Bank of New South Wales v Permanent Trustee Co of New South Wales Ltd
[1943] HCA 27(Decision by: Starke J)
Bank of New South Wales
vPermanent Trustee Co of New South Wales Ltd
Judges:
Latham CJ
Rich J
Starke JMcTiernan J
Judgment date: 4 October 1943
Melbourne
Decision by:
Starke J
Appeal from a judgment of the Supreme Court of New South Wales upon a special case stated by the parties. The question for the opinion of the court was whether the appellant was precluded by the provisions of the Moratorium Act 1930 as amended or by the provisions of the Moratorium Act 1932 as amended from suing for and recovering from the defendant as executor of the will of Percy Moore Wood upon covenants contained in a memorandum of mortgage dated 1st February 1932 for the payment of the principal sum of £2,745 17s. 2d. and interest thereon secured by the mortgage.
In June 1928, Dr. Wood and several other persons jointly and severally guaranteed to the bank repayment of certain credit advances and accommodation to be given to James Syphonic Visible Measures Ltd., the principal debtor. Default was made by the principal debtor, and ultimately an order to wind it up was made and sequestration orders were also made against each of the guarantors other than Dr. Wood, who was called upon by the bank to meet his engagement under the guarantee. He did not meet that engagement, but instead gave the mortgage already mentioned upon which the bank sues.
The mortgage was given in consideration of the sum of £2,745 17s. 2d. owing by the mortgagor to the bank under and by virtue of the guarantee already mentioned given by the mortgagor and others to secure the repayment of advances and accommodation to be afforded by the bank to James Syphonic Visible Measures Ltd. and in further consideration of the forbearance by the mortgagee to enforce immediate payment of the said sum of £2,745 17s. 2d. And for the purpose of collaterally securing to the bank payment of the said principal sum and interest thereon the mortgagor did mortgage to the bank certain lands and also for the consideration aforesaid the mortgagor covenanted with the bank to pay to it the principal sum of £2,745 17s. 2d. together with interest thereon at the rate of six per cent per annum. The mortgage also contained a stipulation that nothing contained in it should merge, extinguish, postpone, lessen or otherwise prejudicially affect the security of the bank under or by virtue of the guarantee or any other security then or thereafter held by the bank or any right or remedy which the bank had or thereafter might have against the mortgagor or any other person. There were also other covenants and provisions in the mortgage, but they are not material to this case.
The Moratorium and Interest Reduction Act 1931 (No. 66 of 1931, s. 4) avoided all covenants, agreements or stipulations by a mortgagor for the payment or repayment of any moneys secured by a mortgage of real property, and s. 2 of the Act of 1930 (No. 48 of 1930) provided that "mortgagor" means the person liable under the provisions of a mortgage or entitled to redeem a mortgage and includes, inter alia, any person who has guaranteed the payment of any money the payment of which is secured by a mortgage or the performance by the mortgagor of any covenant, condition or agreement expressed or implied in the mortgage or in any other instrument. Consequently the personal covenant given by Dr. Wood for the payment of the principal sum mentioned in the mortgage and interest thereon was avoided.
But the Moratorium Act 1932 (No. 57 of 1932, ss. 35 and 41), which repealed s. 4 already mentioned of the Act No. 66 of 1931 (inserted as s. 25 (7) in the Moratorium Act 1930-1931 (No. 48 of 1930-No. 66 of 1931)), provided that the word "mortgagor" in that section did not include a person who had guaranteed the payment of any money notwithstanding that the payment of such money or the performance of such guarantee was secured by a mortgage as defined by the Moratorium Act: See Permanent Trustee Co. of N.S.W. Ltd. v. Hinks(11). The words are, I think, clear and explicit, and the policy or assumed policy of the Act is irrelevant in such a case. Dr. Wood certainly gave a mortgage which contained covenants to pay the money therein mentioned. But a mortgagor may be a guarantor and his mortgage may operate as and be a guarantee. And if the mortgage given by Dr. Wood guaranteed the payment of money the Act expressly provides that the word "mortgagor" shall not include him notwithstanding the mortgage.
