Option Holdings Pty Ltd & Ors v Guo

BELL CJ: This is an appeal from a decision of Peden J (the primary judge) sitting in the Real Property List of the Equity Division of the Supreme Court of New South Wales: Songshan Guo v Option Holdings Pty Ltd [2024] NSWSC 1506 (PJ or primary judgment).

The appeal arises out of a Commercial Loan Agreement (the Loan Agreement) entered into on 3 February 2021 by the Respondent, Mr Guo, with the First Appellant, Option Holdings Pty Ltd (Option Holdings), and a Guarantee (the Guarantee) provided by the Second Appellant, Mr Cao. The Guarantee included a charge over two properties located on Pitt Street and Sussex Street (the Sydney Properties) in which Mr Cao had a 50% interest as tenant in common. His then wife, the Third Appellant, Ms Du, held the other 50% interest.

Under the Loan Agreement, Option Holdings agreed to pay Mr Guo a sum of $1,100,000 plus outstanding interest, to repay funds borrowed under two previous loans entered into in 2016. Repayment was due under the Loan Agreement by 31 December 2021.

On 12 April 2021, Mr Guo registered a caveat over the Sydney Properties (the Caveat). The interest recorded was as follows:

The Sydney Properties were also subject to a first ranking mortgage in favour of Westpac Banking Corporation.

On 7 July 2022, Yingke Law Firm issued letters of demand both to Option Holdings and Mr Cao, demanding repayment of the entirety of the loan amount plus interest as well as a demand under the Guarantee.

On 12 August 2022, Option Holdings paid Mr Guo $500,000 of the funds owing under the Loan Agreement. At that point, $759,183.60 was still owed. Discussions and electronic exchanges between representatives of the parties occurred both before and on 12 August 2022, and they are the subject of the principal issue in dispute, namely whether a binding oral agreement was reached on that date which had the effect of releasing Option Holdings and Mr Cao from the balance of their obligations under the Loan Agreement and the Guarantee.

On 31 August 2023, as part of their separation, Ms Du and Mr Cao entered into a binding financial agreement (BFA) under the Family Law Act 1975 (Cth) pursuant to which Ms Du “became, and remains, the beneficial owner of all [of Mr Cao’s] right, title and interest” in the Sydney Properties: PJ [6]. The Loan Agreement was listed under Mr Cao’s schedule of liabilities annexed to the BFA under the description “Disputed loan claim of $1,000,000 and interest of $80,000”.

In October 2023, Daniel Man, Mr Guo’s son in law, chased up Mr Cao as to when he was intending to make the balance of the loan repayments. In a series of WeChat voice messages sent on 13 October 2023, Mr Cao did not deny any indebtedness, indicating only that he was trying to obtain funds and that repayment of the balance of the loan agreement was his highest priority.

A further letter of demand was sent on 19 October 2023 and proceedings were commenced in this Court on 6 February 2024. An issue was sought to be raised for the first time on appeal as to whether the 19 October 2023 letter was a demand only issued to Option Holdings or also issued to Mr Cao as guarantor. The letter was addressed to Mr Cao who was the sole director and shareholder of Option Holdings.

The issues at first instance were in narrow compass as are the issues sought to be agitated in this appeal although, as shall be seen, a number of issues which were not argued below were sought to be introduced into the case for the first time on appeal.

Focussing on the two issues argued at first instance, first, it was contended that the payment of the sum of $500,000 on 12 August 2022 was accompanied by an oral agreement made between Mr Cao and Ms Man on behalf of her father, Mr Guo, that the payment of $500,000 would discharge Option Holdings’ and Mr Cao’s liability under the Loan Agreement and Guarantee, and that Mr Cao would endeavour to pay what would have been the balance under a non-binding “gentleman’s agreement” at some point in the future if and when he was able to do so. As will be seen, this contention was only introduced into the case shortly before the hearing before the primary judge and required the withdrawal of prior admissions that monies remained owing under the Loan Agreement.

The second issue related to the exercise of the primary judge’s discretion to order a judicial sale of the Sydney Properties in circumstances where this was not opposed by the first mortgagee. In addition to Ms Du’s 50% interest in the Sydney Properties as tenant in common in her own right, she asserted that she was the beneficial owner of Mr Cao’s 50% interest by reason of the BFA. The primary judge rejected Ms Du’s resistance to a judicial sale on the basis that her 50% equitable interest in the Sydney Properties under the BFA post-dated that of Mr Guo under the charge, and in any event was obtained with notice of that prior charge. Accordingly, Mr Guo’s charge took priority.

