GE Commercial Corporation (Australia) Pty Ltd v Gregory Ronald Wallis and Anne Marie Wallis

The plaintiff sues the defendants as guarantors of the debts of Custom Group Pty Ltd in its own right and as trustee for Custom Group Discretionary Trust (the customer), being monies advanced under a facility agreement of 25 January 2010, essentially discounting rendered invoices. The initial financier was Allianz Finance Pty Ltd, which sold its discounting business on 15 April 2013 to the plaintiff, for that purpose assigning and novating its securities, including those with the customer, to it. From 11 March 2014, Custom Group Pty Ltd ceased to trade. It is not disputed that this constituted an event of default under the facility agreement and the guarantees. On 13 March 2014 the plaintiff issued a notice to the customer, copied to the defendants, amongst other things terminating the facility. On the following day, the plaintiff appointed administrators to the company pursuant to s 436C of the Corporations Act 2001. The administrators disposed of the company’s assets and applied the proceeds in reduction of its indebtedness under the facility and, on 30 April 2014 the company was wound up in insolvency. On 30 May 2014 the plaintiff issued Notices of Demand to each of the defendants in their capacity as guarantors requiring them to pay the remaining debt.

In substance, the defendants deny an effective assignment of the facility and the related security (including the guarantees) by Allianz to the plaintiff and, accordingly, assert that the company is not indebted to it and they are not bound by their guarantees to indemnify the plaintiff for any amount that was or might be owed to Allianz under the facility. In the alternative, as I understand their case, their guarantees were entered into with Allianz and the plaintiff is not able to enforce them in its favour.

On 25 January 2010 Allianz offered a facility to the customer, the terms and conditions were set out in a letter of offer and a document I shall call the Standard Terms. The defendants (with other related entities, presently irrelevant) guaranteed the customer’s performance of its obligations under the facility, in particular that concerning repayment of the advanced funds. Clause 31 of the Standard Terms and Conditions specified the events of default which triggered the obligations under the guarantees. As mentioned, the company’s ceasing to trade was such an event. I should mention for completeness that the original loan was 2.5 million dollars, which was increased to 3.5 million dollars by variation deed of 29 July 2010.

The clauses as to assignment are as follows –

The relevant terms in the guarantee and indemnity are –

On 21 June 2013 the plaintiff wrote to the customer and each defendant a letter (the “notice”) in the same terms stating, inter alia, that Allianz had sold its invoicing discount business to the plaintiff, in connection with which, Allianz had novated and assigned to the plaintiff on and from 15 April 2013 its rights and obligations under the contract and related documents which had been entered into by the company and the defendants. The purpose of the notice was to inform various parties of the novation and assignment and direct that all payments falling due to the plaintiff and all the obligations in favour of the plaintiff were to be performed on and from the date of the notice. Each notice contained an acknowledgement “[confirming] your acceptance of, and agreement to, the novation and assignment described in this notice.” The notices to the company and to Mr Wallis as guarantor were both signed by him. However, the notice to Mrs Wallis was not, in the result, signed by her. It is worth noting, at this point, that, for over a year, invoices were sent by the company to the plaintiff for payment under the facility and the plaintiff made those payments.

The deed effecting the sale by Allianz of its invoice discount business to the plaintiff recited at the outset –

The effect of other clauses, which it is not necessary to set out, is that the “Customer” consists of the original debtors, the “Contract” is the facility agreement, and the “Guarantee” is the guarantee executed by the defendants, each of whom is also the “Guarantor” within the meaning of the deed. The deed provides specifically for the assignment and novation of the facility agreement, securities and guarantees.

As it happened, each of the company and Mr Wallis indeed had signed an “acceptance of and agreement to the novation and assignment” to the plaintiff of the facility and the guarantee. Although Mrs Wallis had declined to sign the notice, the plaintiff’s case is that she had consented in advance by the clauses of the guarantee set out above, to the assignment and the novation of the contract and guarantee.