Further, s. 41 of the Act No. 57 of 1932 also provided that, notwithstanding anything contained in the Act or the Moratorium Act 1930, or any Act amending the same, where any person whether before or after the Act guaranteed the payment of any money or the performance or observance of any obligation and such payment, performance or observance or such guarantee was secured by a mortgage of land the person entitled to the benefit of the guarantee might give notice of his intention to exercise his rights, powers and remedies against the guarantor or against any property mortgaged by the guarantor to secure the guarantee then the person entitled to the benefit of the guarantee might exercise such of the rights, powers and remedies against the guarantor and any property mortgaged by the guarantor to secure the performance of the guarantee as he would have been entitled to exercise if the Acts had not been passed. But it was provided that s. 41 should apply only in respect of contracts of guarantee made prior to the commencement of the Act No. 57 of 1932 which were affected by the provisions of Part IV. of the Moratorium Act 1930-1931 as amended by subsequent Acts: See No. 48 of 1930; No. 43 of 1931; No. 66 of 1931.
Guarantees for the payment of money the payment of which was not secured by a mortgage stand outside the foregoing provisions and were not avoided by them. Consequently the guarantee of 21st June 1928 was unaffected by any of these provisions and might have been sued upon by the bank but for difficulties, so it was said at the Bar, arising out of the Statute of Limitations. And the bank has not sued on this guarantee, but, having given a notice pursuant to the provisions of s. 41 of the Act of 1932 (No. 57 of 1932), upon the covenants in the mortgage of 1st February 1932 given by Dr. Wood to it. It was said, however, that Dr. Wood was properly described by reason of the guarantee of 21st June 1928 as a person who had guaranteed the payment of money notwithstanding (No. 57 of 1932, s. 35) that the payment of such money was secured by the mortgage of 1st February 1932 and also because (No. 57 of 1932, s. 41) he had guaranteed (by the guarantee of 21st June 1928) the payment of money the payment whereof was secured by the mortgage of 1st February 1932 which was affected by the provisions of Part IV. of the Moratorium Act 1930- 1931 as amended by subsequent Acts.
But this argument cannot, I think, be supported. The covenant or obligation sued upon must operate as and be a guarantee, for only if the person sued is a guarantor (whether a mortgagor or a person who has guaranteed the payment of money secured by mortgage) (Act No. 57 of 1932, ss. 35 and 41) is his liability restored. The guarantee of 21st June 1928 affords aid no doubt to the proper understanding of the relationship created by the mortgage of 1st February 1932, but it does not determine the nature of the obligation created by the mortgage nor the description of the parties thereto. The question, as I see it, is whether the obligation created by the mortgage can be described as a guarantee and Dr. Wood as a person who guaranteed the payment of money covenanted to be paid and secured by the mortgage. If so, then the personal covenants in the mortgage are restored by force of the Act No. 57 of 1932, ss. 35 and 41. I say by force of s. 41 as well as s. 35 because if the mortgage be a guarantee then it was affected by the provisions of Part IV. of the Moratorium Act 1930-1931 as amended by subsequent Acts. The personal covenants in it were, as we have seen, avoided by those Acts.
A guarantee may be described as an engagement to answer the debt of another, but is not limited to cases in which a personal liability is assumed (De Colyar, Law of Guarantees, 3rd ed. (1897), p. 1; In re Conley(12)). "This does not mean that" the "liability is necessarily only conditionally enforceable but merely that it is collateral... And what is contemplated is that the principal shall pay. But this may be so, although the undertaking of the surety is as absolute as that of the principal" (Rowlatt on Principal and Surety, 3rd ed. (1936), pp. 2, 3; Permanent Trustee Co. of N.S.W. Ltd. v. Hinks (2)). "In strictness," says Rowlatt (p. 4), "perhaps, no-one under a liability ex facie absolute should be described as a surety, unless that liability was from the first, to the knowledge of the creditor at that time, only undertaken for the purpose of affording security for the payment of the principal debt."
The question is one of substance and not of form. But in considering the question "it is of course important not to be misled by the fact that certain relationships involve the application of equitable principles similar to those which apply in the case of sureties" (In re Conley(15)). Still, when two or more persons bound as full debtors arrange, either at the time when the debt was contracted, or subsequently, that, inter se, one of them shall only be liable as surety, the creditor after he has notice of the arrangement is bound thereby and the surety acquires rights as such (Rouse v. Bradford Banking Co. Ltd.(2)).
