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- Unreported Judgment
DISTRICT COURT OF QUEENSLAND
Wang v Gao & Anor  QDC 298
JACKSON YUEXUEN GAO
JIE ZHEN PENG
D287 of 16
District Court, Southport
20 November 2020
6 and 7 October 2020
Kent QC DCJ
GUARANTEE AND INDEMNITY – CONTRACT OF GUARANTEE – MISREPRESENTATION OR NON-DISCLOSURE – GENERALLY – where the plaintiff agreed to loan $500,000.00 to the first defendant’s business, KStar Australia Pty Ltd, pursuant to a loan agreement – where the second defendant was married to the first defendant, but was otherwise not involved in the business and was not a shareholder or director thereof – where the first and second defendants, inter alia, personally guaranteed the loan to KStar Australia Pty Ltd, plus interest, if the company defaulted in its repayment – where the company defaulted on its repayment and was thereafter placed into liquidation and deregistered – where the plaintiff sought to enforce the guarantees given by the defendants – where the first defendant pleaded that the deed had not been read or explained to him and was unaware of the guarantee and the terms in which it was provided but did not attend the trial – where the second defendant said that she signed the deed at the first defendant’s behest, she did not understand the purport and effect of the guarantee and that the plaintiff took no steps to have the documents independently explained to her – where the plaintiff knew of the marriage and that the second defendant was a volunteer – whether it would be unconscionable for the plaintiff to enforce the guarantee against the second defendant pursuant to the principle in Yerkey v Jones (1939) 63 CLR 649 – whether the deed is void ab initio and unenforceable.
Uniform Civil Procedure Rules 1999, r 476
Australian Securities and Investments Commission Act 2001, s 12BC
Australian Consumer Law, s 21
Agripay Pty Ltd v Byrne  2 Qd R 501
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447
Garcia v National Australia Bank Limited (1998) 194 CLR 395
National Australia Bank Ltd v Savage (2013) NSWSC 1718
Pinehurst Nominees Pty Ltd v Coeur De Lion Investments Pty Ltd (2012) QSC 314
Schultz v Bank of Queensland Ltd  2 Qd R 86
State Bank of NSW v Chia  NSWLR 587
Yerkey v Jones (1939) 63 CLR 649
Mr S Farrell for the Plaintiff
Mr M Black for the Defendants
Short Punch & Greatorix for the Plaintiff
John P Bussa & Co for the Defendants
- This is a claim for money owing pursuant to a deed of loan and guarantee dated 13 January 2012, whereby the plaintiff entered into the arrangements with the defendants pursuant to a loan to a company, KStar Australia Pty Ltd (“KStar”) in the sum of $500,000. The plaintiff’s case is that the defendants have defaulted on their obligations and the proceedings are to recover the money allegedly owing. I will set out the background including the pleadings; the evidence; the submissions and my conclusions.
- The plaintiff was desirous of obtaining a permanent resident visa for Australia. She was placed in contact with the defendants, particularly the first defendant. His company, KStar, had a business in relation to the construction and supply of solar inverter technology for solar panels, based in Sydney in New South Wales. It seems that the immigration arrangements at the time were to the effect that an investor in an Australian based business could rely on that fact to assist a permanent resident visa application.
- The loan was entered into, and it is common ground that it was not repaid on the due date, which was 31 December 2014. The company was placed into liquidation and subsequently deregistered. This brought into play the guarantees given by the defendants. The plaintiff in these proceedings seeks to enforce the obligations arising pursuant to the guarantee. The response, broadly, of the first defendant was to the effect that the deed had not been read or explained to him, nor did he obtain independent legal advice and was unaware of the guarantee and the terms in which it was provided. This was pleaded to give rise to a declaration that the deed of loan was void ab initio and unenforceable. The first defendant did not attend the trial, and the proceedings as against him are generally governed by r 476 of the Uniform Civil Procedure Rules 1999 (“UCPR”). The pleadings may be taken into account, but of course he did not give or tender any evidence, or otherwise take part in the trial.
- In relation to the second defendant, the pleaded case is similar but more extensively pleaded. She was married to the first defendant and pleads that she signed the deed of loan and guarantee at his behest and under his influence (although this was not pressed at the trial), further that she did not understand the legal ramifications of the Deed of Loan and Guarantee due to language problems and that the plaintiff took no steps to explain the documents to her, where the plaintiff knew of the marriage and the second defendant was a volunteer. In the circumstances it is said by the second defendant that it would be unconscionable for the plaintiff to enforce the guarantee against her. The principles in Yerkey v Jones are relied on. Unconscionability as set out in s 12BC(1) of the Australian Securities and Investments Commission Act 2001 is also relied upon as is s 21(1) of the Australian Consumer Law.
- The plaintiff gave evidence that she was born in Jilin Province in China on 11 July 1988 and was 23 years of age when she entered into the relevant loan arrangement. She was introduced to the first defendant by an accountant who worked for the first defendant, a man by the name of Chen. This occurred on about 29 August 2011. Mr Chen was a friend of the plaintiff’s family.
- Present at the first meeting were the plaintiff, the first defendant, Mr Chen and the plaintiff’s parents. It occurred at the first defendant’s warehouse in Sydney. The first defendant ran the company KStar Group Australia Pty Ltd (he was the sole director and shareholder). The company manufactured solar inverters.
- At the meeting the first defendant explained that he was looking to expand his business and required an injection of capital. This suited the plaintiff, in that she was interested in obtaining permanent residency and an investment visa would achieve the purpose.
