COURT
IN THE SUPREME COURT OF THE NORTHERN TERRITORY OF AUSTRALIA
MILDREN J

CWDS
  Guarantees

HRNG
DARWIN
#DATE 2:6:1994

Appearances not available

ORDER
  Motion dismissed.

JUDGE1
MILDREN J The plaintiffs have applied by originating motion for the following
relief:
    1. A declaration that Registered Charge No. 383600 given by
    KJS Pty Ltd ("the Company") in favour of Westpac Banking
    Corporation on 20 April 1993 and assigned to the plaintiffs
    on 3 March 1994 has priority over Registered Charge No.
    384311 given by the Company in favour of Bunnings Building
    Supplies Pty Ltd on 14 April 1993 to the full amount of the
    moneys owing by the Company to the plaintiffs as a result of
    the payment made by the plaintiffs to Westpac Banking
    Corporation on 3 March 1994, namely $102,364.77.
    2. A declaration that Robert William Cowling is entitled to
    possession of the assets, property, rights and undertaking of
    KJS by reason of his appointment as receiver and manager
    pursuant to a written appointment dated 5 May 1994.
    3. An order that Allan Charles Garraway forthwith deliver
    possession of all the assets and undertaking of the Company
    including the proceeds of sale in gross of all stock sold by
    him to Robert William Cowling, the receiver appointed by the
    plaintiffs.

2.  The first plaintiffs, Mr and Mrs Hilder, are directors of and the majority
shareholders in K.J.S. Pty Ltd (KJS).  The second defendant Bunnings Building
Supplies Pty Ltd (Bunnings) owned and operated a hardware business at
Katherine in the Northern Territory.  By an agreement dated 6 April 1993
Bunnings sold the plant, stock and other assets of the business to KJS.  The
agreement was subject to finance from the vendor.  On 14 April 1993 KJS
executed a mortgage debenture over the whole of its undertaking in favour of
Bunnings to secure inter alia monies due to Bunnings as the consideration for
the agreement for sale and purchase dated 6 April 1993.  The Bunnings
debenture is both a fixed and floating charge.  On the same date the Hilders
and their son Simon Hilder, the remaining shareholder and director of KJS,
executed a Deed of Guarantee  and Indemnity under seal in favour of Bunnings
to secure the due and punctual performance of KJS of its obligations as
purchaser under the sale agreement (the Bunnings guarantee).

3.  In the meantime, since February 1993, Mr Hilder senior had been
negotiating with Westpac Banking Corporation, Katherine Branch, for a business
loan for KJS.  Westpac was aware that Bunnings would hold securities of some
kind over at least some of the assets of KJS. The exact level of awareness
which Westpac had is a matter of dispute between the parties.  Because of the
conclusions which I have reached it is not strictly necessary to resolve this
dispute. However, in case this matter should go further, I find that I am
unable to conclude on the balance of probabilities, Westpac knew at the time
the Westpac debenture executed, that a charge had already been granted by KJS
to Bunnings over any of its assets.

4.  Westpac required a mortgage debenture over KJS's assets as well as other
securities to secure its advances, and a Deed of Priority between itself and
Bunnings.  A Deed of Priority was prepared (by whom is not known) and executed
by Bunnings on 15 April 1993.

5.  The agreement for sale and purchase between KJS and Bunnings settled on 19
April 1993.

6.  On the same date, KJS and Westpac entered into a business loan agreement
for $100,000. To secure this sum, as well as future advances, KJS gave Westpac
a fixed and floating charge over the whole of its undertaking by a mortgage
debenture executed on the same day (the Westpac Debenture).  To further secure
Westpac's loans and future advances, the Hilders and Simon Hilder gave to
Westpac a guarantee, and Mr and Mrs Hilder gave a security over a term deposit
of $100,000 which they deposited with the bank to secure repayment of KJS's
loans.

7.  The Westpac Debenture was registered by the Australian Securities
Commission on 29 April 1993.  On 5 May 1993 the Bunnings Debenture was also
registered by the Commission.

8.  The Deed of Priority between Bunnings and Westpac was finally entered into
on 10 May 1993.  By clause 2(a) the Deed provided Westpac with priority over
Bunnings to the extent of $75,000.  On 25 August 1993 Bunnings wrote to
Westpac as follows:  "As requested by Mr Hilder, we confirm that we accept
your increasing the banks charge over the KJS business to $150,000 from
$75,000."

