Morne Industries PNG Ltd v Kina Finance Ltd [2004] PNGLR 46 (26 November 2004)

NATIONAL COURT OF JUSTICE

MORNE INDUSTRIES PNG LIMITED

V

KINA FINANCE LIMITED

WAIGANI: KANDAKASI J

03 September 2003; 26 November 2004

CHATTEL MORTGAGE – Bill of Sale – Specie of- Prescriptive nature of.

CONTRACT – Finance contract – Valuable consideration – Advance of finance by one and promise to repay by another and provision of security – Funds advance - Security instrument – Bill of Sale – Statutory requirements – Intent of – Meaning of "truly set out consideration" – General statement of without specifying the actual amount – Effect of – Failure to meet specific statutory requirement – Invalid instrument – Instruments Act (Chp. 254) ss.4, 8, 10 and 42.

Facts

The defendant loan a sum of money to the plaintiff on the basis of bills of sale as security. The plaintiff defaulted on repayment and sought inter alia a declaration that the two registered bills of sale it granted to the defendant were invalid for failure to satisfy the Instruments Act.

Held

1. The Instruments Act differs from the English Bills of Sale Act in being of general application, whereas the English Act is restricted to Bills of Sale.

2. Unlike the English Act, the Instruments Act contains no prescribed form. It is, however, intended to be prescriptive.

3. One of the specific requirements in a bill of sale is the requirement to, "truly state the consideration". Based on the above authorities, I am of the opinion that this means, a requirement for a precise statement of the amount of the advance, agreed interest thereon and the specific amount of periodical or installment repayments.

4. In order for an instrument to qualify for registration under the Act the names of the parties would have to be grantor and grantee not mortgagor and mortgagee as used in the documents.

5. A bill of sale that does not meet the requirements of the Instruments Act is ineffective and invalid .

Papua New Guinea cases cited

Bank of Papua New Guinea v Derick Sakatea Niso (2004) PNGLR 128.
Chen Limited v The Tower Limited (No 2) (20/01/03) N2319.
Fly River Provincial Government v. Pioneer Health Services Limited (24/03/03) SC705.
Patterson v. NCDC (05/10/01) N2145.

Other cases cited

Davies v Burton [1883] QBD 537.
Ex Parte Dalgety Farmers Ltd [1987] 2 Qd R 481.
Hughes v Little [1886] UKLawRpKQB 146; (1887) LR 18 QBD 32.
Olsen v General Credits Ltd [1985] 2 Qd R 506.

Counsel

T Boboro, for the plaintiff.
A Mana, for the defendant.

26 November 2004

Kandakasi j. The plaintiff through a writ of summons is seeking amongst others, a declaration that two registered bills of sale it granted to the defendant are invalid and consequential orders of inter alia, a return of the value of certain goods repossessed by the defendant pursuant to the bills of sale. In so doing, the plaintiff claims that, the bills are invalid for failure to meet the requirements of s.4 of the Instruments Act (Chp. 254). The defendant argues to the contrary and submits that the plaintiff is not entitled to the consequential orders it seeks.

The main issue is therefore, whether the bills of sale fail to meet the requirements of the Instruments Act? Secondly, depending on the answer to that issue whether the plaintiff is entitled to the consequential orders it claims.

Background and facts

The background and facts giving rise to these proceedings and the issues before the Court are not much in dispute. They start with a written loan agreement dated, 29 June 2001, between the parties. Under that agreement, the defendant agreed to provide certain financial advances to plaintiff on the terms and conditions set out in the agreement.

For the purpose of the loan, the plaintiff was required to and did provide security for the loan facility in terms of a personal guarantee and an indemnity from Mr. Greg Neville per a deed of guarantee and indemnity dated 29 June 2001. That was in addition to a registered bill of sale No. BS3525/01 dated, 29 June 2001, over various chattels described in part 2 of the schedule to the bill of sale. The defendant claims the plaintiff also gave a registered bill of sale No. BS825/02 dated, 20 April 2002 over various other chattels specified in part 2 of its schedule.

