Further limitation on "all monies" clauses

By Quentin Solomon.

Key Points:
A recent Federal Court decision has supported the limitation of the scope of all monies provisions. The Court looked at the intention of the parties and the subject matter of the transaction as a whole, disregarding the broad scope of the provision.

Justice Finkelstein's comments in Re Piccolo:McVeigh (Trustee of the Bankrupt Estate of John Peter Piccolo) v National Australia Bank Limited [2000] FCA 187 suggested that a court should look beyond the wording of "all monies" provisions to the transaction as a whole, in an effort to assess the intention of the parties at the time the transaction was entered into.

A 2004 decision of the Federal Court appears to provide further support for the comments of Justice Finkelstein by confining the scope of an "all monies" provision.

The facts

In the matter of Geoffrey Niels Handberg (in his capacity as administrator of Australian Risk Analysis Pty Ltd) and Australian Risk Analysis Pty Ltd (Controller Appointed) (Administrator Appointed) v Chacmol Holdings Pty Ltd and Matthew Lee Johnston [2004] FCA 720, Justice Heerey tried certain questions that Justice Finkelstein on 10 May 2004 directed be separately tried pursuant to Order 29, rule 2 of the Federal Court Rules. The key question to be separately tried was whether, on the facts of the case, an "all monies" clause in a deed of charge had the effect of securing only a specific amount of money or also secured subsequent advances of money.

The facts of the case were as follows:

• An insurance consultancy business was sold by the first respondent, Chacmol Holdings Pty Ltd to the second applicant, Australian Risk Analysis Pty Ltd (then known as Australian Underwriting Agencies Pty Ltd (AUA)) for $5 million ("purchase price") payable over five years.
• There was also a pre-existing debt of $378,000 ("pre-existing debt") then owed by AUA to Chacmol.
• The purchase price and pre-existing debt were secured by a charge given by AUA in favour of Chacmol. The charge contained an "all monies" clause.
• Advances of money other than the purchase price and pre-existing debt were subsequently made by Chacmol to AUA.
• Subsequently Chacmol purported to appoint a receiver of the assets of AUA pursuant to the charge.
• AUA claimed that this was an invalid appointment on the basis that the debts secured by the charge had been repaid.

In this matter there were three key documents:

Contract of Sale which made clear that the purchase price and pre-existing debt were to be repaid by 60 monthly instalments;

Acknowledgement of Debt that states that:

• the Purchaser under the Contract of Sale is to repay the Vendor:
  • the "principal sum", being the total of the purchase price and the pre-existing debt;
  • interest on the principal sum; and
• subject to the consent of Westpac (as prior chargee), the Purchaser will execute a deed of charge in favour of the Vendor to "secure to the Vendor the Purchaser's obligations hereunder";

Deed of Charge which contained an obligation on the Purchaser to pay "all moneys now owing or payable or hereafter to become owing and payable to the Vendor by the Purchaser".

The decision

Justice Heerey's view was that the Contract of Sale, Acknowledgement of Debt and Deed of Charge "were entered into to effect one object and are to be construed as one instrument and read together".

Having reached this conclusion, Justice Heerey noted that there was a conflict between the three documents as:

• the Contract of Sale referred to the Purchaser's obligation to pay the purchase price and pre-existing debt;
• the Acknowledgement of Debt refers to the Purchaser's obligation to repay the "principal sum" (being the purchase price and pre-existing debt) and to enter into a charge to secure the "Purchaser's obligations hereunder"; and
• the Deed of Charge secured "all monies now owing or payable or hereafter to become owing or payable".

The court cited the principle established by the High Court in Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 that the general words of a release were to be read down and confined to the matters forming the subject of the disputes which the deed recited, to support the view that the general words of the "all monies" clause in the Deed of Charge be read down and confined to the object of the transaction.

Justice Heerey was not persuaded by arguments for the respondents that the literal meaning of the "all monies" clause should be paramount stating that "the logical consequence of that argument if that an all monies clause, which usually is only too clear when read in isolation, could never be read down. Plainly that is not the law".

Based on these reasons Justice Heerey confined the application of the "all monies" Deed of Charge to only securing the purchase price and pre-existing debt and did not extend to secure the subsequent advances made by Chacmol to AUA. As such, Chacmol was not entitled to appoint a receiver to the assets of AUA pursuant to the Deed of Charge as the debts secured by that charge had been repaid at the time of the purported appointment.

Conclusion

The lesson for lenders from this case is that where transactions are documented in a number of agreements, either those agreements should present a consistent message about the nature and extent of payment obligations that exist or may come into existence between the relevant parties, or the terms of an "all monies" clause in a deed of charge should be drafted such as to override any inconsistent intention that may be contained in other agreements forming part of the transactions. Otherwise a lender risks having its security read down and limited to that which was in contemplation between the parties as interpreted by a court from a review of the transaction as a whole. Such an outcome may lead to circumstances where a lender is under a misapprehension as to the extent to which its security will apply to secure repayment obligations of a borrower.