Last Updated: 25 February 2004

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AT MELBOURNE

COMMERCIAL & EQUITY DIVISION

No. 4486 of 2001

No. 7407 of 2002

Background 10

Brewery Land and Mortgage 11

Residential Land and Mortgage 18

Lease Purchase Agreements 19

Proposed Restructure 23

The December 1998 Loans and Guarantees 32

Subsequent dealings with NAB 39

Receivership and Sale 41

HER HONOUR:

THE PROCEEDINGS

In this matter two related proceedings were heard together. In proceeding No. 4486 of 2001 ("the principal proceeding"), Fritz Walter, Ingrid Walter and Carmen Walter, together with an associated company and family trust as plaintiffs, seek orders invalidating certain loan contracts, mortgages, guarantees and debentures executed by them in favour of the National Australia Bank ("NAB"). In proceeding No. 7407 of 2002 ("the enforcement proceeding") the NAB seeks to enforce one of the mortgages, which was executed by Fritz Walter and Ingrid Walter over a residential property of which they are registered proprietors.

THE PARTIES

The plaintiffs in the principal proceeding are Fritz Josef Walter, his wife Ingrid Adelheid Walter, their daughter Carmen Walter (collectively, "the Walters"), the Walter Family Trust and Palatinat Brewery Pty Ltd. Fritz and Ingrid Walker are stated to be plaintiffs in their capacity as natural persons, as sole trustees of the Walter Family Trust and as directors of Palatinat Brewery Pty Ltd.

The Walter Family Trust is a discretionary trust. Its beneficiaries are Walter family members, including Fritz, Ingrid and Carmen Walter, and a broad class of additional beneficiaries. Its trustees are Fritz and Ingrid Walter. The Walter Family Trust is not a legal person. It lacks standing to sue. No point was taken on this issue by the NAB at trial.

Palatinat Brewery Pty Ltd ("Palatinat") is a company limited by shares, first registered on 1 April 1998. Its directors are Fritz, Ingrid and Carmen Walter. The shareholders are Fritz, Ingrid, Carmen and Roland Walter. Palatinat is in receivership. The residual power of directors of a company in receivership to institute legal proceedings in its name is subject, inter alia, to an indemnity for the costs of the action[1]. There was no evidence of such an indemnity in the present case but no objection was made.

The NAB is the defendant in the principal proceeding.

Fritz and Ingrid Walter are the defendants in the enforcement proceeding. They are the registered proprietors of a residential property in Wodonga subject to a mortgage in favour of the NAB, which the NAB, as plaintiff in the enforcement proceeding, seeks to enforce.

LITIGANTS IN PERSON

The Walters were not legally represented. They appeared as litigants in person. Their case at trial was conducted by Ms Carmen Walter. Ms Walter presented her case with considerable ability, intelligence and tenacity. Although English is not her native language, she was extremely articulate. Ms Walter is not legally qualified. The Walters' pleadings in both proceedings were drawn, and the associated documents and submissions were prepared, principally by Ms Walter. Ms Walter acknowledged that she had received assistance in research and preparation from Mr Smart, who is not legally qualified but had experience as a litigant in person in a case involving many similar allegations against a mortgagee bank

The Walters' pleadings did not comply with the usual conventions or technical requirements of pleadings. In some instances, allegations in the pleadings did not disclose a cause of action. In other cases, there were simply assertions which made no allegation at all. Allegations were not consistently or satisfactorily particularised.

During the course of the trial, the Walters' amended statement of claim was supplemented by a document dated 26 May 2003 and proposed amended pleadings dated 24 June 2003 intended to clarify their claims. Ms Walter also orally amended or amplified the Walters' claims at various stages during the course of the trial.

Commendably, in recognition of the difficulties associated with litigants in person, counsel for the NAB did not make merely technical objections to the Walters' pleadings or the conduct of their case.

The Walters raised a number of unorthodox arguments and challenges to jurisdiction at the commencement of the trial, on which I ruled at the outset. The matters in question included the alleged impact of Freemasonry, an alleged banking practice described as "fractional reserve banking", the invalidity of the Constitution of the State of Victoria, the Walters' entitlement to trial by jury under Magna Carta, and apprehended bias on my part, due to my disclosure of beneficial ownership of a parcel of NAB shares.

I determined that none of the Walters' challenges to the Court's jurisdiction was of any substance. I also ruled that the issues of Freemasonry and fractional reserve banking were of no substance and irrelevant to any legitimate claim. Despite those rulings, the issues, which were not clearly defined, were persistently raised by the Walters in various altered guises throughout the course of the trial.

The claims and challenges based on Freemasonry, fractional reserve banking, constitutional invalidity and Magna Carta which were raised by the Walters in these proceedings have previously been raised by litigants in person in the course of enforcement proceedings by banks. All have been the subject of some degree of previous judicial consideration and have been dismissed as wanting substance or as nonsense. Although those arguments occupied a considerable time at trial, the Walters also advanced a more conventional claim that the loans and securities were unenforceable on various related equitable grounds, including unconscionable conduct, duress, undue influence and estoppel.

In essence, they contend that having incurred liabilities of approximately $1.3 million to the NAB (principally to fund their brewery - reception centre), in December 1998 they agreed to restructure the liability on terms wholly disadvantageous to them. They allege that they were induced to agree to replace their existing, longer-term facilities with a principal loan for $1 million for a one year fixed term and a business-combination loan for $380,000 for a seven year term, by an assurance that the one year fixed term loan would be unconditionally and automatically renewed. They contend that they were presented with the relevant documents for execution in circumstances where their lack of English language skills and their unfamiliarity with Australian commercial practice amounted to a special disability which the NAB exploited in order to perfect invalid or defective existing securities. They allege that the NAB subsequently `fabricated' their default and invalidly appointed a receiver who, in breach of duty, sacrificed their interests by selling the security property (on which they had expended approximately $3 million) for approximately $1 million.

THE PLEADINGS

Amended Statement of Claim - Proceeding No. 4486

The amended statement of claim dated 9 June 2001 in the principal proceeding was prepared by Ms Walter, a litigant in person, who is not legally qualified. The writ was filed on 16 February 2001. The plaintiffs are Carmen Walter, Fritz and Ingrid Walter as trustees of the Walter Family Trust, Palatinat Brewery Pty Ltd, as lessee of Lot 4, Lincoln Causeway, Wodonga, and the Walter Family Trust.

