Cai v Tsang (No 2)

1. [1]

   In this action the plaintiff claims an amount of $4,289,593.60 for which the defendant is alleged to be liable as guarantor of a loan from the plaintiff to the defendant’s company, Xiang Rong (Australia) Investment Group Pty Ltd (“the company”). The defendant’s liability is said to arise under a written agreement entitled “Loan Agreement and Deed of Guarantee and Indemnity” made on 20 March 2015 (“the Loan Agreement”). The parties to the Agreement were the plaintiff as lender, the company as borrower and the defendant as guarantor. There is no dispute that the Loan Agreement was executed by these parties on 20 March 2015. The defendant however contends that the Agreement provided for third-party mortgage security to be given in favour of the plaintiff and that as this security was not forthcoming he is relieved of liability.

2. [2]

   The debt claimed by the plaintiff comprises principal of $3.5 million and interest of $789,593.60. Most of the interest consists of overdue monthly instalments of $17,500 each. The Loan Agreement provided that any interest instalment which was overdue for two months or more would itself bear interest at 20% per annum from the date it was due until paid. The interest calculation and the total sum owing by the company to the plaintiff are not in dispute. The company is insolvent and on that ground was on 18 July 2017 ordered by this Court to be wound up.

Circumstances of the Loan Agreement being entered into

1. [3]

   The plaintiff is a resident of China. He affirmed an affidavit which was read in his case and he was not cross-examined on it. The defendant is an Australian resident. The defendant also affirmed an affidavit but did not make himself available for cross-examination at the hearing as required by notice issued to him by the plaintiff’s solicitors. In those circumstances the defendant’s solicitor did not seek to read the affidavit.

2. [4]

   The uncontested evidence shows that on 30 December 2013 the plaintiff transferred to the company $3.5 million on loan for four years at 6% per annum interest. The interest was payable monthly. This loan was recorded in a document made in the Chinese language between the plaintiff as lender and the company as borrower, dated 30 December 2013. The company was at that time engaged in the business of developing real estate in New South Wales. The defendant and his wife, Chun Xiang Zeng, were the directors. The defendant was the sole shareholder with one million shares.

3. [5]

   From the terms of conversations between the plaintiff and the defendant at the time of this loan being advanced I infer that the purpose of the defendant and his company was to utilise borrowed funds as business capital. From the plaintiff’s point of view, in addition to earning interest on the principal sum advanced, he had the purpose of qualifying for a visa under item 188 of Sch 2 of the Migration Regulations 1994 (Cth) (known as a subclass 188 visa or Business Innovation and Investment visa). The relevant regulations required that he invest a further $1.5 million with an Australian government. In about December 2013 or January 2014 the plaintiff purchased New South Wales Treasury bonds to the value of $1.5 million.

4. [6]

   On the day before the advance, when the plaintiff and defendant were discussing the loan in prospect, the plaintiff asked whether he would receive security for repayment. The defendant undertook to issue to him 3.5 million shares in the company. The defendant also said this:

5. [7]

   The first instalment of interest on the loan was due on 29 January 2014. The company did not pay it. No interest was paid throughout 2014 or up to 2 March 2015, on which date the plaintiff commenced proceedings in this Court against the company and the defendant claiming repayment of the principal and satisfaction of all overdue interest. Within days of this statement of claim having been served negotiations commenced between the plaintiff and defendant. These culminated in the Loan Agreement being entered into on 20 March 2015. It is an 11-page document in English, prepared with the assistance of solicitors and containing many terms of a kind which are common in loan/guarantee agreements. Clause 22 provides that the company and defendant will only be bound by the Agreement if the plaintiff should file a notice of discontinuance of his recovery proceedings in this Court by 25 March 2015. That was done.

Important provisions of the Loan Agreement

1. [8]

   I set out below relevant extracts from the clauses of the Loan Agreement that appear to be material to the issues before the Court. Throughout, the plaintiff is referred to as “Lender”, the company as “Borrower” and the defendant as “Guarantor”. The first group of relevant provisions are those which create the company’s obligation to pay and to provide security:

2. [9]

   Clause 14, defining Default Events and prescribing the consequences of such an event occurring, is important to the construction of cl 3.1. Clause 14 expressly exempts from the class of Default Events a failure by the company to procure the mortgage securities referred to in cl 3.1(b). This shows that all parties to the Agreement (a) recognised that procurement of the mortgages was to take place in the future, after the Loan Agreement (including the defendant’s guarantee obligation) had come into force and (b) contemplated that the company might fail to procure the mortgages and provided for the consequences, without including amongst those consequences that the defendant’s liability as guarantor should be discharged.