The plaintiff denies signing and giving the second registered bill of sale. The defendant's argument is to the contrary. The affidavit of Mr. Greg Neville annexes a copy of the relevant bill as annexure "B". I notice in the date space, the initial month entered is "August"but later crossed out and replaced with "April". Similarly, the year originally entered is "2001"but subsequently changed with a cross out of the figure "1" and replaced with the figure "2"to read as "2002". There is no initialing of these changes by both of the parties, which is the usual way of confirming the agreement of the parties to the changes: See Chen Limited v The Tower Limited (No 2) (20/01/03) N2319.

In addition to the above, there is no disclosure of the names of the person witnessing and executing the document on behalf of the plaintiff. Similarly, the document does not disclose the name of the person signing the document on behalf of the defendant. Further, there is no evidence as to where and when exactly did the parties execute the document. If indeed, the plaintiff executed the bill as the defendant claims, it should have provided evidence of that but it has not. In these circumstances, I find that, there is no evidence of the defendant signing the bill. I therefore find that, the second purported bill is not a bill of sale between the parties.

Moving on, I note that based on the loan agreement, the defendant advanced to the plaintiff a sum of K120,000.00. Since the advancement of the loan in June 2001, the plaintiff serviced the loan until it ran into financial difficulties and was not able to service the loan. The plaintiff therefore, defaulted on the loan resulting in the defendant issuing notices under the first bill of sale for payment of the debt. Failing a payment of the total amounts owing, the defendant issued a statutory demand against the plaintiff on 28 February 2003, but served it on the plaintiff on 4 March 2003. The plaintiff did not comply with that demand. That led the defendant to issue a petition to wind up the plaintiff on 11 April 2003 under MP No. 123 of 2003.

The wind up petition was initially returnable on 23 May 2003 but, was adjourned to allow for settlement negotiations. On 30 May 2003, the plaintiff filed an application and moved on 4 June 2003, for a stay of the wind up petition on the basis that, funds sufficient to offset the debt were forthcoming from the State to the plaintiff and that, it was just and equitable that the defendant's petition be stayed. His Honour, Justice Sakora, granted that application on 25 June 2003, staying the petition, with liberty in the defendant to revisit these orders if payments were not made within a reasonable period. However, on 4 August 2003, the defendant lodged in the Supreme Court an appeal against Sakora J.'s orders. I will return to this in the later part of this judgment because this is significant.

Continuing with the chronology of events, I note that, prior to the stay orders, the defendant issued on 9 June 2003, two repossession notices purportedly under both the bills of sale. Consistent with the position the plaintiff took in relation to bill No. 825/02, the plaintiff says, the repossession notices could only be under registered bill No. 3525/01 and not No. 825/02. In the light of the plaintiff's objection, the defendant repossessed the equipment or chattels covered only under bill No. 3525/01 and not those under 825/02.

As a response to the defendant's actions, the plaintiff issued these proceedings on 29 July 2003, challenging the validity of the two bills of sale. Apart from the plaintiff denying the execution of the second of the bills of sale, which I have just found in its favour, it argues also that, both of the bills are invalid. The basis of this argument as noted already is s 4 of the Instruments Act, which requires bills of sales to "truly set out the consideration for which they have been given".

Requirements of the Instruments Act

I now turn to a consideration of the requirements of the Instruments Act and the meeting or failure to meet them in the present case. Once again, the relevant provision is s.4 of the Act, which reads:

"4. Requirements of bills of sale.

(1) A bill of sale shall—

(a) be registered in the manner prescribed by this Part; and

(b) truly set out the consideration for which it was given.

(2) A bill of sale has no effect as to chattels comprised in it, whether as between the parties to it or as against any other person, unless—

(a) it is registered within 60 days after the day on which it was executed; and

(b) the consideration is truly set out in it."

The language used in this section is very clear as to the requirements a bill of sale must meet in order for it to be effective. These are that: (1) registration in accordance with the prescription in the Act; (2) the registration takes place within 60 days of its execution; and (3) truly set out the consideration for it. The section employs the mandatory "shall" as opposed to the discretionary "may". Therefore, in my view, these requirements are mandatory. Hence, a failure in one of them would render the bill of sale ineffective or invalid.

