Tjen v Marquess Investment Fund Pty Limited

1. [1]

   LEEMING JA: I agree with Basten AJA.

2. [2]

   MITCHELMORE JA: I agree with Basten AJA.

3. [3]

   BASTEN AJA: This appeal raised a short point as to the construction of a deed varying an earlier loan agreement (and the extent to which that was governed by a statement of purpose in a recital), and any consequential effect on the appellant’s guarantee of the obligations of the borrower.

4. [4]

   The appellant, Joshua Tjen, was a guarantor of the obligations of two companies under a loan agreement pursuant to which they had borrowed from the respondent, Marquess Investment Fund Pty Ltd, an amount to cover the deposit on land to be purchased for a proposed development. The borrowers were unable to repay the loan and the respondent sought to recover the outstanding debt from three directors of the developers who had guaranteed repayment.

5. [5]

   Proceedings against the appellant were commenced by the respondent on 16 October 2020 in the Common Law Division. The pleading process took a leisurely course which continued after the first day of the hearing on 13 February 2023. A further amended statement of claim was filed by leave a month later, on 24 March 2023. Final submissions were made on 16 June 2023 and judgment was thereafter delivered expeditiously on 23 June 2023. The trial judge, Chen J, upheld the respondent’s claim against the guarantor and made orders, entered on 17 July 2023, in favour of the respondent in an amount in excess of $4 million. [1]

6. [6]

   For the reasons set out below, the appeal must be dismissed with costs.

Background

1. [7]

   Given the limited issues raised on the appeal, the background to the dispute may be set out briefly.

2. [8]

   On 28 February 2017, David Tan, the sole director and secretary of the respondent signed, on its behalf, a suite of documents including a loan agreement and a general security deed which accompanied the loan agreement, together with personal guarantees executed by three directors of the borrowers, including the appellant. The borrowers were two companies, Halcyon Rise Pty Ltd (Halcyon) and South Land Holdings (NSW) Pty Ltd which were jointly proposing to undertake a residential subdivision of land at Box Hill on the north-west outskirts of Sydney. Mr Tjen executed the deeds on behalf of both companies, which were jointly identified as the “Borrower”.

3. [9]

   The loan agreement provided for a commencement date being the earlier of 1 February 2017 and the date on which the first drawdown was made. The evidence demonstrated that the whole of the advance of $1.1 million was made on 28 February 2017, and, for reasons which were not explained, that was taken as the commencement date of the loan agreement. The “Termination Date” was three months after the commencement date. That was assumed to be 28 May 2017.

4. [10]

   On 23 May 2017, the borrowers and other related parties entered into a deed with the respondent entitled Profit Sharing and Forbearance Deed (“Forbearance Deed”). It is the effect of that deed which was the focus of the appeal.

5. [11]

   On the same day, 23 May 2017, the respondent and the borrower entered into a second loan agreement for a sum of $2 million. The details of that agreement are not presently relevant, except that the respondent retained an amount of $237,500 on account of fees and interest due under the first loan agreement. That payment satisfied a condition precedent in the Forbearance Deed, but the second loan did not discharge or otherwise affect the earlier loan agreement. Nor did the respondent bring proceedings with respect to the second loan which, on 24 July 2017, it had assigned to third parties, for which it was paid $2.1 million.

6. [12]

   The development of the land at Box Hill did not proceed. On 4 December 2017, administrators were appointed to Halcyon which had taken control of the development and was insolvent. Thereafter, the land was sold in parcels. There were other financiers with priority over the respondent, which was left with a shortfall. The respondent took steps against the three guarantors to recover such amounts as it could from them. Settlements were reached with two of the guarantors; the third, the appellant in the present proceeding, resisted payment under the guarantee. No issue arose in the appeal as to the calculation of the judgment debt in the event that the appellant were to be found liable on his guarantee.

7. [13]

   The trial judge identified five issues raised by the appellant in resisting payment under his guarantee. However, it is convenient to turn directly to the terms of the loan agreement and the Forbearance Deed which provided the limited basis upon which the judgment below was challenged.

Contractual documentation

1. [14]

   The repayment obligation, for breach of which the guarantors would be liable, was expressed in the following terms:

2. [15]

   The appellant’s case was that cl 9.1 imposed an obligation, but with a binary choice. If the terms of cl (b) were met, there was no obligation to repay the amount owing under cl (a). The appellant submitted that the Forbearance Deed fell within cl (b).

