Kranz & Anor v National Australia Bank Ltd [2004] HCATrans 211 (18 June 2004)

--

Kranz & Anor v National Australia Bank Ltd [2004] HCATrans 211 (18 June 2004)

Last Updated: 2 July 2004

[2004] HCATrans 211

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M250 of 2003

B e t w e e n -

MOTEK KRANZ and MANSVILLE PTY LIMITED

Applicants

and

NATIONAL AUSTRALIA BANK LIMITED

Respondent

Application for special leave to appeal

GLEESON CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 18 JUNE 2004, AT 12.24 PM

Copyright in the High Court of Australia

MR J.F. BLEECHMORE: If the Court pleases, I appear on behalf of the applicant. (instructed by Glennen, Burstyner & Co)

MR N. MUKHTAR, QC: May it please the Court, I appear with my learned friend, MR A.T. SCHLICHT, for the respondent. (instructed by Russell Kennedy)

GLEESON CJ: Yes, Mr Bleechmore.

MR BLEECHMORE: If the Court pleases, the applicant was unsuccessful in the court below and the court declined to grant the relief sought because it concluded that the Bank did not have relevant knowledge, if I can use that shorthand phrase, of, in the first place, a relationship of trust and confidence between Kranz, the applicant, and Lefkovic, who was the principal debtor, and, secondly, did not have relevant knowledge or insufficient knowledge in that sense of a position of special disadvantage which was suffered by the applicant.

In reaching these conclusions, our points are that the court fell into error in two ways. First of all, it divided the proper inquiry into two separate inquiries, one whether there was knowledge by the creditor, by the Bank, of the relationship of trust and confidence, and the other, whether it knew of a position of special disadvantage. What happens when the inquiry is split in that way is that the applicant is denied the cumulative force of a consideration of all of the circumstances in determining what is a unitary inquiry after all. That is whether the principal debtor was liable to perpetrate a common law equitable wrong against the proposed surety, that is to say, whether he was likely to provide an attenuated and inadequate explanation of the transaction or one that was misleading. That is the central inquiry and all of the facts are relevant consonant with the approach of equity in dealing with the application of very broad and flexible rules rather than the process of law of reasoning by analogy and by categories.

The second point is that the court fell into error in considering this question of knowledge in simply applying the wrong test. I will develop that now, your Honours. The correct test, of course, is derived from Amadio and that is whether there was actual awareness by the creditor of the possibility that a situation of special disadvantage is in existence, a special disadvantage constituted by the relationship of trust and other matters which would give rise to the possession of inadequate facts for the surety to make a proper judgment about his interests. Actual awareness, actual knowledge or facts that would raise that possibility in the mind of any reasonable person. That is derived from Amadio in the familiar passage from Justice Mason in which Justices Deane and Wilson agreed.

The court stated the test that they applied. At page 103 of the application book at line 23:

In Australia it remains therefore for the debtor to establish that the bank was aware of a relationship that put the bank on enquiry, such as that of husband and wife or solicitor and client, or that there was a relationship of trust and confidence between the debtor and the third party.

We do not say there was error necessarily there, although the way that it is put could lead the court to fall into error in the way it applies the test if it elides that important concept of a possibility because that possibility certainly existed here, we would say.

The application of the test occurs at page 111 of the application book. His Honour Justice of Appeal Charles, with whom the other members of the court agreed, says:

Given the limited extent of the information available to the bank, I do not accept that the bank knew or should have assumed that there was a relationship of trust and confidence between Kranz and Tom Lefkovic, so as to bring into play the principles acted on in Garcia.

To say that that is the test, “knew or should have assumed”, produces a different result. We would submit that if you apply the test adumbrated by Justice Mason in Amadio that I referred to a moment ago, you would, in fact, quite clearly get to a different result. The Bank knew that my client Mr Kranz was family, that he was a brother-in-law. They knew it was a non-commercial relationship.

GLEESON CJ: Just a minute. It is something of an oversimplification to describe this association as non-commercial, is it not?

MR BLEECHMORE: Yes. Kranz was a volunteer, your Honour.

GLEESON CJ: He had a commercial association as well as a family association, did he not?

MR BLEECHMORE: No, it was non-commercial in the Etridge sense, we would submit, in that there was nothing in it for him. He did it as a member of the family.

GLEESON CJ: This may indicate a difficulty with this concept of a non-commercial association.