The amended statement of claim alleges the following:

The NAB provided Fritz, Ingrid and Carmen Walter with an overdraft facility for their personal account in September 1997.

In early 1998, the NAB provided the Walters with various loan facilities, including a home loan facility and car lease and hire purchase facilities.

In October 1998 the Walters sought an extension of those loan facilities, which was verbally approved, but was not put in place until December 1998. The completion of paper work took two months.

On 16 December 1998, Fritz and Ingrid Walter, as trustees of the Walter Family Trust, executed two letters of offer for two loans.

(a) a $1,000,000 interest only loan with a one year term; and

(b) a $380,000 loan with a seven year term.

The loans were secured by the personal guarantees of Fritz, Ingrid, Carmen Walter and Palatinat, a debenture over Palatinat and mortgages over the Walters' brewery property and residential land.

The above loans were illegal in that they breached ss.32, 36 and 38 of the Credit Act.

The NAB gave no consideration. The Walters met all payments of interest/monthly instalments.

The Walters were not given an opportunity to read the documents. The fact that the Walters were to execute the documents in the capacity as trustees put the NAB in a superior position of advantage.

The Walters were not given the opportunity to obtain independent legal advice. The NAB did not send the documents to their accountant to peruse. The NAB did not inform the Walters of the necessity to seek advice prior to signing, nor explain their legal effect.

The letters of offer were signed under duress. The Walters requested the extension in October 1998, but not until December 1998 did the NAB present the documents for signing. This was illegitimate pressure of an economic nature and "unconscionable conduct".

No interpreter was present at the time of signing. The NAB was in a position of advantage and the Walters were under a disability because they lacked knowledge of the English language and familiarity with the bank's business practices and the cultural background distinguishing Australian and German business practices.

The NAB did not explain the full nature of the documents although it knew that the Walters had been in Australia for only ten months.

The mortgage over the brewery property is unenforceable because it was executed by Fritz and Ingrid Walter in their personal capacity, but in truth, the Walter Family Trust was the owner of the land. The execution of the letters of offer was defective because the letters of offer were not properly dated or initialled and had other defects. As the Walter Family Trust did not execute the mortgage, the owner of the land did not execute it and consequently "no legal mortgage is available to justify a mortgage sale".

There was no default under the mortgages, because the Walters made payments on time.

The receiver's sale of the brewery property was illegal. The Walters apprised the NAB of that, and its "wilful ignorance" amounts to fraud.

The NAB was in a position of advantage. Mr Membrey, the relevant NAB officer, did not disclose the full implications of the documents, and made only brief explanations to Fritz and Carmen Walter, since Ingrid Walter was not present at the outset of the meeting. Mr Membrey explained the facilities "as ongoing for a long term and did not explain, point out nor stress the fact that the defendant would ask the principal sum to be repaid after 12 months. He left the plaintiff in the understanding of a long term loan which was at least as long as seven years". The NAB's conduct therefore amounts to misrepresentation and unconscionable conduct.

The NAB is estopped from commencing proceedings because Mr Membrey, the relevant bank officer, promised an ongoing facility with a year by year renewal on 16 December 1998, "very clearly".

The Walters did not read the documents on 16 December 1998 and were not offered time to read and understand them nor an opportunity to obtain independent legal advice. The NAB did not explain the legal effect of the guarantees.

The guarantees were signed under duress due to the "massive delay" in preparing the documents for execution.

The NAB knew that the brewery mortgage was defective because it was not executed by the Walter Family Trust as the owner of the land and "to cover up their mistake" the bank rushed to appoint a receiver and manager.

The debenture given by Palatinat was executed in relation to an earlier loan but the NAB sought to rely on it for the later loans. The debenture was therefore illegal and the appointment of the receiver was void.

The receiver conducted the auction of the brewery land and chattels "without legal instrument" and the price achieved at auction was significantly lower than previous valuations.

The Constitution of 1975 is "not a source of legal authority".

"Questions of law" involved are identified as:

(a) validity of the Victorian Constitution;

(b) ownership of the Victorian Constitution;

(c) determination and assessment of "Foreign Power";

(d) determination of authority of all parties involved;

(e) Freemasonry.

"Magna Carta is current statute law in Victoria" and "we have the Fundamental and Constitutional Right that this matter is heard by Trial by Jury ... "

"Fractional reserve banking is illegal. The NAB is a private banking institution governed by the Federal Reserve Act, the Banking Act, the Credit Act and others. None of these Acts provide a statute, which allows the defendant to pursue fractional reserve banking".

Defence - Proceeding No. 4486

By a defence dated 9 June 2001 the NAB admits the making of the relevant loan agreements, guarantees, mortgages, debenture and lease-purchase agreements. It alleges that the bank initially provided financial accommodation secured by mortgages over a brewery property and a residential property owned by Fritz and Ingrid Walter. It also entered lease-purchase agreements with Fritz and Ingrid Walter. The NAB alleges that in November 1998 Carmen Walter requested it to consolidate the liability under the existing loans and lease-purchase agreements. It offered Fritz and Ingrid Walter two restructured loan agreements, being an interest-only loan of $1 million for a one year term and a business combination loan of $380,000 with a 7 year term. The restructured loans were secured by the pre-existing mortgages and securities. The loan agreements were executed on 16 December 1998.

The NAB denies the allegation that it promised "a year by year" or "on-going" renewal of the interest-only loan. It alleges that the Walters acknowledged that the loan facilities were subject to periodic review and to other special conditions.

The NAB denies that it subjected the Walters to duress or unconscionable conduct through exploitation of a special disability or special disadvantage.

It denies the allegations of invalidity of the brewery mortgage due to the existence of a trust and the allegations of the invalidity of the appointment of the receiver. It denies the allegations based on credit legislation, on the ground that it does not apply to the relevant loans. It does not plead to the "allegations" based on Magna Carta, the Constitution, Freemasonry and Fractional Reserve Banking, on the ground that they are unintelligible.

Statement of Claim - Proceeding No. 7407

In proceeding No. 7407 of 2002 the NAB as plaintiff alleges that Fritz and Ingrid Walter, as defendants, mortgaged the land situated at 13 Sanctuary Boulevard, Wodonga, to the NAB by instrument of mortgage dated 30 April 1998; and that Fritz and Ingrid Walter defaulted on the payment of principal and interest and retained possession of the land. The NAB claims possession of the land under s.78(1)(b) of the Transfer of Land Act 1958 (Vic).