3. [16]

   The recitals to the Forbearance Deed included the following:

4. [17]

   The “Project” was defined as the “residential subdivision project” at specified addresses in Box Hill, which Halcyon was carrying out: recital A. By way of background, recital B identified the shareholders of Halcyon, which were two other parties to the deed, being South Land and a party identified as M&A Group Pty Ltd, each of which was a 50% shareholder of Halcyon. Recital B also stated that five other parties which were parties to the Deed and described as “existing shareholders” were entitled to dividends and distributions from the company and the project. The nature of the interests of the existing shareholders was not explored.

5. [18]

   The Forbearance Deed contained three operative provisions. Clause 1 defined “Net Profit” as “the net profit of the company from the Project available for distribution after payment of all liabilities (including tax liabilities) and development costs”. Clause 2 of the Deed provided as follows:

6. [19]

   Clause 2 (b) was subject to cl 3, which provided as follows:

Findings of trial judge

1. [20]

   The trial judge concluded, at [89], that the Forbearance Deed did not constitute an agreement within cl 9.1(b) of the loan agreement. The trial judge noted that cl 9.1 of the loan agreement presented a binary choice, namely that the borrowers would either repay the Amount Owing, or reach agreement to convert that amount into equity in the project: at [92]. The trial judge’s reasons continued, in a passage challenged by the appellant:

2. [21]

   The judge accepted that recital D provided “some support” [2] for the appellant’s construction. However, the judge observed that there were “limits” to reliance upon a recital to govern the meaning of an agreement of which it formed part. While accepting that the recital set out context for the transaction, he continued, quoting OneSteel Manufacturing Pty Limited v BlueScope Steel (AIS) Pty Ltd [3] to the effect that whilst recitals “can assist in interpretation of operative provisions, … they do not control the latter’s operation when clear and unambiguous”. The judge did not consider there was ambiguity that might permit the use of the recital in the way that the appellant contended as that would be “to accord primacy to the recital over the terms of the agreement”. He continued: [4]

Grounds of appeal

1. [22]

   After a belated amendment on 6 November 2023, the notice of appeal raised nine grounds of appeal, which may be broken down as follows.

2. [23]

   First, the appellant’s primary and overarching proposition was that the Forbearance Deed was an agreement in satisfaction of cl 9.1(b) of the loan agreement: grounds 1 and 2. Secondly, and consequently upon the first proposition, there was no money owing under the loan agreement at the “end of the forbearance period”. The judge’s error in failing to accept that conclusion was said to lie in construing cll 2(c) and 2(d) as dominant, rather than subject to, cl 2(b): grounds 1B and 3. Thirdly, the appellant contended that as the Forbearance Deed discharged the obligations of the borrowers under the loan agreement, so the obligations under the appellant’s guarantee were also discharged: ground 2.

3. [24]

   The other grounds appeared to be different ways of expressing the same basic issues. Thus, ground 1A identified error on the part of the trial judge in not construing the Forbearance Deed as “binary” in the same manner as the loan agreement: ground 1A. In similar vein, the appellant contended that the judge erred in holding that “a discharge under cl 9.1(b) would obviate any need for a forbearance”: ground 1C. This ground appeared to challenge the construction of cl 9.1(b) as envisaging only that the loan would be converted into equity and would therefore no longer subsist. In substance, the appellant’s proposition was that, if the contingency in cl 2(b) (“subject to clause 3”) were satisfied, then the obligations under the loan agreement were extinguished by the Forbearance Deed. On the other hand, if the contingency were not satisfied, then in accordance with cll 2(c) and 2(d) the loan agreement remained on foot and enforceable. There was no basis, it was submitted, to conclude that such a conditional agreement did not satisfy the requirements of cl 9.1(b).

4. [25]

   Finally, the appellant submitted that the trial judge ought to have held that “moneys owing under the loan agreement were only payable if funds were available from the project to repay the loan”. It may be accepted that the judge did not read cl 2(b) as having that effect. The contention treated the absence of one of the three criteria identifying the end of the forbearance period in cl 2(b)(i) as meaning that the loan need never be repaid, because the period did not come to an end.

5. [26]

   Finally, grounds 5 and 6 related to the obligations under the guarantee. They challenged a finding that the Forbearance Deed did not constitute a variation of the guarantee (ground 5), and asserted (in ground 6) that the Deed did constitute such a variation and thereby discharged the guarantee.

