Commonwealth Bank of Australia v Moola [1999] QDC 247

IN THE DISTRICT COURT HELD AT BRISBANE QUEENSLAND [Before ROBIN Q.C. DCJ] [Commonwealth Bank of Australia -v- Fuzlahuck Moola] Plaint No 877 of 1999 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA Plaintiff AND: FUZLAHUCK MOOLA Defendant JUDGMENT Judgment delivered: 7 July 1999 Catchwords: Contract - guarantee - defendant company director became guarantor when the company obtained overdraft facilities “not exceeding $80,000" with plaintiff bank - mandate required cheques signed by both directors - all moneys guarantee - director a “silent partner” - fellow director entrusted with management of company - overdraft permitted to exceed $80,000 - several cheques bearing one signature only paid - whether guarantee discharged - whatever position under general law might be, provisions of guarantee held effective to prevent discharge - bank’s equity against company to be reimbursed for discharging its debts - such payments came within guarantee - whether construction of guarantee controlled by consideration clause. Counsel: Mr T Sullivan for the Plaintiff Mr A Skoien for the Defendant Solicitors: Clarke & Kann for the Plaintiff Nicol Robinson Halletts for the Defendant Hearing Date(s): 24, 25, 26 May -- 1 of 35 -- 15, 16, 18 June 1999 -- 2 of 35 -- IN THE DISTRICT COURT HELD AT BRISBANE QUEENSLAND Plaint No 877 of 1999 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA Plaintiff AND: FUZLAHUCK MOOLA Defendant REASONS FOR JUDGMENT -ROBIN Q.C. D.C.J. Delivered the 7th day of July 1999 The plaintiff bank sues Dr Moola as guarantor of The Cottage Car Company Pty Ltd. The essential question in the case is whether the bank so conducted the company’s overdraft account as to discharge Dr Moola from his obligations as surety. His two complaints, which he made known to the bank at a fairly early stage, were that it habitually permitted the company’s overdraft to exceed $80,000 and that on frequent occasions it paid company cheques bearing one signature only on behalf of the company, that of Mr Nico Post. While asserting Dr Moola’s liability is unlimited, the bank says it would be content to accept that there was an $80,000 limit upon Dr Moola’s liability, as opposed to the company’s, for purposes of the case, on the basis that the sum sued for derives from a debit balance at the end of November 1997 of $80,116.18, which exceeds the limit only by reference to the bank charges of $9.00 and $108.00 debited on 27th November and 28th November respectively. For Dr Moola, it was submitted that this simplistic approach is wrong, that the balance has blown out, and his position has been actually or potentially prejudiced accordingly, by reason of interest charged along the way on debit balances exceeding $80,000. (Typically, a “penal” rate was charged on that component of the overdraft in excess of $80,000.) -- 3 of 35 -- 2 The bank’s main witness was Mr Renton, who is no longer with it. He was approached by Mr Post and Dr Moola in November 1996 with a request that the company be granted a $100,000 overdraft facility. Both men banked elsewhere; they indicated their assessment, after shopping around, that the plaintiff offered the company more attractive banking services than competitors did. Mr Renton’s detailed notes (exhibit 49) record that the company had been operating for 8 months dealing in motor vehicles and trading on a day to day basis without need for any overdraft facility. The facility requested would enable the company to take advantage of opportunities to “purchase prestige vehicles below wholesale prices”, vehicles which might have to be held before a customer’s payment for them was obtained. The anticipated profit on the sale of such vehicles ($10,000 to $20,000) “would easily exceed the overdraft cost, and would be a simple way of increasing the business’s profitability.” Both directors (that is, Dr Moola and Mr Post) presented as financially sound. Each offered security. Mr Renton noted that “Moola is a silent partner who has had little involvement in the business since providing his original 50% equity.” That note is dated 26th November 1996. A document dated the following day, with the bank’s received stamp for 28 Nov 1996 appearing on it, indicated the “Method of Operation” of the company’s account, namely “BOTH DIRECTORS TO SIGN JOINTLY”. Item (c) provided that cheques, etc. payable to the order of the company intended to lead to crediting of proceeds to the company’s account/s were “to be solely endorsed by (Dr Moola) or (Mr Post)”. The mandate given by this document (exhibit 47) to the bank with a request it be recognised “until the branch of the Bank where the account/s is/are then conducted receives notice in writing of the cancellation thereof” was signed by Mr Post as chairperson of directors. His and Dr Moola’s signatures follow immediately, as “signatures of authorised officers.” A centimetre or so below them appears in block capitals, somewhat repetitively, “BOTH DIRECTORS TO SIGN”. Exhibit 49 refers to unlimited guarantees by both directors. It is not clear they were told of this requirement in writing, but exhibit 35 (27/11/96) describes the security which the directors (and Mrs Post) were to give. Exhibit 3 is a deed of 20th December 1996 incorporating Dr Moola’s guarantee. In the argument of Mr Skoien, appearing for Dr Moola, the statement of the consideration assumed great importance, by way of limiting the extent of the guarantee. The deed identified the company as “the debtor” (it also executed the guarantee) and went on: “...WHEREAS the Bank has granted or agreed to grant to the Debtor at the request of the Guarantor certain advances and accommodation AND for the -- 4 of 35 -- 3 purpose of securing to the Bank the payment of the moneys hereinafter mentioned the Guarantor has agreed to execute this Guarantee NOW THIS DEED WITNESSES that in consideration of the premises the Guarantor HEREBY GUARANTEES to pay to the Bank on demand such of the moneys hereinafter mentioned which at any time and from time to time are not paid by the Debtor when due to be paid ...” Mr Skoien’s argument was that the guarantee extended to the company’s new overdraft account, and to nothing else - moreover, that Dr Moola’s liability as guarantor would be discharged totally, if the bank without his consent departed from its mandate (to process only cheques bearing two signatures) or from the stipulation which he submitted became operative that the overdraft not be allowed to exceed $80,000. Much reliance was placed on a dictum of Sheppard J said to have been adopted by the Full Court in Boral Resources (Qld) Pty Ltd -v- Donnelly (1988) 1 QdR 506. Connolly J wrote the leading judgment. Williams J, agreeing with it, added at 510: “My brother Connolly has had resort in reaching his conclusion to the stated consideration for the respondent entering into the guarantee. Such a clause can, in my view, be of particular relevance when one is considering questions of the type raised in this appeal. The approach of Sheppard J in Scholefield Goodman & Sons Limited -v- Gange (Supreme Court of New South Wales, No. 5747 of 1973; 4 December 1979, unreported) is pertinent to the resolution of the problem now before this court. His Honour there said (at 9): “The opening words are a statement of the consideration for the execution of the guarantee moving from the plaintiff. They are therefore an integral part of the document and are to be taken into account in the construction of it. Indeed, they control its construction because unless the liability for which the guarantors are said to be liable is of a kind which falls within the consideration for the instrument, it will not be one for which they are responsible. That is the position notwithstanding the wide and unambiguous words which are used in the operative part of the document.” The operative part of this document is not unambiguous, and therefore, in my opinion, the clear words of the consideration clause are of greater significance. I agree with Connolly J that the consideration clause strongly suggests that the guarantee was given to Boral Concrete (Qld) Pty Limited only.” As in the present case, by reason of s.45(2) of the Property Law Act 1974, consideration was unnecessary, “but the consideration clause is available as an aid to construction: Scholefield Goodman ...” (Per Derrington J at 512). With respect, I think Mr Skoien has taken too much -- 5 of 35 -- 4 from Scholefield Goodman and Boral Resources, the latter of which supports no presently relevant proposition beyond the statement in the headnote of the report: “The operative part of the guarantee was ambiguous on the face of it in that it did not identify precisely the person to whom the guarantee was offered and therefore regard could be had to the consideration clause of the guarantee to identify the offeree.” The question in Boral Resources was whether Donnelly had given a guarantee to one particular company within “the Boral Group” (as opposed to others) at all. I do not accept that the passages quoted bind this court to accept the dictum in Scholefield Goodman for all purposes. Sheppard J’s statement was recently subjected to careful consideration by Sundberg J in Bankrupt Estate of Piccolo -v- National Australia Bank Ltd [1999] FCA 386 after being reproduced in paragraph 11 of the reasons. A full review of the following authorities (all relied on by Dr Moola) followed: National Bank of Nigeria Ltd -v- Awolesi [1964] 1 WLR 1311; Bank of India -v- Patel [1982] 1 Lloyd’s Rep 507 - affirmed [1983] 2 Lloyd’s Rep 298; National Bank of New Zealand Ltd -v- West [1978] 2 NZLR 451 and Geelong Building Society -v- Encel [1996] 1 VR 594. His Honour concluded: “17 In my view the last two sentences of the passage I have quoted from Sheppard J’s judgment in Scholefield Goodman overstated the significance of a consideration clause. In my opinion the true position is that * the manner in which the consideration for a guarantee is expressed is relevant, but not conclusive, in construing the terms of the surety’s obligation * wide and unambiguous words of guarantee which clearly create a substantive liability will not necessarily be cut down by a statement of consideration * the consideration clause does not control the construction of the operative parts of the guarantee in the sense that “unless the liability for which the guarantors are said to be liable is of a kind which falls within the consideration for the instrument, it will not be one for which they are liable” * the question is one of intention, and depends upon a reading of the whole of the document in the light of the genesis of the transaction and the surrounding circumstances. 