Defence - Proceeding No. 7407

By a defence dated 24 October 2002 Fritz and Ingrid Walter, as defendants, admit execution of the instrument of mortgage but deny that it was represented to be a mortgage document. They allege that the mortgage was procured by fraud, misleading and deceptive conduct and unconscionable conduct, in that the relevant NAB bank officer, Mr Wayne Keating, failed to alert the signatories to the possibility of seeking independent legal and financial advice, knowing they lacked understanding of the English language.

Fritz and Ingrid Walter further allege that the NAB did not provide consideration for the mortgage and that they did not receive any advances.

SUMMARY OF FACTS

Background

Fritz and Ingrid Walter migrated to Australia from Germany in 1998. They had conducted a successful Peugeot car repair and dealership business in Germany for over 20 years.

Carmen Walter, the daughter of Fritz and Ingrid Walter, migrated with them from Germany. She was educated to tertiary level in Germany. Her education included the formal study of English. At all material times, Ms Carmen Walter was proficient in spoken and written English.

From 1981 onwards, the Walters made frequent visits to Australia, where they spent many vacations. They were attracted to Australia and in consequence purchased a property in Western Australia. Despite their frequent visits, from 1981 until their permanent settlement in Australia in early 1998, Fritz and Ingrid Walter were not fluent in English. They relied on their daughter Carmen to translate where necessary.

In the late 1980's Fritz and Ingrid Walter attended a Victorian Government promotion at Frankfurt in German, which was aimed at encouraging German business migration to Australia. As a result, they formed the idea of migrating to Australia, establishing a business and settling there permanently.

Fritz and Ingrid Walter, during a subsequent visit to Australia, had further discussions with the representatives of the Albury-Wodonga Development Commission and the Albury Wodonga Council about establishing a new business in Australia. Although their business experience was in car repair and dealerships, they were advised that there was no suitable opening for such a business in the Albury-Wodonga area. They therefore decided to establish a combined function centre and boutique brewery in the Albury-Wodonga region, intended to form part of a new tourist development proposed by the Albury-Wodonga Development Commission.

Ms Carmen Walter had completed tertiary courses in biotechnology and food technology in Germany which equipped her with the expertise to conduct the brewing and yeast maintenance aspects of the Walters' proposed new business.

Brewery Land and Mortgage

The Albury Wodonga Rural Council suggested a site for the proposed function centre and brewery in a complex known as the "Gateway Island" which was to be developed as a tourist centre.

In March 1996 the Walters selected the land suggested by the Albury-Wodonga Council which was situated at Lot 4, Lincoln Causeway, for the function centre and brewery ("the brewery land"). On 13 May 1996 Fritz and Ingrid Walter executed a contract to purchase the brewery land for $138,000. They paid a deposit of $10,000. They subsequently paid the outstanding balance of $128,000 from their own funds. No funds were borrowed from NAB in relation to the purchase of the brewery land.

The Walters had retained Mr Simon Dubois, a chartered accountant based in Western Australia, who advised them to establish a family trust in relation to the purchase of the brewery land. As a result of that advice, the Walter Family Trust was established. Fritz and Ingrid Walter were the trustees of the Walter Family Trust. They retained Mr Warren Judd of McHarg's Solicitors, in Albury/Wodonga, to prepare the trust deed and to represent them in relation to the purchase of the brewery land. The Walters also sought the advice and assistance of an acquaintance, Horst Kempf, who was experienced in the operation of boutique breweries.

After the purchase of the brewery land the Walters returned to Germany to complete the necessary arrangements there. During a transitional period they visited Australia periodically whilst based in Germany prior to their permanent settlement in Australia. While they remained resident in Germany it was necessary for the Walters to exchange documents with, and give instructions to, Australian-based agents (including the NAB) in relation to banking, business and legal transactions. They did so principally by facsimile transmission and post.

Fritz and Ingrid Walter had not executed the contract of sale for the brewery land as trustees or in any other representative capacity. When the instrument of transfer of the brewery land was forwarded to them for execution in Germany it stated the purchasers to be Fritz and Ingrid Walter. Ms Walter wrote in the words "as trustees for the Walter Family Trust" after Fritz and Ingrid Walters' names on the transfer. The Walters wished the Walter Family Trust to be registered as the proprietor of the brewery land. Their solicitors, McHargs, advised them that it was not possible to register a trust as the proprietor of land under s.37 of the Transfer of Land Act 1958 (Vic). No caveat notifying the existence of beneficial interests under a trust was lodged.

The Walters opened a bank account with NAB in order to facilitate payment for the brewery land and to conduct other banking needs. They deposited $140,000 for the settlement of the purchase of the brewery land. The local NAB manager with whom the Walters principally dealt during the initial phase of their banking relationship with the NAB was Mr Wayne Keating. Prior to the Walters' permanent relocation from Germany to Australia, Mr Keating corresponded with them and communicated by facsimile. He assisted the Walters with the transfer of funds, drawing cheques and related matters.

The construction of the brewery and reception centre commenced in July 1997. Ms Walter took an active supervisory role. The Walters acted as owner-builders. It is undisputed that the workmanship and quality of the brewery and reception centre were of a very high standard. Ms Walter estimated that the Walter family expended over $3,000,000 on the construction of the building.

The fit-out of the building was also very expensive. All the restaurant and brewery equipment was of excellent quality. At trial, Ms Walter conceded that "we made mistakes" and the Walters consequently experienced cost overruns. She stated that: "We probably spent a lot on things because we thought with our hearts instead of with our heads". Ms Walter conceded that as a result of the cost overruns "we ran out of money".

The completion of the building was accelerated in order to meet an official opening date of May 1998 by the then Premier of Victoria. The acceleration to meet the deadline placed further pressure on the Walters.

The Walters' restaurant sold only their own "Palatinat" brand of beer. which was brewed on the premises by Ms Walter and was relatively high in price. At first, the Walters intended to concentrate on serving German-style cuisine in their restaurant.