Determination of appeal

1. [27]

   Reading cl 9.1(b) as it might have been read in February 2017, before the Forbearance Deed was prepared or executed, both text and purpose are readily identifiable. Paragraph (a) contained a standard obligation for the borrower to repay moneys due at a specified time. The term “Amount Owing” was defined in cl 9.1 to mean “on any day the aggregate of all money owing or payable actually or contingently by the borrower to the lender under this document”. However, cl (b) was given primacy, so as to remove the repayment obligation in circumstances where it applied. It did not require that a further agreement be entered into, but required the parties to negotiate in good faith to that end. If they failed, cl (a) continued to apply.

2. [28]

   What needed to be achieved to satisfy cl (b) was an agreement by which the “Amount Owing” was converted “into equity”. The appellant accepted that cl 9.1 involved true alternatives: if the amount owing was converted into equity, it was no longer repayable; if it were not converted into equity, it remained repayable under the loan agreement. It was that proposition (the correctness of which was not challenged by the appellant) which led the trial judge to conclude that if cl (b) were satisfied, there would be no need for a forbearance deed, because there would be no outstanding obligations, the enforcement of which might be forborne. On that approach, a deed which purported to provide for forbearance would not satisfy the terms of cl (b).

3. [29]

   The appellant sought to avoid that conclusion by noting that cl 9.1(b) envisaged that the converting of the amount owing into equity was to be done “on terms to be agreed”. However, that neutral expression in parenthesis cannot be read as qualifying the nature of the agreement which was to be a conversion of the amount owing under the loan agreement into a capital contribution to the project.

4. [30]

   There was, as the appellant submitted, no necessary difficulty in finding that a conditional or contingent agreement might satisfy the terms of cl 9.1(b). The contingency in the Forbearance Deed was satisfaction of cl 3. That conditioned Marquess’ agreement to forbear upon payment of an amount of $237,500. It was common ground that that condition was satisfied, though it is not commercially insignificant that satisfaction was achieved by the respondent making a further loan (of $2 million) and withholding the amount specified in cl 3 as a payment by the borrowers to it for the purposes of the Forbearance Deed. The method of payment is commercially significant because it suggested that the borrower would not have been able to repay even that small amount of the loan prior to completion of the project. To construe cl 2(b) as an agreement by the lender to forego any entitlement to enforce the loan agreement unless the project succeeded (in which case enforcement would not be required) would be commercially implausible.

5. [31]

   The appellant’s reliance on recital D, as the trial judge noted, carried little weight. There is no doubt that recital D reflected the terms of cl 9.1(b). However, the obligation under that clause was to negotiate in good faith with the purpose of achieving an agreement of a specified kind. The recital confirmed that an agreement was reached (thereby implicitly acknowledging satisfaction of the obligation to negotiate in good faith), but it could not, even if it purported to, characterise the terms of the agreement otherwise than in accordance with their proper construction.

6. [32]

   The appellant relied on an email (which had been tendered at trial without objection) from the solicitor for Marquess to the principals of the respective parties, dated 18 May 2017. The email read:

7. [33]

   To the extent that the solicitor’s email identifies anything by way of context or background that does not appear from the terms of the deed (including the recitals), it is not favourable to the appellant. It may be accepted that the solicitor (and the parties) drafted (and executed) the forbearance deed with one eye on cl 9.1(b) of the loan agreement. However, it is clear that the intention was not that the respondent in fact convert its entitlements under the loan agreement into a share in the capital of the project. Rather, it is clear that the deed was indeed based on “forbearance”, with the effect that the loan agreement remained on foot but the entitlement to interest was replaced by an entitlement to a share in the profits (if any).

8. [34]

   It is necessary to turn to the express terms of cl 2 of the Forbearance Deed. Contrary to the appellant’s submissions, the trial judge, quite properly, did not give priority or precedence to sub-cll (c) and (d) in cl 2. Rather, he approached cl 2 on the basis that it should be read harmoniously as one provision. Clause (a) identified an agreement that the respondent would be entitled to 8% of the net profits of the project. Clause (b) was awkwardly drafted but may be understood as having two parts. The first was an agreement by the respondent to forbear exercising its rights under the loan agreement and an agreement that the loan would not accrue interest from the date of the deed. The second part specified the period during which the respondent would adopt that approach, which was undoubtedly intended to be a finite period. The loan agreement continued to subsist throughout that period with one qualification, that during the period interest would not accrue. That reading was confirmed by cl (c) which expressly stated that the respondent did not “disclaim or forgive” the moneys payable under the loan agreement. Further, cl (d) expressly confirmed that the respondent could exercise its rights under the loan agreement at the end of the specified period.