The plaintiff relies on the provisions in the Standard Terms and the guarantees concerning assignment and novation, which are set out above. Mr Dowdy, counsel for the plaintiff, submits that these clauses amount to prospective authorisation of both assignment and novation citing, in particular, Leveraged Equities Limited v Goodridge (2011) 191 FCR 71, where the court dealt with this issue (at [299] ff), which arose from the view of the primary judge that it was not possible for one party to a contract to prospectively authorise a novation that might be unilaterally made by the other party. Jacobson J (with whom Finkelstein and Stone JJ agreed) concluded that the primary judge’s approach could not be supported (ibid at [316]) and resolved the question of principle in favour of the proposition that a contracting party is able to authorise the other party unilaterally to novate the contract to a third party in future. The remaining question was whether the original contract gave such authority. The relevant clauses, which differed somewhat from those in the present case, provided as follows –

Macquarie (the original financier) had sold its margin lending portfolio to the appellant in such a way to affect a transfer of all the rights and obligations of it and the customers to the plaintiff. At the same time, Macquarie wrote to the defendant notifying him of the sale, stating that the plaintiff was now the lender under the agreement which he had originally entered into with Macquarie. Jacobson J observed that it appears to have been thought by the drafter of clauses 21.2 and 21.4 that express reference to the assumption of liabilities by the new lender and the release of the obligations of the original lender was unnecessary and sufficient attention was not given to the distinction between assignment and novation. However, his Honour concluded that “the references to ‘novate’, ‘obligations’ and ‘without the consent of the borrower’ make it sufficiently clear that the borrower was given prospective consent to all the elements required to give effect to a novation … [and these clauses] make it sufficiently clear that the borrower gave prospective consent to the novation of the [agreement] to any third party who was prepared to assume the obligations of the lender”: ibid at [324]-[325]. It followed that the defendant’s consent prospectively authorised the plaintiff to take over the facility arrangements which he had with Macquarie. (I mention, though on the view which I take it is unnecessary to decide this point, that, of course, implicit consent can be given by conduct. I have already mentioned the evidence that the customer and, necessarily, the defendants dealt with the plaintiff for a period in excess of a year upon the basis that, indeed, it stood in the shoes of Allianz.)

There is a distinction between novation of a contract and its assignment although, as Sackville AJA (Bathurst CJ and Campbell JA agreeing) observed in CSG Limited v Fuji Xerox Australia Pty Limited [2011] NSWCA 335, the results in each case may be similar. His Honour adopted what he described as the “classic statement” of Windeyer J in Olsson v Dyson [1969] HCA 3; 120 CLR 365 at 388 –

Sackville AJA noted that the distinction had “perhaps” become somewhat blurred “now that it has been held that a party to a contract can prospectively authorise a novation to be made by another party unilaterally” citing Leveraged Equities and Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; 149 FCR 395, observing that “while it remains the law that the burden of a contract cannot be assigned … a party to a contract may agree in advance that a third party can later assume the obligation to perform the contract” (ibid at [134]). In CSG the clause dealing with “assignment and novation” read as follows –

In construing these clauses Sackville AJA said: -

Other clauses required CSG to cooperate with Fuji in various ways, including the assignment or novation of existing service management agreements to Fuji or a nominated third party should Fuji terminate the dealership agreement. These provisions supported the conclusion that “assignment” included “novation”.

It is submitted by Mr Dowdy that, although clause 43.2 of the Standard Terms does not, in terms, refer to novation, the reference to assignment of both rights and obligations necessarily implies it. He submits, further, that the terms of this clause amount to consent in advance to the assignment and novation, as it actually happened, of the facility agreement. The obligation of the company to execute any document that might reasonably be required for the purpose of effecting the assignment and novation does not impose a condition on Allianz or, for that matter, the plaintiff to obtain some other (whether a consent or otherwise) before the assignment and novation are effective. So far as the guarantee is concerned, clause 7.6 refers both to assignment and novation. Again, the obligation to provide an executed document which might be requested by Allianz to effect the assignment or novation is merely precautionary and imposes no condition necessary to be fulfilled before the assignment or novation is effective.

