Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Property Builders Pty Limited v Adelaide Bank Limited [2011] NSWCA 266
• Hearing dates: 27 July 2011
• Decision date: 15 September 2011
• Before: Bathurst CJ at [1]; Allsop P at [58]; Sackville AJA at [59]

Decision

1 Appeal allowed in part.

2 Orders 4 and 6 be set aside and the following orders made in lieu:

(a) Judgment against the first defendant in favour of the first plaintiff in the sum of $268,821.79 to take effect as at 29 July 2011 plus interest thereon until the date of payment at the rate referred to in the letter from Eurofinance Capital Pty Limited to Property Builders Pty Limited dated 31 March 2008, being 16.60 percent per annum.

(b) Direct the parties within 10 days to file written submissions as to the appropriate orders as to the costs of the appeal and the costs of the proceedings in the Court below.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: REAL PROPERTY - loan agreement - where loan "rolled over" - whether roll over of loan creates new loan; REAL PROPERTY - loan agreement - where mortgage assigned - whether secured debt also assigned; REAL PROPERTY - loan agreement -whether notice given - whether notice effective - whether legal or equitable assignment - Conveyancing Act 1919 (NSW) s 12; GUARANTEE AND INDEMNITY - whether guarantee assigned with principal debt - whether notices of assignment given under s 12 Conveyancing Act 1919 (NSW) are sufficient evidence of assignment of guarantee
• Legislation Cited: Conveyancing Act 1919 s 6(1), s 12; Land Title Act 1994 (Qld) s 62; Real Property Act 1900 s 52, 80A
• Cases Cited: Cator v Croydon Canal Co (1843) 160 ER 1149; Consolidated Trust Company Limited v Naylor (1936) 55 CLR 423; Fulham v M'Carthy (1848) 1 HLC 703; Holroyd v Marshall (1862) 10 HLC 191; Hutchens v Deauville Investments Pty Limited [1986] HCA 85; (1986) 68 ALR 367; International Leasing Corporation Limited v Aiken [1967] 2 NSWR 427; Nemeth v Reachcord Pty Limited [1998] NSWSC 271; (1998) 9 BPR 16,557; Queensland Premier Mines Pty Limited v French [2007] HCA 53; (2007) 235 CLR 81; Tailby v Official Receiver (1888) 12 App Cas 523
• Category: Principal judgment
• Parties: Property Builders Pty Limited (First Appellant); Michael Phontos (Second Appellant); Adelaide Bank Limited (First Respondent); Advance Investment Finance No 2 Pty Limited (Second Respondent); Eurofinance Capital Limited (Third Respondent)
• Representation: Counsel; Rod Freeman (First and Second Appellants); M J Cohen (First, Second and Third Respondents); Solicitors; Phontos Legal (First and Second Appellants); Gadens Lawyers (First, Second and Third Respondents)
• File Number(s): 2008/286721

Decision under appeal

• Citation: [2010] NSWSC 830
• Date of Decision: 2010-07-29 00:00:00
• Before: Simpson J
• File Number(s): 2008/286721

Judgment

1 BATHURST CJ: This is an appeal from a judgment of Simpson J in proceedings in which the first respondent ("Adelaide Bank") sought: possession of the properties known as Units 1 and 5,110-112 Twin Road, Ryde from the first appellant ("Property Builders"); and a judgment in the monetary sum of $1,550,256.81 from each of the appellants. The claim against Property Builders was based on the covenants contained in a Real Property Act 1900 mortgage which had been transferred to Adelaide Bank and in respect of which there had been default. The claim against the second appellant ("Mr Phontos") was made pursuant to a guarantee given by him in respect of the debts secured by the mortgage. Adelaide Bank claimed that the benefit of the guarantee has been assigned to it.

Factual Background

2 On 10 October 2006 the third respondent Eurofinance Capital Limited ("Eurofinance") made an offer of loan to Property Builders. The offer was for a loan of $2,400,000 for a period of 9 months with interest at a rate of 15.2 percent per annum reducing to 10.2 percent for prompt payment. The security required for the loan was a registered mortgage over the property 110-112 Twin Road, Ryde, of which the units formed part. In addition, joint and several guarantees for the loan were sought from Mr Phontos and a Mr Peter Phontos. In the events which occurred, Mr Peter Phontos did not give a guarantee but no point was taken concerning this.

