Supreme Court New South Wales

• Medium Neutral Citation: ANZ Banking Group Limited v Tiricovski [2012] NSWSC 1304
• Hearing dates: 4 & 5 July 2011 & 24 August 2011
• Decision date: 26 October 2012
• Jurisdiction: Common Law
• Before: Adams J

Decision

1. Judgment for the third and fifth defendants.

2. Further orders to be filed within 14 days or written submissions on the matters in dispute.

3. Liberty to apply on 3 days' notice.

• Catchwords: CONTRACTS - loan to company - personal guarantee by director - cross-guarantee in respect of loans to other related parties - release by bank of company on cross-guarantee - effect on personal guarantee - whether guarantees operative - new cross-guarantee - forgery of director's signature - indoor management rule - whether bank dealt with company - director's ostensible authority - whether personal guarantee covers later cross-guarantee - whether guarantee given in course of director's business - s 6(2) Contracts Review Act 1980 - whether unconscionable for bank to rely on guarantee
• Legislation Cited: Contracts Review Act 1980; Corporations Act 2008
• Cases Cited: Australian Bank v Stokes & anor (1985) 3 NSWLR 175; Bank of Western Australia Limited v Primanzon and anor [2010] NSWSC 862; Blomley v Ryan (1956) 99 CLR 362; Collins v Parker (unreported NSWSC 11 May 1984); Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Commercial Bank v Pollard [1983] 1 NSWLR 75; Commonwealth Bank of Australia v Roubas & Anor [1997] NSWSC 475; Ford v Perpetual Trustees (2009) 75 NSWLR 42; Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 170 CLR 146; Soyfer & Anor v Earlmaze & Ors [2000] NSWSC 1068; Story v Advance Bank Australia Ltd, (1993) 31 NSWLR 722; Toscano v Holland Securities (1985) 1 NSWLR 145; Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388
• Texts Cited: Austin, Ford and Ramsay, Company Directors Principles of Law and Corporate Governance, LexisNexis Butterworths, 2005; Phillips & O'Donovan, The Modern Contract of Guarantee , 2nd Edition, Law Book Company, 1992
• Category: Principal judgment
• Parties: ANZ Banking Group Limited (plaintiff); Robert Tiricovski (first defendant); Slavica Tiricovski (second defendant); Vlado Tiricovski (third defendant); Australian Fresh Confectionary Pty Limited (fourth defendant); Frenmast Pty Limited (fifth defendant); RV & Sons Limited (sixth defendant)
• Representation: M Cohen (plaintiff); R W Tregenza (defendants); Norton Rose Australia (plaintiff); Richard Licardy & Co (defendants)
• File Number(s): 2010/137578

Judgment

Introduction

1 This action concerns loan agreements and cross-guarantees entered into in various ways with the ANZ Banking Group Limited by Robert, Slavica and Vlado Tiricovski and companies associated with them, Australian Fresh Confectionary Pty Limited (Administrators Appointed) (AFC), Frenmast Pty Limited (Frenmast) and RV and Sons Pty Limited (Administrators Appointed) (RV). Except with respect to several matters of fact which are in dispute and to which I will come to in due course, the general outline of the relevant background of facts is, in substance, not disputed. In 2001 and 2008 guarantees were executed in respect of the various loans. Essentially the issues in the case are whether they are still operative, in the former case because it is alleged Frenmast's execution was not authorised by the Board and there was a later agreement by the bank to release it and, in the latter, the alleged forgery on the guarantee of Vlado's signature as director of Frenmast and the company not having authorised entry into the obligation. A related issue is whether, if the 2008 guarantee is binding on Frenmast by virtue of the so-called indoor management rule which is embodied in ss 127,128 and 129 of the Corporations Act 2008, Vlado's personal guarantee extends to the obligation which in effect arises because Frenmast is estopped from denying that it is bound.

2 Vlado and Frenmast by their cross-claims seek various declarations having the effect that Frenmast is not bound by the 2001 or 2008 cross-guarantees and that Vlado is not bound to pay ANZ for Frenmast's obligations as claimed to arise under the 2001 and 2008 cross-guarantees, together with ancillary relief. Inter alia, Vlado and Frenmast claim that, at the time of entering into the 2008 cross-guarantee, the bank failed to enquire or sufficiently enquire as to whether he had agreed or consented to or approved it and it ought to have known that he did not do so, thus that it is unconscionable for the bank to rely on the guarantee in making its claim against Frenmast and it should be set aside. In the alternative, Vlado claims that it is unconscionable for the bank to rely upon the 2008 cross-guarantee in making a claim against him on his personal guarantee of the debts of Frenmast. Frenmast also claims that it tendered payment of the balance due to the bank of its outstanding debt - except for the bank's claims under the cross-guarantee - but the bank refused to accept payment and discharge its mortgage. It alleges that the refusal was an anticipatory breach of the terms of the loan and mortgage entitling it to damages.

3 Vlado also seeks relief pursuant to the Contracts Review Act 1980 in respect of his personal guarantee, relying on the circumstances in which he came to execute it and the Frenmast cross-guarantee, alleging that Robert implicitly implied that his and the Frenmast guarantee related only to the debt of about $920,000 borrowed by Frenmast and was not informed by the bank or Robert that the debts of AFC, RV and Robert and Slavica were also being secured by those guarantees. Although not specifically claimed under this heading, I understand that Vlado also seeks to rely on the Act in relation to his liability arising from the 2008 guarantee (should it be held to be enforceable against Frenmast), which is alleged to be invalid as against him.

Background

4 Robert Tiricovski, Tony Trapp and Vlado Tiricovski commenced the manufacture of liquorice in 1995, initially in partnership. Liquorice was produced from raw materials and sold to retail stores such as Coles, Woolworths and Target. Mr Trapp ceased to have any involvement in the business in about 1998. Frenmast owned land at Carlton on which there was a factory that was used by RV to manufacture liquorice up until about November 2009 when a voluntary administrator was appointed. There was no written lease between Frenmast and RV but RV paid for its use and occupation of the land by paying to Frenmast the outgoings on the land and the mortgage payments due to ANZ in respect of the mortgage on the land. The shares in Frenmast were acquired by 1997, 100 each by Steve Tiricovski, Robert and Vlado, the vendor retaining ten shares. At this time the Carlton land was already owned by Frenmast. As I have mentioned, Frenmast did not engage in any activity except as owner of the land used by RV.

5 When the business commenced, Robert, Mr Trapp and Vlado undertook the production work whilst Robert and Mr Trapp also undertook the office work. Although Vlado did a little office work, this was limited because he could not write (but he could, with difficulty, read) in English. From shortly after the commencement of the liquorice business, Robert managed the business in terms of its administration, including the arrangement of finance, whilst Vlado concentrated on undertaking and supervising the manufacturing of the product, as I understand it, for RV. A third brother, Steve, was also a director of Frenmast but spent most of his time overseas and, it appears, did not participate actively in the management of the company. In 2006, Steve and Vlado had a major disagreement with Robert and no longer communicated with him. There is no evidence as to how the company was thereafter conducted, except that Steve and Vlado's evidence is to the effect that they played no part in its affairs (which, of course, were merely static as the owner of premises rented out to RV), though they remained as directors, and did not authorise Robert or the company to enter into any arrangements of any kind with the bank. AFC, formerly VR & Sons Pty Limited, undertook the business of selling liquorice to retailers, having its own retail customers, as did RV and it seems that AFC sold liquorice which it purchased from RV. Although, until 2000, Vlado was a shareholder as well as director and secretary of AFC, he was removed as shareholder and from the offices of director and secretary and replaced by Slavica Tiricovski, Robert's wife. He says that he did not know the circumstances in which he was removed from these positions but it is of no immediate importance.

