28On 30 November 2006, at the request of the defendants, the plaintiffs advanced the sum of $6,370,000 under the First Loan Facility to Banksia, of which Mr Faeghi was the sole director. 29On 17 April 2007, the plaintiffs advanced the sum of $2,478,000 to Mr Faeghi under the Second Loan Facility. 30Mr Faeghi was at all relevant times the sole director of the third defendant, Peter Faeghi Group Pty Ltd ("the Faeghi Group"). The Faeghi Group is a guarantor in relation to the First Loan Facility and the Second Loan Facility. 31At all relevant times, Mr Faeghi was the sole director of Sadri Holdings Pty Ltd ("Sadri"). Sadri is a guarantor in relation to the First Loan Facility and the Second Loan Facility. 32The fifth defendant, Faeghi Holdings Pty Ltd ("Faeghi Holdings") is a guarantor in relation to the First Loan Facility and the Second Loan Facility in its own right and as trustee for the Faeghi Family Trust. Mr Faeghi was also the sole director of that company. The Defence and "Amended Defence" 33A Defence on behalf of the second to fifth defendants was filed on 29 January 2013. Subsequently on 10 June 2013, an "Amended Defence" was e-filed on behalf of the second to fifth defendants. This was done without the leave of the court. A Notice of Motion was filed on behalf of the second to fifth defendants on 30 July 2013 in which leave was sought to file the Amended Defence. I have decided that leave should be granted so that the Defence in its amended form may be fully considered in the context of the plaintiffs' Notice of Motion filed 1 August 2013. 34Paragraphs 1 to 60 of the Amended Defence plead defences in the same numerical sequence as the paragraphs appearing in the Statement of Claim, including admissions as to pleaded facts. 35Paragraphs 61 to 65 plead a defence in respect of the fifth defendant as trustee of the Faeghi Family Trust in which breach of fiduciary duty by that defendant is pleaded. The issues arising from those paragraphs of the Amended Defence will be separately considered below. Evidence on the Application 36The plaintiffs relied upon and read on the application the following affidavits: (i) Affidavits of Alex Edwards sworn 31 July 2013 and on 4 September 2013. (ii) Affidavit of Michael James Scott Thomson sworn 6 August 2013. (iii) Affidavit of Dominic Stephen Calabria sworn 7 August 2013. 37There was no objection to any of the above affidavits. They were read on the application. 38On behalf of the defendant, the following documents were tendered: (i) Copy letter from Willis & Bowring to Garry Penhall and Co Solicitors, 3 September 2013. (ii) Copy of the unfiled Statement of Claim in the name of Renee Faeghi, Jahan Faeghi and Jordan Faeghi against the plaintiffs admitted and marked on the basis stated (T 3). 39Mr Edwards' affidavits establish that, as outlined above, the relevant loan facilities were provided by BNY and Ashe Morgan respectively on 30 November 2006 ($6,370,000) and on or about 17 April 2007 ($2,478,000). 40Annexure A to Mr Edwards' first affidavit establishes that the amount outstanding under the first account as at 31 July 2013 was $1,298,564.79. 41Mr Thomson in his affidavit stated that guarantor demands were made, firstly on 8 October 2012 to Mr Faeghi, Peter Faeghi Group, Sadri Holdings and Faeghi Holdings in the sum of $1,512,212.70 pursuant to the First Guarantee, the Second Guarantee, the First Deed of Forbearance and the Second Deed of Forbearance. 42On or about 8 October 2012, a demand was made on Banksia for the sum of $1,515,212.70 pursuant to the Second Guarantee, the First Deed of Forbearance and the Second Deed of Forbearance. 43Mr Calabria, in his affidavit, following review of documents identified in paragraph [3] of his affidavit, stated that he did not believe that the second to fifth defendants have a valid defence. He set out in paragraph [5] of his affidavit the basis for that belief. 44Mr Newton in his opening submissions for the plaintiffs stated that between the First Loan Agreement and the Second Loan Agreement the level of indebtedness was reduced by the sale of certain properties secured by mortgages. There were in all, three properties, a South Australian property, Western Australian property and a New South Wales property (in Double Bay, Sydney): T 5. 45Certain payments were made by reason of the fact that the Deeds of Forbearance made provision for payments of instalments during the extended term. 46The position was that all monies due and owing under what has been referred to as the Second Loan Agreement and the Second Guarantee have been paid. Accordingly, as of 4 September 2013 the records of Ashe Morgan record that there is no amount owing to the plaintiffs under the Second Loan Facility. 47Accordingly, as at the date of the hearing, the debt as due and owing is in connection with the advance of monies under the First Loan Agreement which was in turn secured by the First Deed of Guarantee which was acknowledged to be due and owing under the Deeds of Forbearance. 48Accordingly, the monies outstanding concern the loan given to the first defendant and the guarantees given by the second to fifth defendants. 