3 The offer of loan was made subject to the following conditions:

"1 Non-refundable settlement fee of $33,000 (GST inclusive) which is payable upon acceptance of this letter.

2 Suitable insurance with interest of Eurofinance Capital Limited noted as first mortgagee.

3 Customer's acknowledgment that this proposed mortgage may be transferred to Advance Investment Finance No 2 Pty Limited and onto Adelaide Bank Limited.

4 Customer providing an advise [sic] from quantity surveyors JPQS Pty Limited of the cost to complete and obtain strata title. The advise [sic] should be addressed to Eurofinance Capital Limited.

5 Customer providing an undated payout figure from Provident Capital Limited.

6 Valuation on the property offered as security to be performed by the lenders' appointed valuer. Such valuation is to be to the full satisfaction of the lender. Estimated fee of $1,100 to your account.

7 Eurofinance Capital Limited to retain $100,000 from the advance as an interest provision."

4 The offer also expressly stated that the letter of offer should not be deemed or construed for any purpose as a contract of loan.

5 The offer was accepted by the appellant on 12 October 2006. On 31 October 2006 Property Builders granted a mortgage in favour of Eurofinance over the property, 110-112 Twin Road, Ryde. The mortgage was registered under the provisions of the Real Property Act 1900. So far as relevant the mortgage provided as follows:

"In consideration of $2,400,000 the 'Principal Sum' lent or to be lent to the Mortgagor at the request of the Mortgagor, the Mortgagor covenants with the Mortgagee as follows.

1. Memorandum

All the provisions contained in Memorandum 2367091 are deemed to be incorporated in this Mortgage and are deemed to be covenants for the purposes of section 80A of the Real Property Act 1900. If there is any conflict between the provisions of this Mortgage and the Memorandum, the provisions of this Mortgage prevail.

2. Definitions

In this Mortgage -

(a) The Borrower is Property Builders Pty Limited ACN 094 832 792.

(b) The Guarantor is Michael Phontos and Peter Phontos.

(c) The Trust is named in Item 1.

(d) Collateral Documents include the documents specified in Item 2.

3. Principal repayment

The Mortgagor must pay to the Mortgagee the outstanding Principal Sum, and the balance, if any, of the Debt on the date specified in Item 3.

4. Payment of interest

The Mortgagor must pay interest on the Principal Sum at the rate specified in Item 4 by payments on the dates specified in Item 5 in each and every year. Interest is calculated daily from the date specified in Item 6.

...

6. Variation of interest rates

The Mortgagee in its absolute and unfettered discretion by written notice to the Mortgagor may vary the higher rate and the lower rate of interest or either of them, which variation will apply from the date nominated by the Mortgagee in the notice. The Mortgagee may exercise this right at any time. The Mortgagee may deliver the notice to the Mortgagor at any time before and up to one month after the commencement of the period to which the notice relates. The Mortgagor must pay interest on the Principal Sum at the rate or rates specified in each and every notice in respect of the period to which the relevant notice applies on the monthly days specified in this Mortgage. The Mortgagor upon request by the Mortgagee will execute any documents required by the Mortgagee to witness any variations to the terms of the loan pursuant to this clause. Any notice may specify new payment amounts which the Mortgagor hereby covenants to pay. The Mortgagee may also by written notice to the Mortgagor extend the date for repayment of the Debt and during the term of any extension may vary in accordance with this clause the rate or rates of interest and/or the payment amounts to be paid and the Mortgagor acknowledges that the date so nominated will be deemed to be the date specified for repayment of the Debt in this Mortgage. The Mortgagee may by subsequent notices further extend the date for repayment of the Debt and/or further vary the rates of interest, and/or the payment amounts."

6 The schedule to the mortgage defined the Collateral Documents as the deed of guarantee from Mr Phontos and Mr Peter Phontos dated on or about the date of the mortgage and the letter of offer from the mortgagee to the mortgagor dated 10 October 2006. No further references to the Collateral Documents are contained in the mortgage.