Some illustrations may aid the application of the Acts and of these propositions to the case now before the Court.
1. I guarantee the payment of the debt of A.
Such a promise is a mere guarantee and would not be affected by the Moratorium Act avoiding personal covenants for the payment of money secured by mortgage.
2. I guarantee the payment of the debt of A and hereby mortgage my property to secure such payment.
An instrument in this form constitutes a mortgage and all stipulations by a mortgagor for the payment of any mortgage moneys would, if this be so, be avoided by the Act No. 66 of 1931, s. 4. Then comes s. 35 of the Moratorium Act 1932 (No. 57 of 1932), which restores the guarantee stipulation, for it provides that a person who has guaranteed the payment of money is not included within the word "mortgagor" notwithstanding that the payment of such money is secured by a mortgage as defined by the Moratorium Act. And if the guarantee stipulation be not a covenant or stipulation by a mortgagor for the payment of any moneys secured by a mortgage of real property within the meaning of the Act No. 66 of 1931, s. 4, then it would also stand outside the Act and not be avoided or affected by it.
3. I promise to pay the debt of A absolutely but collaterally with him and hereby mortgage my property to secure such payment.
This I apprehend is in law a guarantee, and the same result would follow as in case 2.
4. Having failed to meet my engagement under my guarantee as in case 1 and being granted further time to meet my engagement I promise absolutely to pay the debt of A on a given day but collaterally with A and hereby mortgage my property to secure such payment.
Again I apprehend such a promise would be a guarantee and the same result would follow as in case 2.
5. So I come to the present transaction.
It originated as one of guarantee; in other words, Dr. Wood by the document of 21st June 1928 guaranteed the payment of advances made by the bank to the principal debtor. But the principal debtor did not meet its engagement, nor did Dr. Wood, its surety. By the mortgage of 1st February 1932 Dr. Wood obtained time, but engaged to meet the sum of £2,745 17s. 2d. which was payable by him to the bank under and by virtue of the guarantee and also interest thereon and he gave a mortgage over his land to secure the performance of that engagement. But the moneys which Dr. Wood engaged to pay were in substance and in truth the sum for which he had become collaterally liable with the principal debtor under his guarantee. The right of Dr. Wood to recover over against the principal debtor was in no way affected by the mortgage, nor was his right to contribution against the co-sureties, nor his right to take over from the bank, upon discharging the engagement which he undertook under the mortgage, securities, if any, given to it by the principal debtor. In essentials Dr. Wood was under the same liability as and entitled to the same rights as a surety. And the relationship existing between Dr. Wood and the bank was that of guarantor (surety) and guarantee (creditor) because the bank had notice and was at all times aware of the relevant facts.
But to clinch the matter there was passed in 1936 another statutory provision, the Moratorium (Amendment) Act 1936 (No. 58 of 1936, s. 2) as follows:-"'Person who has guaranteed the payment of money' includes and shall be deemed always to have included a person who to the knowledge of the creditor at the time of incurring such liability has incurred a primary liability to the creditor to pay money to such creditor as surety for a third person."
To me the section seems plain enough: it contemplates the case of a person incurring a primary liability to a creditor as did Dr. Wood to the bank by means of the mortgage and, as I think, to the knowledge of the bank as surety for a third person, namely, James Syphonic Visible Measures Ltd. The giving of a mortgage of land to secure a guarantee is both recognized and provided for in ss. 35 and 41 of the Act of 1932 (No. 57 of 1932). Smith v. Motor Discounts Ltd.(16) does not conflict with this result. The plea alleged that the covenant sued upon was not a guarantee: See the report (2).
Consequently the argument that the mortgage creates a liability separate and different in character and substance from that of a guarantee fails and this appeal should be allowed. The bank should have judgment for the sum of £ 4,096 5s. 1d. together with interest on £2,762 18s. at the rate of four and a half per cent from the date of writ to judgment and for costs as agreed in the special case.