The execution of security documents

6 The three crucial documents are the Frenmast cross-guarantee and Vlado's guarantee of Frenmast, both executed on 7 September 2001 and a further Frenmast guarantee executed on 3 September 2008.

7 The Frenmast cross-guarantee concerned the liabilities to the bank from time to time of Frenmast, RV, AFC, Slavica and Robert. At the time, Robert, Vlado and their brother Steve were the directors of Frenmast. Robert was also secretary. As I understand it, Vlado does not deny that he signed this document. Attached to this cross-guarantee is an extract of minutes of a meeting of directors of Frenmast signed by Robert as secretary, in substance, authorising execution of the cross-guarantee, floating charge and a mortgage over the Carlton property. The resolution also provided -

"(g) each director of the Company is jointly and severally authorised on behalf of the Company to act fully and effectually in all dealings, matters and transactions with ANZ about the Securities now or in the future, including:

(i) to act in terms of and for the purposes of the Securities and any other document relevant to the facilities provided by ANZ to the Customers; and

(ii) to complete and deliver to ANZ on behalf of the Company any acknowledgment of changes in the facilities provided by ANZ to the Customers (including increased or additional facilities) and any confirmation that the Securities and any other security, guarantee or indemnity which may be given by the company continue to secure facilities provided to the Customers despite any changes in arrangements between ANZ and the Customers."

8 Whether there was in fact any such meeting of directors as stated in the minute is an issue in the case.

9 A diary note dated 7 September 2001 signed by Ms Josie Isaac, Relationship Manager and Ms Jennifer A. Campbell, Assistant Manager, records that they visited the Frenmast premises at Carlton "to explain and execute" the security documents "with customers, Robert, Slavica and Vlado Tiricovski", stating that the mortgage documents were handed to them "with the request that they should seek independent legal advice if they wish to do so". The note also states that the parties "declined our request as they had previously signed these documents with [another ANZ connected entity], therefore they waived their rights to seek independent legal advice and in the circumstances the general nature of the documents were then discussed with them". This statement falls far short of narrating the course of events, in particular it does not refer to handing over the guarantees, let alone what was said in relation to them. The only information stated as having been conveyed concerns obtaining independent legal advice.

10 Vlado's evidence is that he can recall only one woman being present on the occasion the documents were signed and that, at all events, he did not speak with her. He said the documents were given to him in the production area and that Robert and the lady walked away to talk. By the time they returned, he had already signed the documents. He knew where to sign because there were stickers on the documents indicating where he should do so. He said that there was no suggestion he should get independent legal advice. It is implicit in his evidence that Slavica was not present.

11 The effect of Vlado's evidence is that he trusted Robert to manage the financial affairs of the Company and simply signed the documents because Robert had told him they were necessary "for the refinance on the building". Robert mentioned that the amount (which Vlado does not now precisely recall) was about $920,000 and certainly not greater than $930,000. Vlado believed that the documents involved only Frenmast's obligation of $920,000 or thereabouts to the Bank and he was unaware that he was guaranteeing also the obligations of RV, AFC and the personal obligations of Robert and Slavica. The fact that his name was struck from the cross-guarantee of those parties and he executed a separate guarantee that did not mention Frenmast's obligations under the cross-guarantee is, however, suspicious since it is difficult to see why such an unnecessary course was taken when the same result would have been achieved had he been a party to and executed the cross-guarantee together with the other cross-guarantors. Vlado also said, in substance, that he thought that Frenmast was borrowing that sum in respect of its business and was not told and did not understand Frenmast was also guaranteeing the obligations of RV, AFC, Robert and Slavica. He does not recall the documents he signed or how many times he attached his signature to the documents.

12 Vlado agreed that he also signed (as a director) on the Frenmast mortgage on 7 September 2001. This does not specify the amount of debt secured or give any details of interest or repayment. The imprint of the Office of State Revenue states that the "amount secured" is $924,000. The mortgage incorporates a "Memorandum of Common Provisions". As one might expect, this is in general terms and gives no details of the transaction. Inter alia, it provides that the mortgage "is security for payment to the ANZ of the secured money and for the performance of my obligations under this mortgage and under any collateral securities", this latter reference being adequate to cover the cross-guarantee executed on the same day as the mortgage.

13 So far as the minute is concerned, Vlado said that no such meeting took place. Indeed, his evidence was that no meetings of directors occurred.

14 Vlado gave evidence that he never signed any other documents having connexion with the bank including, in particular, the 2008 guarantee by Frenmast. He said that his relationship with Robert soured and he has not spoken to him since Christmas 2006.

15 Steve Tiricovski made an affidavit which was read in the proceedings. He also gave evidence and was cross-examined. He was a director of Frenmast from 29 June 2001 concerned with the operational side of the business. He was absent from Australia for most of the period between 2001 and 2006. He recalls one formal meeting of the Board in that time, the purpose of which was to remove Robert from the Board because he (Steve) was unhappy as he was not kept informed about the business. He was quite sure that this was not the meeting to which the minute of 7 September 2001 referred. He said that at that time he was out of the country and he found out later about what had happened.

16 Robert was a director of Frenmast from 2 December 1997 until 23 November 2009, during which time he was also secretary.

17 I accept the evidence of Vlado and Steve that there was no meeting of directors as referred to in the minute signed by Robert. Their evidence on this point is essentially uncontradicted except by the minute itself. The general and unqualified character of the minute strikes me as most unlikely unless it were a requirement of the bank.

18 However, so far as the 2001 guarantees are concerned, there is no real doubt to my mind that they were indeed executed validly by Frenmast and by Vlado on his own account. Having, as it were, delegated to Robert responsibility for making arrangements as he thought it necessary in the interests of Frenmast he implicitly authorised him - at least so far as the bank was concerned - to enter into them to the extent that the documents which he signed provided. His decision not to read the documents cannot absolve him from the liability he undertook by virtue of his execution of them. In the circumstances, by his signature he represented to the bank that he understood and agreed with their effect and the bank was entitled to rely on that representation. He did not care to obtain independent advice - whether or not it was suggested that he should - and acted on his decision to place his complete trust in Robert.

19 Accordingly, although Vlado did not understand (as I accept he did not) the extent of the obligations created by the 2001 securities and very likely believed them to be far more limited than in fact they provided, the bank was entitled to regard them as validly entered into. In my view the evidence does not justify the inference that Robert acted as agent for the bank in procuring Vlado's signature, such as to give it constructive notice of the misleading statements, if any, made by Robert to Vlado. Certainly, the bank would not have provided the facilities if the documents were not executed but, as I mentioned above, it seems to me that Robert was entrusted by Vlado with responsibility for such arrangements and that Robert was Frenmast's agent for the purpose of effecting them as he thought fit. If Robert misled him as to their effect - as, indeed, is quite possible - I do not see how that can be laid at the feet of the Bank.