7 Memorandum 2367091 incorporated into the mortgage defined the expression "Debt" in the following terms:

" 'Debt' means all money owing by You to the Mortgagee now or in the future on any account. The Debt includes any money due or possibly due by You to the Mortgagee as a result of any arrangement including any loans made to You or guarantees given by You to the Mortgagee, and includes any loss or damage suffered by the Mortgagee as a result of those arrangements. It also includes interest, costs, fees, duties, taxes and any other amount You are obliged to reimburse or pay to the Mortgagee at any time under the Mortgage or otherwise."

8 Clause 6.04 of the memorandum gave the mortgagee an express right to assign or otherwise deal with the mortgage and obliged the mortgagor to do anything the mortgagee reasonably required to enable any dealing with the mortgage.

9 There was in evidence an undated and unsigned guarantee. However, it was common ground that this was the form of guarantee executed by Mr Phontos. Clause 1 of the guarantee contained an unconditional guarantee of the payment to Eurofinance of the Debt. The Debt was defined as all money owing at any time by the Borrower, defined as Property Builders, to Eurofinance on any account whatever, including money due in relation to the loan documents specified in the Schedule. The loan documents described in the Schedule included the letter of offer of 10 October 2006 and the mortgage.

10 Clause 6.6 of the deed of guarantee provided that the lender may assign or otherwise deal with the guarantee in any way it wishes and that the guarantor must sign anything and do anything the lender reasonably requires to enable any dealing with the guarantee.

11 The loan to Property Builders was made by Eurofinance on the date of the mortgage.

12 Although the loan was expressed to be for a period of 9 months, it was not repaid in full in that time. By letter of 31 March 2008, long after the term of the original loan had expired, Eurofinance offered to "roll-over" the loan for a further period of 3 months. So far as relevant the letter provided as follows (being directed to the directors of Property Builders):

"With reference to our recent discussion we advise we are prepared to roll-over your existing loan facility for a further term on the following terms and conditions subject to receipt of acceptance of this offer and payment of the roll-over fee.

Borrower: Property Builders Pty Ltd

Guarantor: Mr Michael Phontos

...

Purpose: Roll-over existing facility

...

Loan Term: Three (3) months expiring on 1 July 2008.

...

Security: Registered First Mortgage over residential propertys [sic] situated at

Unit 1, 110-112 Twin Road Ryde NSW

Unit 3, 110-112 Twin Road Ryde NSW

Unit 5, 110-112 Twin Road Ryde NSW

Fixed and floating charge over Property Builders Pty Ltd

...

Would you please acknowledge your acceptance of the above terms and conditions by signing the extra copy of this letter and return it together with the roll-over fee to our office by the required acceptance date."

13 The offer was accepted on 31 March 2008.

14 The principal sum referred to in the letter ($1,528,602) was less than the amount originally advanced. This reflected the fact that two of the units at the mortgaged property, Lots 2 and 4, had been sold and that Eurofinance had received $1,115,107.95 from the proceeds of sale.

15 According to an affidavit filed by a Mr Yianni Socratous, a director of both Eurofinance and Advance Investment Finance No 2 Pty Limited ("AIF"), Eurofinance funded its lending activities from investments made by the public. Mr Socratous deposed that AIF was a related company to Eurofinance carrying on lending activities through funds provided by Adelaide Bank under a revolving credit facility.

16 Mr Socratous deposed that in May 2008 Eurofinance was looking to free up capital and "therefore move the loan over to AIF to utilise the Adelaide Bank facility".

17 At a meeting of directors held on 2 May 2008, the directors of Eurofinance passed the following resolution:

"In accordance with the company practice of freeing up funds in Eurofinance Capital Limited and in accordance with the Letter of Offer to Property Builders Pty Limited dated 10 th October 2006 the following loan is to be transferred to Advance Investment Finance No 2 Pty Limited under their facility with Adelaide Bank Limited.

-Property Builders Pty Limited."