- Also discussed at the meeting was the necessity to provide adequate security for the loan and various proposals were raised.
- The plaintiff attended a second meeting on the following day. Present at that meeting was the first defendant’s solicitor, Vincent Zhu. This was about the 30 or 31 August 2011 and it took place at Mr Zhu’s office. Present were Mr Zhu, Mr Chen, Mr Gao, the plaintiff and her parents. There was discussion about the loan, and a guarantee and the exchange rate between Chinese and Australian currencies.
- Subsequently the plaintiff received some draft documents in respect of the transaction, two or three months later, in approximately November 2011. These were sent to her by Mr Chen, via email. The documents included a deed of loan and a share sales agreement and also a put option and call option.
- The plaintiff returned to Sydney in January 2012. She went to the bank and got a bank cheque for the loan amount. Then she went with Mr Chen to the office of another solicitor, Nolan Quin. Mr Quin was the plaintiff’s solicitor, having been referred by Mr Zhu. Mr Quin modified some of the documents. At the end of that meeting, the plaintiff returned to Queensland, leaving the bank cheque with Mr Quin.
- Later, about 11 January 2012, the plaintiff received word that the defendants had signed the agreement. She authorised the payment of the money by Mr Quin to the defendants and the deed of loan was executed on 13 January 2012. The deed is the first document in an agreed bundle which was tendered at the trial. It bears the signatures of the parties.
- The plaintiff said that none of the advanced loan moneys were repaid and the company KStar was subsequently wound up, with the plaintiff receiving no dividend therefrom.
- The plaintiff had become a director of the company after the loan advance, which she said she thought was one of the requirements of the business investment visa. She also had a 30 percent shareholding. She used the put option around 23 December 2014, prior to the date for repayment of the loan, and returned to the company her 30 percent shareholding. She also ceased to be a director of the company.
- In cross-examination the plaintiff agreed that she had never met the second defendant.
- The plaintiff also called Vincent Zhu. He gave evidence via video link from the Bar Association offices in Sydney. He is a solicitor and was first admitted in December 2004 in New South Wales. He practises in business law, disputes, litigation and administrative law. He was involved in the execution of the deed of loan and the guarantee by Mrs Peng. Prior to that time, he had experience in advising clients and borrowers concerning the obligations and risks associated with personal guarantees, having advised on these topics on a number of occasions. He was also familiar with the principles in Commercial Bank of Australia Ltd v Amadio (presumably a reference to the general principles relating to unconscionability due to lack of knowledge or education and imbalance in bargaining power).
- He had experience in providing independent legal advice for bank and non-bank borrowers and guarantors.
- Mr Zhu gave evidence that in relation to the transaction between KStar and the plaintiff, he was acting for KStar, the company. At the time he was a partner with the firm Auyeung Hencent & Day Lawyers.
- Mr Zhu said that had prior dealings with the first defendant, but not the second defendant. He also recalled meeting the plaintiff sometime prior to the signing of the documents, and he expressed the belief that this took place in his office in the conference room. He recalls that Mr Chen was present. He said that the plaintiff’s intention was to invest in KStar and she was considering applying for a business visa. He prepared some documents at some stage after that meeting. He recalled that to have been a share purchase agreement, and share call options or put option deeds.
- Importantly, Mr Zhu described the process whereby he had the second defendant sign the deed of loan. He witnessed the signature of both of the defendants. The execution appears at p 7 of the document, which is the first document in the agreed bundle.
- What Mr Zhu described was being told by the first defendant that his wife had to sign the documents because security was required over property owned by his wife, Ms Peng. He attended the second defendant at her home in Chatswood in Sydney. He met her in the lobby of her apartment building and he described in some detail the process of going through the documents with her in the lobby, although he did not have a file note of the attendance. It was some time in January 2012.
- Both Mr Zhu and the second defendant speak fluent Cantonese, and it was this language that they used to communicate. Mr Zhu said that he did not perceive that Ms Peng had any difficulty understanding. He took her through the documents including the most important provisions therein. He said:
“And the way I explained to her that the guarantee would work is that in the event that the borrower is unable to pay, then the guarantor, which is Mr Gao and her, would have to step up and make repayments of the amount that they’re owed under the loan agreement… and I also explained to her the reason why she needed to sign was because the lender wanted her to bound by that and also by the fact that she’s dealing with the property and that the property would be at risk or that the lender may take it, similar to any bank loan.”
- Mr Zhu said that the discussion took at least 20 minutes and he explained the transaction. She had an opportunity to ask questions. He also had a caveat in relation to Ms Peng’s property in Queensland and this was signed at the same time. It is at p 56 of the trial bundle. Mr Zhu gave evidence that the second defendant signed the document in his presence that day. It bears the date of 13 January 2012 (as do the other documents, and on the pleadings this date is not in issue). Mr Zhu said that he described to the second defendant what a caveat was and what it does and its purpose in this particular case in relation to her property.
- He continued that later he discovered there was a problem with the caveat and he needed to have a consent form executed as well. He contacted Mr Gao and was asked to see Ms Peng again. He went to her workplace, the Ryde Hospital where she worked as a senior nurse. This was perhaps later in January the same year. He met her in the carpark and discussed the consent with her but she refused to sign the document. The unsigned general consent form is at p 57 of the trial bundle.
- In cross-examination Mr Zhu rejected the suggestion that Mr Gao was present with him and Ms Peng for the meeting in the lobby. He otherwise adhered to the version he had given in chief.