The original Notice of Appeal challenged only the primary judge’s finding (i) as to the alleged oral agreement which was said to represent an accord and satisfaction of any liability under the Loan Agreement and Guarantee, and (ii) the exercise of her Honour’s discretion to order a judicial sale.

By its Amended Notice of Appeal, the Appellants sought to introduce two additional grounds of appeal:

The issue sought to be raised by proposed ground 1A was not raised at first instance and should not be permitted to be agitated on appeal. Had a technical argument of this kind been raised, it could have effectively been met by the issue of a demand out of an abundance of caution, or by further evidence. In any event, there were other insurmountable difficulties with the argument including at least the following:

It is convenient to structure the balance of these reasons by reference to the two issues identified in [12] and [13] above, noting that ground 1B of the Amended Notice of Appeal falls for consideration in the context of the second issue.

There was no dispute that, unless an accord and satisfaction were established, Option Holdings and Mr Cao were in default of the Loan Agreement and the Guarantee.

The first ground of appeal is a bare challenge to the primary judge’s holding that Mr Cao was unable to establish either element required for an accord and satisfaction, namely:

Her Honour made reference in this context to Ashton v Pratt (2015) 88 NSWLR 281; [2015] NSWCA 12 (Ashton v Pratt). At [172]-[173] of that decision, Bathurst CJ said:

As to the first element, the primary judge observed that “[t]here was no dispute between the parties as at August 2022. Instead, the loan was simply in default. There was no challenge to its existence or validity” (emphasis added). The only answer proffered to this aspect of the primary judge’s reasoning was a submission that “at the time of entering into the BFA, [Mr Cao] and Mr Guo were in dispute” (emphasis added). This is to entirely miss the point. For there to be accord and satisfaction, there must be an extant dispute at the time of the alleged accord. This was the point of her Honour’s reference to “as at August 2022” in her reasons. The BFA was not entered into until August 2023.

In the course of the hearing of the appeal, Mr Tzovaras, who appeared for the Appellants, was unable to point to any extant and genuine dispute that existed between the parties as at the date of the supposed accord and satisfaction. This alone is sufficient to dispose of the first ground of appeal but, as will be seen, the attack on her Honour’s rejection of the existence of any oral agreement was equally weak.

In rejecting the existence of any oral agreement, the primary judge had the benefit of observing the participants in the 12 August 2022 conversation in which the asserted agreement was said to have been made give evidence, and had before her a translation of the “WeChat” voice to text exchange which followed the conversation between Mr Cao and Ms Man (and which did not support his account). Her Honour further tested Mr Cao’s account by reference to his conduct after the alleged agreement was said to have been struck. As will be seen, that conduct was quite inconsistent with Mr Cao’s case.

It is convenient to reproduce the essence of the primary judge’s reasoning on this issue, bearing in mind the requirement noted in Ashton v Pratt for the need for there to be a clear and unequivocal demonstration of an intention to release claims in consideration of the payment to be made:

This was exemplary fact-finding. The primary judge also described Mr Cao as an unimpressive witness, “loquacious and non-responsive”, also appearing “deliberately argumentative and dishonest with his answers, or at least careless”: PJ [29]-[30].

Her Honour’s analysis and reasoning were reinforced by a number of further matters that were inconsistent with the alleged oral agreement including the reference to a continuing liability in the schedule to the BFA, as noted at [8] above, as well as in a voice message Mr Cao left for Mr Man on 13 October 2023 which was tantamount to an admission of liability:

The primary judge could also have referred to the fact that both Option Holdings and Mr Cao admitted in paragraph 24 of their original defences in the proceedings that Option Holdings was “liable to the plaintiff for the amounts owing under the 2021 Loan Agreement” but did “not admit the correctness of amounts specified”. Although the primary judge generously gave leave to withdraw this admission in November 2024, this plea was entirely inconsistent with the argument based upon accord and satisfaction which was only introduced into the proceedings on 8 November 2024, shortly prior to the hearing, when Mr Cao filed an affidavit containing his account of the conversation with Ms Man and annexed proposed amended defences.

Mr Cao had opportunities to introduce his argument based upon an oral agreement prior to commencement of proceedings in answer to the 19 October 2023 letter of demand, in his and Option Holdings’ original defences and in his evidence filed on 22 May 2024 in answer to the evidence of Mr Guo. That he did not do so was forensically telling, a point which Mr Foley made effectively through his cross examination of Mr Cao at first instance.