MR BLEECHMORE: It does indeed, your Honour, yes. It is not clear. We would say that since Garcia, under the perhaps baleful influence, if I may be so disrespectful to refer to it as that, of Etridge, there is a great deal of confusion about the nature of the relationships that would be properly characterised as ones of trust and confidence for the relevant purpose. Indeed, in a recent decision, to which I would like to refer in a moment, the Queensland Court of Appeal has referred to two levels of duty that a creditor may owe in different circumstances: one, a simple duty to ensure independent advice or to provide an opportunity for an independent advice; and another duty which goes beyond that but one that requires the creditor to provide the proposed surety with all relevant information in the possession of the Bank or the creditor, including information about the level of indebtedness of the debtor.

Moreover, your Honours, since Garcia there has been a controversy as to whether Garcia should be limited to family relationships or such like relationships where there is an emotional relationship or perhaps where there is cohabitation, whereas on the other hand the court below here says it extends beyond those to other family relationships where there may be a relationship of trust and confidence. The learned editors of the fourth edition of Meagher, Gummow and Lehane’s Equity Doctrines and Remedies certainly say that, that if it applies to a married relationship, then in a passage quoted in the applicant’s reply here, there is no reason why the same duty should not fall upon a creditor in the case of other family relationships or non-commercial relationships.

I think it is fair to say that what is meant by “non-commercial relationships” is very similar to the concept of a family relationship, and that is what Lord Nicholls was referring to in Etridge in his discussion when he said that it is not for the creditor to enter the details of the intimate relationship or the details of the relationship between the two parties, that they should be put on notice. You start with a married relationship, you go to family, and then beyond that it is better, he said, to draw a line in the sand and refer to non-commercial relationships. By that, we say it refers to a situation where, because of a family connection, there is trust and where a family member is prepared to do something when there is nothing in it for him where he is in equity purely a volunteer.

Here, if you apply the test of whether the creditor was in possession of facts that raised the possibility of a relationship of trust and confidence, it clearly was. It knew that Mr Lefkovic was desperate. “Desperate” was not a term used in argument. It was used on many occasions by the trial judge. He had tried to get this transaction through. He had failed because the Bank wanted further security, so he had brought in his family members, his parents-in-law and his brother-in-law. The Bank knew first of all that Mr Kranz was his brother-in-law. It also knew that Mr Lefkovic, through his long association with him and his brother, was an accountant.

When therefore Mr Lefkovic took responsibility for the whole of the transaction, the provision of confidential information relating to the security property, a statement of assets and liabilities of Kranz, the obvious question was: are you actually his accountant? It is true that the Bank did not concede that they knew that Lefkovic was the applicant’s accountant, but it knew everything else. In our respectful submission, what it did know raised the reasonable possibility that there was a relationship of trust and confidence.

The odd thing about this case is that it is a case where the Bank officers themselves took the view that the nature of the transaction, its unusual and speculative nature, and in particular the requirement of a holding period, made it necessary that the applicant be provided with a proper explanation. In other words, they took the view that they would be acting unconscionably if they had not provided it, and they said, of course, that they did, but the trial judge found against them and found that they had not. So it is odd to say they are wrong about this.

Obviously we accept that it is an objective test and it is not for the Bank officers to state the law but in a situation where the Bank knew better itself what it really knew, for them to say they thought it was unconscionable not to have provided Mr Kranz, the applicant, with an explanation, odd indeed that the court would say, “No, in fact, you didn’t need to at all. You’re being unduly scrupulous”. That evidence appears at page 125 of the application book in paragraph 75, if I may take the Court to that. At line 18:

Later in his evidence Brooke agreed that there were negative features about the transaction, both that the shares could not be sold for a fixed period and that the quantity in question was substantial, 5% of the share capital of the company. Asked whether the guarantors “quite clearly as a matter of fairness ought to have the opportunity of considering all of those things as well”, Brooke agreed. He also agreed that given the unusual nature of the transaction and the conditions imposed on Lefkovic as the acquirer the fair thing to do in all the circumstances would be to provide an opportunity or require the guarantors to obtain independent legal advice to which he replied that that would be normal. Later in cross-examination –

this is the regional manager, your Honours –

he said that “we had a duty of disclosure, I believe, both personally and professionally to specifically inform the prospective guarantors of the risks and obligations associated with the loan”.

I have indicated that the division of the inquiry into two legs in which the argument on behalf of the applicant was characterised as possessing two legs when it did not – as I have indicated, it was a unitary inquiry – to see whether in all the circumstances the Bank knew or there were facts that raised the possibility that the applicant might not receive a proper explanation of the transaction. In a unitary inquiry you consider everything at once. You consider – and the court, in our respectful submission, ought to have considered – the question of the relationship obviously but also at the same time, as part of a proper equitable inquiry into a very broad and flexible rule, the circumstance that Mr Lefkovic was desperate to the knowledge of the Bank.