- Mr Zhu did agree that he had not pointed out in detail to Ms Peng the share sale agreement, particularly in the context of her right to cause additional directors to be appointed to the company. He said that he expressly explained to her that she would have to personally repay the amount of $500,000 if the company and Mr Gao failed to do so. He also explained that her Brisbane property would be at risk of being sold to repay it. He also said that he remembered the transaction, partly because of the provision about the immigration visa, which while not unique was at least unusual. It was put to Mr Zhu that the second meeting with Ms Peng did not occur; he disagreed.
- Mr Zhu also confirmed that he went through the documents with Ms Peng explaining in Cantonese, and that she also gave the appearance at least of being able to read English.
- In the defendants’ case, the second defendant, Ms Peng, gave evidence. She said that she was born in China in 1962 and migrated to Australia in 1990. She was a registered nurse in China and met Mr Gao, who came to be her husband, in Australia. They were married in 1994 and had two daughters. She had a basic understanding of English when she was in China but in her nursing training also understood medical English. She continued to learn English in Australia.
- In Australia, she did nursing qualifications at the Australian Catholic University completing a one year program in 2002-2003 and from that time on she had a bachelor of nursing and obtained registration as a registered nurse with the Nursing Board in New South Wales, part of AHPRA. She had worked as a nurse since 2004.
- Ms Peng gave evidence that the KStar company was her husband’s business which he did not discuss very much. She accepted that she signed the document in January 2012 but said that she did so at the request of her husband and said that her husband was with her when she met Mr Zhu in the lobby of her apartment building. She explained this process by saying “Vincent and then Hi and then he said ‘I have document need you sign for borrow the money for Jackson – borrow the money for Jackson’s business.’” She agreed that Mr Zhu had flipped through the pages and pointed out where to sign.
- Ms Peng’s version was that Mr Zhu raised the question of the caveat at that stage which she declined to sign, saying that she thought the loan was to be repaid using her income. She did not wish to use her property to secure the loan. She denied meeting Mr Zhu a second time.
- She said that she separated from Mr Gao in June 2014 although they are not yet divorced.
- In cross-examination she agreed that in 2011 she had been in Australia for 21 years, had a Bachelor of Nursing and had been working as a nurse since 2004, at the Disability Centre which is part of the Macquarie Hospital Complex in North Ryde. She agreed that as part of her duties as a registered nurse they had to make and understand progress notes for patients. Her version as to this was that such notes involve medical terms, not financial terms. She agreed that the assessment for her nursing degree was conducted in English.
- Ms Peng agreed that she had dealt with lending institutions including banks in order to borrow for the two properties which are in her name. After some prevarication, Ms Peng eventually conceded that if she could not make the repayments on her mortgages, the financial institution would sell her house.
- The second defendant went on to deny that the signature on the caveat was her signature, however it is clear that no allegation of forgery is pursued on the pleadings; in my view I should proceed on the basis that it is her signature; and in the circumstances her false, or at least incorrect, denial of her signature is damaging to her creditworthiness. Ms Peng did deny meeting Mr Zhu on a separate occasion at the hospital; this may not be a central issue, but I am inclined to accept Mr Zhu’s evidence on this point.
- The second defendant submits that it would be unconscionable for Ms Wang to enforce the guarantee against her pursuant to the “second limb” of Yerkey v Jones (supra).
Submissions as to the evidence
- The evidence established that Mr Gao and Ms Peng were married at the time. In the period leading up to January 2012, Mr Gao and Ms Wang negotiated (with the assistance of their representatives) a loan of $500,000 from Ms Wang to the company along with a number of other obligations between the parties. However, Ms Wang did not meet Ms Peng. She was aware that they married.
- As outlined above, Mr Zhu advised and acted on behalf of the company. He was not acting for Ms Peng and had not previously acted for her.
- It is uncontentious that Ms Peng was not involved in negotiating the deed of loan and that Mr Zhu acted for the company (via Mr Gao as its controlling mind). Thus MrZhu’s duty was to the company and he had not met Ms Peng prior to January 2012. He attended at her home in Chatswood and met her in the lobby of a building on about 13 January 2012.
- Ms Peng’s evidence included being told by her husband that he needed her to sign the document because he had found a company to borrow some money and he needed her to sign the document. On the second defendant’s version, Mr Gao was present for the meeting. Mr Zhu said something like “I have document need you sign for borrow the money for Jackson – borrow the money for Jackson’s business”. “Jackson” was a reference to Mr Gao. Ms Peng said that Mr Zhu did not explain anything else about the document but took her to the signature page and showed her where to sign. She signed the deed of loan near where Mr Gao’s signature appeared. On Ms Peng’s version Mr Zhu then produced a caveat which she refused to sign because she did not want to use her property to secure a loan. I have noted this passage of the evidence above. Ms Peng’s denial in this regard is somewhat extraordinary. The document bears a signature. The pleadings contain no suggestion of forgery and this was not adopted at the trial; there was no application to amend the pleadings following this passage of evidence. As mentioned above, I find her denial of the signature on the caveat to be either incorrect or deliberately false, and in any case damaging to her credit worthiness. I accept the evidence of Mr Zhu on this point.
- The second defendant’s submissions continue, referring to Ms Peng’s evidence about what she thought her obligations were after signing the deed. Reliance is placed on a passage where she seems to indicate that she was aware that she was borrowing money but did not seem to indicate any understanding of her ongoing obligations. The submission is that I should accept that Ms Peng did not know or think about any future obligations from signing the document. It is not clear to me how that follows from the knowledge, clearly enough expressed on the evidence, that she was taking part in a loan, by signing the relevant documents.