The Walters expected a high volume tourist flow through the Gateway Island tourist complex in which their brewery and reception centre was situated. They were confident that the quality of the complex, the boutique beer and a choice of German style cuisine would attract the custom of a sufficient proportion of the estimated annual one million tourists to make their business profitable.

Due to the cost overruns in construction and equipment and the failure of further funds expected from Germany to arrive as anticipated, by September 1997 the Walters required financial accommodation to complete the project. In September 1997 they approached Mr Keating of the NAB and obtained an overdraft facility for a three month term. The overdraft facility was secured by a mortgage over the brewery land executed by Fritz and Ingrid Walter on 3 September 1997. The Walters' overdraft facility, initially for three months, was subsequently extended to 31 March 1998.

Mr Keating was the principal NAB officer who dealt with the Walters from 1997 until he left Wodonga in August-September 1998. According to Mr Keating, he dealt principally with Carmen Walter in correspondence and in relation to drawing cheques. He stated that he had no difficulty in communicating in English with Carmen Walter. He stated that "there were times when Carmen would stop me and clarify if she did not understand, but no, we held good strong conversations ... if she didn't understand, we would clarify it". Mr Keating saw no reason to use an interpreter when dealing with Carmen but "with Fritz and Ingrid I used Carmen at times as an interpreter" and "Carmen then explained matters to her parents in German."

Mr Keating dealt principally with Ms Walter, but observed that she referred to her father regularly for decision-making. He also regularly communicated with Mr Dubois, the Walters' accountant, who was situated in Perth.

At trial, Mr Keating did not have a strong independent recollection of the details of his dealings in transactions with the Walters.

He handled the Walters' application for a $200,000 overdraft facility with NAB in September 1997 which was required to complete the construction project. The Overdraft Facility Approval Advice dated 3 September 1997 identifies Fritz Walter, Ingrid Walter and Carmen Walter as the customers. The overdraft limit is $200,000. The expiry date is 31 December 1997. The Overdraft Facility Approval Advice sets out the terms of the overdraft facility, including details of the interest rate, events of default and credit fees and charges. It provides that the security of a "first registered mortgage over Certificate of Title Volume 10289 Folio 289 being the property at Lincoln Causeway, Wodonga, [the brewery land] is required to secure the balance of the Facility".

By a letter to Fritz, Ingrid and Carmen Walter dated 3 September 1997 Mr Keating confirmed the approval of the overdraft limit.

By an internal credit memorandum dated 3 September 1997 Mr Keating approved the Walters' $200,000 overdraft credit limit. The credit memorandum noted that the Walters had reached agreement with Albury-Wodonga Development Corporation to construct a German-style boutique brewery on the Lincoln Causeway. It further noted that "Mr Walter has owned and managed one of the largest motor vehicle dealerships in Germany, which was under contract of sale with a settlement anticipated by 30 October 1997 to result in $3.5 million approximately". It stated that "these funds will be transferred as necessary through this bank to fund the $2 million brewery development. Essentially, it is the settlement of the business that forms the core serviceability of the proposed facility".

The credit memorandum further noted:

"The Walters also have a residential property under negotiation for sale in WA. The return on this should be around $300K. Should this settle then it will be utilised to clear the O/D. [overdraft] Given the estimated worst case settlement scenario it is expected that the debt will reach around $150K before cash is available. This connection has held over $400K in credit during the past 12 months with balances averaging around $25K. We are comfortable with the expected settlements. Having walked the construction site confirm works to date are being completed in accordance with plans. Expected completion date is April 1998. The Walters represent an excellent long term banking prospect."

In cross-examination, Mr Keating confirmed that his principal discussions about the sale of the German business interests were with Carmen Walter. He said that he "wouldn't have felt comfortable in holding the extent of that conversation with either Fritz or Ingrid because I really struggled with the German language and I don't think that they were au fait with the English language."

In order to secure the overdraft facility Fritz and Ingrid Walter executed a mortgage over the brewery land dated 3 September 1997 ("the brewery mortgage"). The brewery mortgage provided that the provisions contained in Memorandum of Common Provisions No. AA291 retained by the Registrar of Titles were incorporated in the mortgage.

The Memorandum of Common Provisions No. AA291, by clause 35, defines "the moneys hereby secured" broadly, to include:

"(a) all moneys owing or remaining unpaid to the bank on any account whatsoever by the Mortgagor, whether alone or jointly with any other person and whether as principal or surety.

(b) moneys which the bank whether requested to do so or not has advanced or paid or become liable to pay to or for on account or on behalf of the Mortgagor".

The brewery mortgage was, in short, an "all moneys, all accounts" mortgage.

Mr Keating did not recollect whether he was aware, as at September 1997, that the brewery property was owned by the Walter Family Trust. There was no evidence to establish that the Walter Family Trust was brought to his attention at that date. He was unable independently to recollect when he had first heard of the establishment of the Walter Family Trust.

At trial, Mr Keating could not independently recollect the circumstances of the execution of the brewery mortgage. He described his uniform standard practice as a banker of twenty-two years' experience, which was to "sit down, explain the document, its impact on the client in case of mortgages and guarantees and other like securities and always suggest that independent legal advice should be taken". He testified that there was no reason why he would not have adhered to that practice with the Walters when the brewery mortgage was executed.

In cross-examination, it was not put to Mr Keating that he failed to explain the mortgage documents to Fritz and Ingrid Walter or that he failed to suggest that independent legal advice should be obtained.

Mr Keating could not recollect any circumstance which had suggested to him that the Walters were particularly vulnerable or unable to understand the relevant transactions. His evidence was that as at September 1997, he considered that the Walters were able to look after their own interests.

Mr Keating stated that in approving an advance of $200,000 credit to the Walters, he relied on Ms Walter's representations and the fact that substantial sums had been deposited and invested in the brewery property.

He testified that although he had no independent recollection of the execution of the brewery mortgage and assumed that he had carried out his standard practice, he did not believe that he had referred to any bank manuals. He did not refer to bank manuals for standard transactions. The overdraft and the brewery mortgage were standard transactions.

Ms Walter confirmed that she was present when Fritz and Ingrid Walter executed the documents to secure the overdraft in September 1997. She testified that she was "always present when these dealings or meetings took place".