As the trial judge said, that desperation led him to provide an inadequate explanation to his brother-in-law. The fact that he did that indicates that someone who is desperate may well do that. Secondly, that it was a very unusual transaction that had peculiar features. It was not just a loan of money to buy shares. They were shares in a mining company. They were to be purchased on 28 August. They had to be sold. The Bank demanded by 31 December 1989. There was a compulsory holding period of two to three months, which Justice Charles, it is accepted, said was negotiable, but there was to be a holding period.

It is obvious from that that there was a narrow window of opportunity in this transaction to sell those shares at a profit. They were negative features and were accepted by the Bank as being negative features and led them to conclude that it was only fair, both personally and professionally, to provide the applicant with an explanation. As to his anxiety, the Bank knew that he – they refused him on the basis that he needed extra security, that his family home was at stake, that his mother’s home was at stake and that he was sufficiently desperate in the case of his parents-in-law to say – they were in New York at the relevant time – “My wife has a power of attorney and we’ll use that”. All of those matters ought to be considered as part of this unitary equitable inquiry as to the duty of the creditor to avoid a conclusion that the creditor has acted unconscionably.

The second major question is whether knowledge of the family relationship between the applicant and Lefkovic and the non-commercial nature of the relationship, whether it follows from that by itself without more that that itself put the Bank on notice in such a way that to avoid unconscionable behaviour it ought to ensure that the surety received an adequate account and description of the relevant transaction.

Justice Eames, your Honours will recall in the judgment, reached the conclusion that this case would have been decided differently in England under the influence of Etridge’s Case, which is an extraordinary conclusion to think that something as basic as the concept of what is fair and decent and honourable and conscionable produces different results of that kind. The question has been expressly left open in Garcia as to whether the creditor’s duty may extend beyond cases where it knew of a husband and wife relationship but knew of a different kind of family relationship or other kind of non-commercial relationship.

As I have indicated, the courts since Garcia have displayed uncertainty as to how far the principle does extend. The primary judge in this case and the primary judge in the single case that I have made available to the Court, Alirezai, both decided that it had to be confined to marriage relationships or other intimate relationships, cohabitation relationships. On the other hand, as the discussion of the cases by Justice Charles shows, there are cases going both ways. So there is an air of uncertainty about whether one extends Garcia to other kinds of relationships, a point which the court said did not fall for decision in that case and, indeed, whether it extends beyond family-type relationships to other family relationships such as mother and son and so forth, brothers-in-law.

In Alirezai I have indicated a further development appears to have occurred in which two coextensive duties but quite separate duties, no doubt to be discharged in differing circumstances, have been posited by the members of the Court of Appeal. If I can take your Honours to that in my remaining minutes, Alirezai, in the judgment of the learned President, Justice McMurdo, at page 12 at paragraph [53]:

The third ground of appeal is that her Honour erred in finding that ANZ did not know that the appellant’s relationship with Mr Sarlak was of the type requiring it to be put on inquiry that the appellant may be in a situation of special disadvantage.

This case, your Honours, was a case of friends; it was not a family relationship. The bank knew that the surety felt obligated to the debtor because he had previously borrowed money from him, so that sense of obligation was really all the bank knew about it. Then further down:

The appellant has not referred this Court to any case where a relationship genuinely comparable to that between the appellant and Mr Sarlak has been found to be in the category referred to by Lord Nicholls in Etridge (No 2), requiring the creditor with knowledge of the relationship and the proposed financial transactions to take special care. A close friendship between borrower and surety based on shared cultural and religious values does not in itself
require a banker to do more than what was done here, namely, ensure the surety obtains independent legal advice on the transactions.

That passage indicates that this Court might well have decided our case, the case presently for consideration, differently. Then halfway down paragraph [54]:

In the circumstances, where ANZ had ensured the appellant was obtaining independent legal advice on the mortgages, Mr Sarlak said he would explain the mortgage of Lot 2 was not limited to the $150,000 guarantee and there was nothing noticeably irregular about the borrowings.

Your Honours, I would just simply say in conclusion, and my time is up, that all three judges reached the conclusion that you had to distinguish between giving independent advice and giving advice where you had to provide the information.

GLEESON CJ: Thank you, Mr Bleechmore. We do not need to hear you, Mr Mukhtar.

The Court is of the view that having regard to the findings of fact made in this case, it is not a suitable vehicle for agitation of the issues sought to be raised by the applicant. In addition, there are insufficient prospects of success of an appeal to warrant a grant of special leave. The application is dismissed with costs.

AT 12.45 PM THE MATTER WAS CONCLUDED