3. [10]

   Clause 14 is in these terms:

4. [11]

   Clause 20 contains the defendant’s guarantee and indemnity obligations. This clause also provides for protection of the lender against loss of rights vis a vis the defendant in the event of the lender granting indulgences to the company as Borrower:

The failure of the company to procure third-party mortgages

1. [12]

   The defendant relied upon authorities which have considered the circumstances in which one of several intended guarantors of a debt may be relieved of liability if a co-guarantor fails to execute the guarantee instrument. He submitted that the mortgages to be provided by Jessica Zhao and Chun Xiang Zeng pursuant to cl 3.1(b) would necessarily be guarantee mortgages. That is, neither of those intended mortgagors was a borrower or would become a principal debtor and therefore by providing mortgage security they would necessarily assume liability as guarantors. The liability would, by the same mortgage instrument in each case, be secured over their respective interests in land.

2. [13]

   The defendant cited Re Farm Pride Foods Ltd [1999] QSC 174 as accurately stating the consequences of an intended co-guarantor failing to sign a guarantee instrument. In that case a husband and wife were directors of a company which bought product from Farm Pride Foods Ltd. The husband signed a document entitled “Guarantee and Indemnity” which identified both himself and his wife as guarantors and provided that the two of them “hereby charge all of our real and personal estate in favour of the Creditor with all the money due and payable”. The wife did not sign.

3. [14]

   Chesterman J held as follows:

4. [15]

   I do not doubt the accuracy of his Honour’s statement of the law. However, it is not applicable to the present case. The Loan Agreement was not drawn in a form showing the defendant and others as intended joint and several co-guarantors. It was drawn to provide, by cl 3.1(c), that only one guarantor, the defendant, would execute the instrument and thereby become bound forthwith. As to the intended guarantee mortgages, they were to be procured by the company at some unspecified time after the Loan Agreement had become binding. The Agreement made no provision for the defendant’s obligations as surety to be suspended until the mortgages were given or to terminate in the event of them never being given. On the contrary, as referred to at [9] above, the parties explicitly contemplated that the company might fail to procure the mortgages but refrained from prescribing that this would relieve the liability of the single guarantor who was, on the face of the document, committed to his obligations from the moment of execution.

5. [16]

   In Marston v Charles H Griffith & Co Pty Ltd (1982) 3 NSWLR 294 Powell J expanded upon the formulation of the principle quoted above from Rowlatt on Principal and Surety. The following is an extract of his Honour’s statement of the principle, abbreviated as relevant to the present case (at 300):

6. [17]

   Principle 2 in the above extract corresponds with the situation considered by Chesterman J in Re Farm Pride Foods Ltd. Here it is inapplicable because this Loan Agreement was not drawn in a form which provided for any other person to execute as co-surety. The Agreement was not a parol contract. It was a deed because it was expressed to be such, it was signed by each of the individual parties and their signatures were attested as required by s 38 of the Conveyancing Act 1919 (NSW) and it was executed on behalf of the company by two directors in accordance with s 127 of the Corporations Act 2001 (Cth). Powell J’s decision in Marston v Charles H Griffith & Co Pty Ltd is authority for the proposition that if the guarantee instrument is a deed, equity will relieve a guarantor in accordance with the same principles as apply at common law to a parol agreement.

7. [18]

   Powell J’s principle 1 has an equivalent in relation to a guarantee given by deed under seal: see his Honour’s principle 4 (at 301). So far as the defendant relies upon principle 1 (or 4), this depends upon there being a term of the Loan Agreement that other co-sureties, namely Jessica Zhao and Chun Xiang Zeng, would in fact provide mortgage security for the principal debt. I am unable to construe the Agreement as containing such a term. Clause 3.1(b) did not stipulate that guarantee mortgages from the third parties would be executed and delivered, or make that event a condition of the defendant’s liability. It did no more than create an obligation of the company to procure such instruments. Clause 14 then prescribed the limited consequences of the company failing to fulfil this obligation. On my construction of the Agreement, fulfilment by the company of this obligation was not a precondition of the defendant’s liability as guarantor.

8. [19]

   Powell J accepted that a term requiring the binding of co-guarantors or the provision of security as a precondition of a guarantor’s liability may be either express or implied. In Taubmans Pty Ltd v Loakes [1991] 2 Qd R 109 McPherson J said (at 111-112):

9. [20]

   I find no basis for implying or inferring a common intention of the plaintiff and defendant in this case that the latter should only be bound as guarantor if the third-party guarantee mortgages should be provided. The “cogent factor” referred to by McPherson J is not present here. The Loan Agreement did not provide for Jessica Zhao or Chun Xiang Zeng to sign. Consistently with the terms of cl 3.1(b), the provision of securities over their interests in land was not a precondition mutually expected by the plaintiff and defendant to be fulfilled contemporaneously with the defendant’s liability as guarantor taking effect.