18 The balance of authority favours the view that the consideration clause in a guarantee does not control the meaning of the operative part of the document. Awolesi and Patel are distinct on this point. Richmond P in West quoted with -- 6 of 35 -- 5 approval the relevant passage from Awolesi. And while Somers J considered that the width of the operative part of the guarantee there in question there was controlled by the consideration clause, his Honour propounded no general rule to that effect, as his discussion of Awolesi makes clear. Although Tadgell J in Encel did not expressly prefer the Awolesi/Patel approach to that in Scholefield Goodman, there is no doubt that he endorsed the proposition that wide and unambiguous words of guarantee which clearly create a substantive liability will not necessarily be cut down by a consideration clause, and that whether the clause has that effect will depend on the whole of the circumstances and the context of the language used. These cases and the textwriters’ opinion are against the view that a mortgage cannot impose on a surety an obligation that is more extensive than that contained in the statement of consideration. Each of the cases to which I have referred concerned a consideration clause in a guarantee. However, I see no reason why the approach adopted in Awolesi, Patel, West and Encel should not apply to such a clause in a mortgage. 19 Putting authority aside, there is my view no reason in principle why the ambit of a guarantor’s liability or that of a mortgagor must necessarily be coterminous with the reason why the guarantee or mortgage was granted as expressed in the consideration clause. An approach which gives primacy to the consideration clause over the operative part of a document is inconsistent with the cardinal rule in the construction of a contract, that in determining the meaning of any part of it regard must be had to the whole of its terms in the light of the surrounding circumstances. See Chitty on Contracts 26th ed (1989) vol 1 par 809, vol 2 par 5035; Restatement of the Law 3d (1996) “Suretyship and Guaranty” ch 2 par 14; New York Jurisprudence 2d, “Guaranty and Suretyship” par 88.” The present is an “all moneys” guarantee, carefully and painstakingly drawn. The guarantee is of payment of “moneys hereinafter mentioned”, rather than “moneys hereinbefore mentioned.” What Dr Moola guaranteed to the bank is prominently set out at the beginning of the relevant document: (a) all moneys (including moneys advanced by way of loan for fixed term or provided by way of overdraft) now or hereafter to become owing or payable to the Bank by the Debtor either alone or on joint or partnership account or on any other account whether as principal or surety; also (b) all moneys which the Bank shall pay or become liable to pay to for or on account of the Debtor either alone or jointly with any other person and either by direct advances or by reason of the Bank accepting or indorsing or paying or discounting any order draft cheque promissory note bill of exchange or other engagement whether such order draft cheque promissory note bill of exchange or other engagement shall have matured or not or by entering into any bond indemnity or guarantee or otherwise incurring liabilities for or on behalf of the Debtor; also -- 7 of 35 -- 6 (c) all moneys which the Bank shall lend or pay or become liable to lend or pay or may have advanced or may advance the payment or repayment of which the Debtor has guaranteed or may hereafter guarantee to the Bank; also (d) all moneys which the Bank shall land pay or advance or become in any way liable to lend pay or advance to for or on the credit or for the accommodation or otherwise on the account of the Debtor or to for or on account of any other person upon the order or request or under the authority of the Debtor; also (e) all moneys with which the Bank shall be at liberty to debit and charge the account of the Debtor under any security now or hereafter held by the Bank from the Debtor or under the covenants conditions or provisions herein contained; also (f) all moneys payable or to become payable to the Bank for discounts stamp duties postages commissions charges exchanges re- exchanges and expenses according to the usage and course of business of the Bank; also (g) all moneys which the Debtor has agreed or shall hereafter agree to pay to the Bank whether as principal or surety; also (h) interest on all such moneys as aforesaid or on so much thereof as shall for the time being be due or remain unpaid at the rate or respective rates agreed upon in writing if any and in the absence of any such agreement then without prior or other notice to the Debtor or the Guarantor at the prevalent rate charged or chargeable by the Bank for the time being or from time to time to its other customers on the like account such interest to be deemed to accrue from day to day and to be computed from the time or respective times of such moneys being lent provided paid or disbursed or becoming due; and also ... (all of which moneys liabilities and interest as aforesaid are intended to be secured by this Guarantee and hereinafter referred to as the moneys hereby secured)” In my opinion, Mr Sullivan, for the bank, was correct on the face of it, in his argument that everything the bank sues for comes within one or more of the categories (a) to (h). The authorities reviewed by Sundberg J show that is not an end of the matter, if parts of the bank’s claim do not come within the consideration for the guarantee. Thus, in Sholefield Goodman the guarantor’s liability was limited to items connected with the acquisition of goods by the principal -- 8 of 35 -- 7 debtor, and held not to extend to liabilities not within that category incurred as acceptor of bills of exchange. In Awolesi, the guarantee was construed as limited to an existing account, and not to extend to a second account opened for the principal debtor. Similarly, in West, where directors of a company signed a guarantee in consideration of “advances and other banking accommodation ... made or given by the bank” to it, their guarantee, notwithstanding its wide terms, did not extend to liabilities undertaken by the company (without their knowledge) after its “merger” with another entity and arising under an unlimited guarantee given by the company of that entity’s indebtedness. Closer to the present case is Encel. The building Society’s document of loan provided it would only make advances upon an architect’s certificate. Advances made in the absence of a certificate were held not to fall within the guarantee. It was held the guarantor was entitled to expect the lender to withhold advances until certificates were provided. There never was any commencement of building work at all. The appeal court held that Hayne J’s conclusion that making advances without certificates was a substantial departure from the principal contract which prejudiced the guarantor was clearly correct. The guarantor, not having consented, was discharged. A point of distinction is that Hayne J noted in his reasons (see page 604) that “it was not suggested that any express provision of the guarantee modified the application of the principle that a surety is discharged when conduct on the part of the creditor has the effect of altering the surety’s rights.” The building society sought to amend its pleadings to assert reliance on two such provisions, but the Appeal Division refused leave to amend. Mr Sullivan’s conduct of this case involved no similar oversight. Mr Skoien located another interesting decision tending to assist Dr Moola’s case, Bank of Baroda -v- Patel (1996) 1 Lloyd’s Law Reports 391. The bank provided finance facilities to an importer company subject to a requirement that every transaction should be provided with “ECGD cover” (taken to indicate hedging protection); the evidence of the guarantor, not himself a director of the principal debtor, but father-in-law of a director, was that he knew of the ECGD requirement and regarded it as a term of first importance. It was obscure what (if any) discussion took place with the bank, but Potter J said (at 393) he was “satisfied that the bank must have been well aware of the commercial importance of the term as to ECGD cover and its benefits to the bank and the defendant in terms of any risk attached to (the principal debtor’s) and the bank’s financing of foreign transactions.” The judge noted it was “common ground that, in relation to -- 9 of 35 -- 8 a number of foreign bill transactions, ANY (the principal debtor) did not obtain ECGD cover; nor, with knowledge of that failure, did the bank require them to do so, but rather operated the facility despite the absence of such cover, so that, as a result of several uncovered transactions, ANY’s liabilities to the bank very substantially increased.” This, as the judge noted at 396 “not only exposed the defendant to liability under the terms of his guarantee but substantially increased the claim which is made against him.” It seems (393) the Bank of Baroda waived the ECGD requirement at ANY’s request. At the end of the day, no actual prejudice to Dr Moola flowing from the irregularities he complained of in the bank’s conduct of The Cottage Car Company’s account has been demonstrated, nor in my opinion, an increase in risk (of the kind which led to discharge of the guarantee in Nelson Fisheries Ltd -v- Boese (1975) 2 NZLR 233, when the creditor, entitled to a charge over the catch, permitted the principal debtor to move a fishing operation to a different port). That may not matter. Mr Skoien relied heavily on the leading Australian case of Ankar Pty Ltd -v- National Westminster Finance (Australia) Ltd (1987) 162 CLR 249, in which four judges in a joint set of reasons at 599 said of a “rule” explained in Holme -v- Brunskill (1877) 3 QBD 495: “The rule does not permit the courts to enquire into the effect of the alteration [of the contract between creditor and debtor]. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it can not in any circumstances increase the surety’s risk, e.g. a reduction in the debtor’s debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety.” The judges had earlier (at page 556) noted that: “In the context of suretyship contracts there has been a natural tendency to refer to the creditor’s promise as a condition precedent rather than as a condition. This is because many guarantees are unilateral instruments, containing no promises on the part of the creditor except in so far as the recital of the consideration may refer to such a promise.” Ankar shares with the present case the feature of the guarantor having made a cash deposit available as security in support of the guarantee. A distinguishing feature is that the Ankar guarantee recorded express agreements by the creditor, including to use its best endeavours to ensure that machinery (lease payments on which were the subject of the guarantee) -- 10 of 35 -- 9 remained in the possession of the lessee, and that the surety be notified should the lessee propose to sell or assign its interest in any of that machinery, further to notify the guarantor should the lessee be in default and to consult with the guarantor to determine a course of action. The point of Ankar was that the creditor’s obligations were classified as conditions of the surety’s liability, not as mere warranties. The present guarantee contains no express limitation of Dr Moola’s potential liability. The letter of 27th November 1996 referred to approval of an overdraft limit of $100,000. However, things did not work out as contemplated at that time, because of the bank’s misgivings regarding the value of the securities offered. The bank wrote Dr Moola a letter dated 13th November 1996 (exhibit 50) purportedly enclosing for signature the guarantee, with a booklet “What It Means To Be A Guarantor”. The letter contains the statement: “Your present maximum liability to the Bank under the document(s) is $100,000 plus interest, costs, charges and expenses as provided in the document(s).” The $100,000 reference is important, and a restriction upon the bank’s rights, since it could hardly be permitted to resile from the following statements in the booklet: “• A guarantee may say it is a limited guarantee. Or a letter we send you may say that your liability is limited. If your liability is limited, you should understand what that limit is, as regards principal, interest and other costs. • If the guarantee you give us does not say it is a limited guarantee, you should understand that there is no limit to the amount it guarantees. You guarantee all moneys the debtor now owes us and all moneys the debtor may owe us in the future on all the debtor’s accounts with us. • You can give us written notice at any time discontinuing your liability for any further advances of principal that we make to the debtor. However, you are still liable for all amounts the debtor owes us at the time you give us your notice. The guaranteed debt increases by the accumulation of amounts of interest on the unpaid balances ... etc. ...” Mr Renton’s letter of 20 December 1996 (exhibit 48) advises Mr Post and Dr Moola that the “overdraft limit of $30,000 is now available for use.” This proved a temporary arrangement, as will appear, and does not, in my view, affect the indicated maximum liability of $100,000. I do not accept the defence argument that it fixed a new limit for both overdraft and Dr Moola’s liability. On 6th January 1997, Dr Moola signed a document in favour of the bank entitled Letter of Setoff - On Demand/Term Deposit Account. That document referred to $30,000 in Dr Moola’s cash management account with the bank no. 4162-10168986, which was made available -- 11 of 35 -- 10 in support of his guarantee of the company’s overdraft. A week later that instrument was replaced by another (exhibit 37) reflecting an increase in the amount of the cash management account to $50,000. It would seem curious in the extreme if a $30,000 limit were and continued in effect until 2nd May, as the defence contended. Litigation between the parties commenced as in Ankar, by Dr Moola’s suing the bank in the Magistrate’s Court for return of the money in the cash management account, which the bank claims entitlement to retain as security. The “Letter” begins: “In Consideration of Commonwealth Bank of Australia (the Bank), granting certain advances or accommodation to THE COTTAGE CAR COMPANY (Debtor) I FUZLAHUCK MOOLA (Account Holder) hereby agree with the Bank that notwithstanding the terms of any other arrangement, agreement or security, present or future: 1 So long as any moneys remain or become owing or payable to the Bank by the Debtor on any account whatsoever whether as principal or surety (all of which moneys are hereinafter called the Moneys Owing): a the Bank shall be under no obligation to repay any moneys standing to the credit of the account/s described in the Schedule below (the Account/s) and, where moneys are deposited for a term, the Bank may from time to time renew the term deposit for such period and at such rate of interest as the Bank may determine; b my interest at any time in any one of the Accounts is limited to the difference, in my favour, between the credit balance in the Account and the Money Owing at that time; and c the Bank may, without prior notice to me, prepay and apply the whole or any part of the moneys standing to the credit of the Account/s and any interest accrued thereon in or towards payment of any Moneys Owing by the Debtor or any part thereof. 2. This agreement shall not be considered as wholly or partially satisfied by payment by the Debtor at any time hereafter of any of the moneys owing or by any settlement of account or by the granting to the Debtor by the Bank of any time or other indulgence or by any other matter or thing whatsoever.” Exhibit 37, in all the circumstances, led to the bank’s writing to Dr Moola on 11 February 1997 (exhibit 54) by Mr Horne, particularising approval to increase facilities to the company to -- 12 of 35 -- 11 $80,000 “subject to your acknowledgement”. On the following day, Mr Horne wrote exhibit 55 inviting signature of the Letter of Set-off - On Demand/Term Deposit Account by you over CMCA account no. 416210168986. This letter said: “Your present maximum liability to the Bank under the document(s) is $80,000 plus interest, costs, charges and expenses as provided in the document(s).” These documents appear to be the explanation of an acknowledgment signed by Dr Moola as well as another copy of the letter of set-off - on demand/term deposit account in the same terms as exhibit 37, but now exhibit 56 - both of which are dated 2nd May 1997. The explanation for the new document is that its predecessor, held by the bank only as a faxed copy, was being replaced. (By this time the first few cheques signed by Mr Post alone and not covered by a written authorisation by Dr Moola had been paid by the bank: exhibit 19A - 13.3.97 ($31,000.00), Exhibit 72A - 15.4.97 ($795.10) and exhibit 28A - 24.4.97 ($165.45) - apparently without complaint to the bank. There was complaint about them afterwards.) The terms of the acknowledgment, signed by Dr Moola in front of a witness, are as follows: “I hereby acknowledge that the Bank has granted or may be granting from time to time to The Cottage Car Company Pty Ltd ACN 073 465 531 (the Debtor) accommodation and otherwise permitting the Debtor to incur liabilities to the Bank not exceeding an aggregate amount at any one time and from time to time of $80,000 against the security of my Guarantee to the Bank referred to in the schedule below. I clearly understand that my Guarantee will also secure the payment to the Bank of interest and any costs, charges and expenses with which the Bank shall be at liberty to debit and charge the account of the Debtor or for which I am liable under my Guarantee. Schedule Guarantee dated 18/12/96, liabilities under which are secured by Letter of Set-Off - On Demand/Term Deposit Account dated 2/5/97 over CMCA account number 4162 10168986.” The bank denied that exhibit 55 could be regarded as a letter advising limitation of Dr Moola’s liability under the guarantee to $80,000, on the basis that the guarantee was not listed in the schedule of “document(s)”, only the Letter of Set-off. It denied that the acknowledgment had such an effect, it not being a letter from the bank. I recall no submission to the effect, but -- 13 of 35 -- 12 presumably the bank would have said of exhibit 54 that it had no effect other than to announce an increase in facilities offered to the company, saying nothing of Dr Moola’s liability. In the circumstances, I find that line completely unpersuasive. All three documents emanated from the bank. In my opinion exhibit 55 should be read as (or regarded as susceptible of rectification to read as) communicating a limit of liability under the guarantee by reference to a principal of $80,000. As indicated elsewhere that may be sufficient for the bank’s purposes in this action. It is impossible to accept the argument made for Dr Moola that when the bank permitted the company to draw more than $80,000 against its overdraft, that had the effect of discharging Dr Moola’s guarantee. It cannot of course lead to Dr Moola being held liable for any more than $80,000 and related sums calculated by reference to the appropriate amount within that limit. Provisions effective to limit a guarantor’s liability which expressly refer to a limit on the principal debt are not normally interpreted to make the guarantee conditional upon the creditor’s not allowing the principal debt to exceed the sum indicated. See O’Donovan and Phillips, The Modern Contract of Guarantee (3rd) 230, citing Total Oil Products (Aust) Pty Ltd -v- Robinson (1970) 1 NSWR 701, 704: “It was argued on behalf of the defendants in this appeal that, because the obligation undertaken by the defendants in cl. 7(a) was in respect of the guarantee given by the plaintiff in pursuance of cl. 1 and because cl. 1 should be construed as a guarantee of the overdraft account of the company with the French bank in respect of advances which must not exceed £36,000, as advances were made by the bank in excess of that sum without their consent, the defendants were discharged from any obligation to the plaintiff under cl. 7 (a) on the ground that there had been a material alteration to the subject matter of the defendant’s obligation in cl. 7(a) into which was imported by the presence of the words “as guarantor” the same limitation upon their liability as was contemplated to be placed upon the plaintiff by the provisions of cl. 1. For the purpose of considering this argument I will pass by what might flow from the fact that the defendants were the sole directors of and shareholders in the company which obtained these advances from the French bank and also I will assume that some of the principles governing the relationship between debtor, guarantor and principal creditor apply in the case where the promise is not one of guarantee but one of indemnity (cf. Way v Hearn (1862), 11 CBNS 772; 142 ER 1000). I am of the opinion that this argument has no substance. Unless it otherwise clearly appears from the terms of the promise itself, a promise by a guarantor in the form of clause 1 is to be construed as merely restricting the liability of the guarantor to the amount expressed as the limit (in this case the sum of £36,000) of the guarantor’s liability and not as making the liability of the guarantor conditional upon the debtor’s liability being limited to that sum (see Rowlatt on Principal and Surety, 3rd ed., p 108; Laurie v Scholefield (1869), LR 4 CP 622; Matthew -- 14 of 35 -- 13 Thompson & Co Ltd v Everson (1934), 34 SR (NSW) 114, per Jordan, CJ, at p 124). In my opinion the principle of construction to which I have just referred applies both to the guarantee to be executed pursuant to cl. 1 and to the guarantee in fact executed by the plaintiff pursuant to that clause and, accordingly, that the liability of the plaintiff thereunder was not to be conditioned upon the indebtedness of the company not exceeding £36,000. It