- The second defendant’s submissions continue that she had plainly limited English language skills and her competency was in her familiar field of nursing or medical technology rather than financial business matters. Of course, this arises in the context that Mr Zhu discussed the transaction with Ms Peng in Cantonese, which appears to be the native language of both of them, and on his evidence he provided an explanation of the documents in that language. The second defendant gave evidence in the trial in English without the assistance of an interpreter or apparent difficulty. She has lived and worked in Australia for many years and has a tertiary degree in this country, taught in English.
- The second defendant’s submissions criticised the evidence of Mr Zhu in that he did not have a file note nor did he send a letter to confirm the advice he had given. His evidence was based on his own memory of events occurring more than eight and a half years ago. It was submitted that Mr Zhu would have had no particular reason to recall the events prior to 2016 at the earliest, four years after the conversation.
- It is also submitted that Mr Zhu, in his legal practice, has been involved in a lot of cases and given advice to clients in many different transactions. Other than the feature that Mr Zhu was witnessing a document out of the office, there was no special reason for him to remember the details. It is also submitted that Mr Zhu was unwilling to concede that it was unlikely he would have a clear, precise recollection of what was said; and that this unwillingness counts against his creditworthiness because such a recollection, it is submitted, is objectively unlikely.
- It is also argued that Mr Zhu was unwilling to concede that his evidence had been influenced by what he believes he would have done based on his usual practice, however objectively there is likely to be an element of reconstruction in his account.
- The submissions advance a number of other features of the evidence. The second defendant’s signature appears above that of Mr Gao, consistent with him having signed first. It is argued that this is consistent with him therefore being present as MsPeng recalls, however, in my view that proposition does not necessarily logically follow. He could easily have signed it at an earlier time, although Mr Zhu is the only witness. It is not clear to me that this was precisely analysed in the evidence.
- It is argued that Mr Zhu could not remember exactly how the meeting was arranged. This is said to leave open the possibility that Mr Gao was present to make the introductions.
- It is common ground that when Mr Zhu explained the consent to caveat document, Ms Peng refused to sign it, whenever that may have been. It is argued that this is consistent with Ms Peng signing the deed without understanding her obligations, as she was resistant to put up her Queensland property as security. However, the two versions do not really meet. Mr Zhu explained how Ms Peng signed the caveat document at the same time as the deed of loan. It was only at a later time, on a separate occasion, at a separate location, that he presented her with the consent to caveat form but she refused to sign. Thus, Mr Zhu’s evidence is consistent with the second defendant understanding and consenting to the caveat procedure, however later, in the interim before being presented separately with a consent document, changing her mind to reject it; i.e. getting “cold feet” in the meantime.
- The second defendant submits that her evidence should be accepted, resulting in a finding that Mr Zhu did not explain the material aspects of the deed of loan or the share sales agreement and Ms Peng did not understand her obligations. Reliance is placed on what are said to be six material aspects of the transaction:
- (a)She was personally guaranteeing to repay the $500,000 plus interest involved in the loan if the company failed to do so;
- (b)She was using the Queensland property to secure the loan and thus placing it at risk;
- (c)She would be precluded from selling or renting out or refinancing the Queensland property without Ms Wang’s consent;
- (d)She was also personally guaranteeing the performance of KStar’s other obligations, including doing the things necessary to facilitate Ms Wang’s application for an Australian permanent resident visa;
- (e)The loan was repayable by 31 December 2014, but could be repayable early if KStar failed to keep Ms Wang as a director of the company or failed in various other obligations (none of which, on the evidence in this case, came to pass).
- (f)Further, pursuant to the share sales agreement, Mr Gao had agreed to appoint “as additional directors, secretaries and public officers” of KStar such persons as nominated by Ms Wang. This is submitted to be a material part of a transaction which Ms Peng was guaranteeing, because it had direct implications for KStar’s capacity to comply with its obligations under clause 4 of the deed of loan.
This was not canvassed in cross examination of the plaintiff. There is no suggestion she ever knew of this right or sought to exercise it; nevertheless, the second defendant submits that its presence in the deed was significant.
- The second defendant further submits that even on Mr Zhu’s evidence he did not adequately explain three material aspects namely that:
- (a)In relation to the guarantee, Zhu said that MsPeng would be obliged to repay only if both KStar and Mr Gao failed to repay. That suggests that Ms Wang could only seek to enforce the guarantee against MsPeng if she first sought payment from Mr Gao, however that is not the effect of the document as Ms Peng’s obligation was joint and severable.
This is not quite the evidence. He said she would have to repay “if the company and Jackson failed to do so” The second defendant’s point, that Zhu was suggesting a clear and precise descending order of liability, contrary to the terms of the deed, is not made out, in my view. Zhu’s language, which was not further examined, is capable of being understood as consistent with the deed; if either the company or Jackson paid, Ms Peng did not have to. The word “only”, which supports the submission, was never put to Mr Zhu. It may well be that, if it had been put in that way, Mr Zhu could have referred to the joint and severable nature of the obligation; the evidence does not reveal this either way.
- (b)Mr Zhu did not clearly explain that Ms Wang could call for early repayment if KStar breached one of its obligations (again, this did not happen).
- Thus, the second defendant submits that Ms Peng did not fully understand, and MrZhu did not adequately explain, the nature and effect of the relevant transaction.