Immediately thereafter a resolution was passed by AIF in the following terms:

"In accordance with the company practice of freeing up funds in Eurofinance Capital Limited and in accordance with the Letter of Offer to Property Builders Pty Limited dated 10 th October 2006, the following loan was accepted to be transferred to Advance Investment Finance No 2 Pty Limited under their facility with Adelaide Bank Limited.

-Property Builders Pty Limited."

18 The resolutions did not refer to the guarantee.

19 On 9 May 2008 the mortgage was transferred from Eurofinance to Adelaide Bank in a form complying with the Real Property Act 1900 . The transfer of mortgage was registered under the provisions of that Act.

20 On 21 August 2008 Eurofinance sent Mr Phontos a letter in the following terms:

"Dear Sirs,

RE: Adelaide Bank Limited enforcement of mortgage to

Property Builders Pty Limited

Security 1: Unit 1/110 Twin Road, North Ryde.

Folio: 1/SP77529

Security 2: Unit 5/110 Twin Road, North Ryde.

Folio: 5/SP77529

This is a notice pursuant to s12 Conveyancing Act 1919.

We hereby notify you as guarantor under the Agreement, that the Agreement, in its entirety (including the debt due under the Agreement, and the mortgage and guarantee securing that debt), has been assigned to Adelaide Bank Limited. Your obligations pursuant to the Agreement are therefore owed to Adelaide Bank Ltd.

The Transfer of Mortgage is enclosed.

In this notice the following definitions apply:

The Agreement - the agreement between Eurofinance Capital Limited and Property Builders Pty Ltd, Michael Phontos and Peter Phontos consisting of the following documents:

1. Mortgage over the above security properties dated 31 October 2006 (the 'Mortgage')

2. Letter of offer dated 10 October 2006 (the 'Letter of Offer')

3. Deed of Guarantee dated 31 October 2006 (the 'Guarantee')

4. Memorandum 2367091 (the 'Memorandum')

Yours Faithfully,

EUROFINANCE CAPITAL LIMITED"

21 It was contended that this did not amount to a notice to Property Builders of the assignment of the debt to Adelaide Bank. The trial judge rejected that submission, stating that Mr Phontos was the alter ego of Property Builders (at [93]-[94]). For the reasons which appear hereunder, it is not necessary to consider whether her Honour was correct in that finding.

22 On 27 August 2008 Adelaide Bank commenced proceedings. AIF was subsequently added as a plaintiff and Eurofinance was joined as the defendant. During the course of the hearing on the application of the plaintiffs and Eurofinance, Eurofinance was removed as a defendant and joined as a plaintiff.

23 Prior to the commencement of the proceedings a contract for the sale of Lot 3 of the property was exchanged. The sale was settled on 26 September 2008 and the sum of $590,153.54 was paid to AIF.

The Trial Judge's Findings

24 Her Honour identified three matters raised by Property Builders in its defence to the claim brought against it. The first was that the 2008 "roll-over" of the loan entirely replaced the 2006 loan. Given that it was the 2006 loan that was originally secured by the mortgage, this was said to have the consequence that the transfer of the mortgage to Adelaide Bank could not possibly operate to transfer the 2006 loan which, the appellants contended, no longer existed. Thus, it was submitted that there was no liability to the bank. The appellants sought to rely upon Queensland Premier Mines Pty Limited v French [2007] HCA 53; (2007) 235 CLR 81 as authority for this proposition (see judgment at [61(i)]).

25 The second contention was that the resolutions of Eurofinance and AIF on 2 May 2008 amounted to an equitable assignment of the 2008 loan to AIF. Aligned with this proposition was the submission that AIF at the time of the assignment paid out Eurofinance and, accordingly, when the mortgage was transferred there was no money owed to Eurofinance. Accordingly, it was claimed that if Property Builders owed any money it was to AIF (see judgment at [61(ii)]).

26 The third proposition was that no notice of assignment of the debt from Eurofinance to Adelaide Bank was given to Property Builders prior to the commencement of the proceedings and, therefore, there was no basis for the bringing of the claim (see judgment at [61(iii)]).