follows that the liability of the defendants to the plaintiff under cl. 7(a) was likewise not so conditioned.” There is an instructive Full Court decision, The Queensland National Bank Limited -v- Queensland Trustees Limited (1899) 9 QLJ 282. The guarantor’s obligation was limited to £15,000 and interest. His executors argued unsuccessfully that the guarantee was discharged when the bank permitted drawings by the principal debtor on its number 2 account producing a debit balance in excess of £50,000. The guarantor had been given by the bank a letter setting out the consideration for his guarantee incorporating various components, including a forbearance to call up £28,087 17s., the debt standing in an old account, for twelve months and “that the limit of overdraft at number 2 account shall be £50,000.” Griffith CJ said in a passage at 287, which I consider applicable in the present case: “I think that when this letter says “the limit of the overdraft shall be £50,000,” the meaning is that the limit up to which the debtors may draw without any further arrangement with the bank shall be increased to £50,000. I do not think any other construction is fairly open to argument. On the other hand, the construction that the bank shall not be allowed to advance to the debtors more than £50,000 seems to be prima facie improbable, because the ruling object of the parties at the time was to obtain further advances, and at the same time not only to obtain further advances, but to secure a continuance of those further advances, and also to protect the guarantor from the literal construction of some of the stipulations of the printed form. It is not disputed that a guarantor may enter into a stipulation with the creditor that the creditor shall not allow the debt of the debtor to exceed a certain amount, and that if he does the guarantee shall be at an end; but such a stipulation would be very unusual, and one not to be looked for in a transaction in which obviously the principal object was to obtain further credit for the debtor. The other construction, it seems to me, is more consistent with the rest of the document, and is what may be expected - a stipulation which is something like what ought to be there to make the rest of the document intelligible and consistent. I have no difficulty, therefore, in concluding that the word “limit” means the amount up to which the debtors may draw without any further communication with the bank, so that if they had drawn a cheque within that limit, and it had been dishonoured, they would have been entitled to maintain an action for injury done to their credit. Assuming, then, that these documents contain the contract between the parties, the fact that the overdraft was allowed to exceed £50,000 is no answer to the action.” -- 15 of 35 -- 14 Dr Moola’s evidence and actions, in all the circumstances, suggest he was content to have the overdraft exceed $80,000, at least when Mr Post told him that moneys shortly to be deposited would bring the debit balance back below that sum. Requirement of two signatures The company’s business was conducted at Spring Hill. Dr Moola resided at Rochedale and conducted a medical practice at Runcorn. In the circumstances, conduct of the company’s business was essentially entrusted to Mr Post. Dr Moola attended at Spring Hill once, or maybe a couple of times each week, when able. He used the opportunity to peruse the books, and, doubtless, on occasions, to place his signature on company cheques. The evidence suggests that on other occasions cheques were brought out to him for signing. I accept his evidence to the effect he was careful to ensure the cheques he signed related to proper company debts. On occasions, Dr Moola provided the bank with written authorisation to “accept” cheques with only Mr Post’s signature on them. This occurred on 24th January 1997 regarding cheques 063 to 067, none of which exceeded $600 in amount, but each of which took the debit balance in the account further beyond $80,000, and on 6th February 1997, for three cheques all under $750, each of which had the same effect. See exhibits 39 and 40. Exhibit 41 (9th July 1997) is an authorisation signed by Mr Post for a cheque for $18,970 signed only by Dr Moola to be “cleared”. The amount of the cheque was debited to the account on the same day (producing a debit balance exceeding $99,000). The following day, there is a credit in the same amount by way of a “reversal”. The statements contain many “reversals”, which were not explained. On 11th July 1997, Dr Moola wrote to Mr Renton on a theme which Mr Renton conceded was pursued with him from time to time: “Re - Cottage Car Co. Account at CBA. It has come to my notice that the CBA is still accepting and honouring cheques from the above Company with one signature only or accepting altered cheques with one initial only despite the fact that the account has been set up to have two signatures on cheques etc and despite our previous conversation about this. I ask that the bank desist from doing this but if it does persist with this action then I will not be liable for any debts incurred, by the above Company, with your bank and also I will demand the release of my $50,000 held by the bank as security. I make this request as the major share holder of the Company. Should you have any questions feel free to phone and discuss this with ME.” (Exhibit 42) -- 16 of 35 -- 15 From the end of March 1997 Dr Moola had taken to writing the word “unaltered” close to his signature on some cheques, but certainly not universally. On one such cheque, 203 (21st March 1997), it appears he went on to place his signature against an alteration of the payee’s name from Main Roads Department to QDOT, probably no more than a correction to reflect a name change. That probably can not be said of the change to the previous cheque (on the same day) from M&JL Enterprises to N&JM Post, also initialled by Dr Moola. An instance of Dr Moola initialling an alteration to the amount of a cheque (downwards) is cheque 361 of 18 June 1999, written in favour of AMEX. (It is convenient to note at this point two further cheques showing a change of payee to “N Post” - 529 on 4th September 1997, in which the change was from “cash” and the amount was reduced from $2,846.05 to $2,803.70, and 537, dated 10th September 1997 for $7,580.35, the cheque having originally been written to Esanda Finance. Dr Moola complained that cheque 369 (26th June 1997) was made out to ATO (Australian Taxation Office) for $2,000, but endorsed on the back, by Mr Post’s signature alone, “Please pay M&J Post”. The butt has written on it “Tax replacement for 000309”, whose butt reads “ATO” but is marked cancelled. There were other cheques for $2,000 written in favour of Mr Post in December 1996, and January and March 1997, among a considerable collection of such cheques in round amounts like $1,000 or $600. The January cheque (041) appears to show Dr Moola’s initialling an alteration in the payee from “VIP” to N&JA Post. In the ordinary course of things, one might have misgivings about cheque 369. However, in the circumstances, it does not seem particularly extraordinary. Exhibit 42 seems to refer to the ATO cheque. There had been similar communication, verbal only, on 4th March 1997, if Dr Moola’s note on exhibit 82 is correct: “4/3/97 - Spoke to Mark Renton - they can’t do anything about above if done by Nico. Advised him that I do not want account to exceed the $80,000 o.d. & if it does I will not be liable. He assured me this will be put in place immediately.” The above appears to refer to copies of cheques 116 (12/2/97) and 134 (25/2/97) which were changed (very likely after signature by Dr Moola) to increased amounts from something under $300.00 to $3,387.84 and from $80.00 to $1,945.00 respectively and to change the original (indecipherable) payees to Caltex Karana Downs and N&JA Post respectively. In the end, Dr Moola was not complaining about either payment. Within days of exhibit 42, Dr Moola was writing to Mr Renton (exhibit 38): -- 17 of 35 -- 16 “Please accept this letter of request that cheque no. 000422 for $17,000 to be cleared with only Nico Post’s signature. The cheque is made out to N Post from Cottage Car Co. cheque account. If you have any queries, please do not hesitate to contact me. Thank you. F Moola.” The most recent faxed request appears to have been exhibit 58 (7th July 1997) in respect of cheque 383 for $139,500, signed only by Mr Post. (Exhibit 58). Faxed authorisations from Dr Moola do not stop. Exhibit 59 is one of 5th November 1997 in respect of cheque 620, for $17,360. One feels some sympathy for the bank. The company’s account was conducted in an inconsistent and rather complicated manner. It is not clear whether Mr Renton’s letter of 14th July 1997 (exhibit 43) addressed to Dr Moola “crossed” with his of the following day. Mr Renton’s is something of an eye-opener, and consistent with evidence (which might attract a similar description) that, even in the face of a mandate requiring two signatures, the bank would not examine particular cheques for compliance with the mandate, at least below some limit ($10,000 being mentioned) - the bank being prepared to “take the risk” of becoming financially exposed itself. The case was a reminder that impressions of traditional banking, with staff giving careful individual attention to all transactions, is a phenomenon of the past, perhaps because staff are no longer there in sufficient numbers, also, no doubt, because customers do not wish to pay the cost of the service. On the back of exhibit 42 are (unexplained) notes which appear to reflect enquiries made within the bank leading to the proposal in exhibit 43 (14.7.97): “In an effort to ensure that no further cheques are paid without both signatures, we have today placed a stop on the above account. This will result in a Commonwealth Bank staff member physically examining every cheque that is written on the above account. This is not a standard Bank service, and will result in a charge of $4.00 per cheque. The total fee will be debited to the above account at the end of each month. Any further cheques issued with only one signature will be returned unpaid, and will incur our usual dishonour fee of $30. In addition, we will no longer able to act on faxed requests to pay cheques with only one signature.” -- 18 of 35 -- 17 As implemented, the proposal involved the assembling together of Cottage Car Company cheques for scrutiny. The bank came to the view that delay in the ordinary processing of cheques created an unacceptable risk (to it) of one hand not knowing what the other one was doing, and a branch paying out on a regular two-signature cheque over the counter simultaneously with clearance elsewhere in the bank of the cheques assembled for scrutiny. On 16th October 1997, Mr Renton wrote to Dr Moola: “We refer to your fax dated 16th October. Our decision to remove the stop on your account came as