So far as the deed between Allianz and the plaintiff is concerned, Mr Dowdy submitted that the reference in the recital to a consent by each customer (here, the company and the Wallis’ as guarantors) comprehends consent in advance as constituted respectively by clauses 43.2 and 7.6. The mere fact that additional consent, as it happened, was sought is immaterial and cannot affect the proper construction of the recital in question. The Wallis’, for their part, denied that they had given their consent as at the date of the deed and Mrs Wallis denied ever having given her consent, obviously a reference to the consent contained in the plaintiff’s letters to them of 21 June 2013.

It was also submitted by the defendants that the notices of 21 June 2013, in form given under s 12 of the Conveyancing Act 1919 did not comply with that section as they were given by the plaintiff and not by Allianz as the assignor of the relevant rights. However, this is to misunderstand the provision. What is required is an “absolute assignment by writing under the hand of the assignor”, which was here constituted by the deed of novation and assignment between Allianz and the plaintiff, “of which express notice of writing has been given”. The section does not require that notice to be given in any particular form, except that it must be in writing. Nor, more particularly, does it require the notice to be given by the assignor, here Allianz. There can be no doubt that the notice given by the plaintiff is a notice within the meaning of s 12 of the Act.

In her affidavit, Mrs Wallis acknowledges that she received the notices on 3 July 2013, showing them to her husband whom she told (for reasons which are not material) that she would not sign the documents in accordance with the request of the plaintiff. Mrs Wallis pointed out that although she had signed the successive guarantees related to the company’s financing arrangements with Allianz and later for the variation extending the facility, she stood down as a director of the company on 14 March 2011, telling her husband that she would no longer be providing any personal guarantees for the business in future. However, she took no steps to limit her liability under the guarantees which she had earlier executed, for example by seeking a release from Allianz.

Mr Zoran Ristevski, the relevant manager of the account for the plaintiff says that, about mid July 2013 he checked which clients had not signed and returned the novation documents and spoke about this to Mr Wallis. His recollection was that Mr Wallis told him that his wife who was no longer a director of the company would not be signing the notice and his response was, “OK, well we will have to have a look at that.” He said that he did not recall Mr Wallis suggesting that Mrs Wallis would not continue her guarantee. The evidence of the defendants in relation to this communication was contained in hearsay form in Mrs Wallis’ affidavit, Mr Wallis not himself deposing to the conversation with Mr Ristevski. However taking that evidence at its highest, and ignoring the hearsay problem, it by no means proves that there was any release by the plaintiff of Mrs Wallis’ obligations under her guarantees. The defendants may have mistakenly believed that by her not signing the consent document, she was not bound by her guarantee, so far as any monies advanced by the plaintiff were concerned. Furthermore there was nothing in Mrs Wallis’ defence raising a case of release. As I have already mentioned, the assignment and novation comprehended her obligations under the guarantee and, if those obligations were validly assigned by Allianz to the plaintiff, she remained bound by them although, as at the date of the assignment to the plaintiff rather than to Allianz.

The defendants’ defence, as it seems to me, is based upon a fundamental misunderstanding of the legal effect of the conditions in their contracts with Allianz. They submitted (and, I think, also believed) that their debts to Allianz had either been expunged by its transaction with the plaintiff or, at least, if the company continued to owe money, and they continued to be bound by their guarantees that it should repay the monies owed, to Allianz, Allianz was not seeking to enforce its rights against them but, rather, it was the plaintiff with whom they had no relevant contractual relationship. However, the relevant clauses permitted Allianz unilaterally to assign its interests to the plaintiff, whether or not the defendants consented and gave their prior consent to the substitution of the plaintiff as party to the facility agreement and the guarantees. The deed between Allianz and the plaintiff effectively assigned and novated the agreements with the customer and the guarantees of the defendants.

The plaintiff tendered without objection the customary certificate as provided in the Standard Terms as to the outstanding amount. Accordingly, there should be judgment for the plaintiff against the defendants plus costs. I will make formal orders after submissions following delivering of the reasons.