27 Her Honour rejected each of those contentions.

28 In relation to the first, she found that the 2008 "roll-over" was an extension of the existing facility. In these circumstances she held that the first matter raised did not provide a defence to the claim against Property Builders.

29 So far as the second contention was concerned, the trial judge found that even if there was an equitable assignment of the debt to AIF, the resolutions passed by Eurofinance and AIF in May 2008 did not "confer on Property Builders any equitable rights, and [they] certainly did not give Property Builders any absolution from its obligations to repay the debt ... " (see judgment at [89]).

30 As I have indicated earlier, her Honour rejected the third contention, namely that no notice of assignment to Adelaide Bank was given under s 12, stating that the notice to Mr Phontos was sufficient as he was the alter ego of Property Builders.

31 So far as the claim against Mr Phontos under the guarantee was concerned, her Honour accepted the argument that the transfer of the mortgage did not carry with it an assignment of the guarantee. However, her Honour took the view that the s 12 notices constituted sufficient evidence that such an assignment had taken place (see judgment at [101]).

The Appeal by Property Builders

32 The written submissions filed on behalf of Property Builders as developed orally seemed to suggest that the appeal should be allowed for three reasons. First, that there was an equitable assignment of the debt in 2008 as a result of which Eurofinance retained no interest in the debt such as to enable a transfer to Adelaide Bank. Second, the transactions of 2 May 2008 resulted in the mortgage being paid out. Third, that no notice of the assignment was given to Property Builders under s 12 of the Conveyancing Act 1919.

33 In my opinion, none of these propositions is correct. As to the first, 1 accept for the purpose of the argument that the resolutions of 2 May 2008 evidenced an agreement for valuable consideration to assign the debt due by Property Builders from Eurofinance to AIF, thereby effecting an equitable assignment ( Holroyd v Marshall (1862) 10 HLC 191 at 209; Tailby v Official Receiver (1888) 12 App Cas 523 at 531, 546-547). On that bais, Eurofinance remained the legal owner of the debt, albeit as trustee for the assignee, at least after the consideration was paid: Cator v Croydon Canal Co (1843) 160 ER 1149 at 1150; Fulham v M'Carthy (1848) 1 HLC 703 at 722. This does not mean that Eurofinance could not assign the legal interest in the debt or that it could not sue as legal owner of the debt to recover the money due.

34 In this context it is necessary to have regard to the effect of the transfer of mortgage. This is set out in s 52 of the Real Property Act 1900, which provides as follows:

"52(1) By virtue of every such transfer, the right to sue upon any mortgage or other instrument and to recover any debt, sum of money, annuity, or damages thereunder (notwithstanding the same may be deemed or held to constitute a chose in action), and all interest in any such debt, sum of money, annuity, or damages shall be transferred so as to vest the same at law as well as in equity in the transferee thereof.

(2) Nothing herein contained shall prevent a Court from giving effect to any trusts affecting the said debt, sum of money, annuity, or damages, in case the transferee shall hold the same as a trustee for any other person."

35 In the present case the mortgage contained a covenant to pay the principal sum secured thereby, namely the $2,400,000 advance and interest thereof. In these circumstances the right to recover such principal and interest was transferred to Adelaide Bank and vested in it by virtue of the transfer of mortgage. Property Builders first sought to argue that the mortgage only secured money due under a separate agreement, namely what was described as the 2006 loan agreement as varied in 2008, and as that agreement was not assigned to Adelaide Bank there was no debt upon which Adelaide Bank could sue. It relied in support of that submission on what was said by Kiefel J in Queensland Premier Mines Pty Limited v French supra as to the operation of s 62 of the Land Title Act 1994 (Qld), which is the equivalent provision of s 52 of the Real Property Act 1900:

"The words of the section are plain. Neither the historical reason for the provision nor its purpose, of effectuating a transfer of both security interest and the right to moneys arising from the mortgage transaction, supports a construction which extends the section to obligations arising otherwise than under the terms of the mortgage. It is no part of the purpose and function of a statute such as the Land Title Act to rewrite the bargain between transferor and transferee." (at [56])

36 This submission is incorrect for two reasons. First, it ignores the fact that the mortgage contained the express covenant to pay the nominated principal sum and interest. As counsel for Property Builders properly conceded, the mortgagee could sue on the personal covenants contained in the mortgage without any reference to the loan agreement. Further, the loan agreement was merely an agreement to make a loan once certain conditions were satisfied. The loan was only made once those conditions were satisfied and then on the terms and conditions contained in the mortgage.