The principal argument raised in written submissions (in reply) in respect of the first ground of appeal was that some of the conversations relied upon by the primary judge in her analysis included hearsay evidence which, although not objected to, were said to have “little if any probative value”. This argument is unavailing, even if the characterisation of the accounts of conversations as hearsay were sound, which they were not. As to the critical exchanges between Ms Man and Mr Cao, both participants in the 12 August 2022 conversation gave their accounts and her Honour had before her a certified translation of an exchange that followed the conversation which had been recorded on the “WeChat” platform and which was inconsistent with Mr Cao’s account.

The Appellant’s arguments failed to address, let alone criticise other elements of the primary judge’s reasoning, including the fact that (even on Mr Cao’s account) there was insufficient clarity to satisfy the test for an accord and satisfaction. Moreover, the Appellants did not seek to challenge her Honour’s factual findings as “glaringly improbable” as is required with credit-based findings of fact: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [29] and confirmed in Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [55].

The primary judge’s finding, far from being “glaringly improbable”, was sound. It was the Appellants’ arguments that were glaringly improbable. They entailed the highly unlikely proposition that a lender, who had taken care to document his lending and obtained security for it, would simply give that up and reduce himself to an unsecured position with no legal entitlement to recover a significant sum of money, replacing that security with a mere hope that a gratuitous payment would be made in the amount that remained owing under the Loan Agreement at some time in the future, if at all.

In oral submissions in reply, Mr Tzovaras sought to make much of Mr Guo’s agreement in cross examination that the proposal put by Mr Cao as relayed to him and which he found “acceptable” was that “Mr Cao would repay $500,000 to you in August 2022 and would repay the balance of the loan funds when he himself had sufficient funds to do so”. The language “would repay the balance of the loan funds” is inconsistent with any release or forgiveness. If the agreement claimed to have been reached had the effect for which Mr Cao contended, there would be nothing to “repay”, no outstanding “balance” or “loan funds” and no obligation (“would”).

As the primary judge pointed out, even if any oral agreement had been reached, to release Option Holdings and Mr Cao from their obligations in order to found an argument based on accord and satisfaction, the agreement would not have been supported by consideration; the payment of $500,000 on 12 August 2022 would not amount to consideration, it being hornbook law that part payment of a debt is not good consideration: Foakes v Beer (1884) 9 App Cas 605; [1884] UKHL 1.

The Appellants also contended that the fact that the second letter of demand was not issued until 19 October 2023 in some way assisted their argument. It did not. The Loan Agreement unsurprisingly contained a familiar “no waiver” clause (14.8(a)) which provided that “no failure or delay by the Lender to exercise any power, right or remedy under this Agreement will operate as a waiver of that power, right or remedy.”

The first ground of appeal must be dismissed.

The second aspect of the appeal relates to the primary judge’s discretionary decision to order a judicial sale of the Sydney Properties (ground 2) and, by ground 1B, a contention that the primary judge erred in finding that Mr Guo’s equitable charge over Mr Cao’s interest in the Sydney Properties which arose in February 2021 took priority over Ms Du’s equitable interest in the Sydney Properties acquired from Mr Cao pursuant to the Binding Financial Agreement entered into between Ms Du and Mr Cao on 31 August 2023.

As to the challenge raised by ground 1B, it is immediately apparent that Mr Guo’s equitable interest as chargee was anterior in time to the creation of any interest Ms Du obtained under the BFA. Absent any disentitling conduct (see, for example, Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd; Guan v Linfield Developments Pty Ltd [2017] NSWCA 99), equity accords priority by reference to the timing of the creation of the equitable interests: Rice v Rice (1854) 61 ER 646; Latec Investment Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265; [1965] HCA 17.

In the written submissions, this obvious obstacle to the matter raised by ground 1B of the appeal was sought to be circumvented by invocation of s 43A of the Real Property Act 1900 (NSW) which relevantly provides:

As explained by Bryson AJ in Nabeth Taleb v National Australia Bank Ltd (2011) 82 NSWLR 489; [2011] NSWSC 1562 at [40]:

Section 43A was not raised or relied upon by any of the Appellants in the proceedings at first instance and, unsurprisingly, the Respondent objects to it being raised for the first time on appeal. Apart from considerations of unfairness and prejudice in seeking to raise the argument for the first time on appeal, Mr Tzovaras was unable to point to any “registrable dealing” under which Ms Du had taken any interest in the Sydney Properties. Mr Cao’s contractual obligations recorded in the BFA themselves were not such a registrable dealing. So much is fatal to the argument.