49In his second affidavit sworn on 4 September 2013, Mr Edwards confirmed that the total amount owing to the plaintiffs as at 4 September 2013 under the First Loan Facility is $1,310,025.22 representing the amount outstanding for both principal and interest to 4 September 2013. 50At the time of swearing his affidavit, no other payments had been received from the defendants in relation to the First Loan Facility other than those recorded on the statement, Annexure A, to his affidavit. Execution of the First Deed of Guarantee 51A discrete issue is raised in the Amended Defence concerning the First Guarantee and the Second Guarantee. In that respect, whilst the defendants admit that the First Guarantee and the Second Guarantee were each signed by Mr Faeghi, it is contended that he did so "in his own right" and that he signed each guarantee on behalf of each of the corporate defendants, but the defendants do not admit: (i) That the documents constituting the First Guarantee and the Second Guarantee are deeds. (ii) That the execution of the First and Second Guarantees satisfied the provisions of ss 127 and 129 of the Corporations Act. 52In paragraph [16] of the Statement of Claim the plaintiffs allege that Mr Faeghi, Peter Faeghi Group, Sadri Holdings and Faeghi Holdings, as guarantors, executed a Deed of Guarantee and Indemnity in favour of BNY, being the First Guarantee. That was said to have occurred on or about 30 November 2006. 53Similarly, in paragraph [18] of the Statement of Claim it is pleaded that on or about 16 April 2007, Peter Faeghi Group, Banksia, Sadri Holdings and Faeghi Holdings, as guarantors, executed a Deed of Guarantee and Indemnity in favour of BNY, being the Second Guarantee. 54The Amended Defence responds to each of paragraphs [16] and [18] in the Statement of Claim in the following terms: 16. The defendants admit that a document was signed by Peter (Peter Faeghi) in his own right and that he placed his signature as sole director of the balance of the defendants but none of the defendants admit: a. That the document is a deed; b. That the execution satisfied, where relevant, sections 127 and 129 of the Corporations Act 2001. c. To being bound to the terms thereof. 55Paragraph [18] of the Amended Defence is in the following terms: 18. The defendants and each of them admit that a document headed 'guarantee' is dated 16 April 2007 and that Peter (Peter Faeghi) signed in his own right and signed on behalf of each of the companies but none of the defendants admit: a. That the document is a deed. b. That the execution satisfied the terms of section 127 of the Corporations Act 2001; c. To being bound by the terms thereof. 56The relevant provisions of ss 127 and 129 of the Corporations Act are set out below. 57Section 127 of the Corporations Act is in the following terms: Execution of documents (including deeds) by the company itself (1) A company may execute a document without using a common seal if the document is signed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary-that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company. (2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary-that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company. (3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2). (4) This section does not limit the ways in which a company may execute a document (including a deed). (emphasis added) 58Section 129(5) of the Corporations Act provides: "A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. (emphasis added) Submissions for the Third, Fourth and Fifth Defendants 59Submissions were made on behalf of the defendants both in writing and orally: see Outline of Submissions of the Third, Fourth and Fifth Defendants dated 2 September 2013. 60Mr DKL Raphael of counsel appeared on behalf of the second to fifth defendants. In submissions he relied upon the provisions of s 127(3) of the Corporations Act 2001 (Cth) in contending that there had been a failure by the documents in question to state that the execution of the deeds relied upon had been made in accordance with the provisions of that section. 61In paragraph [3] of the outline Mr Raphael addressed the issue of the execution of a document as a deed by a corporation. The submission there was: "... where the instant execution fails is, it is submitted, that it does not state, that, in executing the document by the sole director/shareholder that the party executing that same is relying upon the provisions of s 127 of the [Corporations] Act. The question of authority to execute is dealt with by s 129. Yet again it is submitted that failure to express that the execution is made in terms of s 127 and 129 of the [Corporations] Act result in not enlivening the authority of s 129 let alone that of s 127. In other words, because there is no reference in the testimonial to execution in terms of those Sections (one cannot say what act if at all, it is upon which the party executing is relying) to enable the document to be a Deed": at [3](b). 62In paragraph [5] of the Outline of Written Submissions of the Third, Fourth and Fifth Defendants it was contended that the First Guarantee did not refer to a document being signed by any company by way of s 127 of the Corporations Act. 63In his oral submissions Mr Raphael repeated that there was a need to expressly refer, in executing the guarantees to the fact that the document was being executed in terms of s 127 of the Corporations Act: T 15:35-40. 