The dispute in this case is in relation to the meaning and application of the requirements under paragraphs (b) of both subsections. There is no local case directly on point to assist. Both parties thus submit and I accept that, Halsburys Laws of England Vol. 4(1) 4th Edition, provides some general guidance as to the requirements of bills of sale. In doing so, I note that the origin of the PNG Instruments Act traces back to the English, Bills of Sale Act (1878) Amendment Act, 1882, which has provisions essentially similar to our Instruments Act.

The defendant submits and relies only on the following passage from the source in question:

"The facts respecting the consideration should be set forth with substantial accuracy, according to their legal or business effect."

In addition, the defendant relies on this Court's judgment in Patterson v. NCDC (05/10/01) N2145, where the Court considered and stated the legal characteristics of the concept of "consideration" in these terms at p.9 of the judgment:

"A basic feature of consideration is that 'something valuable in the eyes of the law' must be given in promise by one of the parties to the other, in order to make the contract enforceable: see Thomas v. Thomas [1842] EngR 260; (1842) 2 Q.B. 851 at 859. The definition of the concept of consideration turns on the requirement that 'something of value' must be given by one of the parties to the other. It can be either a 'benefit' or 'detriment' which is in essence the same thing looked at from different positions. For example, in the case of an agreement for the sale and purchase of a motor vehicle the consideration is the vehicle for the purchaser while the consideration for the vendor is the price at which the vehicle is sold. To the vendor he suffers a detriment in letting the vehicle go in exchange for the agreed price, which is a benefit. In the same transaction the giving of the agreed amount of money for the purchase of the vehicle is a detriment to the purchaser whilst the taking delivery of the vehicle is a benefit to him or her."

These views are correct on the doctrine or concept of "consideration"generally in the context of contract law. They define what consideration is but do not state how a bill of sale should, "truly set out the consideration." The following passage from the same source, Halsbury at paragraph 680, page 290, quoted and relied upon by the plaintiff is helpful:

"680. Characteristics of the Statutory Form

The statutory form processes fourteen characteristics, all of which must feature in the bill of sale if it is to accord with the statutory form. These characteristics are: (1) the date of the bill; (2) the names and addresses of the parties; (3) a statement of the consideration; (4) an acknowledgement of receipt, if the advance is a present advance; (5) an assignment by way of security of personal chattels capable of specific description (6) exclusion of any description of the chattels from the body of the bill and relegation for such description to the schedule; (7) the securing of a monetary obligation, as opposed to some other form of obligation; (8) a statement of the sum secured, the rate of interest and the installments by which repayment is to be made; (9) any agreed terms for the maintenance or defeasance of the security; (10) a proviso limiting the grounds of seizure; (11) signature and sealing by the grantor; (12) an attestation clause; (13) the name, address and description of the attesting witness; (14) a schedule in which a reference is made to chattels comprised in the bill".

It appears clear to me that the consideration has to be in terms of a statement of the exact amounts of money secured by the bill of sale, the rate of interest and the installments by which it must be repaid. Brett MR, made that clear in his judgment in the case of Davies v. Burton [1883] QBD 537, cited and relied on by the plaintiff at page 540 in these terms:

"The real principle of the form is that whatever may be the consideration for the sum of one secured by the Bills of Sale, a fixed sum shall be stated therein in figures and in direct terms, and that sum with ratable interest thereon shall be recovered by the holder; that interest shall be calculated up to the time of when the sum mentioned as the principle amount shall be recalled in".

I accept the defendant's submission that, the English Act, is not on all fours with the PNG Act. The PNG Act covers a whole range of instruments of which some set out monetary consideration while others do not and deems them all as bills of sale. Therefore, unlike its English counterpart, the PNG Act does not prescribe a standard form. The PNG Act is hence of general application, whereas the English Act is restricted to a bill of sale.