20 Despite the limited information contained in the memorandum of its officers as mentioned above, the bank did not call either of them for which no explanation was forthcoming. I consider that Vlado's evidence was truthful in the sense that it reflected his actual recollection, although its precise reliability is somewhat doubtful, given the lapse of time. I conclude that the documents were signed much as he described, although it is possible that there was some brief discussion with a bank officer which did not convey the extent of cross-obligations which the documents created.

21 The 2008 Frenmast guarantee is in a very different position. The guarantee concerned the debts of AFC and Robert and Slavica (and not RV). There is no supporting evidence at all as to the circumstances in which it came to be created or executed. It may be that Robert, purporting to act on Frenmast's behalf, dealt with the bank to procure it but there is no evidence that he did so. He appears to have signed as a director of Frenmast, but this is speculative as no more than his name appears with a signature that may or may not be his. Merely because the guarantee appears to be very much in his interest does not, to my mind, justify the inference that he in fact acted or purported to act as Frenmast's agent with respect to it. My hesitation in this regard is strengthened by the bank having declined to adduce any evidence of its dealings with Frenmast (through Robert or anyone else), which information is very much within its own knowledge. (I deal below with the possibility that, if the bank dealt with Robert as agent for Frenmast, it was entitled to do so merely on the basis of his being a director.) Vlado denies (and I accept) that the signature purporting to be his as director is his. He denies (and I accept) signing any document that relates to this guarantee. I accept that, by this time, his relationship with Robert had completely broken down. It is clear that his former trust was destroyed. Steve's evidence is to the same effect. I accept his evidence that he did not sign this guarantee and, furthermore, that Frenmast had not decided or agreed to enter into it.

22 Vlado's 2001 guarantee of Frenmast's obligations was an "all money guarantee" unlimited as to amount and included the obligations undertaken by Frenmast in respect of its guarantee of AFC, RV, Robert and Slavica. The guarantee provides in clause 19 that the obligations remain in force until discharged by ANZ in writing or Vlado paid ANZ the full amount of the guaranteed money or made other arrangements acceptable to ANZ to pay an agreed sum.

23 Neither guarantee obliges the bank to give notice of any variation in the primary debt. However, each of the loan agreements relied on by the bank which varies the loan amounts requires an acknowledgment by the guarantors, in effect, that their securities cover, inter alia, the facilities referred to in the agreement. As the matter is pleaded, however, it is unnecessary for me to determine that this apparently invariable practice had the effect of requiring the bank to give notice.

The loan agreements

24 By letter dated 13 September 2001 addressed to the directors of Frenmast (incorrectly omitting Steve and adding Slavica) ANZ offered a variable rate "Business Loan" of $923,000 for a maximum term of 15 years for the purpose of refinancing borrowings from an ANZ instrumentality called ANZ Investments, for which the loan funds were obliged to be used unless ANZ's approval in writing to another use was obtained. The loan was repayable by monthly instalments of principal and interest. The securities for the Facilities were listed as follows -

(a) cross-guarantee and indemnity between AFC, RV, Frenmast, Robert and Slavica Tiricovski - "to be taken" (but, in fact, already taken);

(b) guarantee "unlimited as to amount" by Vlado as guarantor on account of Frenmast, also "to be taken" (but already taken).

The securities mentioned in paragraphs (a) and (b) were supported by the following further securities, all "to be taken" -

(c) first registered mortgage by Frenmast over the Carlton land;

(d) floating charge over all the assets and undertaking Frenmast;

(e) floating charge over all the assets and undertaking of AFC; and

(f) floating charge over all the assets and undertaking of RV.

25 The letter provided for an acceptance by the parties and the document tendered shows that this was signed by Vlado, Robert and Slavica on 13 September 2001 (no reference was made to Frenmast but no point is taken about this). Also part of this document is one entitled "Guarantor acknowledgement" in the following terms -

"Each of the following guarantors acknowledges that the securities given, or to be given by us secure all present and future obligations of the clients to ANZ, including obligations in respect of the facilities."

This document is signed by Vlado, Robert and Slavica. Although the guarantor acknowledgement refers to "clients" in the plural, the only client referred to in the letter of offer is Frenmast, to whose directors it is addressed. Nor is there any acknowledgment by AFC or RV.

26 On 23 November 2004 the bank wrote a "letter of offer" to Robert and Slavica, and Frenmast who were described as clients. So far as Robert and Slavica were concerned, the "facility amount" was specified as "$3,155,000 (increase of $600,000)". The term was described as extending the "Interest Only term for another 12 months commencing from the expiry of current Interest Only term ... [upon] expiry convert to Principle [sic] & Interest ... [the maximum term of the loan being] 15 years, expiring on the date of 15 October 2018". The loan was for the purpose of purchasing new equipment. Usual conditions are stipulated as to interest, fees and the like. In respect of Frenmast, the facility amount is specified as $920,784.84, being the balance as at 23 November 2004 of the "existing loan". The term is stipulated in the same way as that in respect of Robert and Slavica's facility, although it will be noted that the original loan agreement did not provide for any period of interest only payments. The purpose of the loan was also that of purchasing equipment.

27 The securities for the facilities, described as "already held" were listed as follows -

(a) cross-guarantee between AFC, RV, Frenmast, Robert and Slavica;

supported by

(b) guarantee unlimited as to amount by Vlado as guarantor on behalf of Frenmast;

supported by

(c) mortgage by Frenmast over the Carlton land;

(d) floating charge over the assets and undertaking of Frenmast;

(e) mortgage by Robert and Slavica over property in Kurnell;

(f) mortgage by Robert and Slavica over property at Taren Point;

(g) floating charge over the assets and undertaking of AFC;

(h) floating charge over the assets and undertaking of RV; and

(i) (this appears to be duplicated paragraph) floating charge over the assets and undertaking of Frenmast.

This letter of offer states that it is "signed for and behalf of Frenmast..." by one of its authorised representatives, identified as Robert. It was also signed by Robert and Slavica. The guarantor acknowledgement by AFC was signed by Robert as "one of its directors", as also were those of RV and Frenmast.

28 On 8 March 2006 a "variation letter" was addressed by ANZ to the directors of Frenmast, specifying in this respect Robert and Slavica only. The facilities are described, in respect of Frenmast for the purchase of commercial property at Carlton, as the current balance of $917,414.87 for a maximum terms of 10 years and 4 months from the date of the advance and, in respect of Robert and Slavica the facility having a current balance of $3,150,017.85 for a maximum term of 13 years and eight months commencing from the date of advance. The mode of repayment was varied to interest only for the first 5 years and then principal and interest.

29 Described as "already held", the security was listed as follows -

(a) cross-guarantee between Frenmast, Robert, Slavica, AFC and RV.

supported by

(b) mortgage by Frenmast over the Carlton land;

(c) mortgage by Robert and Slavica over the property at Kurnell;

(d) mortgage by Robert and Slavica over the property at Taren Point;

(e) floating charge over the assets and undertaking of Frenmast;

(f) floating charge over the assets and undertaking of AFC;

(g) floating charge over the assets and undertaking of RV.