Submissions as to equitable principles
- The second defendant then calls in aid the principle from Yerkey v Jones (supra), wherein equity would invalidate a guarantee given by a wife for a husband’s debt where the wife does not understand the effect of the document or transaction. Reliance is placed on the observations by Dixon J at p 683:
“… If a married woman’s consent to become a surety for her husband’s debt is procured by the husband and without understanding its effect in essential respects she executes an instrument of suretyship which the creditor accepts without dealing directly with her personally, she has a prima facie right to have it set aside.”
- The second defendant also relies on Garcia v National Australia Bank Limited. It is submitted that in this case the High Court explained that Dixon J’s second limb in Yerkey v Jones does not depend on a presumption of undue influence by the husband over the wife. The plurality said at :
“… Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transactions purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable.”
- Lastly it was submitted that what raises the unconscionability is the combination that:
- (a)in fact the surety did not understand the purport and effect of the transaction;
- (b)the transaction was voluntary in the sense that the surety obtained no gain from it;
- (c)the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife and yet;
- (d)the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.
Whether these last two features have as much force where the plaintiff is not a bank or other financial institution (as in many of the decided cases) but rather a private citizen and a relatively young woman, in a foreign country, albeit with the assistance of legal advice, may be debatable, but not necessary to resolve.
- Thus it is submitted it would be unconscionable for Ms Wang to enforce the guarantee against Ms Peng if:
- (a)Ms Wang was on notice of the marriage;
- (b)the transaction was voluntary;
- (c)Ms Peng did not understand the purport and effect of the transaction (the onus of establishing which is on Ms Peng);
- (d)Ms Wang did not herself take steps to adequately explain the purport and effect of the transaction to Ms Peng or ensure that an independent person had explained it to her, in respect of which the onus was on Ms Wang.
- As to these factors, first the second defendant submits that Ms Wang did know about the marriage (this is admitted in the pleadings).
- Ms Peng then submits that she was a volunteer in the relevant sense. She did not obtain any direct or immediate benefit from the transaction. It is submitted that she had no involvement in her husband’s KStar business and was not a shareholder or director thereof. The deed of loan reveals no direct benefit to Ms Peng; Mr Gao did not in fact give her any money. It submitted that the prospect of a profit or benefit accruing to the family unit is insufficient to deny Ms Peng the character of a volunteer. This is not contested by the plaintiff.
- In this context, the second defendant grapples with clause 5(c) of the deed of loan which includes a representation that both guarantors have directly and/or indirectly financially benefitted from and/or keep financially benefitted from the loan. The second defendant argues that this is of no assistance to the plaintiff. If there was an indirect benefit this is insufficient. Secondly the fact and substance of the matter overcome a representation in the deed if she did not in fact so benefit: National Australia Bank Ltd v Savage. Again, this is moot; the plaintiff does not contest the second defendant’s position as a volunteer.
Lack of Understanding
- The second defendant further pursues the proposition that Ms Peng did not understand the purport and effect of the transaction. Comparison is made to Byrne (supra) where the wife was a well-educated, intelligent medical practitioner; it was nevertheless accepted that she did not adequately understand the relevant transaction. Reference is made to the observations of McMurdo P at . However in that case, as the President explained, Dr Byrne, despite her intelligence, education and experience of life, did not read or even browse through the document. She was not aware of a number of essential aspects of the transactions she was guaranteeing. At  the combination of circumstances was described as “unique”. At  the President referred to “commercial lenders” which may not be an apt description of Ms Wang. In any case, the factual matrix in Byrne was, in my view, different from the present case.
- Again, the second defendant relies on various aspects of the transaction of which she says she was not informed; see - above.
Independent Adequate Explanation
- The second defendant next submits that once she has demonstrated she did not understand the transaction in a material way, the onus is on the plaintiff to establish that she (Ms Wang) took steps to adequately explain the purport and effect of the transaction to her or that she ensured that an independent person adequately explained the transaction;
- It is thus submitted that Ms Wang must rely on the actions of Mr Zhu, however he was not an “independent and disinterested stranger” rather he was the solicitor acting for KStar which was a party to the deed of loan and thus not independent and disinterested.
- The second defendant draws a comparison to the decision of Byrne at first instance. This is to the effect that an investment adviser in that case was not disinterested and thus his explanation was not sufficient to defeat the equity. The parallel is drawn to MrZhu in the present case.
- The second defendant also submits alternatively that the plaintiff does not discharge her onus of establishing that Mr Zhu provided Ms Peng with an adequate explanation. Even on Mr Zhu’s evidence it falls short of proving that he adequately explained the transaction because of the material aspects not explained.
- It is also submitted that the acknowledgement by the guarantors that they had been advised to seek independent legal advice in clause 5(f) of the Deed of Loan does not assist the plaintiff and relies on observations to this effect in Savage v Byrne (supra). Thus, the plaintiff has not discharged her onus of establishing that an independent person explained the transaction to Ms Peng. It is thus argued that the relevant defence is made out and the claim against Ms Peng should be dismissed.
- In relation to the factual overview, the plaintiff accepts the second defendant’s submissions apart from the feature that although Mr Zhu acted on behalf of KStar, the plaintiff understood that he was acting on behalf of the company and each of the guarantors; secondly by reasons of clause 1(b) and 1(f), earlier repayment of the loan could only be demanded in the event of a breach of the company’s obligations under clause 4 of the deed of loan, not merely at the plaintiff’s election.
- The plaintiff notes that the second defendant has abandoned any defence based on the principles in Commercial Bank of Australia Limited v Amadio. She has also not pressed arguments based on the statutory provisions referred to in the defence, possibly because these would require a finding of unconscionable conduct on behalf of the plaintiff.