A further obstacle, and an answer to ground 1B of the Amended Notice of Appeal, is the primary judge’s factual finding that Ms Du had actual or constructive notice of Mr Guo’s charge over Mr Cao’s 50% interest in the Sydney Properties prior to entry into the BFA: PJ [39]. In this context, Ms Du gave evidence that she had asked her solicitors to do searches and make inquiries in respect of the Sydney Properties, and she recalled that they did a title search and that she discussed the title search with them. The title search, which was in evidence, clearly recorded the Caveat that Mr Guo had lodged over the Sydney Properties. Ms Du said that she could not recall whether the solicitors told her about the Caveat in the course of discussing the title search. This was not a denial that they did so and it was perfectly open to the primary judge to proceed on the basis that they did. As her Honour said, “[t]here is no reason to believe that her lawyers would not have discussed Mr Guo’s caveat”: PJ [39]. As a matter of necessary inference, this was almost irresistible. It would have been extraordinarily negligent of them if they did not, a proposition Mr Tzovaras accepted in the course of argument in the Court of Appeal.

It follows that, contrary to ground 1B, there was no error in the primary judge’s finding that Mr Guo’s equitable charge over Mr Cao’s interest in the Sydney Properties which arose in February 2021 took priority over Ms Du’s equitable interest in the Sydney Properties acquired from Mr Cao pursuant to the BFA in late 2023. That interest was properly characterised, consistent with the decision of Gaudron J in Stern v McArthur (1998) 165 CLR 489 at 537; [1988] HCA 51, as “merely an equitable interest commensurate with the ability to protect the interest under the contract by obtaining specific performance”.

It is convenient at this point to reproduce ground 2 of the Amended Notice of Appeal:

The burdens on an appellant challenging a discretionary decision are too well known to need repetition. There may be a question whether her Honour’s ordering of a judicial sale was a matter of practice and procedure in which case the burden confronting the Appellants would have been even greater: see PPK Willoughby Pty Ltd v Baird [2019] NSWCA 48.

A ground of appeal which is formulated or partially formulated in the language of “failing to give due weight” to various factors provides an unpropitious base for attacking a discretionary decision. As the High Court has said, ‘discretion’ refers to a decision-making process in which “the decision-maker is allowed some latitude as to the choice of the decision to be made”: Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194; [2000] HCA 47 at [19].

In light of the way in which ground 2 was formulated, it is worth repeating the observations of Bathurst CJ and Leeming JA in Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd (2019) 99 NSWLR 419; [2019] NSWCA 61 at [12]-[20] in relation to appellate challenges of exercises of discretion by reference to matters of weight:

This valuable elucidation of principle provides the context for the consideration of subparagraph (a)(i)-(iii) of ground 2 of the Amended Notice of Appeal, which, as I have earlier observed, is expressed in terms of “failing to give due weight” to certain matters.

A complaint of giving “undue” or “insufficient” weight to a matter in the context of the exercise of a discretion accepts both that the matter in question is relevant and that some weight has been given to it. The amount of weight to be accorded to those factors was pre-eminently for the primary judge.

In any event, I can see no reason for a conclusion that each of the three matters identified in subparagraph (a)(i)-(iii) of ground 2 was given insufficient weight. The first two matters simply reflected the fact of Ms Du’s interest in the Sydney Properties and the fact that she was neither party to the Loan Agreement nor a guarantor. To identify these two matters was simply to identify the context in which the discretion whether to make orders for judicial sale of the Sydney Properties fell to be exercised. As to the third matter, in one sense many orders for judicial sale will be prejudicial to a tenant in common but not necessarily “unfairly” so. The position is a fortiori where the later interest holder knows of the former equitable interest. The nature of a tenancy in common, moreover, is that the other tenant will generally be free to deal with his or her interest as they see fit, including by using it as security. Were Ms Du’s recourse to the mantra that Mr Guo could always sue Mr Cao in damages a sufficient answer to an application for judicial sale, the value of holding a security interest would be rendered nugatory.

There was no error in the primary judge’s exercise of discretion.

Nor was her Honour required to identify “special or exceptional circumstances” (cf. ground 2(b) of the Amended Notice of Appeal) at least in circumstances where no objection of the prior mortgagee was raised to the proposed sale: Morris Finance Ltd v Free [2017] NSWSC 1417; see also Koovousis v Tony, trustee in bankruptcy of the Estate of Vrkic [2014] NSWSC 218.

Ground 2 must be dismissed.

For the foregoing reasons, the appeal should be dismissed with costs.

PAYNE JA: I agree with the Chief Justice.

McHUGH JA: I agree with the Chief Justice.