9.  It is an agreed fact between the parties that in reliance upon this
letter, Westpac made further advances to KJS.

10.  By March 1994, KJS was experiencing financial difficulties.  As at 3
March 1994, KJS owed Westpac $102,364.77.  On that date, the Hilders paid
Westpac the amount owed by KJS, from the term deposit; the bank released the
Hilders and their son from their guarantee by granting a release; and the bank
entered into a contract with the Hilders assigning to them the Westpac
Debenture and the Deed of Priority. On the same day, the directors of KJS
appointed one Richard Morris as administrator of the company pursuant to
s436A(1) of the Corporations Law.

11.  On 17 March 1994 Bunnings appointed the first defendant, Mr Garraway, as
receiver and manager of KJS pursuant to the Bunnings Debenture.  On 21 April
1994, pursuant to Part 5.3A of the Corporations Law, KJS entered into a Deed
of Company Arrangement with its unsecured creditors, the idea behind which is
enable KJS to keep trading.  However, Mr Garraway has advertised for
expressions of interest in purchasing the assets of KJS on a "walk-in
walk-out" basis.  On 22 April, the solicitors for the Hilders delivered to the
solicitors for Bunnings certain documents executed by the Hilders under seal
and described by the Hilders' solicitors accompanying letter as "draft deeds
of priority".

12.  In the letter the Hilders' solicitors state:  "We confirm that the
Hilders are prepared to enter into this Deed in accordance with the original
priority agreement between Westpac and Bunnings and have executed the enclosed
(*) draft deed."

13.  On 29 April 1994 the Hilders registered at the Australian Securities
Commission notice of the assignment of the Westpac Debenture.  On 5th May
1994, the Hilders appointed the second plaintiff, Mr Cowling, as receiver and
manager of KJS, and on 6th May, commenced these proceedings.

14.  The defendants resist the declarations sought on a number of grounds, the
main ground being that the Hilders were precluded from appointing a receiver
of KJS because of the terms of the Bunnings guarantee.

15.  Clause 8 of the Bunnings guarantee provides:
    "The Guarantors in respect of any sum paid by them under and
    in respect of any other right which may have accrued
    howsoever to them shall not attempt to recover the same from
    the Purchaser or to enforce the payment of the same until all
    purchase price, occupation fee and other moneys payable to
    the Vendor under or by virtue of this deed and the Agreement
    have been fully paid and satisfied."

16.  Mr Hiley QC, who appeared for Bunnings, submitted that this clause
precludes the Hilders from taking any action, including appointing a receiver,
to enforce whatever rights they may have obtained as assignees of the Westpac
Debenture or otherwise, until the Bunnings' debt had been fully paid and
satisfied.

17.  Mr Hiley submitted, assuming the Westpac Debenture took priority over the
Bunnings Debenture and that the rights of Westpac had been validly assigned to
the Hilders, that the Hilders could, by contract, limit their ability to
enforce their rights until Bunnings had been paid out, and that clause 8 of
the Bunnings guarantee achieved this purpose.  Mr Wyvill conceded that the
Hilders could contract out of their rights and that if clause 8 had the effect
contended for by Mr Hiley, the plaintiffs would not be entitled to the relief
sought.  I consider that Mr Wyvill's concession was a proper one:  see O'Day v
Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 219-20, 233; Morris v
Ford Motor Co. Ltd. (1973) 2 All ER 1084.  Mr Wyvill contended on the true
construction of the clause it did not have the effect contended for.  Mr
Wyvill further submitted that it was incumbent upon the defendants to show
that clause 8 has a certain meaning which applies to the circumstances of the
plaintiffs, but that if several alternative meanings can be attributed to
clause 8, any one of which would place the plaintiffs outside of the purview
of the clause, the plaintiffs would be entitled to the benefit of the doubt.
In support of this proposition, Mr Wyvill relied upon Ankar Pty Ltd v National
Westminster Finance (Australia) Ltd (1986-7) 162 CLR 549 at 561, (per Mason
ACJ, Wilson, Brennan and Dawson JJ):
    "At law, as in equity, the traditional view is that the
    liability of the surety is strictissimi juris and that
    ambiguous contractual provisions should be construed in
    favour of the surety."