- It is submitted that it is common ground that the full amount of the debt is due and owing. With the (miniscule) interest, the amount owing at the date of the trial was $500,148.36 plus statutory interest under the Civil Proceedings Act, amounting to $160,117.71.
The First Defendant
- The plaintiff dealt with the position of the first defendant.
- The first defendant did not appear at the trial although his name was called. Numerous efforts had been made to contact him, as deposed to by Mr O’Connor.
- The plaintiff submits that judgment may be entered against the first defendant on the pleadings where his defence admits that he entered in to the deed of loan had the personal guarantee; it further admits that the loan monies were advanced, that the company defaulted and was wound up and that liquidators were appointed.
- Further, denials and non-admissions are made in respect to the guarantee, that the plaintiff has exhausted her rights and may bring her claim against the guarantors; that a demand was made and that the principle sum is due and owing.
- The plaintiff thus submits that many of these denials or non-admissions do not comply with UCPR 166(4) and thus are taken to be admissions.
- The plaintiff points out that at para 5 of his defence the first defendant pleads that the deed of loan was prepared under the direction and instructions of both he and the plaintiff, which seems uncontroversial. However, inconsistently with that, at para 6 of the defence a number of propositions are advanced contesting liability under the guarantee. He pleads that he plaintiff never requested a personal guarantee, it had not been discussed, the terms of the deed were not explained to or read by him, he was not given or recommended independent legal advice and was unaware of its terms.
- The plaintiff points out that the evidence at the trial demonstrated that Mr Zhu acted for the company on instructions from the first defendant and the first defendant was involved at all stages.
- The plaintiff relies on the constructive admissions in the pleadings and further argues that the case pleaded by the first defendant is either contradicted by the evidence or in any event, is unable to support any equity or principle at law absolving the first defendant from the guarantee. Thus judgment should be entered against him, with costs. In my conclusion these submissions should be accepted.
The Second Defendant
- In relation to the second defendant, as outlined above, the sole issue really is whether in the circumstances the second limb in Yerkey v Jones is engaged.
- The plaintiff concedes that:
- (a)She was on notice that the first and second defendants were married;
- (b)The second defendant was a “volunteer” to the transaction (in the relevant sense); and
- (c)She took no direct steps to provide an explanation to the second defendant or ensure that independent advice was provided to her.
- The plaintiff’s contention, however, is that the second defendant has not discharged her onus of proving that she had a material misunderstanding of the transaction.
- As the plaintiff submits, the principals from Yerkey v Jones appear anachronistic in the modern age, but its continued existence was confirmed by the High Court in Garcia v National Australia Bank Ltd. The second limb of the principle is engaged where there is a failure to adequately explain the surety transaction.
- The plaintiff points out that in Schultz v Bank of Queensland Ltd Boddice J noted that for the principle to operate it is necessary to show the vulnerable party in fact did not understand the purport and effect of the transaction. The onus of establishing that requirement properly rests with the surety.
- Schultz itself is a case where the primary judge found that there was no material misunderstanding, at first instance.
- The question in the present case is primarily whether there was a material misunderstanding concerning the purport and effect of the guarantee. There may be an issue as to the reasonableness of the plaintiff’s reliance upon Mr Zhu for that purpose, however this seems secondary. The test for the primary issue is whether the second defendant understood the “general nature and effect of the instrument”.
Lack of understanding – the plaintiff’s submissions
- In this context the plaintiff relies on Mr Zhu’s evidence as outlined above. He was an experienced practitioner, did not draft the documents and acted for the company, not the first defendant personally. In particular, Mr Zhu had an independent recollection of the relevant circumstances, because of its urgent nature and that it was conducted out of the office. Mr Zhu correctly detailed where the meeting took place. In the meeting he took the second defendant to the loan amount, the interest rate, and the default clause. He explained that the lender would like the second defendant to give a guarantee and he told her that “the way … the guarantee would work is that in the event that the borrower is unable able to pay, then the guarantor, which is Mr Gao and her, would have to step up and make the payments of the amount that they owed under loan agreement on the document.”
- The plaintiff relies on Mr Zhu’s evidence that the meeting lasted about 20 minutes or so and he was not going so fast as to prevent Ms Peng from asking questions. It was conducted in Cantonese, the native tongue of each of Mr Zhu and the second defendant. He explained the principal amount, the default clauses, the interest rate and the guarantee provision itself. The plaintiff argues that Mr Zhu had a clear memory of explaining the background information as to how the loan came about including the plaintiff’s requirement for an immigration visa in terms of her investments into the business and he specifically informed the second defendant of the obligations in Clause 4 of the Deed.
- The plaintiff relies on Mr Zhu’s evidence that he showed the second defendant the share sale agreement, although he was not sure he went through every page of it. As outlined above, he confirmed that the first defendant was not present. As also noted above, the second defendant signed the caveat in his presence. I have noted above the improbability – indeed, the non-issue - of this being a forgery (including the lack of any pleading to this effect), and this aspect of the evidence being damaging to the credibility of the second defendant.
- The plaintiff also refers to Mr Zhu’s evidence of the later visit to the second defendant’s work place at the hospital where she refused to sign the consent to caveat form.
- As to the plaintiff’s right under the share sale agreement to appoint other directors to the company, the plaintiff accepts that Mr Zhu did not specifically tell the second defendant of that aspect, but it is submitted to be not material as a change in governance is always a possibility with any company and it is inherent to a personal guarantee that the guarantor may be exposed to the vagaries of the borrower.