64He added: "... in a nutshell, your Honour, if a party seeks to rely upon what are in effect representations implied by s 129 it is necessary to specifically state that it is executed in terms of s 127, that the party executing is specifically adopting the enabling provisions of s 127" T 15:40-45. 65Mr Raphael also submitted that there had been no "declaration" or "resolution" expressed in terms of s 248B(2) of the Corporations Act before the Court. The submission was that where any document referred the issue of execution as having been made under s 127 of the Corporations Act, a declaration in terms of s 248B(2) was also required. Where such a declaration did not exist, there was a failure to satisfy the section (Outline of Written Submissions of the Third, Fourth and Fifth Defendants at [4]-[5]). Mr Raphael supplemented, albeit briefly, his written submissions on the point at T 17:25-18:34. He contended that it was "an arguable point": T 18:34. Submissions for the Plaintiff 66Mr Newton on behalf of the plaintiffs, responded in his oral submissions stating that the allegations as to the execution of the First and Second Guarantees cannot succeed having regard to: (a) The First Guarantee which states both that it was executed as a deed and had been executed by each corporate defendant by Mr Faeghi as sole director and sole secretary, (b) The Second Guarantee also states that it was executed as a deed and that it was executed by each corporate defendant by Mr Faeghi as sole director, sole secretary and in accordance with s 127 of the Corporations Act. (c) The First Deed of Forbearance made on 22 October 2009 was executed by each defendant. It too acknowledged the guarantors' liability under the First and Second Guarantees. 67It was further noted that the Amended Defence admitted that the documents comprising the First Deed of Forbearance dated 22 October 2009 were "in existence" and that the Second Deed of Forbearance dated 31 August 2011 "exists" but it did not admit that the "alleged execution thereof by the 3 corporate defendants is sufficient to come within the purview of s 127 ... or that the document is a deed": Plaintiffs' Outline of Submissions at [25] and [26] 68It was further submitted for the plaintiffs that consideration in respect of a guarantee is commonly the provision of, or agreement to enter into, the principal arrangement, citing as an example Hill Equipment & Refrigeration Co Pty Ltd v Nuco Pty Ltd (1992) 110 FLR 25 and National Australia Bank v McKay (1995) ATPR 41-409. 69The plaintiffs contended that the allegations of no consideration were not reasonably arguable: see para [31] of the Plaintiff's Outline of Submissions. 70I note that the defence raising a lack of consideration was expressly disavowed in the course of submissions: see Outline of Submissions of the Third, Fourth and Fifth Defendants at [6]. Consideration (1) Sections 127 and 129 of the Corporations Act 71In relation to the execution of the First Guarantee, the Second Guarantee the First Deed of Forbearance and the Second Deed of Forbearance it is clear, in my opinion, that those deeds were executed in a way that complied with the provisions of s 127 of the Corporations Act. 72Section 127 prescribes the method or the manner in which documents may be executed (including deeds) by a proprietary company that has a director who is also the sole company secretary. Provided the execution in relation to such a company complies with s 127(1)(c) there is no requirement for there to be a statement made to the effect that the document was executed pursuant to s 127 of the Act. The execution of both the First and Second Deeds plainly complied with the requirement in and by the terms of s 127(1)(c). 73I should add that, in my opinion, it was therefore not necessary for any "declaration" or "resolution" in terms of s 248B(2) to be made in order for the Deeds and Guarantees to be duly executed. 74I am of the opinion that the pleaded defence based on s 127 of the Corporations Act does not raise any viable defence of fact or law. (2) Defence Alleging Breach of Trustee Obligations 75As noted in the Plaintiffs' Outline of Written Submissions (at [33]), paragraph [61](b) and (c) and paragraph [62](a) and (b) and paragraph [63](a) of the Amended Defence plead a breach of trustee fiduciary obligations and additionally allege that the plaintiffs were accessories in such breaches. 76Paragraph [61](a) of the Amended Defence pleads: (i) That at the relevant time the fifth defendant was trustee of the Faeghi Family Trust; (ii) That the fifth defendant as trustee and in its own right entered into both the First Guarantee and the Second Guarantee whereby the plaintiffs and each of them assert that the fifth defendant guaranteed the obligations to them and each of them (iii) That the Deeds of Forbearance were in due course entered into with the fifth defendant being both guarantor and covenantor. The contention was, as earlier noted, that the fifth defendant received no consideration for giving the Guarantees or for entering into the Deeds of Forbearance. 