30 The document which is exhibited in the proceedings is not executed by any party. It should be noted that the cross-guarantee of Frenmast is not specified to be supported by the personal guarantee of Vlado which, in light of the listing of the securities that are relied on to support that obligation, gives rise at least to the possible inference that it was not intended to be relied on in respect of the specified loans. The affidavit of Mr Tayabali, ANZ's Manager, Lending Services states that this document constituted a "variation of the loan" between ANZ and Frenmast.

31 On 9 May 2006 a letter of offer addressed to the directors of Frenmast, (again identified as Robert and Slavica) concerned an overdraft facility of $300,000 to AFC, to continue at least until the review date, of which the next was 24 May 2006. The client is specified to be AFC, and the acceptance is to be given by AFC alone. The securities for the facility were listed as -

(a) guarantee from Robert in respect of the obligations of Frenmast, "limited to $917,415" - to be taken;

supported by

(b) guarantee from Robert and Slavica in respect of the obligations of AFC, limited to $300,000 - to be taken;

supported by

(c) guarantee and indemnity unlimited as to amount by Vlado as guarantor on account of Frenmast - already held;

supported by

(d) cross-guarantee between Frenmast, AFC, RV, Robert and Slavica - "to be released" (emphasis added);

supported by

(e) guarantee from AFC and RV in respect of the obligations of Frenmast unlimited as to amount - to be taken;

supported by

(f) guarantee from AFC and RV in favour of ANZ in respect of the obligations of Robert and Slavica unlimited as to amount - to be taken;

supported by

(g) mortgage by Frenmast over the Carlton property - already held;

(h) mortgage by Robert and Slavica over the property at Taren Point - already held;

(i) mortgage by Robert and Slavica over the Kurnell property - already held;

(j) floating charge over all the assets and undertaking of Frenmast - already held;

(k) floating charge over all the assets and undertaking of AFC - already held;

(l) floating charge over all the assets and undertaking of RV - already held.

32 The letter provided that the offer was to be accepted by signing the duplicate of the letter and returning it to the bank. (I interpolate that clause 6.1 of the 2001 guarantee provides that the guarantee and indemnity remain in force "until ... ANZ discharges both in writing". Although it was submitted otherwise by the bank, I consider that this letter is a sufficient writing for the purpose of this provision.) Attached to the exhibited document is a formal acceptance dated 16 September 2006 executed by Robert and Slavica as director and director/ secretary on behalf of AFC. A guarantor acknowledgement attached to the letter of offer that "the securities given, or to be given by us secure all present and future obligations of the client(s) to ANZ, including obligations in respect of the facilities" was executed on 16 May 2006 by AFC (signed by Robert and Slavica) and RV (signed by Robert and purportedly by Vlado), and also signed as individuals by Robert, Slavica and purportedly by Vlado. Vlado says (and I accept) that the signatures purporting to be his are not. This letter, also said by Mr Tayabali to constitute a variation of the loan between Frenmast and the bank, raises the question whether that variation comprehended the obligations of Frenmast under the 2001 cross-guarantee, thus releasing it, upon acceptance of the bank's offer, from its guarantees of the obligations of the other debtors. The effect of this release would have been that Vlado was left guaranteeing only the direct debts of Frenmast. Although the client is specified as AFC, plainly enough the release of the Frenmast cross-guarantee directly affected that company's obligations. It is not surprising, therefore that the letter was addressed to Frenmast's directors, although its form expected that the offer would be accepted by AFC. Also for obvious reasons, it was thought necessary that guarantee acknowledgments should be made by AFC, RV and Robert and Slavica, whose positions were also affected by the release of Frenmast from its cross-guarantee.

33 On 8 November 2006 the bank addressed an annual review and variation letter to Robert and Slavica for signature and return, which listed the "facilities available" as follows -

Client	Facility	Facility Limit
Frenmast	ANZ Business Loan (Variable)	$917,414.87 (current balance as at 8.11.2006)
Robert and Slavica Tiricovski	ANZ Business Loan (Variable)	$3,150,017.85 (current balance as at 8.11.2006)
AFC	Overdraft Facility	$300,000 (current limit)

34 The letter sets out what are described as new or varied facilities being an increase of the second of the above loans by $500,000 to $3,650,017.85 The "existing security ... [remains] in full force and will extend to cover the existing facilities and the variations to facilities in this letter". The "Securities for the facilities" were specified as follows -

(a) guarantee from Robert and Slavica in respect of the obligations of AFC limited to $300,000 - already held;

supported by;

(b) guarantee from Robert in respect of the obligations of Frenmast limited to $917,415.00 - already held;

supported by

(c) guarantee from AFC in respect of the obligations of Robert and Slavica unlimited as to amount - already held;

supported by

(d) guarantee from AFC and RV in respect of the obligations of Frenmast and limited as to amount - already held;

supported by

(e) guarantee indemnity unlimited as to amount by Vlado as guarantor on account of Frenmast - already held;

supported by

(f) mortgage by Robert and Slavica over the Taren Point property - already held;

(g) mortgage by Robert and Slavica over the Kurnell property - already held;

(h) mortgage by Frenmast over the Carlton property - already held;

(i) floating charge over all the assets and undertaking of AFC - already held;

(j) floating charge over all the assets and undertaking of Frenmast - already held;

(k) floating charge over all the assets and undertaking of RV - already held.

This offer was accepted by Robert and Slavica on 8 November 2006. The guarantor acknowledgement is executed by AFC and RV in each case by Robert and Slavica. No provision was made for any acknowledgment by Frenmast or Vlado and neither it nor he signed the document. This letter also is described by Mr Tayabali as having varied the loan to Frenmast.

35 The list of securities supports the inference referred to above in connection of the variation of 9 May 2006 that the cross-guarantee by Frenmast had been released. Not only is it not referred to as supporting any of the facilities but Frenmast's acknowledgment as guarantor of the obligations of AFC and RV is not sought. Since, on this hypothesis, there was no variation of the obligations of Vlado as guarantor of Frenmast (though he is listed as a guarantor of its direct obligations to the bank), there was no necessity for him to make any acknowledgement of the variation for which the letter provided.

36 Given the importance of the bank's interest in security for its advances, it is extremely difficult to infer in the absence of persuasive evidence that the statement in a formal letter of offer that a guarantee of substantial liabilities such as existed in this case was to be released at the time was not the subject of careful consideration by the relevant manager. However, there was no evidence or explanation from the bank (although it had ample opportunity) as to how the release came to be proposed or in any way providing a basis for the suggestion that these letters were mistaken and ought not to be taken at face value.

37 Annexed to the affidavit of Mr Wayne Christey, the bank's manager of commercial lending services, are a number of additional loan agreements, in the same form as those to which I have already referred. The first of these, addressed to Robert and Slavica as directors of AFC is dated 9 October 2007. It is described as a variation of the existing facilities "as detailed in your original letter of 09 May 2006". The letter provides for an overdraft of $800,000 until the end of 2007 and then $300,000. It is unnecessary to refer to the listed securities except to note the significant fact that no reference is made to Frenmast or, for that matter, to Vlado. This is consistent, in my view, only with the position that Frenmast had been released from its cross-guarantee of AFC, RV's and Robert and Slavica's obligations to the bank. Acknowledgments of guarantors are given by AFC (signed by Robert and Slavica), Robert and Slavica and RV (signed by Robert and purportedly by Vlado). Vlado says, and I accept, that the signature purporting to be his is not.