However, I do not accept the defendant's arguments that the intent of the PNG Act is not to be prescriptive. This argument runs contrary to what most of the provisions in the Act seek to do, which is to prescribe what should and should not be in a bill of sale. In my view, the Act has retained the essential features of a bill of sale as provided for under the English Act. Whilst there is not a prescribed form, a bill of sale in PNG should confirm to the requirements as to what should be in the bill. In this regard, the principles discussed above in the context of the English Act are relevant but with appropriate modification as noted to reflect the PNG position.

This has to be done, in my view, with an appreciation that bills of sale are a particular kind of security. It is similar but distinct from a mortgage. This is why the Land Registration Act, (Chp.191) provides for and governs mortgages, which is why the Instruments Act excludes it from its coverage (s.3(3)). Mortgages deal with real property while, bills of sale concern chattels. Their requirements are specific and differ from each other although they might have some similarities.

There were three main purposes or objectives behind the enactment of the English Act. The first was to prevent fraud on creditors by secret bills of sale. The second was to protect the needy and often times illiterate persons who sought to borrow money. Finally, it was to regulate the giving of bills of sale by way of security for loans of money by extortionate class of moneylenders: see Hughes v. Little [1886] UKLawRpKQB 146; (1887) LR 18 QBD 32. The importance of all of these objectives was to ensure that, a borrower understood the true nature of the document and level of his debt and so would a third party upon a search of the register of bills of sale.

All of these purposes are good for the PNG setting. I am therefore, of the view that, the same objectives or purpose drove the enactment of the PNG Act. This appears clear to me from the requirements for registration within 60 days of execution of bills of sale, "truly state the consideration" (s. 4), attestation (s.10), include all conditions and the like that affect the bill, in the bill itself (s.5(2)), maintaining a register of bills of sale (s.8) that is open for search by the public (s.42) and the other requirements under the Act. Hence, I am of the view that, as did the legislature in England, the legislature in PNG enacted the Act for the sake of unfortunate persons that is, those persons incapable of understanding a legal and commercial document so as to avoid mischief.

One of the specific requirements in a bill of sale is the requirement to, "truly state the consideration". Based on the above authorities, I am of the opinion that this means, a requirement for a precise statement of the amount of the advance, agreed interest thereon and the specific amount of periodical or installment repayments. This point is clear, when one looks at some of the forms prescribed under the Instruments Act, an example of which is, the lien under schedule 1 and 2 of the Act it start with the words "In consideration of the advance of K..."

The Bill of Sale in the Present Case

Bearing the foregoing in mind, I now turn to the case on hand. In evidence are the relevant purported bills of sale, both prepared by Fiocco Posman & Kua Lawyers. Although the documents bear the headings "bills of sale", they describe the parties as mortgagor and mortgagee instead of their usual description as grantor and grantee. The parties to a bill of sale or an instrument created and registered under the Instruments Act are usually known by the names, grantor and grantee. The importance of this appears clearly from the provisions of s. 8 of the Act. The provision in relevant parts read:

"8. Register of bills of sale.

(1) The Registrar shall cause—

(a) each bill of sale registered under this Part to be numbered; and

(b) the bill of sale, or the filed copy of the bill of sale, to be marked with the date of registration and the number; and

(c) particulars of the bill of sale to be entered in a register to be kept for the purpose in the prescribed form; and

(d) an index of the names of grantors and grantees of bills of sale to be kept with reference to the entries in the register of the bills of sale given by each grantor.

(2) The index referred to in Subsection (1)(d) shall be arranged in divisions corresponding with the letters of the alphabet, so that all grantors and grantees whose surnames begin with the same letter (and no others) are comprised in one division, but the arrangement within each division need not be strictly alphabetical."

This provision makes it clear, in my view, that in order for an instrument to qualify for registration under the Act, the names of the parties would have to be a grantor and a grantee. This is because the registration and keeping of the records have to be in terms of a grantor and a grantee. Clearly, therefore, the description of the parties as mortgagor and mortgagee has no place within the context of the Instruments Act.