77In paragraph [61](b) of the Amended Defence it is alleged that the fifth defendant had fiduciary and other obligations to the beneficiaries of the above trust estate of which it was trustee and its shareholders and likewise to creditors but that the fifth defendant disregarded its obligations. 78In paragraph [61](c) it is alleged that the fifth defendant failed to obtain consideration commensurate with the risk upon which it was embarking in giving the Guarantees and entering into the Deeds of Forbearance. In that respect it is alleged that it acted recklessly and wrongfully towards those to whom it owed obligations. 79In paragraph [62](a) it is alleged that no valuable consideration was received by the fifth defendant in its dual capacities and further that the plaintiffs did not pay or ensure consideration was paid or passed to the fifth defendant. 80In paragraph [62](b) it is alleged that the plaintiffs were aware at the time of seeking the Guarantees and the Deeds of Forbearance from the fifth defendant that it was acting as trustee for the beneficiaries and had obligations to shareholders and creditors. 81It is further pleaded in the Amended Defence in paragraph 62(c), that the plaintiffs "deliberately closed their eyes" to the fact that in giving the Guarantees and Deeds of Forbearance, they were "recklessly heedless" of the fifth defendant's breach of its duties and obligations referred to in the Amended Defence. 82In the Amended Defence it is alleged that the plaintiffs were aware that they were seeking guarantees and covenants from the fifth defendant but that they made no inquiry of the fifth defendant as to whether or not the consideration was sufficient for the promises to pass to the fifth defendant. 83The Amended Defence pleaded that in its capacity as trustee of the trust, the fifth defendant breached its fiduciary obligations to the objects of the trust and additionally, in either capacity, also breached its fiduciary obligations to its creditors. 84In [63] an additional or alternative defence was raised that in refusing or failing to inquire (or both) the plaintiffs acted with indifference to the consequences of the fifth defendant giving the Guarantees and executing the First and Second Deeds of Forbearance. It was submitted that they were accessories to the breaches of fiduciary obligations by the first defendant. 85In the Plaintiffs' Outline of Submissions it was contended that the Amended Defence does not plead any fact, matter or thing that supports the allegations: (a) That there was a breach of fiduciary duty by the fifth defendant, Faeghi Holdings; or (b) That the plaintiffs had knowledge of any breach. (At [34]) 86It was further submitted at [35] that the Amended Defence does not assert that the plaintiffs knowingly induced or procured breaches of duties owed by Faeghi Holdings or by Mr Faeghi: "... it is not pleaded that Mr Faeghi engaged in dishonest or fraudulent conduct in which the plaintiffs knowingly participated such as to make the plaintiffs an accessory under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 at 254." 87It was submitted, in any event, that the allegations relied upon cannot be sustained having regard to the provisions of: (i) The various agreements; (ii) The Guarantees; (iii) The Deeds of Forbearance; (iv) The Directors Certificates signed by Mr Faeghi dated 13 March 2007: Plaintiffs' Outline of Submissions at [36]. 88In the Outline of Submissions of the Third, Fourth and Fifth Defendants it was submitted that these grounds assert, as noted above, that, "... the plaintiffs either deliberately closed their respective eyes to the fact or connived with Mr Faeghi so to do ...": at [7]. 89It was submitted that it is "pivotal" that consideration was paid to the guarantor by "... the party borrowing the funds ...": at [8]. 90It was further submitted that the "state of solvency" of a party being guaranteed is relevant to the nature of, or basis for, the enforceability of a guarantee and that it may be set aside by a beneficiary or object of a trust estate where: "... the borrowers were aware that the guarantor was a trustee of a Discretionary Trust and there was no informed consent to the giving of the guarantee. No enquiry was made with respect to solvency. This will be a matter of evidence at the trial.": at [9](b). 91In the Outline of Written Submissions of the Third, Fourth and Fifth Defendants at [9], a number of specific matters are addressed in relation to the issue of "consideration". 92In paragraph [10] of the Outline of Written Submissions of the Third, Fourth and Fifth Defendants, the issue of "fiduciary breach" was formulated as follows: "10(a) The question for consideration is whether or not the giving of a guarantee by the trustee of the trust to a party with whom another party controlled by the client himself (the trading party) was involved in a commercial transaction with a vendor to another party which latter now seeks to enforce the terms of the guarantee, is indeed enforceable. Arguably the same proposition would be relevant where a company gave the guarantee in its own right. It is submitted that, if the trading party was on, or close to, the borderline of insolvency at the time the guarantee being given, the giving of such a guarantee is a breach of the trustee's fiduciary obligations to the beneficiaries of the trust estate to which the trading party is an accessory. This is all a matter of evidence at the trial and not of pleading. It is also a fiduciary breach and potentially a fraud upon the trust creditors." 