18.  This statement of principle by the High Court is undoubtedly the approach
which I am bound to apply to the construction of clause 8: see also Chan v
Cresdon Pty Ltd (1989) 168 CLR 242 at 256, where a guarantee to perform the
tenant's obligations "under this lease" was construed to refer to a lease at
law but not to an equitable lease. In Coghlan v. S.H. Lock (Australia) Ltd
(1986) 61 ALJR 289 at 291 the Privy Council observed that a guarantee "is to
be construed strictly; it is to be read contra proferentem; and, in case of
ambiguity, it is to be construed in favour of the surety.  But these
principles do not, of course, mean that where parties to such a document have
deliberately chosen to adopt wording of the widest possible import that
wording is to be ignored.  Nor do they oust the principle that where wording
is susceptible of more than one meaning regard may be had to the circumstances
surrounding the execution of the document as an aid to construction."  I do
not think therefore that the plaintiffs will necessarily escape from the
provisions of clause 8 merely by showing that there is some other remotely
possible construction of it which is more favourable to them.  The principle
in Ankar applies where the clause is ambiguous; for a clause to be ambiguous,
the Court must be satisfied that the alternative construction relied upon
still has merit after having had regard to the ordinary meaning to be
attributed to the words used considered in the context of the whole of the
document, and after having had regard to the surrounding circumstances.

19.  Mr Hiley submitted that in construing clause 8, I ought to take into
account as part of the factual matrix, that at the time the Hilders executed
the Bunnings guarantee, they knew that this was not the only guarantee which
might be in existence in the event of KJS defaulting, and that therefore they
must have known or contemplated that if the company defaulted, there could be
competition between Bunnings and themselves as guarantors of the Westpac
Debenture exercising their rights of subrogation.

20.  In Reardon Smith Line Ltd v Yngar Hansen-Tangen (1976) 1 WLR 989 at 995,
Lord Wilberforce said, in an oft-quoted passage:
    "No contracts are made in a vacuum:  there is always a
    setting in which they have to placed.  The nature of what is
    legitimate to have regard to is usually described as the
    "surrounding circumstances" but this phrase is imprecise:  it
    can be illustrated but hardly defined.  In a commercial
    contract it is certainly right that the court should know the
    commercial purpose of the contract and this in turn
    presupposes knowledge of the genesis of the transaction, the
    background, the context, the market in which the parties are
    operating."

21.  I consider, that as part of the ordinary approach to the construction of
a guarantee, it is appropriate, to resolve any ambiguity, to take into account
the "surrounding circumstances", in arriving at the presumed intention of the
parties.  In considering the commercial purpose of the contract, what is to be
considered is what, objectively, reasonable persons would have in mind in the
situation of the parties: see Reardon Smith Line Ltd, supra.

22.  The commercial purpose of the Bunnings Debenture and of the Bunnings
guarantee was to provide finance to KJS to enable it to acquire the assets
sold to it by Bunnings and to provide security to Bunnings from both KJS's
assets as well as from the Hilders under their guarantee.  The factual
background included the fact that the Hilders were the directors of KJS and
would be involved in KJS's management.  In addition it must be taken to have
been known that KJS would grant a debenture to Westpac to secure advances to
KJS to enable it to trade, and that loans to KJS by Westpac would in all
probability be secured to Westpac by personal guarantees from KJS's directors.
In these circumstances the Hilders and Bunnings must have contemplated the
possibility that the Hilders may well themselves become creditors of KJS, and
that there might be competition between Bunnings and the Hilders for payment
of their respective debts.  However, the extent to which it was essential that
Bunnings might be expected to protect itself from competition from the Hilders
in the circumstances is quite another matter.  The Hilders might become
employed by KJS, not merely as directors, but in the daily operations of the
business, for which a right to wages might accrue, for example.

23.  Mr Wyvill suggested that there are several problems with the precise
meaning to be given to clause 8.  The first problem is the word "under".  One
possibility is that the word "under" has no object and should be read as
"hereunder"; another possibility is that the object is "any other right", so
that the whole phrase "under and in respect of any other right" is to be read
as one.  The next problem is the use of the word "other" in the expression
"other right". Another problem is what is meant by "the same".

24.  It is clear that clause 8 does not preclude the Hilders from acquiring
rights against KJS, nor does it take away rights already acquired.  The
clause, at most, defers the exercise of rights until Bunnings has been paid.
Mr Hiley submitted that the appointment by the Hilders of the second plaintiff
as receiver was a breach of clause 8 in that it was an attempt to enforce the
payment of monies due to the Hilders by KJS prior to payment of the Bunnings
debt in full.  Mr Wyvill contended that the defendants' construction of clause
8 would give the clause a very wide operation - for example it would preclude
the Hilders from attempting to recover wages due to them by KJS - and that in
any event the recovery of monies due to them as the assignees of the Westpac
debenture did not fall within the clause because there was no sum paid by them
in respect of rights which "may have accrued to them"; rather, the payment
gave rise to rights which then accrued.  In other words, to fall within the
literal meaning of the clause, it would be necessary to read "may have
accrued" as "may accrue".  Mr Hiley argued that the Hilders as guarantors of
Westpac had a "right" to pay out KJS's debt to the bank but only upon payment
were they entitled to assignment of Westpac's securities.