10. [21]

    Further, I construe cl 20.4 as expressly excluding any implied term or argument of construction according to which the defendant’s guarantee liability would be conditional upon the third-party mortgages being obtained. Obtaining the mortgages was an obligation of the company, as principal debtor, which the plaintiff might have endeavoured to enforce. The plaintiff’s failure to obtain performance of this aspect of the company’s obligations is, in effect, the basis upon which the defendant seeks to be relieved of his guarantee. Clause 20.4 is against this.

11. [22]

    In Keith Murphy Pty Ltd v Custom Credit Corporation Limited (1992) 6 WAR 332 Anderson J referred to an equitable principle which may be invoked by a defendant who has committed himself as a guarantor in the expectation that he would have co-guarantors:

12. [23]

    Elsewhere it has been made clear that equity will only regard the enforcement of the guarantee as unconscionable if the creditor knew of the guarantor’s expectation and of the circumstances which negated it, yet seeks to hold the guarantor liable: James Graham and Co (Timber) Ltd v Southgate-Sands [1986] QB 80 at 94 (Browne-Wilkinson LJ). As his Lordship stated, “Equitable rights and defences operate, and operate only, on the conscience of the plaintiff”. Knowledge, actual or constructive, is necessary for the plaintiff creditor’s conscience to be affected.

13. [24]

    I am not satisfied as a matter of fact that the defendant expected and depended upon execution of the third-party mortgages. He has given no evidence to that effect. So far as the terms of the Loan Agreement disclose the expectations of the defendant, they only show that procurement of the mortgages was an obligation of the company and that the plaintiff made no promise to the defendant that it would be fulfilled. Jessica Zhao is the defendant’s daughter-in-law and the other mortgage was to be provided by the defendant and his wife as co-tenants. The defendant was the controlling mind and will of the company. Given these relationships, he would know whether the mortgages were likely to be provided or not. He was not acting under an expectation in which it could be said the plaintiff knowingly acquiesced.

14. [25]

    The principles considered here and the authorities which support them were considered by Blow CJ in CARS Pty Ltd v Brent [2015] TASSC 23. That was a case somewhat different from the present, in which one of two guarantors, both of whom were to have been signatories, did not in fact sign. What appeared to be the co-guarantor’s signature was shown to have been a forgery. His Honour’s collection and analysis of the cases reaffirms the principles which I have applied.

15. [26]

    The arguments of the defendant said that in the absence of any contractual term, express or implied, his guarantee should be conditional upon the third-party mortgages. He has failed to prove that he had any expectation with respect to those mortgages or that the plaintiff knew of such expectations which could render the plaintiff’s action on the guarantee unconscionable.

Other defences not pressed

1. [27]

   The defendant pleaded that because the Loan Agreement provided for the company to procure mortgage securities in respect of its debt to the plaintiff, in circumstances where those mortgages were not obtained the provision by the defendant of his guarantee was:

2. [28]

   Of these various alternatives only s 7 of the Contracts Review Act was supported in written argument provided at the outset of the hearing. Even that basis of seeking relief against enforcement of the Loan Agreement was not viable, first by reason of s 6(2) of the Act:

3. [29]

   It is indisputable that the Loan Agreement was entered into in the course of and for the purposes of a business carried on by the defendant through the company. Secondly, and in any event, as the defendant did not go into evidence he has made no attempt to discharge his onus of proving that the Agreement or any provision of it was “unjust in the circumstances relating to the contract at the time it was made” for the purposes of s 7. Consequently, no relief can be granted under the Act.

4. [30]

   The defendant also pleaded that, as the plaintiff remained a director of the company from 20 March 2015 (when the Loan Agreement was entered into) until 29 September 2015, his omission to exercise his power as a director to have the company procure from the third parties the mortgage securities referred to in cl 3.1(b) amounted to prevention of the performance of an aspect of the Loan Agreement. The defendant’s written submissions were to the effect that this conduct of the plaintiff precluded him, on equitable principles, from enforcing the Loan Agreement against the defendant.

5. [31]

   This argument could not succeed because, despite the plaintiff being a director according to the company’s records and according to documents filed with the Australian Securities and Investment Commission, it is established by unchallenged evidence of the plaintiff that the defendant expressly never permitted him any active role or any authority in the affairs of the company. His merely nominal directorship was the subject of an explicit arrangement from its inception in late December 2013 (see [6] above). Further, the plaintiff gave unchallenged evidence that he in fact never did attempt to take any part in the management of the company and the defendant, as sole active director, would have been well aware of that throughout 2015 and up to the present time. In these circumstances the defendant’s solicitor sensibly did not press his argument about the “prevention principle” at the hearing.

Orders

1. [32]

   For these reasons at the conclusion of the hearing on 3 December 2018 the following orders were made:

   1. (1)

      Judgment for the plaintiff against the defendant in the sum of $4,289,593.60.

   2. (2)

      The defendant is to pay the plaintiff’s costs of the proceedings.