Turning to the point in issue between the parties, I note that the only place in the bills of sale under consideration where the issue of a "true statement of the consideration" appears is in the recitals. The relevant recitals are in the following terms:

"A. The Mortgagor has requested the mortgagee to provide to the Mortgagor but only at and during the pleasure of the Mortgagee advances and accommodation to such extent as the Mortgagee in its absolute discretion thinks fit to enable the Mortgagor to purchase or acquire the chattels described in Part 2 of the Schedule ("Chattel").

B. The Mortgagee has agreed to provide advances and accommodation to the Mortgagor on the condition that the Mortgagor enters into and executes this deed and this deed is registered in Papua New Guinea under and in accordance with the Instruments Act Chapter 254 of the Revised Laws of the Independent State of Papua New Guinea and any other legislation affecting Chattels or requiring registration of this deed."

Clause 2 of the bills of sale does the actual assignment of the chattels to the defendant for the purposes of securing the "due and punctual payment of the Secured Moneys". Then in clause 4.1(a) the plaintiff undertakes to "punctually pay the Secured Moneys"with interest (4.1(b)) "in accordance with the terms of any agreement in writing between the mortgagor and the debtor". I note that, there is no clear indication of what exactly is the amount advanced, the rate or amount of interest thereupon, when and how the plaintiff should make the repayments, except for the reference "any agreement in writing". Even that appears, in my view, to be against the provisions of s. 5(2) of the Instruments Act, which requires any condition, defeasance or a declaration of a trust not contained in a bill of sale to be written on the same paper or parchment and included before registration of the bill of sale.

The plaintiff has provided in its evidence an example of a bill of sale used by the Papua New Guinea Banking Corporation. That is annexure "A" to the affidavit of Mr. Turai Elemi sworn on, 7 August 2003, and filed on 8 August 2003. This document has all of the relevant features of a bill of sale for the purpose of the Instruments Act. It starts with a provision for the date of its execution, followed by a provision for entry of the names and address of the parties, correctly described as the grantor and grantee. The recitals then follow in terms of:

"The Debtor is now indebted to the Bank in the amount (including interest to the date hereof)...(K... )

The Bank has at the request of the Grantor agreed to advance to the Debtor at the time of making or giving this Bill of Sale the sum of .... (K...)"

By way of explanation, the defendant submits that the bills of sales in its case, could not set out the exact loan sum because it was an "all monies" form of chattel mortgage. It goes on to submit that even the example of the bill of sale document tendered by the plaintiff remains an "all monies" mortgage and it refers to recital clause 3, 4 and 5 immediately following the foregoing recitals.

The doctrine of "all monies" clause is a term that is familiar in mortgage settings. I had the opportunity to consider that doctrine for the first time in our jurisdiction in my most recent judgment in the case of Bank of Papua New Guinea v Derick Sakatea Niso (2004) PNGLR 28. Counsel for the defendant has not drawn the Court's attention to any authority on point that extends the doctrine to bills of sale. I consider this is a significant defect in the defendant's arguments because, if anything is clear from the foregoing, the whole intent of the Act under consideration is to ensure the bill of sale is specific and unambiguous. Given the difference between a mortgage and a bill of sale, I am not prepared to extend the application of the doctrine or principle to bills of sale, at least on this occasion, without further assistance.

In the circumstances, I find that the bills of sale in this case fall short of the requirement to "truly state the consideration". This gives rise to the question, what is the effect of this failure? I will return to this question a little later after making the following additional observations against the bills of sale.

The bills of sale also fail to disclose fully the names and place of residence and the occupations of the person or persons witnessing the execution of the bills of sale. I briefly noted this in the context of the second of the two bills of sale before me, based on which I found the bill of sale as not a bill of sale between the parties. This failure to disclose is clearly contrary to s. 10 of the Act, which stipulates that, whilst:

"Sealing is not essential to the validity of a bill of sale, but each execution of a bill of sale shall be attested by at least one witness, who shall add his place of residence and his occupation."

Effect of Invalidity

Returning now to the question of what is the effect of these failures, I note that ss. 4 and 10 speak in terms of, in order that a bill of sale is effective or valid it must meet the requirements they respectively set out. It follows therefore that, a bill of sale that does not meet the requirements of these provisions or, for that matter, the other provisions of the Instruments Act is ineffective and invalid.