93In paragraph [11] of the Outline of Written Submissions of the Third, Fourth and Fifth Defendants, it was contended that no consideration passed to the guarantor for giving the guarantee "... and the trustee of the trust and the plaintiffs were aware of the giving of the guarantee in such circumstances and acted in complete indifference to the guarantor's fiduciary obligations to the objects of the trust". 94The plaintiffs relied upon the decision in Rural Bank Limited v Merriba Pty Ltd [2012] NSWSC 498 at [34] in which White J, in an application for summary judgment and an application to strike out parts of an Amended Commercial List Response, dealt with a claim that purported acceptance of offers were signed by persons not authorised to act on behalf of a defendant. In the plaintiffs' submissions reliance was placed upon the following observations of White J at [22] to [26] as follows: "The plaintiff does not seek any substantive order against the first defendant. That is to say, it does not seek any judgment for a monetary sum, nor does it seek, today, an order for possession. Rather, it seeks to strike out various parts of the Amended Commercial List Response of the first defendant. The response in section C commences by the first defendant's repetition of paras (i) to (vii) of section B which identifies issues that the first defendant says may arise. In effect, the matters in section B are themselves pleaded as an answer to the claim. The first such issue was pleaded as follows: 'B. The issues which the first defendant says may arise are: (i) No consideration passed to it for giving the guarantee upon which the plaintiff relies. One question will be whether or not that failure of consideration vitiates the guarantee and/or mortgage. The second will be whether or not, if consideration was received, whether that same is adequate to the promise. The third is whether or not, by the actions of the parties an estoppel arose to prevent the first defendant from setting aside the guarantee. The plaintiff was aware that it sought a guarantee from the first defendant and either deliberately "closed its eyes" to the fact that, in giving the guarantee, the directors of the first defendant breached their fiduciary obligations to the members of the first defendant and/or its creditors because they did not give valuable consideration for the grant of the guarantee and as such the plaintiff is liable as an accessory to the breach of those fiduciary obligations. In particular the first defendant says that the plaintiff is fixed with "transmitted fiduciary obligations" and is hence an accessory to that fiduciary. This last raises the issue of whether or not the plaintiff, as an accessory to the breaches of fiduciary obligations, is itself liable as a fiduciary. The first defendant will so assert.' There is no elaboration of these allegations in section C of the response. The pleading is manifestly inadequate. The first sentence alleges that there was no consideration for the guarantee. As explained in argument, this is intended to allege that there is no consideration sufficient to support a contract of guarantee. The reason for that being what is further alleged in this paragraph, as I understand it, that the first defendant did not receive consideration for its promises. Although there must be consideration for a contract, the consideration from the promisee does not need to move to the promisor. The first defendant does not dispute, and could not dispute, that the plaintiff made advances to or for the benefit of the second and third defendants. Those advances are manifestly sufficient consideration to support a contract of guarantee. The balance of the paragraph, as I understand it, is a plea that the directors of the first defendant breached their obligations to the company by allowing the company to give the guarantee for the benefit of two of the shareholders and to give the mortgage for the benefit of two of the shareholders without receiving adequate reward. The plea is that the plaintiff has knowledge that this was a breach by the directors of their fiduciary duties and that they assisted in the breach and are themselves liable as accessaries. The plea does not assert that the plaintiff knowingly induced or procured breaches of duty by the directors. Nor is it pleaded that the directors have engaged in a dishonest or fraudulent design in which the plaintiff participated with knowledge, so as to make the plaintiff liable as an accessory under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 at 254. These would be necessary allegations to support a plea of accessorial liability. See Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22; at [161]-[163]. The plaintiff did not say that the first defendant should not have leave to replead these allegations, although the allegations have already been repleaded once. I will give that leave, but I emphasise that it is the obligation of the first defendant and its legal representatives to ensure that only real issues are raised for determination. It would be a serious matter to plead either that directors had engaged in a fraudulent or dishonest design, or that the plaintiff procured a breach of duty by the directors. If such matters are to be pleaded, it would be necessary for the first defendant to plead with particularity the facts which are said to give rise to the breach of fiduciary duty and the facts by reason of which it might be said that the directors were engaged in a dishonest and fraudulent design or the facts, by reason of which it might be pleaded, that the plaintiff procured the alleged breaches. The first defendant should not expect that it will be allowed a further opportunity to replead those matters beyond the leave that I will give today." 95Finally, as to the allegation that the plaintiffs made no inquiry or sufficient inquiry of the fifth defendant as to whether or not consideration sufficient to the promises made by the fifth defendant was to be received by the fifth defendant, the submission for the plaintiffs was that it is not apparent how this allegation raises a defence. 96In any event, it was submitted, the First Loan Facility, the Second Loan Facility, the First Guarantee, the Second Guarantee and the Deeds of Forbearance provide a complete answer to this allegation. The Guarantees, given by and the obligations of Faeghi Holdings, it was submitted, were security for the very transactions entered into by the plaintiffs at the request of Faeghi Holdings. Consideration 97The grounds of defence relied upon in the Amended Defence alleging liability in the plaintiffs as accessories to the breach of fiduciary obligations by the fifth defendant are defective in that they do not assert any knowing inducement or procurement by the plaintiffs of breaches of the duties alleged in the Amended Defence. Insofar as the Amended Defence purports to rely upon the second limb of Barnes v Addy in providing a cause of action against a person or persons who provide knowing assistance to a trustee or fiduciary who dishonestly and fraudulently breaches his/her duties as trustee or fiduciary, the following elements would need to have been pleaded and satisfied in order to establish liability on that basis: (i) A dishonest and fraudulent breach of duty by the trustee or fiduciary; (ii) Knowledge on the part, in this case, of the above breach by the plaintiffs; and (iii) The assistance by the plaintiffs towards the trustee's or fiduciary's dishonest and fraudulent breach. 98In these proceedings there is no pleading of the matters necessary to support any of the three elements of the second limb of Barnes v Addy. Furthermore, I note that the person acting on behalf of the fifth defendant in relation to the subject transactions was the second defendant, Mr Faeghi. 99At the hearing of this matter, I permitted Mr Raphael the opportunity of seeking instructions as to whether or not the defendants he represented sought to put on evidence that Mr Faeghi acted in a dishonest or fraudulent breach of duty. 100In the course of oral submissions I observed that the Amended Defence did not raise any matters of fact to support the defence that the plaintiffs had acted as accessories to a breach of trust by the fifth defendant. Mr Raphael conceded that the defence required repleading: T 29:50 and T 32:5-10. 101That led to a discussion as to whether or not his clients should be permitted to further amend the Amended Defence to raise an allegation that Mr Faeghi, the sole director and shareholder of the fifth defendant, had acted in a wilful and reckless manner so far as any trustee or other fiduciary obligations owed by the fifth defendant were concerned. 102In the course of his submissions on this question of amendment, Mr Newton correctly observed that that would involve, firstly, a very serious allegation, if made, against the second defendant himself, Mr Faeghi, and, secondly, it would raise serious allegations against the plaintiffs in being knowingly involved in any breach of trust: T 33-34. 103He further observed that there was nothing before the Court that showed that there was any basis for a defence based on breach of trust and a knowing involvement by the plaintiffs in any breach of trust. In this context, in essence, a further amended defence based on breach of trust would require Mr Faeghi to, in effect, "confess a breach" and it would involve him, in effect, bringing such a claim: T 34:15-25. 104Mr Newton also observed that Mr Faeghi was himself the primary beneficiary and of course would not sue himself. There were some general or remote beneficiaries but in the absence of evidence to support an arguable case of breach of trust and knowing involvement in it by the plaintiffs, any application to adjourn the hearing of the application, and for leave to further amend the defence, should be refused: T 34:35-45. 