37 The further difficulty for the appellants is that no notice of any assignment of the debt to AIF was given by Eurofinance prior to the transfer of the mortgage to Adelaide Bank. For there to be an effective assignment at law such notice would need to have been given (assuming there was an assignment in writing). Absent such notice there seems to be no basis for saying that AIF, as distinct from Eurofinance and subsequently Adelaide Bank, was the legal owner of the chose in action, namely the debt.

38 It follows that Property Builders is not entitled to succeed on this argument.

39 The second proposition, namely that the effect of the transactions of 2 May 2008 were to discharge the debt owed by Property Builders to Eurofinance, is also incorrect. It is, of course, inconsistent with the first proposition which depended on the debt being assigned. As the proposition was developed orally it was suggested that the fact that AIF had paid Eurofinance an amount equal to the amount due by Property Builders to obtain an assignment of Property Builders' debt had the effect of discharging the obligation of Property Builders. The proposition has only to be stated to be rejected. The monies were not paid by AIF to Eurofinance to discharge the liability of Property Builders but rather to obtain an equitable assignment of the debt due by it to Eurofinance.

40 So far as the third proposition is concerned, it was conceded in argument that notice under s 12 of the Conveyancing Act 1919 was not necessary to vest the chose in action in Adelaide Bank. That concession was correct. Section 52 of the Real Property Act 1900 provides that the debt vests to the transferee at law as well as in equity by virtue of every such transfer. As such, the assignment does not need to be perfected by a notice pursuant to s 12 of the Conveyancing Act 1919. In that regard s 6(1) of the Conveyancing Act 1919 provides that where it is inconsistent with the Real Property Act 1900, the Conveyancing Act 1919 shall not apply to lands coming under the provisions of the Real Property Act 1900. This analysis is consistent with the analysis of Young J in Nemeth v Reachcord Pty Limited [1998] NSWSC 271; (1998) 9 BPR 16,557 at 16,559.

41 It follows that the appeal against her Honour's order granting possession of the units to Adelaide Bank should be dismissed.

42 So far as the claim under the personal covenant is concerned, in addition to the matters raised above, Property Builders and Mr Phontos appealed on the basis that her Honour erred in awarding $1,550,256.81 to Adelaide Bank in that it included legal costs of AIF and Eurofinance in an amount of $152,682.81 and that the mortgage provided that the mortgagee was only entitled to its reasonable costs. The matter was not addressed orally but in its written submissions Property Builders made the same claim without any elaboration.

43 Adelaide Bank in its submissions pointed to the fact that there was no material in the appeal papers to demonstrate that her Honour was in error in her calculation of the amount due.

44 The only material before her Honour was an affidavit from Mr Socratous setting out the amount he claimed to be due to Adelaide Bank. Whilst it included amounts for legal costs it did not identify the nature of these costs, nor whether they were incurred by the first, second or third respondent, nor for what they were incurred.

45 The position is quite unsatisfactory, but absent any material which would suggest that the costs did not fall within the definition of Debt in the schedule to the mortgage, this ground of appeal also should be dismissed as no error by the trial judge was disclosed.

46 It follows that the appeal so far as it concerns the claim by Adelaide Bank against Property Builders should be dismissed. Pursuant to orders made at the hearing of the appeal, the respondents filed an affidavit of Mr Colin Sherry of 29 July 2011. That indicated that since the orders of the primary judge, funds had been received, presumably from the sale of remaining units and that the amount due as at 29 July 2011 was $268,821.79. In the absence of any application to file evidence to contest the accuracy of that affidavit I will accept it.