a result of numerous difficulties during the past several months, not least of which is the risk of paying cheques which will exceed the amount of your overdraft limit. You will recall that you have told us in the past not to allow the limit of $80000 to be exceeded, and removing the stop on the account is the only way of ensuring that we comply with this instruction. Again, we mention that it is the responsibility of you and Nico to ensure that all cheques contain two signatures. If you do not wish to operate the account under these conditions, please let me know before the end of this month. I will then make arrangements to either place the debt in reduction, or assist you to transfer the account to another Financial Institution. We will continue to forward statements to you when they are issued. We will also forward details of any unstatemented transactions immediately upon request.” (Exhibit 46) The comment regarding ensuring compliance with the $80,000 limit is a little bizarre, in that the new regime proved less effective than the abandoned one in enforcing the limit. Although the limit was honoured in the observance on 21st October (for the first time since 26th September), the debit balance was over $80,000 again within three days. Thereafter, it was within the limit only for part of 27th October and from 31st October for three nights. (Mr Sullivan’s argument that the balance on 28 November can be manipulated to be brought below $80,000 has been noted elsewhere.) While the “stop” was implemented, the overdraft was kept within the $80,000 limit, with the following exceptions: overnight on 24th July (reversal next day); overnight on 31st July (reversal next day); overnight on 6th August (cured by a large deposit next day); overnight on -- 19 of 35 -- 18 26th August (cured by a large deposit next day); overnight 4th September (reversal next day); overnight 10th September (temporarily cured by a large deposit next day, cancelled out by a debit in the same amount on September 12th which was reversed after the weekend to get the account back in order); 17th September (cured by a deposit next day); 22nd September (cured by reversals on each of the two days following and a deposit on 26th September); 29th September (not cured until 21st October as mentioned elsewhere). The bank had written to Dr Moola as “The Director The Cottage Car Company Pty Ltd”, on 15th October 1997 advising removal of the “stop”. Exhibit 44 is: “Your Overdraft Account 4001 10153959 Limit $80000 Balance Dr $85979 The above account has been operating outside of approved arrangements since 29/9/97. Would you please deposit sufficient funds to bring the account into order. As a separate matter, we refer to our letter dated 14th July regarding the method of operation on this account. As you know, we have placed a stop on the account in order to ensure that all cheques are signed by both directors in terms of your instructions. This practice is proving to be both costly and time consuming. It also greatly increases the risk of the Bank paying cheques that will take the account balance above the approved limit of $80000. Accordingly, we will not continue to provide this service. As from 1/11/97, the stop on your account will be removed, and we will no longer inspect all cheques to ensure that they contain two signatures. We will leave it to yourselves to ensure that all cheques written are signed in terms of the authority currently held by the Bank. If these arrangements are not acceptable, or if you have any questions on this matter, please telephone me on 3237 4405.” Dr Moola’s faxed response the following day (exhibit 45) was: “Your letter dated 15/10/97 was received today and I am surprised at your sudden turnaround of procedures and am forced to accept them. However, I again repeat that I will not be responsible for any overdraft above the limit of $80,000.00, which was arranged with you. -- 20 of 35 -- 19 Please remember to send me copies of statements as they become available, to the above address.” At this time Dr Moola had resigned as a Director. Australian Securities & Investments Commission records show his directorship ceased on 16th September 1997. The Commission was notified two days later, but it has not been suggested the bank was told until some time in November. Without suggesting anything ill-intentioned, it must be said it was somewhat misleading for Dr Moola to “accept” procedures making himself and Mr Post responsible for ensuring cheques bore two signatures when he had no realistic prospect of feeling assured that he had control of the cheque books. He complained (at the trial) that he had been excluded from the company’s premises for months. Again, the bank was not told. The last cheque signed by Dr Moola which I have noticed was 537, dated 10th September 1997, referred to elsewhere for the change in payee from Esanda Finance to N Post. Mr Post continued to sign cheques on his own, which may well have been necessary to permit the company to continue trading, pay its employees’ wages and so forth. Many of the cheques Dr Moola complains ought not to have been honoured by the bank for lack of his signature were written by Mr Post after 20th October 1997. There was complaint that the bank removed the stop immediately, rather than wait until 1st November 1997, as Mr Renton’s letter of 15th October foreshadowed. Mr Sullivan’s assertion in paragraph 9(d) of the “Plaintiff’s Response to the Reply” that Dr Moola accepted the change as from 16th October may take rather too much from his cross-examination. It is difficult to think that anything of substance, other than the possible charging of interest for a few days extra, might have flowed from the bank’s “beating the gun”, assuming that it did so. The banking records before the court are replete with examples of new cheques (for the same amount) being written after problems with earlier ones, until payment of company debts was effectively made. Undoubtedly, any single signature cheques written in late October and not paid would have been replaced by new cheques after 1st November. Even as to the interest mentioned in the preceding paragraph, it cannot be said that the company or any guarantor for the company became worse off. The expenditures may well have been useful, enabling the company to realise profits on vehicles got in specifically to meet a customer’s purchase order, for example. If the special stock item could not be purchased and paid for, the sale would be lost in such a case. -- 21 of 35 -- 20 Mr Post was about the court at some stage or stages during the trial. Before the trial, I had made an order, at the bank’s behest, to facilitate service of a subpoena to give evidence upon him. The bank did not call him, nor did Dr Moola. For him it was argued that a Jones -v- Dunkel (1959) 101 CLR 298 inference should be drawn against the bank, that Mr Post’s evidence would not have helped it. It is difficult to see why a similar inference could not be drawn regarding the helpfulness of his evidence to Dr Moola. There was an undercurrent in the case hinting that Mr Post had mananged the company’s affairs in an inappropriate way. The court heard that police had taken possession of a number of company documents and, indeed, it witnessed the production to the court by a police representative of such documents. Various features of cheques, such as alterations made by or endorsements to Mr Post and the like, all had the flavour that Mr Post might have been using company resources to enrich himself or to pay private expenses. Similar suggestions were made about the company’s payment for his American Express (AMEX) card, there being a number of cheques in this category, with an innuendo that, to a greater or lesser extent, private expenses were being met. Dr Moola’s vague statement (transcript 180) regarding Mr Post signing cheques “not related to the business” proves nothing; when he gave some particulars (at p209) in terms of categories, what he said still fell far short of showing that Mr Post was inappropriately enriching himself at the company’s expense - in any event, the concerns he expressed all relate to events before the bank came into the picture and (presumably) were not mentioned to the bank. Mr Skoien made much of the company manager, Mr Moye volunteering (at page 157 of the transcript) that “petty cash”, for which a number of cheques were written, was used for “expenses to do with Mr Post”. The topic was not explored in any depth. By an agreement with the company (which Dr Moola signed), exhibit 71 (dated 23 April, 1996), Mr Post was appointed the “Director” and, subject to directions of the Board, “invested with the general management and control of the business of the company”; specifically, he could “enter into any trade contracts on behalf of the Company in the ordinary course of business and ... do all other acts and things in the ordinary course of business which he may consider necessary in or conducive to the interest of the company.” He was entitled to be paid “a net amount (excluding tax) of $600.00 per week.” I suppose it is a mystery whether Mr Post did anything improper. It has not been established that he did. There is no basis for a finding, even, that he took expenses on an inappropriately lavish scale. He was not a party, and the court would have to be cautious, even -- 22 of 35 -- 21 on apparently persuasive evidence (which did not exist), before attributing wrongdoing to him. cf. Flower & Hart -v- White Industries (Qld) Pty Ltd (1999) FCA 773, para 51ff. As Dr Moola’s stance was to deny the appropriateness of the bank’s debiting the company account with the amount of any cheque signed by Mr Post alone (excepting those he had specifically approved in writing), the bank brought to court a procession of citizens to give evidence that cheques paid to them or their employers represented payment of proper company debts. Typical was Mr Charles Brown, who recalled with some difficulty that a cheque in his favour was payment for a trade-in of a vehicle on the occasion of a replacement vehicle being acquired from The Cottage Car Company for his wife, which was paid for not by her, but by a finance company. Mr Skoien was able to make the point that the bank had not proved the finance company paid The Cottage Car Company Pty Ltd. Generally speaking, he suggested pretty directly that it may have been Mr Post personally who received payment from the finance company, and that Mr Post might well in this, and in other transactions, have been dealing on his own account, using company funds to pay the expenses. There was no examination at the trial of the sources of deposits to the overdraft account, of which there were very many, over the year or so through which the closely scrutinised debits occurred. In my opinion, the court ought to presume, unless cause for doubt appears, that things were done in a regular and honest way. In the end, there was no transaction giving