105Following further submissions on the question, I determined that I should reserve judgment on the application made in the Notice of Motion filed on 1 August 2013 on the basis that the second to fifth defendants would have leave to apply (on affidavit by their solicitor) to further amend the defence to raise a question of breach of trust and knowing involvement in the breach of trust. The affidavit, it was indicated, would be required in order to establish whether or not those defendants were in fact in a position to adduce any evidence in support of a defence based on a breach of trust allegation. 106A direction was accordingly given that any such affidavit was to be filed and served by 5.00pm on Monday, 9 September 2013: T 37:25-35. 107Mr Raphael indicated that if, following discussions and instructions, no application to amend supported by affidavit was to be made, then notification would be given of that fact to the plaintiff's solicitors and to my Associate: T 38:1-10. 108I subsequently received a letter from Mr Raphael's instructing solicitors dated 9 September 2013; that letter has been marked for identification as MFI "1". The letter, in part, stated: "As a consequence of advice tendered by counsel our client has instructed us that, in his capacity as sole director of the 3rd to 5th defendants and in his own right not to seek to further amend the draft pleadings. We write this letter in accordance with an undertaking given to the Court by our counsel 4 September 2013. Since Your Honour will now be giving judgment, we in particular would be looking forward to reading what you have to say about sections 127 and 129 of the Corporations Act and s 248 B subsection of that Act. ..." 109In those circumstances I have determined that there is no basis in fact or in law for the alleged liability of the fifth defendant as pleaded in paragraph [61] to [65] of the Amended Defence. Accordingly no viable issue remains to support the serious allegations that (i) the fifth defendant acted improperly in relation to the transactions; (ii) that the plaintiffs "deliberately closed their eyes" to the particular matters alleged in paragraph 62(c) of the Amended Defence, or acted improperly in the respects alleged in paragraphs 61(c), 62(b), 63(a) or (b) of the Amended Defence. 110In the circumstances I am satisfied that the amended grounds of defence seeking to raise breach of trustee or other fiduciary obligations has no basis. 111I have, accordingly, concluded that, applying the demanding General Steel Industries test, no real question arises on the Amended Defence to be tried. In General Steel Industries Barwick CJ observed: "The plaintiff rightly points out that the jurisdiction summarily to terminate an action is to be sparingly employed and is not to be used except in a clear case where the Court is satisfied that it has the requisite material and the necessary assistance from the parties to reach a definite and certain conclusion." 112The Court also observed that the power to order early termination of proceedings should be exercised with caution and where an absence of a cause of action is demonstrated. That observation equally applies to a defence. As noted, the test to be applied has been variously expressed as "so obviously untenable that it cannot possibly succeed" or as "manifestly groundless", amongst other descriptions. 113I have concluded that the plaintiffs are entitled to the relief sought in the Notice of Motion against the second to fifth defendants as the Amended Defence does not raise any arguable defence. 114In relation to the first defendant, I earlier referred at [14] to the fact that Banksia failed to file a Defence to the Statement of Claim. The matters proved in evidence establish that a loan was made as alleged in the Statement of Claim to Banksia, being the First Loan Facility and that Banksia defaulted on its loan obligations arising under that facility. Further, the evidence establishes that the amount for which Banksia has been sued by the plaintiffs remains outstanding. Accordingly, the evidence on the application establishes that the plaintiffs are entitled to judgment as claimed against the first defendant. 115In those circumstances, and having regard to the failure by Banksia to defend the plaintiffs' Statement of Claim against it, default judgment may be entered for the plaintiff against Banksia for all amounts due and owing by it under the First Loan Facility as varied by the Deeds of Forbearance. 116Accordingly, I make the following orders: (1) I grant leave to the second to fifth defendants to file the Amended Defence dated 6 June 2013. (2) Pursuant to Rule 16.3 of the Uniform Civil Procedure Rules 2005, default judgment is entered for the plaintiffs against the First Defendant. (3) Pursuant to Part 13, Rule 13.1 of the Uniform Civil Procedure Rules 2005, that judgment be entered for the plaintiffs against the Second, Third, Fourth and Fifth Defendants. (4) The proceedings are re-listed for the purpose of: (a) the making of final orders to give effect to this judgment (b) the making of any ancillary orders including orders as to interest 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: 03 December 2013