9. [35]

   It is not possible to construe that language as involving a conditional discharge of the loan agreement, let alone an unconditional conversion of the amount owing under the loan agreement into equity. The language of the deed expressly preserved the entitlement to recover the amount owing at the end of the specified period. The only variation of the loan agreement (to which it will be necessary to return) was the foregoing of an entitlement to interest according to the terms of the loan agreement during the specified period. Subject to one further consideration, the trial judge was clearly correct to conclude the Forbearance Deed did not satisfy cl 9.1(b) of the loan agreement. An agreement which had that effect would have discharged the obligation of repayment under cl 9.1(a); the Forbearance Deed did the opposite, by preserving the obligation of repayment.

10. [36]

    The further consideration is the identification of the specified period. One function of par (b)(i) was to limit the time during which the respondent agreed not to exercise its rights under the loan agreement. It did so somewhat awkwardly, the end point of the period being identified by reference to an assumption that at some point in time “net profits” would be realised. There are two points to note in that regard. The first is the assumption that there would be funds available from the project “to repay the loan”. Consistently with every other part of cl 2, that confirmed that the loan would remain repayable despite the operation of the Forbearance Deed.

11. [37]

    The second point is that the period of forbearance has not, on the appellant’s case, ended, and never will end, because the necessary funds were not and will not be available to satisfy either the repayment of the loan or other costs incurred by the borrower. On that reading, the respondent has not yet become entitled to exercise its rights under the loan agreement, pursuant to cl 2(d), and never will.

12. [38]

    This submission appeared to reflect submissions made at trial, which the trial judge noted were not withdrawn even after the appellant had conceded that the borrower had repudiated the agreement, at least by 20 September 2018. [5]

13. [39]

    The trial judge dealt with “the repudiation issue” (issue 3) at some length. [6] He dealt with more briefly with the “end of forbearance period issue” (issue 4). [7] Thereafter he quantified the plaintiff’s claim in terms which ultimately led to the amount included in the orders. Calculation of the amount turned on the date of acceptance of the repudiation. [8] There being no challenge to any of these findings of the trial judge, this question need not be addressed further.

Variation of guarantee

1. [40]

   The only further issue concerns grounds 5 and 6, alleging that the Forbearance Deed constituted “a variation of the guarantee signed by the appellant” and thereby discharged the guarantee.

2. [41]

   The written submissions in support of grounds 5 and 6 commenced with the following proposition:

3. [42]

   Two things may be noted in this regard. First, the formulation of the grounds was inept to the extent that they alleged a variation of the guarantee, rather than a variation of the obligations under the loan agreement, the subject of the guarantee. Secondly, as counsel for the appellant confirmed in oral submissions, grounds 5 and 6 were contingent upon the Court accepting the propositions under grounds 1-4 to the effect the Forbearance Deed satisfied cl 9.1(b) of the loan agreement. That has not been accepted.

4. [43]

   The Forbearance Deed varied the obligations of the borrower under the loan agreement in two respects. First, it removed any liability to pay further interest after 23 May 2017, during the period for which the deed was on foot. Secondly, it removed the obligation of the borrower to pay the amount owing under the loan agreement whilst the deed remained on foot. The appellant’s written submissions, further stated, with respect to the variation affecting the guarantee:

5. [44]

   The submission misstated cl 20 of the guarantee, which was in the following terms:

6. [45]

   Relevantly, cl 4.3 of the guarantee stated:

7. [46]

   The trial judge concluded that the Forbearance Deed did not vary the loan agreement, [9] but dealt with the possibility that it might amount to a variation in the following passages:

8. [47]

   There was no submission in this Court that cl 4.3 would not be effective according to its terms. However, counsel for the respondent drew the Court’s attention to the observations of Gleeson CJ in Bond v Hong Kong Bank of Australia Limited, [10] dealing with the discharge of liability under a guarantee based on a variation in the amount due under a loan agreement. After concluding that the debtor (Mr Bond) knew about, and had consented to, a deed of rectification, Gleeson CJ continued:

9. [48]

   There was no challenge to the trial judge’s conclusion as to cl 4.3, nor the finding that any variation to the loan agreement was not substantial, nor prejudicial to the guarantor. [11] As the joint judgment in Ankar noted at 560:

10. [49]

    The conditional basis upon which grounds 5 and 6 were supported does not require further consideration of this matter, although in principle, where the appellant was not only “consulted” but was a signatory to the Forbearance Deed and gave no evidence at the trial, the grounds should be rejected for that additional reason.

Conclusions

1. [50]

   Accordingly, the Court should make the following orders:

   1. (1)

      Dismiss the appeal from the judgment and orders of Chen J in the Common Law Division.

   2. (2)

      Order that the appellant pay the respondent’s costs in this Court.