cause for concern. There were a number about which questions might have been raised, but on examination, and in context of the wider picture the court was given of the company’s trading, those questions ceased to be of concern, and satisfied nothing like an “evidentiary onus” requiring the bank to prove the validity of debits to the company’s account, as relating to genuine company debts, either generally or in particular instances. The history of the litigation, and Dr Moola’s pleadings, in particular, made it prudent for the bank to try to establish there were genuine company debts. In many cases, the bank succeeded. In others, Dr Moola landed no blow. Features that looked odd, such as the company’s payment of traffic or parking fines in Queensland and New South Wales, were satisfactorily explained: in this instance, the company was unfortunate enough to be the registered owner of vehicles when transgressions occurred, and became legally liable to pay the fines, recourse against the true transgressor being impractical. In other instances, the explanation turned out to be a change in the company’s name: it had not been paying some other entity’s debt. -- 23 of 35 -- 22 The company’s obtaining title to vehicles it acquired for sale to its own customers required it to “pay out” prior “owners”, frequently finance company/lessors: Herein lay the explanation for the involvement of a company called Ezee Pool Maintenance, whose name causes a brief frisson of excitement at the thought Mr Post might be getting the company to provide him with some purely private domestic benefit. Mr Skoien sought to promote such thoughts in respect of the AMEX payments. The evidence shows that interstate flights paid for with the relevant credit card were taken, in the course of the company’s business. There is no proof that every such flight was in that category: the accounts were not scrutinised in sufficient detail. I return to the point that absolutely nothing was shown that was improper, nor anything suggesting the probability of something being improper. Interest and bank and government charges aside, all debits to the overdraft account were made pursuant to company cheques. As the trial progressed, the defendant took a more accommodating attitude, relieving the bank in certain instances from providing strict proof that the queried account debits related to company debts. Indeed, Dr Moola (who, in my assessment, like all the witnesses, gave his evidence honestly) accepted cheque after cheque in the witness box, in the sense that he agreed he would have signed or approved the relevant cheques if asked. By the end of the trial, the only item which he insisted he would not have paid for, by reason of religous scruples, was the component relating to alcohol in the charges made by Cuisine On Cue for conducting a promotion function for the company at Boggo Road Jail three days after Dr Moola’s resignation as a Director. Exhibit 25 shows the alcohol component to have been $1,093.50; nothing whatever suggests that Mr Post lacked authority to incur the whole debt on behalf of the company. Otherwise, in the end, Dr Moola indicated a willingness to accept the payments if provided with documents to verify them. The evidence showed that the company’s documents had been distributed to various locations, including police premises, and suggested that some were missing, although not in any positive context justifying the entertaining of suspicions. There were no documents (certainly none satisfactory to Dr Moola) in respect of cheque 610 (exhibit 61A), whereby $18,501.94 was paid to Citibank. I accept Mr Moye’s evidence (page 163) that he recalled this as a “payout” of the finance company in respect of an Audi Quattro associated with a gentleman he named. Dr Moola cavilled at cheque 603 (exhibit 80A) made out to Suncorp-Metway, and having some connection with QIDC, part of the merged entity. Dr Moola’s cross-examination on this matter is at page 335. The bank’s evidence in relation to this cheque is less definite than the -- 24 of 35 -- 23 previous one and comes from Ms Ware, the company’s receptionist. In the course of performing her duties, she wrote out the relevant cheque, among others, and (not particularly confidently) attributed the cheque to making “vehicle payments”. What is clear is that she wrote it out in the course of her duty. The inability of the bank to produce documentation of the kind that might satisfy Dr Moola has been explained, in a general way; there is no reason for the court to think there is anything untoward about this cheque, notwithstanding his reservations. The last two cheques as to which he expressed reservations are 573 and 574 (exhibits 74F and 74G), both dated 27th October 1997, both having a note of Mr Renton’s authorisation on the back. The former is made out “bank cheque to C Kuiper”, the latter to cash, although the butt records that the amount ($14,000) was a “loan repayment C Kuiper”. Mr Kuiper gave evidence which I accept that he lent “Mr Post” $24,000 for the purpose of purchasing cars. The doubt raised by the defence is as to whether the company, as opposed to Mr Post, obtained the benefit of the $24,000. Mr Kuiper didn’t know what use was made of the funds in the end. (He said that he required repayment of part in cash to reflect the cash component of the advance he had made.) There is not a scintilla of positive evidence in the case that Mr Post was trading on his own account. To do so would have been a breach of his agreement with the company. There is no reason for thinking that he did other than give effect to Mr Kuiper’s expectations and apply the advance in the acquisition of vehicles for the company. Speaking generally, there has been probing into the company’s dealings at many points, but nothing has been unearthed suggesting that the debts paid by cheques signed by Mr Post alone were other than legitimate company obligations. That conclusion establishes that, as against the company, the bank, assuming it to have been negligent (or worse) in paying cheques on only one signature, is not answerable to the company. In CB Liggett (Liverpool) Limited -v- Barclays Bank Limited (1928) 1 KB 48, at 59 Wright J referred to “the equitable doctrine under which a person who has in fact paid the debts of another without authority is allowed to take advantage of his payment” and said at 64: “I think that the equity I have referred to ought to be extended even in the case where the cheque which was paid was paid out of the credit balance, and was not paid by way of overdraft, so that the banker will be entitled to the benefit of that payment if he can show that that payment went to discharge a legal liability of the customer. The customer in such a case is really no worse off, because the legal liability which has to be discharged is discharged, though it is discharged under circumstances which at common law would not entitle the bank to debit the customer.” -- 25 of 35 -- 24 A more recent instance of a bank escaping liability for payments made on insufficient signatures, according to the relevant mandate, on the bases of authorisation of what the single signatory did, and ratification (both reflected here, in my view) is London Intercontinental Trust Ltd -v- Barclay’s Bank Ltd (1980) 1 Lloyd’s LR 241, especially at 248-49. These authorities do nothing to establish the liability of a guarantor, which must depend on the terms and conditions of the guarantor’s contract. On the face of it, where it is the guarantor’s own signature that was missing from cheques which the bank honoured, one could expect the guarantor to be discharged under the general law. Mr Sullivan submitted that in this context there was relevance in Mr Post’s having been given the management of the company’s business by the agreement of 23rd April 1996 (exhibit 71); there was absolutely no evidence to show that any Board directions were given to limit his authority to cause debts to be incurred by the company and then paid. The articles of association of the company (exhibit 4) by article 30 contemplated there might be only one Director. Article 37 provided: “Where the Company has only one Director, he is responsible for managing the business of the Company. The Director may exercise all the powers of the Company other than those required by the Law or by this memorandum and articles of association to be exercised in general meeting.” After Dr Moola’s resignation on 16th September 1997, not advised to the bank until 10th or 11th November 1997 (by exhibit 86), a question arose as to the necessity of his signature appearing on cheques. Effectively, Mr Post took over conduct of the company’s affairs. On this basis, it was entirely appropriate that cheques bearing his (the sole director’s) signature be honoured by the bank. Indeed, the company was, by Mr Post, the only person then entitled to conduct its business, requesting the bank to process cheques signed only by Mr Post. By resigning as a director, and limiting his influence in the company to what he could exert as a shareholder (the evidence does not show anything was done), Dr Moola may be seen as having acquiesced in new arrangements. Independent of, but perhaps bolstering the foregoing reasoning, is that the mandate originally given to the bank, by describing the authorised signatories as directors, contemplated that they should be signatories only so long as they could appropriately be described as directors. In other words, the use of the description “director” was not mere surplusage, as, for example, -- 26 of 35 -- 25 the stating of a residential address might be, but the expression of a qualification required of (and to be maintained by) a signatory. The plaintiff made out its case that the defendant was liable under what might be called the “all moneys” provisions of the guarantee he gave, on the basis of recoupment of moneys paid in discharge of the company’s debts, regardless of the $80,000 “limit” being exceeded, or single signature cheques being paid. A striking illustration of the width of reach of an “all moneys” provision (in a mortgage, although the judge held this made no difference,) is Re Bankrupt Estate of Murphy (1996) 140 ALR 46. The defence case was based on Ankar. The creditor failed because of its breach of express conditions of the guarantee, which entitled the surety to rescind. The case contains useful statements of the principles whereby “variation of the terms of the principal contract” discharges a non-consenting surety, who need not demonstrate any prejudice, unless it is absolutely clear the variation is to his benefit. These two aspects of Ankar are dealt with in Weaver and Craigie, The Law Relating to Banker and Customer in Australia, 23.600 and 23.630. The defence relied on the second, the submissions referring to “alterations in the principal arrangement.” I think use of the looser word “arrangement” may involve a subtle shifting of ground. I am not satisfied