38 On 3 June 2008, the bank addressed a further letter of offer to AFC concerning the overdraft of $300,000 and (I think, a new) business loan of $500,000. The purpose of this loan was to pay out the overdraft (I think, in the sense to reduce it to $300,000). Again, there is no mention in the list of securities of either Frenmast or Vlado. Amongst the securities listed is the mortgage given by Robert and Slavica over the Taren Point property. Again, a guarantor acknowledgment is given by RV, for which Robert and Vlado purportedly signed. I accept Vlado's evidence that the signature is not his.

39 The final loan agreement is dated 3 September 2008 and relates to a facility of $2,490,000 (including the current facility of $1,966,000) for a term of 13 years and 1 month. The letter states that it varies the conditions of the agreement as constituted by the letter of 3 June 2008 but not in respect of the facilities, which are stated to be unchanged. The security is listed as -

(a) guarantee from AFC in respect of the obligations of Robert and Slavica unlimited as to amount - held;

(b) guarantee from Robert and Slavica in respect of obligations of AFC limited to $800,000 - held;

supported by mortgage over the Kurnell property - held

(c) guarantee from Frenmast in respect of the obligations of AFC and Robert and Slavica unlimited as to amount - to be taken (emphasis added)

(d) Mortgage by Frenmast over the Carlton property - held

(e) mortgage over the Taren Point Property - to be released

(f) mortgage over the Kurnell property -- held

(g) floating charge over the undertaking and assets of AFC

(h) floating charge over the assets and undertaking of RV.

40 Thus, the only change is that the mortgage over the Taren Point property is to be discharged and a guarantee is to be taken from Frenmast. This strongly supports the conclusion that the bank understood and accepted that Frenmast's cross-guarantee of 2001 had been released in accordance with the stipulation in the loan agreement of 9 May 2006. This conclusion is inevitable when the series of loan agreements is considered as a whole. The acknowledgment of guarantors is executed by AFC and Frenmast, in the former case by Robert and Slavica and in the latter by Robert and purportedly by Vlado. However, I accept Vlado's evidence that he was unaware of this transaction and that his signature is a forgery.

The validity of the 2008 cross-guarantee

41 The guarantee was not executed under the common seal of the company. Accordingly the effectiveness of guarantee to bind the company is governed by ss 127, 128 and 129 of the Corporations Act 2001 (Cth), which provide (so far as may be relevant) -

Section 127

Execution of documents (including deeds) by the company itself

(1) A company may execute a document without using a common seal if the document is signed by:

(a) 2 directors of the company; or

(b) a director and a company secretary of the company; or

(c) for a proprietary company that has a sole director who is also the sole company secretary - that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.

(2) ...

(3) ...

(4) ...

Section 128

(1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

(2) A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

(3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.

(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

Section 129

Constitution and replaceable rules complied with

(1) A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.

Director or company secretary

(2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

Officer or agent

(3) ...

Proper performance of duties

(4) ...

Document duly executed without seal

(5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

Document duly executed with seal

(6) ...

Officer or agent with authority to warrant that document is genuine or true copy

(7) ...

(8) Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.

42 The guarantee purported to be executed by Robert as director and Vlado as secretary. At the time, Robert was both a director and the secretary, whilst Vlado was a director but not the secretary. However, despite the descriptions, as it purported to be signed by two persons who were directors, this matter is of no significance. The question is whether, having apparently been signed by two directors (or a director and a secretary) but in fact by only one of them, and thus apparently in compliance with s 127(1), the bank was entitled to assume that it was duly executed by the company. The entitlement to make assumptions for which s 129 provides is predicated upon there being dealings between the person (here the bank) and the company (here Frenmast). It is clear that, in the past, the bank had dealings with Frenmast. It seems that it continued to have dealings with the company in respect of its direct debt of some $923,000 or so. However, the cross-guarantee did not relate to that transaction but to another facility concerning AFC and Robert and Slavica. Robert and Slavica were, at the time, directors of AFC; Vlado was not.

43 Section 129 entitles a person such as the bank to make the specified assumptions only "in relation to dealings with ... [the] company". As has already been mentioned, no evidence was produced by the bank as to the circumstances in which the guarantee came into existence. That it dealt with Robert as director of Frenmast at the time is a distinct possibility, of course, but the evidence is not such as to permit such an inference to be drawn to the point of probability. However, a director is not, merely by virtue of holding that office, an agent of the company capable of creating obligations binding on the company. In Story v Advance Bank Australia Ltd, (1993) 31 NSWLR 722, Gleeson CJ (with whom Cripps JA agreed, Mahony AJ reserving consideration of the limits, if any, implied by the requirement of "dealings") said at 730-1 -

"In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, Diplock LJ observed that the problem with which the indoor management rule is concerned frequently manifests itself as a question of the actual or ostensible authority of a person to represent, and act on behalf of, a company in a business dealing. Actual and apparent authority often coincide, but they are different things. In ordinary business dealings a person contracting with a company will usually rely on the apparent authority of the

company's professed representative. Such apparent authority must be supported by a representation (usually made by conduct) by the company as to the agent's authority. The most common form of representation by a company creating an apparent authority of an agent is permitting the agent to act in the management or conduct of the principal's business. His Lordship said (at 505):

"... Thus, if in the case of a company the board of directors who have 'actual' authority under the memorandum and articles of association to manage the company's business permit the agent to act in the management or conduct of the company's business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorised to do acts of the kind which he is in fact permitted to do usually enters into in the ordinary course of such business. The making of such a representation is itself an act of management of the company's business."

The indoor management rule, together with the principles of agency considered by Diplock LJ, provide the practical underpinning for much of the business done by corporations in modern commerce.

An important qualification to the rule is that it does not protect a person dealing with a company who knows of the irregularity in question or who, being put upon inquiry fails to make due inquiry: Kanssen v Rialto (West End) Ltd [1944] Ch 346; affirmed sub nom Morris v Kanssen [1946] AC 459."

44 Here, as mentioned above, Vlado and Steve deny that Frenmast in fact entered into the transaction or that Robert had any authority to enter into the guarantee on its behalf. The bank has not sought to establish any such authority or to lead any evidence that it relied on any holding out by Frenmast or Robert (or anyone else for that matter) to act as the company's agent for the purpose of the transaction. I have already mentioned that there is not even any evidence that the bank dealt with Robert in connexion with the transaction either as Frenmast's agent or, indeed, at all. Assuming, however, that the bank did deal with Robert, was the fact that he held office as a director of Frenmast sufficient to constitute him its agent, either actual or ostensible. It seems clear that a director is not, merely by holding that office, an agent for the company. Whether in any particular case the company has acted in other ways to make or hold out a director as its agent is a matter of fact and degree depending, of course, on the circumstances. Here, the apparent authority to enter into the 2001 Frenmast cross-guarantee does not indicate that, when that guarantee had been released, he had authority at a later time to commit Frenmast to the 2009 guarantee (assuming that he purported to do so). The minute of 7 September 2001 does not carry the matter any further: plainly enough, it does not extend to entirely fresh obligations. Nor do the intervening loan variations which were signed by Vlado or Frenmast in one way or another suggest such actual or apparent agency.