She stated that in order to execute the security documents in September 1997, the Walters attended at Mr Keating's office. According to Ms Walter, Mr Keating "asked my parents to sign various documents ... now deemed to be the mortgage over the hotel land and that pursuant to the "all moneys" clause they would now secure the interest-only and business combination loan which comes into the chronology at a later stage but at this point in time it was not explained that the mortgage was an ongoing mortgage".

Ms Walter stated that she "saw that documents were exchanged and that my parents were asked to sign the documents". She believed that she would have seen the documents but said that she did not read them to her parents. She stated that she was unable to recall even the substance of what was said.

Mr Walter also recalled the establishment of the overdraft in September 1997. He stated that he did not really remember what he signed. He stated that he had a friendly relationship with Mr Keating and signed a document because "Mr Keating said `sign'."

Following the initial borrowing of $200,000 in September 1997, in April and May 1998 the Walters' borrowings from the NAB increased very significantly during a short space of time. In April 1998 they borrowed moneys to finance the purchase of a residence and in May 1998 they borrowed further substantial sums under a number of lease-purchase agreements.

Residential land and mortgage

Initially the Walters occupied rented accommodation in the Albury-Wodonga area. In April 1998 they purchased a local residence at 31 Sanctuary Boulevard, Wodonga ("the residential property"). Fritz and Ingrid Walter obtained a loan of $310,000 ("the home loan") from the NAB in order to purchase the residence. A mortgage over the residential property was executed by Fritz and Ingrid Walter on 30 April 1998 ("the residential mortgage").

Mr Keating handled the home loan and the residential mortgage on behalf of the NAB. The home loan contract was signed by Fritz and Ingrid Walter on 30 April 1998. The home loan contract states that the securities taken by the bank were registered mortgages over the residential property and the brewery property. The amount borrowed slightly exceeded the purchase price of the residential property, as it included a further amount for additional costs.

The residential mortgage states the mortgagors to be Fritz and Ingrid Walter.

The residential mortgage was an "all moneys" mortgage. By clause 31 "the amount owing" was defined to mean -

"at any time, subject to 28.2(a), all money which one or more of you owe the Bank, or will or may owe the Bank in the future, and which by law may be secured by this mortgage, including:

(a) under an agreement covered by this mortgage; and (b) in respect of any credit provided by the Bank to you other than under an agreement covered by this mortgage; and (c) otherwise payable under this mortgage".

Mr Keating at trial stated that he was confident that he would have advised the Walters to obtain independent advice. However, it was the client's choice whether to do so. He was confident that he would have relied on Carmen Walter to transmit his explanations of the loan and mortgage to her parents, due to the parents' relative lack of fluency in the English language.

Ms Walter attended the meeting to execute the residential mortgage and the associated documentation. She stated that she supposed that she saw the mortgage document that day, but that it was very hard to remember. She could recall no relevant details.

Mr Walter gave evidence that he signed documents in relation to the home loan, but did not remember what they were. When asked whether he knew that the home loan was also secured by the brewery mortgage he responded, "I don't look at the paperwork. What can I say about this? I trust the bank ... ".

Lease-purchase agreements

Initially, the Walters had purchased the restaurant and brewery equipment with their own funds. The restaurant equipment was owned by Palatinat The brewery equipment was owned by Fritz and Ingrid Walter as trustees for the Walter Family Trust. It was of excellent quality and had required very substantial expenditure Because the Walters subsequently needed cash relief due to the overruns in the costs of construction, in February 1998 Mr Keating proposed the idea of a lease-purchase of the brewery equipment and Palatinat's plant and equipment. At that stage there was optimism about the prospects of the business. The Walters' projected cash flow prepared in March 1998 forecast high profits from their future business operations.

Ms Walter's evidence was that "the bank" suggested the lease-purchase agreements "to provide the cash relief and to pay our creditors". She was present at meetings with Mr Keating and at the execution of the relevant documents, including the Palatinat debenture in September 1998.

The Palatinat Hotel was officially opened on 7 May 1998 by the then Premier of Victoria.

On 28 May 1998 the Walters executed four lease-purchase agreements with the NAB.

At trial, Mr Walter stated that he executed the lease-purchase agreements "because the bank offered to us. I can't say why". He agreed that he was aware that the monthly repayments to the NAB on the various loans and facilities would henceforth total over $20,000.

By the first lease-purchase agreement dated 28 May 1998, Fritz and Ingrid Walter as trustee for the Walter Family Trust borrowed $388,032 and $33,102 ($411,134) for the brewing equipment. By the second lease-purchase agreement, Palatinat borrowed $332,139 for the restaurant's internal chattels and restaurant equipment. Payments were to commence in August 1998. Palatinat also executed two lease-purchase agreements for two motor vehicles. The lease-purchase agreements were for five year terms.

Mr Keating put forward a credit submission to enable the Walters to lease-purchase the brewery and restaurant chattels and equipment in May 1998. He prepared a credit memorandum which accompanied the credit submission.

In the credit memorandum, Mr Keating set out the history of construction of the Palatinat brewery. The credit memorandum noted that over $3 million had been invested in the brewery complex, derived from the personal resources of the Walter family. It also noted that the Walters had a further $1 million still invested in properties in Germany, which could not be accessed until May 1999. They also owned a $300,000 property in Western Australia which was currently on the market.

The credit memorandum stated that all of the brewery facility and fittings had been constructed at the "top end" of quality. A satisfactory assessment of the quality and value of the equipment had been made.

It also stated that Mr Keating had consulted a local valuer, Philip Cosgrave, and, given the expenditure of over $3 million and the projected annual turnover of $2.9 million, "we have at this point placed a conservative m/v [mortgage value] on our security of $2.5M".

The credit memorandum noted that the Walter Family Trust "will own the property, brewing equipment and produce the beer". The company, Palatinat, would own the internal chattels of the building. It would lease the building and buy the beer from the Walter Family Trust.

Mr Keating noted "Applicants have invested 100% of expenditure to date on this project. They are impressive, well-educated and enthusiastic types who have the necessary mix of expertise and financial acumen to make an outstanding success of this business".

Further, he noted that "primarily debts may be cleared (all or in part) from settlement monies from WA and Germany" ... and "the applicants have substantial external resources from which they can draw to support the project".

The memorandum also refers to the role of the Walters' chartered accountant, Mr Dubois, who had "extensive industry experience" and the input of the Walters' associate, Horst Kempf, who had operated a number of highly successful "boutique" breweries throughout Australia.