that an “agreement” has been changed because indulgences clearly desired by the company were extended. Bond -v- Hong Kong Bank of Australia Ltd (1991) 25 NSWLR 286 shows that a “variation” should not be too lightly identified, an alleged variation being characterised by the Court of Appeal as a rectification or correction. See per Gleeson CJ at 297-98 and per Kirby P at 307-09. The President asserted (at 309) that Ankar leaves the court free to determine whether a change of the obligor’s liability is “unsubstantial” or “not prejudicial”. In any event (and in my opinion it is the case here), appropriate provisions in the guarantee may exclude the guarantor’s ability to assert a discharge: Total Oil Products (Aust) Pty Ltd -v- Robinson (1970) 1 NSWR 701; Duncombe -v- Australia and New Zealand Bank Ltd (1970) QdR 202. By clause 7 of the guarantee “the bank may from time to time vary the limit or amount of advances and accommodation to the Debtor or to any other person during the continuance of this Guarantee.” By clause 12, “the bank may at any time ... grant to the Debtor any time or other indulgence or consideration ...” Clause 9 provides a still more sweeping basis of liability in Dr Moola: “9. As a separate and independent stipulation the Guarantor agrees that all or any sums of money which may not be recoverable from the Guarantor on the -- 27 of 35 -- 26 footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the Debtor or any other Guarantor if there is more than one or any other fact or circumstance and whether known to the Bank or not shall nevertheless be recoverable from the Guarantor as sole or principal debtor in respect thereof and shall be paid by the Guarantor as if any covenant or agreement by the Debtor to pay the moneys hereby secured or any part thereof had been a covenant or agreement of the Guarantor.” The Fletcher Organisation Pty Ltd -v- Crocus Investments Pty Ltd (1988) 2 QdR 517 reveals the potent effect of such a provision in preventing discharge of a guarantor under the general law. Mr Skoien objected in written submissions regarding what appears in Weaver and Craigie (which counsel were advised I had consulted) that the plaintiff had not pleaded Clause 9. However, Mr Sullivan did make submissions about it at trial; he should be permitted to amend, if necessary. As to breach of the terms of the guarantee, the question is always going to be one of identifying what those terms are. Weaver and Craigie discuss a host of authorities illustrating that a belief entertained by a guarantor as to how the creditor will conduct matters with the principal debtor does not suffice to create a term of the guarantee to the same effect. See TCB Ltd -v- Gray (1988) 1 AllER 108, JGL Investments Pty Ltd -v- Maracorp Financial Services Ltd (1991) 2 VR 168, Mercuri -v- National Australia Bank Ltd (unreported, Vic Sup Ct, No 10322 of 1991, O’Bryan J, 2 May 1996); Watt -v- State Bank of NSW (unreported, NSW Court of Appeal No CA40650/93, 17 March 1994); Sonntag -v- Graziano (unreported, NSW Court of Appeal No CA40402/93, 15 April 1994); cf. BLM Holdings Pty Ltd -v- Bank of New Zealand (unreported, NSW Court of Appeal, No CA40216/93, 25 March 1994). Except for the last, where the guarantee in question was “expressly restricted to moneys advanced pursuant to and in accordance with the terms of the facility”, the facility itself identifying a certain “condition precedent to any drawing”, the guarantors could not point to any stipulation in the guarantee entitling them to take advantage of any leeway or indulgence given the principal debtor, by way of excusing the giving of security stipulated for, or the production of documentation, for example. In this case, Dr Moola fares no better. In my opinion, he is not entitled, in his capacity of guarantor, to insist that his signature appear on all company cheques. He has no express right to do so. Having considered the matter anxiously, I could find no implied right in him to do so. Dr Moola was correct in asserting that he made complaints from time to time. Somewhat inconsistently, he sought a certain amount of latitude himself, effectively inviting the substitution -- 28 of 35 -- 27 of faxed authorisations for signatures on cheques. Further, even if he did not know in advance that single signature cheques were being issued by the company and paid by the bank, he took no action to stop it, apart from sporadic complaints. The court did not hear of his ever remonstrating with Mr Post. Assuming he had been in a position to rescind his guarantee, he never did so. Like all guarantors, he was free to withdraw his guarantee as to future transactions. He never did so. He asserted a lack of knowledge of his rights. Be that as it may, it was clear from his evidence that he did not wish to face the prospect of the bank demanding clearance of the overdraft, and calling on his guarantee to the extent necessary. There was no evidence as to the financial circumstances of the company at any relevant time. For Dr Moola it was submitted that exhibit 52 led to a withdrawal of his guarantee. He had advised on 11th July 1997 that if the bank persisted in accepting and honouring cheques with one signature, “I will not be liable for any debts incurred by the above Company with your bank and also I will demand the release of my $50,000 held by the bank as security.” This seems to indicate the letter was written by Dr Moola in his capacity of guarantor. Mr Skoien’s argument ran that when the bank began to make payment on such cheques on and from 21st October 1997, its action terminated the guarantee. However, the bank gave notice of its intention to honour cheques signed by only one signatory, before adopting the practice of doing so. Dr Moola did not elect to rescind his guarantee for some threatened breach, or clearly indicate that his guarantee would not extend to future transactions. Mr Skoien says that Dr Moola’s statement in his letter regarding being “forced to accept” the bank’s proposition indicates he was not agreeing to it. It may be more to the point that he did nothing to alert the bank that he would no longer regard himself as a guarantor - the likely consequence of which has been noted above. Indeed, things continued much as they had been. Accepting the contents of Dr Moola’s fax dated 10th November 1997 (exhibit 86) on 4th November, he remonstrated with a lady at the bank over single signature cheques having been accepted. (One wonders whether he made the same assumption as the resigning director Melia in the Liggett case, that his resignation as a director would mean the company could no longer operate.) The very next day, by exhibit 59, Dr Moola faxed to the bank a request to accept a cheque for $17,350, with only Mr Post’s signature. Exhibit 86 was: -- 29 of 35 -- 28 “Re - Cottage Car Co. Account On 4/11/97 I had discussed the above account with a lady at your bank who had faxed me the statements I mentioned that this account required two signatures on cheques, which she confirmed and told me you were in charge of the account while Mark Renton was away and she will ask you to phone me to discuss the account but to date you have not phoned. So this fax is the outcome. The above account was opened early 1997 and documents were signed to the effect that all transactions required two signatures. I have reminded Mark of this on a few occasions when cheques with one signature viz. N Post’s were cleared by your bank. I have resigned as Director of the Company but at no time have I authorised your bank to accept cheques with one signature. I am a major shareholder of the Company. In the month of October ‘97 cheques issued with N Post’s signature have been cleared by your bank. By permitting this I gather that your bank does not regard me as relevant to operating the above account. It makes me feel that I am of no importance and have no responsibility with respect to this account underlined further by you not phoning me to discuss it. I would like clarification, as far as CBA is concerned, about my role with regard to the account in question. Therefore, your response by return fax today will be appreciated. If I do not get a response from you today then I will be forced to get advise. Also, please let me know how this account is and will be operating as of 4/11/97 when you became aware of what was happening. Thank you” A few days later came a letter to Mr Renton of 14 November 1997, exhibit 85: “COTTAGE CAR COMPANY PTY LTD OVERDRAFT ACCOUNT - 400110153959 I refer to previous correspondence and discussions. In particular, I refer to your letter of 15 October 1997 wherein you indicate that the bank will no longer inspect all cheques to ensure that they contain two (2) signatures. Quite frankly, this attitude is appalling. The very nature of a cheque is that is authorises you to make payments in a particular manner. Your single most important obligation in this instance is to ensure that the cheque is correctly executed as a bill of exchange from my part. You are aware that I have notified the bank on many occasions in the past not to exceed the overdraft amount and not to honour cheques which do not bear my -- 30 of 35 -- 29 signature. Nevertheless, despite these notices, the bank has continued to act in this way. The result has been that the overdraft limit has been exceeded on several occasions. I hereby place you on notice that I will hold the bank responsible for any and all losses that I suffer in this regard.” Again, Dr Moola takes no action. Presumably, the losses he refers to would be experienced as guarantor, rather than in some other capacity such as shareholder of the company. Dr Moola does indeed seek relief against the bank if (as has happened) he should be held liable under his guarantee, essentially on the basis of the bank’s allegedly acting unconscionably or failing to act conscientiously in supervision of the company’s overdraft account, relying on Olex Focas Pty Ltd -v- Skoda Export Co Ltd (1996) 134 FLR 331. There Batt J, at 355 commenced a discussion of “unconscionable conduct” within section 51AA(1) of the Trade Practices Act, to which the plaintiff is, of course, subject. This was in a context of injunctive relief sought under s.80(1). Dr Moola’s claim would be for damages, to be set off against whatever the bank might recover. “Unconscionable conduct” is a very wide concept, which may be engaged in “even if one is acting within one’s rights: Stern -v- McArthur (1988) 165 CLR 489 (at 527)” - (357). I agree with Mr Sullivan that Dr Moola has not shown himself to have suffered any loss (subject to scrutiny of particular items in the bank statements in exhibit 2 bringing the bank’s claim up to date, and in particular a very large recent amount charged for legal costs). The alternative claim based on misleading representations is not entitled to succeed any more than that in Cosmedia Productions Pty Ltd -v- Australian and New Zealand Banking Group (1996) ATPR (Digest) 