45 Even a managing director (and Robert was certainly not in that position) will generally only be authorised to enter into transactions in the usual course of the company's business: see the discussion of this topic in Austin, Ford and Ramsay, Company Directors Principles of Law and Corporate Governance, LexisNexis Butterworths, 2005 at 152 ff. So far as the implied authority of one of a number of directors is concerned, it is sufficient to cite the judgment of Dawson J In Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 170 CLR 146 at 204 - 205, where his Honour said -

"... the office of secretary would not carry with it any apparent authority to encumber the company's land. The secretary of a company is its administrative officer and, even though his authority ordinarily extends to countersigning the affixation of the company's seal pursuant to a resolution of the board of directors, he has no apparent authority to enter into commercial transactions upon his own decision, save for transactions of an administrative kind required for the day to day running of the company's affairs: Panorama Developments v. Fidelis Fabrics (1971) 2 QB 711, at pp 716-717....

Nor does an ordinary, individual director of a company have any ostensible authority to bind the company. A managing director may have wide powers, actual or ostensible. In Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 it was held that a person who had assumed the powers of a managing director of a property company with the company's approval had apparent authority to engage architects on the company's behalf, this being within the ordinary ambit of the authority of a managing director of a company of that kind. And even ordinary directors may have quite significant functions entrusted to them by the company, although usually these are of a more or less formal nature, such as affixing the company seal to documents which the company requires to be executed: see Lennard's Carrying Company Limited v. Asiatic Petroleum Company Limited [1915] A.C, at p 715. But the position of director does not carry with it any ostensible authority to act on behalf of the company. Directors can act only collectively as a board and the function of an individual director is to participate in decisions of the board. In the absence of some representation made by the company, a director has no ostensible authority to bind it."

46 In Soyfer & Anor v Earlmaze & Ors [2000] NSWSC 1068 the plaintiffs entered into an agreement to lend a Mr Matar $500,000, purportedly for use in a building development. Under that agreement, Mr Matar was to be responsible for fees and interest incurred by the plaintiffs in obtaining the $500,000, and was to pay them $625,000 upon completion of the development or after fourteen months, whichever was the earlier. The plaintiffs also purportedly entered into an agreement with Earlmaze, which was the owner of the property being developed and granted them an option to purchase a unit in the proposed development for $1,000, which could not be exercised if Mr. Matar repaid his loan. Earlmaze had authorised a solicitor to act on its behalf in respect of the option. In due course, the plaintiffs gave notice of exercise of the option. Earlmaze denied that it had any obligation to sell the unit to the plaintiffs for $1,000 on the basis, inter alia, that it had not executed the option agreement. At the relevant time, Mr Matar was director and secretary of Earlmaze. The option agreement was not signed by the director and secretary identified as its signatories on behalf of the company.

47 In respect of the enforceability of the option agreement, Hodgson CJ in Eq (as his Honour then was) pointed out, first, that the assumptions referred to in s 129 must relate to "dealings with the company", that is to say "dealings by the person seeking to rely on the assumptions": (para [67]). Having found that, although one of the signatures witnessing the common seal was a forgery, the execution of the option objectively appeared to have complied with the statutory requirement as to execution and the plaintiffs were entitled to assume that it had been regularly done despite the forgery (para [78]), his Honour added, in response to the argument that this made it too easy for persons dealing with a company to create fraudulent agreements -

"[82] In fact, some protection to the company is given by the requirement that the person must be engaged in dealings with the company in the first place; which in my opinion means that there must be dealings (in the sense of negotiations or other steps in relation to a contemplated transaction) with someone on behalf of the company which are dealings authorised by the company, and the document in respect of which the assumptions may be made must be a document which is "in relation to" those authorised dealings (and I take this to extend to a document arising out of authorised negotiations or other steps). I note that in Story at 733, Gleeson CJ suggested that the concept of having dealings with a company must embrace purported dealings, because if the provisions only applied where the person representing the company had actual authority, they would be largely unnecessary. I take this as meaning that it is not necessary that the person representing the company have authority from the company to commit the company to the relevant transactions or execute the relevant documents; but in my opinion, it is necessary that the person have authority to undertake some negotiation or other steps, so that the dealings, in relation to which the document is executed, are properly considered to be dealings with the company."

If I may, with respect, expand slightly on the explanation of his Honour of the suggestion of Gleeson CJ, I understand his Honour to mean that the person representing the company must have ostensible authority to bind the company to the particular transaction by virtue of his actual authority to take steps of that or a related kind. In the present case, where Robert (assuming him to have been the agent in question) was only a director amongst others, that office did not give any actual authority to bind the company in respect of a guarantee, nor did it confer any ostensible authority to do so.

48 His Honour found that, although Mr Mater was a director of Earlmaze, he did not "have actual or ostensible authority to negotiate in relation to an option to dispose of property of Earlmaze worth $625,000 or thereabouts for $1,000" but the solicitor was so authorised and, accordingly the plaintiffs were dealing with the company in the relevant sense: para [68].

49 Soyfer is also authority for the proposition that the exception in s 128(4), where the person "knew or suspected that the assumption was incorrect", only applies where there is actual knowledge or actual suspicion as distinct from the situation "where circumstances are such as to put a reasonable person upon enquiry but where the person in question has no actual knowledge or actual suspicion": para [70].

50 Accordingly, I am of the opinion that, since Frenmast did not actually enter into the guarantee and it was not actually validly executed by virtue of the forgery of Vlado's signature. Since the bank can only rely on the guarantee if it dealt with Frenmast in relation to the guarantee, and it did not do so, even assuming that it negotiated with Robert as a director of Frenmast, it is unable to rely on the assumptions in s 129 in respect of the 2008 guarantee. I should add that, if the bank were entitled to rely on the assumptions, Frenmast would not be entitled to assert that they were incorrect.

51 Having regard to the nature of the debts being guaranteed and the bank's knowledge from its long-standing relationship with Frenmast as a customer of the nature of Frenmast's business, the bank should have known or suspected that the transaction was doubtful as providing substantial financial support to third parties otherwise than in the course of its business and for no evident advantage to it, especially in light of Robert's obvious conflict of interest (on the assumption he was the person with whom the bank dealt). Its prudential indeed, ethical, duty to make enquiries was not lessened by the fact that Frenmast was its customer. In the result, it appears to have favoured one set of clients over another for the evident purpose of boosting its security in respect of the debts owed to it by those other clients. This conclusion is strengthened by the inferences that justifiably flow from the bank's failure to adduce any evidence of the course of business that led to the creation of the guarantee. However, in the result, the evidence does not permit me to find that the bank actually suspected or knew, as distinct from what it ought reasonably to have known or suspected, that the assumptions as to authorised due execution were incorrect. It follows that s 128(4) does not apply to negate the assumptions of regular entry by Frenmast into the guarantee.