Prior to handing over the Walter file to his successor, Mr Membrey, in August 1998, Mr Keating made a file note dated 21 August 1998. The file note stated that the Walters' funds were still due from Germany. A business plan was required.

Mr Keating stated at trial that in his dealings with the Walters in September 1997 and in May 1998, he would not have allowed the Walters to sign any document if he had thought that they did not truly understand it.

In July 1998 Palatinat received a $100,000 overdraft facility. This was subsequently increased to a limit of $170,000. On 14 October 1998 a further increase to a limit of $270,000 was approved.

By June 1998 the Walters' monthly repayments on their various loan facilities and lease-purchase agreements with the NAB amounted to approximately $20,500. They also still had outstanding debts due to contractors. The business was experiencing problems with staff. Money expected from Germany had not arrived. The anticipated influx of tourists had not eventuated. Local custom was limited. The business was not trading profitably. Turnover was not only below the previous estimates but had not reached the "break even" point. The Walters, however, were prepared to work without remuneration in order to get their business on its feet. They were dedicated to establishing the business. They took the view that it was only experiencing teething problems, which could be overcome given time and commitment.

Palatinat Debenture

In September 1998 Mr Keating requested the Walters to execute the Palatinat debenture over its undertaking, presumably in order to secure its liabilities to the NAB under the overdraft and the lease-purchase agreement. Carmen Walter stated in evidence that neither she nor her father hesitated to sign because they trusted that Mr Keating would "do the right thing".

The debenture executed by Palatinat Brewery Pty Ltd as mortgagor on 28 September 1998 was signed by Carmen and Fritz Walter as directors.

"Secured Amounts" (Clause 2.3) is broadly defined to include:

"(b) all amounts which at that time the Bank has advanced or paid, or has become liable to advance or pay, for any reason:

(i) to or on behalf of the Mortgagor; or

(ii) at the express or implied request of the Mortgagor; or

(iii) because of any act or omission of the Mortgagor; or

(iv) because of any act or omission of the Bank at the express or implied request of the Mortgagor; and

(b) all amounts for which at that time the Mortgagor is or may become actually or contingently liable to the Bank for any reason including all amounts for which the Mortgagor is or may become liable to the Bank in respect of any orders, drafts, cheques, promissory notes, bills of exchange, letters of credit, guarantees, indemnities, bonds, and other instruments or engagements (whether negotiable or not and whether matured or not) which:

(i) have been drawn, issued, accepted, endorsed, discounted or paid by the Bank; or

(ii) are held by the Bank as a result of any transaction entered into by the Bank for, or on behalf of, or at the express or implied request of, the Mortgagor;..."

After any Event of Default, the Bank had the following rights under clause 14:

"Subject to Clause 14.2...the Bank may at its option exercisable by notice in writing to the Mortgagor (and notwithstanding there is an agreement in writing or course of dealing to the contrary and notwithstanding any concession or delay or previous waiver by the Bank of its right to demand payment of the Secured Amounts) treat the Secured Amounts as payable immediately and may immediately or at any later time (in addition to any other rights, powers and remedies conferred on a mortgagee by law and so that no delay or failure by the Bank to exercise any of the Rights of the Bank prejudices their later exercise) do all or any of the following things without giving any or further notice or demand to the Mortgagor:

(a) possession: enter upon, and take possession of, collect and get in the whole or any part of the Mortgaged Property and of its rents and profits or both ...

...

(c) sale: whether in or out of possession, sell the whole or any Mortgaged Property and exercise all other powers conferred upon a mortgagee by law; and

(d) Receiver: whether in or out of possession and whether or not the Bank is entitled to appoint a Receiver under any Statue, appoint any person or persons to be a Receiver of the whole or any of the Mortgaged Property; and

(e) powers of Receiver: whether in or out of possession and whether or not a Receiver has been appointed under this Deed, at any time after the Bank has become entitled to appoint a Receiver and without giving any notice, exercise all or any of the powers, authorities and discretions which may be conferred on a Receiver under this Deed or by law.."

Clause 17.4 sets out the powers of a receiver.

Clause 17.8 provides that:

"every Receiver appointed under or by virtue of this Deed is deemed at all times and for all purposes to be the agent of the Mortgagor and the Mortgagor is solely responsible for the Receiver's acts and defaults and for the payment of the Receiver's remuneration".

Proposed Restructure

In September 1998 Mr Keating left the Wodonga Business Banking Centre. He was replaced by Mr Membrey, who took over the management of the Walters' accounts.

By October 1998 the Walters' difficulty in servicing the monthly payments of $20,500 was increasing. The business had continuing cash flow problems and turnover was still below not only the optimistic estimates, but break even point.

Although the Walters had dismissed most of the staff and were personally performing the work of both brewery and restaurant without remuneration, they were unable to maintain the monthly repayments of $20,500.

Mr Membrey had contact with Simon Dubois, the Walters' West Australian based accountant and financial adviser, in whom they expressed great confidence. Carmen Walter told Mr Membrey that Mr Dubois had experience in relation to breweries. Mr Membrey advised the Walters that it might be preferable to retain a local accountant who understood the local Albury-Wodonga market, but the Walters preferred to rely on Mr Dubois.

Ms Walter stated that when Mr Membrey took over from Mr Keating, Mr Dubois discussed the monthly burden of $20,500 with him. She agreed that the Walters were anxious to have relief from the substantial payments. She therefore decided to request the consolidation of all loans and facilities into one loan.

On assuming control of the Walters' file, Mr Membrey dealt with their application for an increase of the overdraft (then $170,000) to $270,000. Mr Membrey prepared a credit submission and approved the further credit himself. However, his superior, the NAB regional business manager, Mr Selwyn Wegner, supervised the application. Mr Wegner hand wrote on the application "note increase will clear from confirmed sale of property. Principals need to get debt down to a serviceable level or increase income. Acknowledge teething problems but they need to get it working soon or take a loss and move on."

By an internal credit memorandum dated 13 October 1998, Mr Membrey reviewed the Walters' financial position. He prepared the credit memorandum after Mr Dubois had requested "restructuring the leases to a longer term and interest-only facility to give cash flow some breathing space". Mr Membrey stated at trial that it was "clear to us and the accountant that the amortisation of the lease facilities over a five year period was beyond the cash flow of the business". Therefore, it was essential that some action be taken to reduce the outgoings.