46-155, which Mr Skoien relied on as stating the relevant principles; I am not persuaded Mr Renton or any other bank officer made representations (other than in writing) on which Dr Moola placed reliance. Dr Moola never suggested to the bank that he needed protection against Mr Post. In the end, he cavilled only at one component in a cheque Mr Post drew to Cuisine on Cue. Going on appearances, there are aspects in this case of Dr Moola reflecting the performance of guarantors in ANZ Banking Group Ltd -v- Toudien (1981) 6 ACLR 289 whose case involved them, as Master Allen QC put it at 290, acting “in the schizophrenic way of their minds assenting as directors but their minds not assenting as guarantors.” In the authority relied on, the guarantors unsuccessfully claimed they were discharged because the creditor took a security from the -- 31 of 35 -- 30 principal debtor (an eventuality covered by a specific clause in the guarantee in Toudien, resort to which was held unnecessary), Jordan CJ identified the relevant principle as one stated in Rowlatt on Principal and Surety (2nd), 115: “Where a guarantee is given in general terms to cover the liabilities which are to result from a future course of dealing generally specified in the guarantee, the creditor can vary the course of dealing under which successive liabilities arise so long as the course dealing continues to be of a character coming within the scope of the guarantee and no changes made in the terms of any liability after it is actually incurred and the guarantee has attached to it.” (Matthews Thompson & Co Ltd -v- Everson (1934) 51 WN (NSW) 39, 42) Dr Moola’s position is compromised by conduct and acquiescence completely at variance with his occasional complaints. He was content, in practice, for the $80,000 limit to be exceeded, at least if he thought the overdraft would soon be got back in order, and both signed and authorised by fax cheques which would get it “out of order” for a time. He received remuneration from the company himself. Generally speaking, it seems inescapable that he “ratified” Mr Post’s actions with regard to cheques, which were probably within Mr Post’s authority anyway; it is odd to be faced with the argument that the bank was required to police the company’s internal affairs, on pain of losing the benefit of a director’s guarantee. Dr Moola’s case included the submission that the plaintiff’s statements of account made no allowance for “some $364,000" of cheques not drawn in accordance with the two-signature mandate. The total was refined down to $355,603.95, which may not reflect that one of the cheques complained of in the defence (exhibit 28A) does bear two signatures. The broad point remains that if the bank was not entitled to debit the company’s account with the amounts of cheques signed only by Mr Post, there is no valid debit balance at all remaining to be sued upon. Such an argument may seem immeritorious, given that the impugned debits may well have been productive, because without them commercially related deposits could not have been earned. However, the question is what the law requires, rather than where “merit” resides. This well- known rule in Clayton’s case: Devaynes -v- Noble (1816) 1 Mer 529, 572; 35 ER 767, 781 discussed in Weaver & Craigie in para 23.580 requires a bank to exercise vigilance to ensure that a guarantor whose liability comes to be determined for future transactions on an account does not obtain a reduction of liability by reference to credits which ought in justice (at least as the bank would see it) to be linked with debits not guaranteed. The notion that the bank should have an opportunity to protect itself, for example by closing off the existing account in respect of which -- 32 of 35 -- 31 the guarantee remains effective, and opening a new account for the principal debtor (to be kept in credit, or to be the repository of future receipts,) is supported by Falinski -v- Commonwealth of Australia (NSW Sup Ct CA No CA 40475 of 1997, 6 February 1998, discussed loc. cit.) This case reveals the difficulties of Dr Moola’s letter of 11 July 1997, Exhibit 42, having the effect, immediate or delayed, of determining his guarantee. The leading judgment (Sheller JA) says at 15-16 (clause 2 referred to is identical with clause 2 in Dr Moola’s guarantee): “NOTICE UNDER C12 OF THE GUARANTEE Rolfe J referred to Phillips & O’Donovan, “The Modem Contract of Guarantee”, in the 3rd edition of which, at 435, it is said, in my opinion correctly, that if a guarantee provides that it is revocable by notice, the revocation must be clear and explicit and comply strictly with the terms of the clause of revocation. This does not mean that the guarantor is required to use any set form of words; Dickson v Royal Bank of Canada (1976) 66 DLR (3d) 242 at 257. In Preston v Murray- More (NSW) Pty Ltd (unreported), Court of Appeal, 13 May 1983, the Court held that a purported notice did not comply with a clause in a guarantee, which provided that if the guarantor should give notice in writing to the supplier of its desire to discontinue its liability under the guarantee, then the liability of the guarantor should cease and determine fourteen days after receipt of the notice so far as any liability with respect to moneys whether then due or at any time thereafter becoming due in respect of goods supplied by the supplier to the principal debtor after the date on which the notice was received, and failed in its object. Hutley JA held that the instrument was not a notice under the terms of the guarantee at all and said: “It is in writing but it does not exhibit ‘a desire to discontinue liability hereunder’ which must mean ‘a present desire then operating to discontinue hereunder’. ‘Discontinue hereunder’ means cease to acquire further liabilities under the guarantee.” C11 of the guarantee Mrs Falinski signed provided that, subject to c12, the guarantee should be a continuing guarantee. C12 indicated both the form the notice should take and the effect of a notice under the clause. The written notice was required to be of the desire of the guarantor to discontinue any further liability under the guarantee. The notice operated then and immediately after it was given. At that point of time, the liability under the guarantee of the guarantor giving the notice ceased and determined in relation to any liabilities which should be incurred after the receipt of the notice, except so far as any future liability should arise out of any of the documents, engagements or transactions referred to, at that time current or outstanding. Upon receipt of the notice of discontinuance and without notice to the debtor, the bank might forthwith discontinue the making and affording of any further advances or accommodation to the debtor. I emphasise that the notice, if in accordance with cl2, determined any further liability of the guarantor under the guarantee, subject to one proviso, -- 33 of 35 -- 32 and gave CBA the option forthwith not to afford any further accommodation to Nimari. The notation could not operate to determine existing liability. CBA submitted with some force that properly understood and in its context the third paragraph of the letter of 1 April 1992 related only to temporary seasonal facilities due for repayment on or before 31 July 1992. The earlier photographs in the letter confirmed the guarantee in respect of the existing as distinct from the temporary facilities. However, that part of the third paragraph which states that as at 31 July 1992 “the guarantee shall cease to have any force or effect” purports to determine all liability including existing liability under the guarantee. In my opinion, neither the letter as a whole, nor the third paragraph standing alone, was effective as a notice under cl2 of the guarantee. The expressed object of para3 was quite different from that contemplated by a cl2 notice. In the first place, para3 acknowledged Mrs Falinski’s continuing liability “solely” in respect of temporary seasonal facilities due for repayment before a certain date in the future. In the second place, at that date, it purported to determine all liability existing and future by providing for the guarantee to case to have any force or effect. Thus it purported to expunge existing liability other than temporary seasonal facilities as from the date of the notice, and all liabilities, including then existing liabilities arising from the temporary seasonal facilities, as from 31 July 1992. This is the antithesis of what a notice properly given under cl2 was intended to effect. The notice the clause contemplated was concerned only with “further liability”, that is to say, liability by the debtor incurred after the notice was given and had no effect upon liability incurred before the receipt of such notice. In my opinion, Rolfe J rightly held that the paragraph in the letter of 1 April 1992 was not a notice within the terms of cl2 of the guarantee ...” Again, Mr Skoien points out that the plaintiff did not plead ineffectiveness of the alleged withdrawal of guarantee. It is true that Falinski was located by me, thanks to the learned authors, not by Mr Sullivan. In my opinion it was for Dr Moola to make good his plea that Exhibit 42 had effect, months later, to terminate his guarantee. He has not done so. The “Defendant’s Submission in Reply” had earlier referred to Relwood Pty Ltd -v- Manning Homes Pty Ltd (1990) 1 QdR 481, 482-3 in this connection. The notion of a guarantor being discharged because the creditor breached a promise to agree on a monetary limit to the liability of the guarantor does not, in my opinion, have any relevant role in this case. So far as the company’s liability is concerned, the plaintiff has established it, in the court’s view, in respect of the debits representing honoured cheques. There is no occasion, as the evidence stood, to treat some of those debits as proper, others as improper, as Mr Skoien’s written outline (para 4.7) -- 34 of 35 -- 33 urges. He submitted the unjustified debits totalled at least $106,000. I am unable to attach any significance to cheque 615, of 3.11.97, exhibit 75C, which was written out to and deposited in the account of the company. The conclusion I have arrived at is that the bank’s claim to recover against Dr Moola under the guarantee succeeds. Until the appropriate amount is paid, he is not entitled to repayment of the $50,000 he has on deposit. So far as quantum is concerned, there was little examination at trial of the detail of the contents of the bank statements. In principle, they seem acceptable. However, there may be features where, on a proper accounting, adjustments should be made, and not only in respect of the legal costs I have mentioned. The parties will have the opportunity to agree on the appropriate monetary sum. If they cannot, an inquiry of some kind may be called for. I shall hear further submissions at a convenient time as to such matters, and costs. -- 35 of 35 --