The Appeal by Mr Phontos

47 In addition to asserting that Property Builders was not liable to Adelaide Bank based on the submissions referred to above, Mr Phontos argued that even if the debt had been effectively assigned to Adelaide Bank the guarantee had not been so assigned and in these circumstances he was not liable to Adelaide Bank regardless of the position of Property Builders.

48 There was no evidence that the rights of Eurofinance under the guarantee were ever assigned to Adelaide Bank or for that matter to AIF. The resolution of 2 May 2008 made no reference to the guarantee neither did the transfer of mortgage incorporate such an assignment. It is clear that the provisions of s 52 of the Real Property Act 1900 do not of their own force give an assignee of a guaranteed debt a right to sue a surety on a covenant of guarantee contained in a mortgage much less on a guarantee not so contained: Consolidated Trust Company Limited v Naylor (1936) 55 CLR 423 at 431, 434.

49 In its second further amended statement of claim Adelaide Bank pleaded that what was described as "the Agreement" was transferred to Adelaide Bank by the transfer of mortgage. The Agreement was defined to include this deed of guarantee. For the reasons given in the preceding paragraph this contention was incorrect. Further, it follows in my respectful opinion that there was no basis upon which her Honour could infer an assignment from the s 12 notice when the document pleaded as such an assignment did not have that effect.

50 In these circumstances there was, in my opinion, no basis upon which Adelaide Bank was entitled to sue Mr Phontos on the guarantee. In Hutchens v Deauville Investments Pty Limited [1986] HCA 85; (1986) 68 ALR 367 the holder of a guarantee sought to sue a surety in circumstances where it had assigned the principal debt. The High Court stated it was not entitled to do so. The Court cited with approval a passage from the judgment of Jacobs J in International Leasing Corporation Limited v Aiken [1967] 2 NSWR 427 at 439 to the following effect:

" If the debt is assigned but the guarantee is not assigned then the right in the original creditor to recover under the guarantee must at least be suspended so long as the debt is assigned. There cannot be two persons entitled to recover the amount of the same debt, one from the principal debtor, and so long as the principal debtor was in default, another from the surety ."

51 The position is the same when the assignee of the principal debt seeks to sue on a guarantee which has not been assigned to it.

52 Adelaide Bank in its submissions sought to rely on condition 3 of the offer of loan referred to at [3] above as constituting an assignment of the guarantee. There are at least three problems with this submission. First, it was not pleaded; second, condition 3 refers to the mortgage and not to the guarantee; third, and most fundamentally, a condition contemplating the possibility of an assignment does not amount to an assignment.

53 It follows that the guarantee was not assigned to Adelaide Bank and Adelaide Bank was, therefore, not entitled to make a claim on it.

54 In those circumstances, the appeal so far as it concerns Mr Phontos should be allowed.

55 I should add that the Court asked counsel for the respondents whether he wished to consider whether he should seek to amend the respondents' notice of contention or file a cross-appeal to contend that there had been an equitable assignment of the guarantee in May 2008 or that the guarantee had been subsequently assigned, and whether he wished to seek leave to adduce further evidence to deal with those issues. In those circumstances the respondents sought and were granted an adjournment to consider those matters but ultimately determined not to take any such steps.

56 So far as the question of costs is concerned the parties should have the opportunity to make submissions as to the appropriate costs order both in this Court and in the Court below having regard to the orders on the appeal.

57 I would make the following orders:

1 Appeal allowed in part.

2 Orders 4 and 6 be set aside and the following orders made in lieu:

(a) Judgment against the first defendant in favour of the first plaintiff in the sum of $268,821.79 to take effect as at 29 July 2011 plus interest thereon until the date of payment at the rate referred to in the letter from Eurofinance Capital Pty Limited to Property Builders Pty Limited dated 31 March 2008, being 16.60 percent per annum.

(b) Direct the parties within 10 days to file written submissions as to the appropriate orders as to the costs of the appeal and the costs of the proceedings in the Court below.

58 ALLSOP P: I agree with the Chief Justice.

59 SACKVILLE AJA: I agree with the orders proposed by the Chief Justice and with his Honour's reasons.

**********

Decision last updated: 15 September 2011