The credit memorandum noted "Due to vast differences in: (1) estimated costing and final costing which caused original borrowing and (2) projected cash flow and actual cash flow, directors are now in a position that there is a cash flow shortage causing excess in the account."

The credit memorandum further noted that "initial repayment of this increase will come from funds due from the sale of property in Germany". It noted that the business was currently losing $8,000 per month.

It stated "lending to this connection has in the past been based on security held. We have over the past month held lengthy discussions with Directors and following is evident:

"1. There [sic] integrity, cash inputs and quality of produce are very sound.

2. Directors themselves are very concerned regarding overall position. They are well aware that if they cannot make it work they will be required to sell the business and the premises. They acknowledge this clearly.

3. Given trade to date has been slow, it also encompasses traditional slow winter months and initial start up of the business. Coming summer months should give a better indication of true trade.

4. Within the next month an extensive review will be undertaken. Accountant has requested us to consider restructuring leases to a longer term and interest-only facility to give cash flow some breathing space".

A handwritten notation on the letter stated, inter alia, "Whole future this business relies on directors' ability to increase t/o [turnover]. They fully appreciate this. Have indicated willingness to sell asset if unable to turn around."

On 13 October 1998 the debenture charge over the undertaking of Palatinat in favour of NAB was lodged for registration.

On 14 October 1998 Palatinat's overdraft limit was increased to a limit of $270,000.

Mr Membrey gave evidence that in order to discuss banking matters with the Walters, he frequently visited the brewery premises. He recalled frequent discussions with Carmen and Fritz Walter, in which they acknowledged the insufficient cash flow and the necessity to sell assets if it did not improve.

According to Mr Membrey, he did not experience any difficulty in speaking English with Carmen Walter and Fritz Walter. He did not have discussions with Mrs Ingrid Walter, other than to order a meal at the brewery restaurant.

Mr Membrey testified that he discussed the problems of poor turnover and cash flow with the Walters. He stated "it's outside the bank's responsibility to run the business but you try to offer advice to suggest ways to improve the business". He had suggested that the Walters should vary the restaurant menu by offering Australian-style meals, rather than relying solely on German-style cuisine.

As the turnover of the business remained relatively static, Mr Dubois and Mr Membrey discussed an interest-only loan as a means of obtaining relief until cash flow improved. In the circumstances, Mr Membrey considered that this was "the only option to reduce their monthly outgoing payments".

According to Mr Membrey, an extension of the five year term of the leases was not an available option offered by the bank. The overdraft of $270,000 was for a three months term, rather than the usual one year term, because a complete review and restructure was planned in the case of the Walters.

At trial, Mr Membrey had no independent recollection of the specific conversations leading up to the restructuring of the Walters' loans. He recalled that the NAB recognised that the monthly payments of $20,500 could not continue to be met, and that either a restructure or termination of the relationship was required. He personally considered that the Walters deserved the bank's further support and that they should be granted an interest-only facility. Carmen Walter was the person with whom Mr Membrey principally dealt in relation to the proposed restructure. She expressed confidence in the quality of the Walters' product and its future. She believed that turnover could be built up.

Prior to the consolidation, the Walter Family's debt exposure to NAB under the mortgages overdraft and the four lease-purchase agreements totalled $1.38 million. The monthly repayments were $20,500, excluding the overdraft.

Financial statements for the year ended 30 June 1998, prepared by Mr Dubois and forwarded to Mr Membrey, indicated that in order to break even, an annual turnover of $858,000 was required. The projected turnover was only about half of that amount ($411,000). By letter dated 15 October 1998 Mr Dubois stated that "the current cash flow of the business cannot support the monthly repayments on the two large hire purchase contracts and the two hire purchase contracts on the vehicles".

At trial, Ms Walter conceded that it was necessary either to increase turnover or reduce monthly repayments. She discussed that with Mr Membrey. Their relationship was friendly and the Walters felt at ease with him on a personal level. She conceded that the interest-only loan was attractive, because it would reduce the monthly burden to an affordable amount. Although Ms Walter did not concede it, it must have been apparent at this stage that default was unavoidable unless some action was taken.

By letter dated 18 November 1998, Carmen Walter requested the NAB to "consolidate all our existing loans into one fixed interest-only loan totalling $1,4000,000 funded by Commercial Bill Rollovers". The letter also stated "we understand the Bank will review the funding position based upon the performance of the business in April 1999".

Mr Membrey testified that he discussed fully with Fritz and Carmen Walter that the NAB was dissatisfied with the business performance and would need to review "how it was travelling" after a certain period of time. At trial, Mr Membrey recalled that the idea of commercial bills originated with the Walters' accountant, Mr Dubois. Ms Walter could not remember whether Mr Dubois or Mr Membrey suggested the idea. According to Mr Membrey, the Walters did not understand the operation of a commercial bill facility. He therefore proposed a straightforward interest-only bank funded loan instead. He testified that there was a sense of urgency, due to the Walters' inability to service the monthly repayments.

Mr Membrey considered amortising at least a part of the total amount to be borrowed. He ultimately decided to make an offer which split the total amount borrowed into two loans.

Ms Walter denied that she recalled Mr Membrey saying that the restructure would include a larger interest-only loan and a smaller loan, which could be amortised over time.

An internal credit submission dated 24 November 1998 was prepared and approved by Mr Membrey. A one year $1 million interest-only loan and a $380,000 business combination loan were proposed.

Selwyn Wegner, who supervised the Walters' file, noted on the credit submission:

"Lack of progress is of concern and strict monitoring of actuals to budget monthly is essential. Previous increase was to clear from funds due from o/seas. How will those funds now be used. Valuation needs to be done to establish amount M.V. in light of poor performance. CRS needs to be completed for borrowing entity. Fresh S/P also needed. Non-standard pricing is not appropriate. No excesses or further increase!! Not viable at current level of debt".

The credit submission further noted:

"As per prior submission we now propose restructure of facilities on an amortising facility but over a longer term. End result of financing is that Directors are unable to meeting amortisation of leases over proposed five years". ... Debt servicing based on interest-only at 8%. Repayments to be $48,000 p.a. $100K debt reduction from sale of house in Germany remaining a requirement. Directors have advised that sale of a house in Germany remains a requirement. Due to very short history long term viability remains reliant on building sales. As foreshadowed previously this restructure is required to give some chance of ongoing viability."