Does Vlado's guarantee cover the 2008 guarantee?

52 This issue is only relevant if I am mistaken in concluding that the 2008 guarantee is invalid and unenforceable against Frenmast.

53 It will have been noted that ss 127, 128 and 129 do not make valid an invalid instrument. They simply have the effect of preventing the company from asserting "in proceedings in relation to the dealings" that any of the relevant assumptions are incorrect. Thus, they do not prevent Vlado, in the proceedings brought by the bank against him, from seeking to establish that the guarantee is invalid as not entered into by Frenmast or with its authority. It is submitted on behalf of the bank, however, that Vlado is bound by his guarantee to indemnify the bank in respect of all the obligations of Frenmast, however those obligations arise. Therefore, in this case, had the bank sued Frenmast separately and recovered a judgment, that judgment debt would, ipso facto, be an obligation to which Vlado's guarantee applied. This depends, as I apprehend it, on the proper interpretation to be given to Vlado's guarantee.

54 The preamble to the guarantee states that it is given by Vlado "for obligations incurred by or at the request of the customer", namely Frenmast. The "guaranteed money" is defined in clause 1.1 as meaning "at any time all money which ... the customer owes to ANZ at that time for any reason ..." Mention should also be made of clause 5, which provides that the guarantor agrees to indemnify the bank "against any loss it suffers because ... the customer acted without power or exceeded its power or someone appearing to act on behalf of the customer acted without authority, or misused or exceeded that person's authority". In respect of this clause, I apply the findings referred to above, namely that the company did not enter into the guarantee and that no person "appearing to act on ... [its] behalf" did so. The fact is that the company did not act at all. The evidence is silent or, at the most, only suggestive as to the person or persons with whom the bank dealt; if it happened to be Robert, he did not have either actual or ostensible authority to act on Frenmast's behalf. Moreover, the matters to which I made mention in respect of actual notice certainly give rise to circumstances in which the bank, acting reasonably, should have been on notice that the signature of Vlado (and, hence, the valid execution of the guarantee by Frenmast) required verification before the guarantee was acted on. Accordingly, this clause does not avail the bank.

55 The submission of the bank is that it was intended and agreed that the definition of "guaranteed money" comprehended money owing by Frenmast because, although the bank relied on a fraudulent and spurious instrument which it was nevertheless entitled to enforce because there was no evidence that it actually suspected the fraud and thus Frenmast was unable to deny due execution of the instrument and incurring of the liability. That this follows from the definition, if unqualified, cannot be denied. However, I do not think that the definition can be construed in that way. The words "any reason" do not include an obligation created by fraud on Frenmast, still less one of which the bank, acting reasonably, ought to have been on notice of the need for verification of the transaction.

56 (I have mentioned that the liability of Frenmast under the 2001 cross-guarantee, was released by the loan agreement of 9 May 2006 and Vlado's guarantee in respect of Frenmast's liability in respect of the debts of AFC, RV, Robert and Slavica was discharged at least at that point in time. Whether it could be revived by subsequent agreement with Frenmast, as purported to be done pursuant to the 2008 guarantee in the absence of Vlado's agreement is, to my mind, somewhat doubtful: see the discussion in Chapter 6, "Discharge from Liability by the Determination of the Principal Transaction", Phillips & O'Donovan, The Modern Contract of Guarantee , 2nd Edition, Law Book Company, 1992. However, this issue was not argued by the parties and I express no concluded view about it.)

57 Accordingly, I conclude that Vlado's guarantee of 2001 does not extend to the liability created by the fraudulent 2008 Frenmast guarantee.

The Contracts Review Act 1980 and unconscionability

58 The Act provides in s 6 -

(2) A person may not be granted relief under this Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person ...

On the face of it, the contract of guarantee signed by Vlado in respect of the obligations of Frenmast was entered into for business purposes. He was a shareholder and director of Frenmast with a commercial interest in the bank's agreeing to finance its acquisition of its business premises which were rented to RV and in which Vlado worked. It also appears that from time to time the companies traded with each other. There were interlocking family shareholdings and directorships. There is no evidence of any commercial relationship involving Robert and Slavica and Frenmast. I accept Vlado's evidence that Robert did not bring to his attention that his guarantee of Frenmast's obligations also, though indirectly covered the obligations to the bank of AFC, RV and Robert and Slavica.

59 In Bank of Western Australia Limited v Primanzon and anor [2010] NSWSC 862 Johnson J helpfully reviewed (if I may respectfully say so) the authorities dealing with the application of the exclusion from the operation of the Act of contracts "entered into in the course of or for the purpose of a trade, business or profession". I respectfully adopt his Honour's statement of principles. In the circumstances here, the most apposite points made by his Honour (at para [85]) are that the question "should be looked at as a matter of substance and not form" (at para [84]) and, where "the contract under consideration is entered into as an ordinary incident of the carrying on of ...[the] business", then it is entered "for the purpose of" that business. I do not think that it can be argued in the present case that the contract of guarantee by Vlado of Frenmast's obligations to the bank could be otherwise than a conventional incident of its business, but was it entered into in the course of Vlado's business?

60 In Commercial Bank v Pollard [1983] 1 NSWLR 75 at 79-80, Rogers J pointed to the distinction between the situation in which a company operates a business and shareholders borrowed money in their personal capacity to lend to the company on the one hand and, on the other, that in which they were carrying on the business in their personal capacity rather than the company, pointing to the need for evidence as to the business of the company and the position of the shareholders in relation to it. His Honour clearly being of the view that, in the former situation, they would not be disentitled to relief by virtue of s 6(2). In Australian Bank v Stokes & anor (1985) 3 NSWLR 175 the defendants had granted mortgages to the plaintiff over certain premises and, it was not contested, were in default. In possession proceedings taken against them, the defendants sought to rely on the Contracts Review Act 1980. The defendants had used a proprietary company trading as a trust to carry on the business for which the loan was obtained which was secured by the mortgage. Rogers J followed (though with some doubts) the judgment of McClelland J in Toscano v Holland Securities (1985) 1 NSWLR 145, in which that judge had taken the view that in similar circumstances, "if the business is carried on in the name of the company then that is the end of the matter".

61 In Commonwealth Bank of Australia v Roubas & Anor [1997] NSWSC 475, the defendants, who were full time sign writers carrying on their own business, had been engaged in a number of property dealings for the purpose of obtaining an income producing investment and had borrowed money from the bank for that purpose, sought to rely on the Act. In order to demonstrate that this was a business venture, the bank relied on the acquisition by them, through a proprietary company, of a property which was a mixture of rental producing units comprising three retail shops and associated buildings. Applying Toscano and Australia Bank Hunter J said that the defendants' interest in the company did "not amount to the carrying on of any business by them". Indeed, his Honour considered that a contract of loan "entered into to permit ... an income producing investment [to be obtained] was not "in any sense 'entered into as an ordinary incident of the carrying on of (any) particular trade or business ... then being carried on or proposed to be carried on'", quoting the view of Lee J in Collins v Parker (unreported NSWSC 11 May 1984), and cited with approval by Toohey and Gaudron JJ in Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388 at 400. His Honour thought it significant that the involvement of the defendants in acquiring investment producing property "was consistent with their continuation of the full time conduct of their sign writing business and the giving of karate teaching lessons, noting also that the income they derived from these undertakings "was not an insignificant element in the consideration of their capability of servicing the ...loan in addition to their other commitments".