There is no local authority on point. I therefore turn to a number of overseas cases the parties have referred the Court to. One such case is the case of Olsen v. General Credits Ltd [1985] 2 Qd R 506. In that case, a bill of sale failed to meet the attestation requirement. The Court held that the non-compliance was not detrimental especially as between the parties. It nevertheless had the effect of failing to accord the protection a registered bill of sale accords a registered grantee as against a third party.

In Ex Parte Dalgety Farmers Ltd [1987] 2 Qd R 481, the Court arrived at a similar conclusion. That was, however, in relation to the description of the chattels, the subject of the bill of sale. The bill of sale did not sufficiently describe the chattels, which the relevant legislation required.

The above cases highlight the fact that the intent and purpose of the relevant Act and in particular the effect of registration is to confer priority and to constitute notice of the interest protected. As such, a non-compliance of any of the requirements under the Act does not "impinge on the validity of the instrument as between the parties to it" (Olsen v. General Credits Ltd (supra)) but only as against third parties. At the same time, however, other authorities such as that of Davies v. Burton (supra) make it clear that a central theme of the Act is to make a bill of sale certain and thereby avoid the need for further research and consideration as to what a bill of sale really provides for. This is apparent from the following parts of the judgment at p.542 per Fry L.J:

"... [T]he legislature intended to make all bills of sale certain in their terms, and therefore that certainty is very material in the drawing of bills of sale; but this bill of sale leaves it uncertain at what time the grantee may become entitled to the whole of the capitalized interest."

Brett M.R., provides at p.538 the reason for the need for that clarity in these terms:

" ... [T]he object of the legislation was twofold: first, that the borrower should understand the nature of the security which he was about to give for the debt due from him; and, secondly, that a creditor upon merely searching the register should be able to understand the position of the borrower, and should not be compelled to a solicitor in order to get counsel's opinion as to the meaning of a security already created by the borrower.... The legislature intended that the loan of money upon security of a bill of sale shall be a simple transaction; a bill of sale given by way of security for the payment of money shall be void against all the world, even as against the grantor, if it does not comply with the provisions of s. 9."

It is a cardinal principle in the law of contract that the fundamental terms of a contract must be certain in order for contracts to be valid: see Fly River Provincial Government v. Pioneer Health Services Limited (24/03/03) SC705 at pp. 34 – 42 for a discussion and application of this principle.

In this case, I find that the bills of sale fail to meet a fundamental requirement in the Instruments Act. They both fail to "truly state the consideration" in terms of the specific amount of moneys advanced, the number and amount of installment repayments and the rate and amount of interest payable. Similarly, they have failed to meet the attestation requirements. These are serious flaws in the bills of sale before me. Accordingly, I declare that the bills of sale registration numbers BS 3525/01 and BS No. 825/02 void and are ineffective.

Before proceeding to ultimately announce the consequence that should follow from the above declaration, I consider it important to return to the stay orders issued by Sakora J. Those orders ordered the defendants not to proceed with its repossession exercise under the bills of sale. It also left room for the defendant to revisit those orders if there was unreasonable delay in the payments of the debt due to it from the plaintiff. What the defendants have in fact done in seeking to enforce the bills of sale appears to be in contempt of the orders already issued by this Court, per Sakora J. It should follow therefore, that, the additional issues of prejudice and unfairness raised by the defendants, if the Court grants the consequential orders the plaintiff seeks are of the plaintiff's own doing. That would be in addition not ensuring that the bills of sale meet all of the requirements of the Instruments Act, and not going by the orders of Sakora J. Hence, I find there is no impediment to granting the consequential orders the plaintiff seeks. Accordingly, I order the defendants to deliver back to the plaintiff the chattels seized under the now declared void bills of sale, failing which the plaintiff shall be at liberty to go for an assessment of its damages.

I order costs of the proceedings to follow the event.

Lawyers for the plaintiff: Rageau Elemi & Kikira Lawyers.
Lawyers for the defendants: Allens Auther Robinson Lawyers.