- Overall, the plaintiff argues that Mr Zhu’s evidence of the circumstances of the execution of the Deed should be preferred to that of the second defendant. It is argued that the second defendant was unimpressive and evasive and unwilling to make reasonable concessions. Further, her evidence was inherently unlikely and contradicted by the documentary evidence, specifically the caveat to which I have referred. Mr Zhu, on the other hand, offered details that he would likely not otherwise have known such as the location of the second defendant’s employment and made reasonable concessions.
- Further, in this overall exercise of examining the second defendant’s credit worthiness, it is not credible that, having lived in Australia since 1990 and achieving a Bachelor of Nursing at a major Australian university in 2003, in English, and working consistently as a registered nurse since January 2004, she did not have the competency in English to comprehend the Deed of Loan in January 2012.
- Secondly, the second defendant is not financially naive. Since prior to this transaction she has been a registered proprietor of two mortgaged properties, one in New South Wales and one in Queensland. She is solely responsible for both those mortgages. Her evidence that not only Mr Zhu, but bank staff on two occasions, simply showed her documents and asked her to sign them without explanation is not credible. The proposition that a sole wage earner on a nurse’s salary, with two children and solely responsible for two mortgages, does not know either the interest rate she is paying or the monthly repayments is difficult to believe, particularly where she has a Westpac account, a home loan and an investment home loan relating to the Queensland property. It was only after extensive questioning that she conceded that she knew the consequences of defaulting the loan was that “they would sell my house”.
- I do consider this passage to be particularly damaging to the second defendant’s credit worthiness. My clearly formed impression was that the second defendant was well and truly aware that if she did not make the repayments on a loan the mortgagee could sell her property; that this was the nature of a mortgage secured against a property; and that she did not wish to admit this proposition or understanding in these proceedings because she considered it adverse to her interests. On this point I simply did not accept the second defendant’s evidence, and this is somewhat damaging to her cause.
- The plaintiff further submits that the second defendant in refusing to sign the consent to caveat also demonstrated a clear understanding of the purport and effect of the transaction. She said “No. I don’t want to use my property to secure this loan.” It is submitted that the second defendant’s very refusal (on her case) to sign the caveat (in truth, the later proffered consent to caveat) demonstrates both that she was not overborne by her husband (bearing in mind that this limb of the principle is not relied upon) and, importantly, that she had an understanding of the nature of the transaction.
- I am inclined to accept this submission.
- The plaintiff continues that it is implausible that Mr Zhu explained to her the nature of a caveat, but not the obligations of a guarantor. However, in truth, my view of the referenced passage of the second defendant’s evidence is that she understood the nature of both the caveat and the deed of loan. As canvassed above, there was also discussion of the guarantee.
- The plaintiff submits that the second defendant’s evidence includes an acknowledgement that Mr Zhu asked her about the caveat; it was about her Queensland property; to secure the loan; and this is followed by the passage concerning the caveat “I don’t want to sign. I don’t want to use my property to secure this loan. I thought I signed this loan is to use my income. That’s it. So could borrow some money.” The plaintiff submits this demonstrates a clear understanding of the nature of the transaction, the distinction between a personal guarantee of a loan and the provision of a mortgage as security. In my view, this is a correct characterisation.
- It is further submitted on behalf of the plaintiff that I would accept Mr Zhu’s evidence in preference to Ms Peng’s in relation to the incident at the Ryde Hospital carpark. The rhetorical question is posed as to how Mr Zhu would otherwise know where the second defendant worked and further why he would manufacture such a story, particularly where the conclusion of it was that the second defendant refused to sign the consent to caveat. In my view those submissions have significant force. It is also submitted that the second defendant’s description, at the trial, of her signature on the caveat as a forgery is without merit. For the reasons outlined above, in my view this is correct.
- It is further argued that Mr Zhu has no reason to be anything other than candid. He was acting for the company and is not professionally exposed from any deficiency in his explanation, whereas Ms Peng is clearly interested in defeating the guarantee.
- The plaintiff submits I would prefer the evidence of Mr Zhu to that of the second defendant and thus conclude that the second defendant has not discharged her obligation to show that she was under a material misunderstanding concerning the general purport and effect of the transaction. The explanation does not have to be minute in detail. It is not enough to set the transaction aside that some details or possible consequences are not comprehended. In any case, it is not clear to me that any relevant details or possible consequences were not comprehended.
- The plaintiff engages with the second defendant’s submission that Mr Zhu’s explanation incorrectly suggested that Ms Wang could only seek to enforce the guarantee against Ms Peng if she first sought payment from Mr Gao. I have dealt with this proposition above. As the plaintiff submits, it is not founded upon the precise evidence given by Mr Zhu, and the distinction sought now to be relied upon was never explored with either Mr Zhu or the plaintiff in cross-examination.
- The plaintiff relies on a passage from State Bank of NSW v Chia:
“An understanding of the “purport and effect” of the transaction includes, at least, an understanding of the fact of liability, the general extent of liability and the possible consequences of default. However, it is not productive of an equity that the wife misunderstood or failed to appreciate the degree of risk associated in the transaction, or the improvidence or unwisdom of the uses to which the money secured will be put.”
- The plaintiff also argues that Mr Zhu’s position was one of a degree of independence in that he was independent of both the lender and the husband; his duty was to the company and not analogous to the broker’s commission in Agripay Pty Ltd v The Estate of Byrne Mr Zhu did not benefit financially from the second defendant signing the guarantee and he was not paid by the lender. A further distinction from Agripay is that the wife in that case was told almost nothing about the transaction, was given no advice and did not know the amount of the loan or its terms. I agree that the cases are quite different – see  above.