25.  I think that the ordinary meaning to be given to clause 8 is that "the
sum" must be paid "under and in respect of any other right which may have
accrued to them".  The words, "the same", refer to the sum thus paid.
Consequently the sum must be paid under and in respect of a right which, at
the time of payment, has already accrued.  Thus a voluntary payment not made
pursuant to a right to do so but which gives rise to a right of reimbursement
is not within the clause.  This interpretation does no violence to the words
used. Firstly, it is not necessary to treat "under" as "hereunder" or as
missing an object.  Secondly, it avoids the unlikely possibility that the
phrase "to recover the same" was meant to refer to the right, rather than the
sum.  Thirdly, it is not necessary to change the tense of the verb "may have
accrued".  The word "other", must be a reference to a right other than rights
which the Hilders enjoyed as Bunnings' guarantors.  No other right seems
possible.  As Mr Hiley submitted, as guarantors of KJS they had a right to pay
out their principal debtor's obligations in order to seek their own release.
Indeed, as guarantors they could pay the monies into court if the creditor
should refuse payment and acquire the creditor's securities if necessary by
Court order:  see Goddard v Whyte (1860) 2 Giff. 449; 66 ER 188.    Thus
construed, the clause has a relatively narrow operation.  It would not prevent
KJS from paying a debt or meeting an obligation owed to the Hilders such as
payment of director's fees or salaries, although it would prevent the Hilders
from recovery of a sum paid by them on KJS's behalf pursuant to an existing
right and in respect of which a right of reimbursement has arisen, until the
Bunnings debt was paid.  This leaves the expression "under and in respect of".
There  are cases which show how, for example, bets may be paid "in respect of"
gaming contracts, but not "under" them:  see for example Tatam v Reeve (1893)
1 Q.B. 44.  In that case the expression in the Gaming Act 1892 was "any sum of
money paid by him under or in respect of any contract or agreements."
Consequently, a payment made in respect of a right has a wider operation than
a payment made under a right.  In Trustees Executors and Agency Co Ltd. v.
Reilly (1941) VLR 110 at 111 Mann CJ observed that the words "in respect of"
... "are difficult of definition, but they have the widest possible meaning of
any expression intended to convey some connection or relation between the two
subject-matters to which the words refer."  Having regard to this observation,
whether the conjunction used be "and" or "or", the words "under or" or "under
and" add little, if anything, to the words "in respect of" and a construction
which avoids otiosity is generally to be preferred.  However, no other
reasonable construction of the clause is open without doing great violence to
the language of the clause, and otiosity of this kind is a relatively minor,
and a somewhat common, drafting sin.

26.  Mr Wyvill submitted that the clause was designed to prevent the
guarantors under the Bunnings guarantee from paying out part of the Bunnings
debt and seeking to enforce their right of indemnity, which arises even if the
full amount is not paid, from KJS, before the debt is paid in full.  However
this would require reading "under" as "hereunder" and would also require words
such as "by reason of the payment of that sum" to be inserted after "them".
Although missing words will be inserted if it is clear what was intended from
the document read as a whole, I do not think this is such a case.  I conclude
therefore that clause 8 is not ambiguous.

27.  The facts of the case show that the Hilders did have another right, viz.,
a right to pay out KJS's debt to Westpac.  They exercised this right by paying
out that debt, and accordingly I consider that the payment so made was a "sum
paid by them under and in respect of any other right which may have accrued to
them" within the meaning of clause 8.  Accordingly I find that by appointing
Mr Cowling as receiver of KJS, and asserting the priority of their assigned
rights over the Bunnings debenture, they are attempting to recover that sum or
attempting to enforce payment of that sum, before Bunnings' debt has been paid
in full.  In the result, the plaintiffs are in breach of clause 8 of the
Bunnings guarantee, and not entitled to the relief sought in the motion.

28.  It is therefore not necessary to consider the other interesting arguments
raised by counsel for the defendant in support of the other grounds upon which
the motion was resisted.

29.  Accordingly, the motion is dismissed with costs.