62 I am satisfied that Frenmast was the incorporated expression of a partnership being carried on by Robert, Steve and Vlado. In that sense, Vlado's guarantee of its debt to the bank, without which it could not have secured finance, "was entered into in the course of or for the purpose ... [the] business ... carried on" by him and his brothers using Frenmast as the vehicle for doing so. In Ford v Perpetual Trustees (2009) 75 NSWLR 42 Allsop P and Young JA, Sackville AJA agreeing, pointed out (at [95]) that the "application of s 6(2) should be looked at as a matter of substance and not form". With utmost respect for the approach applied in Toscano and Australian Bank I am unable to see how the interposition of Frenmast - given all the significance of the corporate veil - changes the substance, as distinct from the form, of the matter. Accordingly, it seems to me that Vlado is not able to invoke the provisions of the Contracts Review Act.

63 The question is whether the fact that the bank, as I have held, was on notice that the 2008 guarantee required verification of the propriety of its execution, makes it unconscionable for it to enforce Vlado's guarantee of Frenmast's obligations created by it. As Mason J said, in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461 -

"Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds ... [including] fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage ..."

His Honour added -

It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct ...

Citing the observations in Blomley v Ryan (1956) 99 CLR 362 by Fullagar J at 405 to, inter alia, "lack of assistance or explanation where assistance or explanation is necessary" where the "common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other" and Kitto J at 415 to "one party to a transaction ... [being] at a special disadvantage in dealing with the other party because ...ignorance ...or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands". Mason J went to explain -

"... I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party."

64 Turning to the application of the principle to the setting aside of guarantees, Mason J said (at 463, omitting some references) -

"To say this involves no contradiction of the well-entrenched proposition that a guarantee is not a contract uberrimae fidei, that is, a contract which of itself calls for full disclosure. However, it is accepted that the principal creditor is under a duty -

"... to disclose to the intending surety anything which has taken place between the bank and the principal debtor 'which was not naturally to be expected', or as it was put by Pollock MR, in Lloyds Bank Ltd v. Harrison (1925); Unreported, cited in Paget's Law of Banking, 7th ed (1966), 583 'the necessity for disclosure only goes to the extent of requiring it where there are some unusual features in the particular case relating to the particular account which is to be guaranteed'"

(Goodwin v. National Bank of Australia Ltd [1968] HCA 30; (1968) 117 CLR 173, at 175, per Barwick CJ).

It has been said that this duty to disclose does not require a bank to give information as to matters affecting the credit of the debtor or of any circumstances connected with the transaction in which he is about to engage which will render his position more hazardous ... No surety is entitled to assume that the debtor has not been overdrawing, the proper presumption being in most instances that he has been doing so and wishes to do so again ...

But the fact that a bank's duty to make disclosure to its intending surety, arising from the mere relationship between principal creditor and surety, is so limited has no bearing on the availability of equitable relief on the ground of unconscionable conduct. A bank, though not guilty of any breach of its limited duty to make disclosure to the intending surety, may none the less be considered to have engaged in unconscionable conduct in procuring the surety's entry into the contract of guarantee."

65 I should point out that, although there is no evidence of the communications that lead to the creation of the 2008 guarantee, there can be no doubt that the bank, as a party to the document and to the rearrangements of which it was an element, was party also to its procurement in one way or another: it could not have been merely the passive recipient of the substituted security. Furthermore, the proposed undertaking by Frenmast of further very substantial liabilities to secure third party debts - it having been released from being surety for them some two years before - was certainly "not naturally to be expected" or "an unusual feature" from Vlado's point of view as guarantor of Frenmast's obligations to the bank. On this limited ground alone the bank should have disclosed the transaction to Vlado. (See also the discussion by Deane J in Amadio at 475 in connexion with the position of a guarantor where "the benefit of the consideration does not move to the party under the disability but moves to some third party involved in the transaction".)

66 In Amadio, dealing with the particular circumstances of the case, Mason J said (at 467) -

"Whether it be correct or incorrect to attribute to Mr. Virgo [the bank's manager] knowledge of this possibility, the facts as known to him were such as to raise in the mind of any reasonable person a very real question as to the respondents' ability to make a judgment as to what was in their own best interests. In Owen and Gutch v. Homan (1853) 4 HLC at 1035 (10 ER at 767), Lord Cranworth L.C. said:

"... it may safely be stated that if the dealings are such as fairly to lead a reasonable man to believe that fraud must have been used in order to obtain" [the concurrence of the surety], "he is bound to make inquiry, and cannot shelter himself under the plea that he was not called on to ask, and did not ask, any questions on the subject. In some cases wilful ignorance is not to be distinguished in its equitable consequences from knowledge."

...

As we have seen, if A having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interests, takes unfair advantage of his (A's) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same."

67 In my opinion, the bank should have been aware that Vlado may not have known of the transaction. His ignorance (if this element be necessary) placed him at a special disadvantage and rendered him powerless to influence the creation of the security. The mere fact that he was a director of Frenmast was insufficient to have provided any reasonable basis for the bank officers to have thought that he was, as distinct from might possibly have been, aware of what was going on. The absence of any communication with Vlado together with the facts that Frenmast and, to a greater degree, Vlado, apparently obtained no benefit from the resurrected guarantee, and that Robert (assuming it was he with whom the bank dealt) had a very significant conflict of interest between his duty as a director of Frenmast on the one hand and the interests of AFC and his personal interest on the other should have alerted the bank of the need to verify, at the very least the valid execution by Frenmast of the guarantee, even if they did not inform Vlado (as in my opinion they should have done) of the proposed substantial increase of his liabilities, from which the bank benefited. As has already been mentioned, the bank has not led evidence as to how the substituted guarantee by Frenmast came about and what its officers did. This should, to my mind, lead to the conclusion that this is because such information would not assist its case. I would not infer that its officers acted improperly but I do conclude that they ought to have been aware of the facts that would have raised in the mind of a reasonable person the very real possibility that Vlado was unaware of the transaction and had not, in fact, executed the guarantee as a director of Frenmast. The bank must therefore be treated, as against Vlado, as though it had become aware of what its appropriate enquiries would have revealed, namely that Vlado would not, as director of Frenmast, have executed the guarantee and given notice that he would not guarantee new liabilities.

68 It flows that the bank is not to be permitted to enforce Vlado's guarantee of Frenmast's obligations under the 2008 guarantee.

Tender and other matters

69 Frenmast and Vlado cross-claimed for damages arising from the refusal of the bank to redeem the mortgage on what was alleged to be tender. In light of the regrettable delay in delivering this judgment, this matter needs further (written) submissions. Also, in light of the conclusions that Vlado was released on 9 May 2006 from the liability arising from his 2001 guarantee of Frenmast's liabilities under the cross-guarantee and the 2008 Frenmast guarantee is void, I intend to direct the parties to agree on appropriate orders with written submissions in the event they do not agree. It will also be necessary to receive submissions on costs.

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Decision last updated: 31 October 2012