- A distinction is also drawn from Garcia where the lender was a bank and the wife had executed the relevant guarantee under significant pressure from her husband. It was found by the trial Judge that she executed the guarantee to try to save her marriage. Signing of the relevant documents took place at a bank branch and took less than one minute. It was also found that she did not realise that the guarantee was linked to a mortgage executed by her eight years previously. This, again, is quite different from the present case. There is here no suggestion of overbearance by the husband, and the second defendant had an understanding of the purport and effect of the transaction.
- The plaintiff argues that Mr Zhu’s evidence should be accepted over that of the second defendant with the result that she has failed to discharge her onus of showing any material misunderstanding.
- In my conclusion, the plaintiff’s arguments must be accepted. As against the first defendant, I accept the submissions that the pleadings contain constructive admissions, and in any case none of the matters sought to be relied on in the first defendant’s defence were supported by the evidence. There is nothing absolving him from the guarantee.
- As to the second defendant (accepting that in the relevant sense she was a volunteer, and that she was married, and the plaintiff knew of the marriage), the only live issue is whether Ms Peng has discharged her obligation to establish that she was under a material misunderstanding as to the purport and effect of the transaction which she entered into. For the reasons outlined above, she has failed to do so.
- I find that the documents were signed in the way and on the occasion described by Mr Zhu, and in this regard I prefer his evidence to that of Ms Peng where they disagree. I find that the explanation and commentary provided by him was thorough and sufficient to, and did, convey the purport and effect of the transaction to Ms Peng. I find that she did sign the caveat on that occasion, aware of its purpose, and that her denials in that regard damage her credit, as does her denial of the later meeting with Mr Zhu at the hospital, and her evasiveness as to the rights of a mortgagee in relation to her property. In my conclusion she clearly understood the nature and effect of the transaction. I do not accept that Mr Zhu incorrectly advised her that the plaintiff would call on Mr Gao prior to exercising rights against her.
- The lack of explanation as to the share sale agreement was not material, for the reasons advanced by the plaintiff.
- The nature and degree of Mr Zhu’s independence may be debated. He was certainly not acting for the plaintiff. His duty, as the plaintiff submits, was to the company, which apparently desired the transaction to proceed. But the degree of Mr Zhu’s separation or indifference from the transaction would only assume relevance, for the purposes of whether the equity arises, if the second defendant did not understand the purport and effect of the transaction. As I have found that she did, the exact degree of Mr Zhu’s independence recedes as a relevant factor. These are independent, cumulative factors; if, for example, the surety did not understand the nature and effect of the transaction, but the creditor had taken steps to have it independently explained, the creditor may still succeed. In this case, the second defendant has not established the requisite lack of understanding.
- There will be judgement for the plaintiff against each defendant on the claim in the sum of $660,266.07. The plaintiff calculates this sum as $500,000.00 for the principal; contractual interest from 13/01/2012 to 31/12/2014 at .01%, being $148.36; and $160,117.71 statutory interest from 31/12/2014 to 6/10/2020. Costs would normally follow the event. These will be the orders, subject to any submission as to mathematical error or any further argument as to costs or formalities.
(1939) 63 CLR 649
(1983) 151 CLR 447
T1-42, ll 5-9.
See generally T1-45 to T1-46.
Accepting this evidence, as I do, given that it was not contested, puts to rest the reliance on English language problems in para 5(l) of the Amended Defence
T1-52, l 44.
T1-58, l 21.
T1-60, l 40, T1-61, l 5.
T1-64, ll 20-25.
T1-67, l 15.
T1-69, l 16.
T1-69, ll 40-45.
T1-73, l 45.
T1-75, l 46.
T1-82, l 15.
T1-84, ll 15-16.
Supra at l 30.
T1-69, ll 1-7.
T1-69, ll 41-44.
T1-71, ll 10-19.
T1-57, ll 13-18 and 31-38.
T1-54, ll 29-34.
At p 684.
(1998) 194 CLR 395.
 2 Qd R 501.
 2 Qd R 86.
T1-72, ll 1-2.
Byrne at , .
(2013) NSWSC 1718 at  at 102 and 103.
This is highlighted by the factual summary in the judgement of White J at -
See Garcia at  and Schultz at .
Agripay Pty Ltd v The Estate of Murray Andrew Byrne  QSC 189 at .
T1-37, l 13.
Pinehurst Nominees Pty Ltd v Coeur De Lion Investments Pty Ltd (2012) QSC 314, .
Garcia v National Australia Bank Ltd at .
 QCA 208.
Ibid at .
Yerkey (supra) at CLR 689 per Dixon J
T1-60, l 30.
These details were confirmed in cross-examination at T1-60, l 42 – T1-61, l 5.
Exhibit 1, Doc 5.
T1-78, l 26.
T1-79, ll 1 – 37.
T1-79, ll 42 – 47.
T1-81, l 1 – T1-82, l 16.
T1-84, ll 1 – 3.
This is a reference to the plaintiff’s evidence in chief at page 1-71 ll10-20.
Schultz v Bank of Queensland  QCA 208 at .
Yerkey at page 649.
 NSWLR 587 at 600.
 QSC 189 and subsequently  QCA 85.
See e.g. Garcia at  as to the combination of the relevant circumstances giving rise to the equity.
Garcia at , referring to Yerkey at p 686
S 58 Civil Proceedings Act 2011
- Published Case Name:
Wang v Gao & Anor
- Shortened Case Name:
Wang v Gao
 QDC 298
Kent QC DCJ
20 Nov 2020