[A handwritten note beside this comment states "no chance on current performance":]

"Integrity and quality remains of the highest standard. Accountant for the connection has just completed a review of operations. Changes in marketing personnel are to be made with a view to increasing sales".

A handwritten note states:

"Request for valuation agreed verbally to but deferred until new year. Also verbal agreement to provide f/s (financials) and lodge further $100K in first half next year also held".

Mr Membrey testified that he had two or three discussions with Ms Walter (at times accompanied by Mr Fritz Walter although he could not recall individual meetings) which took place in Ms Walter's office at the brewery between the date of approval of the restructured loans on about 24 November 1998 and 16 December 1998 when the Walters executed the documents.

He testified that during those discussions he "verbally discussed what the bank was proposing with the Walters, including the valuation". The Walters were concerned about the $2,000 cost of the valuation, for which they would be liable."

Mr Membrey's evidence was that Fritz and Carmen Walter, on being informed of the 12 month term of the interest-only loan, remarked upon it and "our response was that it is a 12 month term and the bank will review its position in 12 month's time and if trade is to the bank's satisfaction the bank would consider renewing it."

According to Mr Membrey, initially the Walters were concerned that it was a 12 month term but after the discussion and explanation of the 12 month term, Carmen and Fritz Walter "accepted the bank's position" although Mr Membrey in cross-examination could not recall what they said. He recalled that the Walters' "outlook for the future remained very positive".

Mr Membrey testified that he experienced no difficulty in speaking English with either Carmen or Fritz Walter and, in any event, "in my opinion you couldn't find anybody that could speak better German/English than Carmen could, I could not find a better interpreter".

Although the bank would not have financed the Walters had it not already been committed to them, Mr Membrey still considered them very competent and was "hopeful that they could achieve what they wanted to do. We believed it was worth a chance."

According to Mr Membrey, the Walters visited Mr Selwyn Wegner to obtain dispensation from obtaining a valuation prior to executing the loans on 16 December 1999. He could not recall that they complained about delay in the period leading up to the execution of the documentation.

Mr Membrey testified that the usual practice was to forward documents where possible, to give the customer time to read them before executing them. He stated that a "summary" letter to the borrowers, dated 15 December 1998, enclosing copies of the loan documents and guarantees would have been prepared only for the purpose of forwarding it to the customer and would either have been delivered or mailed.

He stated that to the best of his recollection he delivered the letter by leaving it at the brewery, but conceded that he could not say one hundred per cent. "I can't remember the drive down there because I went there often".

Mr Membrey gave evidence that the usual practice, which was mandatory bank policy, was "to table the documents, ask customers if they understand and are comfortable with them and advise them to seek legal advice if they wish." He did not recall questions being asked about the amount or the term but said "that had all been worked out in discussions previously".

He testified that he explained the guarantees, drew attention to the warnings and asked whether the Walters understood. He did not recall any indication that the Walters were uncomfortable or did not understand.

Ms Walter denied that Mr Membrey visited the brewery premises and advised her of the split loans. Although conceding that she was awaiting news of the restructuring application, she stated that she could not remember whether the Walters heard from Mr Membrey at all between the date of her letter on 18 November 1998 requesting consolidation and 16 December 1998 when they executed the transaction documents. At one point, she stated "I could have or I could not have". Ultimately she stated that "I could say that there could have been contact". She conceded she could not dispute it if Mr Membrey deposed to discussions having occurred. Ms Walter appeared evasive and unresponsive in relation to that issue.

She conceded that she had visited Mr Wegner during the relevant period. She denied that the visit occurred because Mr Membrey had informed her that the NAB required a sworn valuation as a precondition of the loan and that she visited Selwyn Wegner in order to obtain his consent to the deferral of a sworn valuation.

Ms Walter stated that she did not know the date of the events "and could not confirm or deny it". At one point she "simply could not say" whether the valuation was a point of discussion prior to the consolidation of the loans. Ms Walter ultimately conceded that she spoke to Mr Wegner but testified that it was only after the consolidation and not in relation to the valuation.

In my opinion, Ms Walter visited Mr Wegner to discuss deferral of the sworn valuation prior to the consolidation.

I also accept Mr Membrey's testimony that his discussions with the Walters about the proposed restructure took place. Ms Walter's testimony on this issue was vague and equivocal. It is improbable that Mr Membrey would have failed to inform the Walters of the proposed terms of the restructure during the three week period between the date of the submission and the execution of the documents. It is equally improbable that the Walters would not have taken the initiative to contact Mr Membrey if he had failed to contact them during that time.

The December 1998 Loans and Guarantees

The letters of NAB (Mr Membrey) dated 15 December 1998 to Carmen, Ingrid and Fritz Walter respectively, stated that:

"We enclose the following documents relating to the above Guarantee and Indemnity. Copy of guarantee and indemnity marked "For Guarantors Information only". Information sheet "what a Guarantee is". Copy of Fixed Interest Rate Interest Only Loan Letter of Offer dated 15 December 1998. Copy of Business Combination Loan Letter of Offer dated 15 December 1998. We wish to draw to your attention to the warning clause printed on the front cover of the Guarantee and should you have any questions relating to the execution of the above documents, please seek independent legal advice."

The Guarantee and Indemnity Document states -

"Warning This is an important document. By signing it you become personally responsible instead of, or as well as, the customer up to the amounts which the customer owes the Bank even if you have given the Bank separate security."

The letter of offer of NAB to Mr and Mrs F.J. Walter ATF The Walter Family Trustee dated 16 December 1998 for the fixed interest-only loan states:

"Fixed Rate Interest Only Loan. We are pleased to advise approval of your application for a Fixed Rate Interest Only Interest in Arrears Loan of $1,000,000."

The terms and conditions were stated to be in the enclosed letter of offer.

The letter requested "We request that you read the Letter of Offer carefully and familiarise yourself with the terms and conditions of the loan and then ring for an appointment to sign the relative (sic) documentation and attend to the other formalities."

The letter stated:

"Clause 3 Loan Amount and Term - The Bank will lend to the Borrower the Principal Sum which must be repaid in full with interest together with any other moneys payable under this Agreement by the Maturity Date."

The letter of offer for the fixed interest-only loan dated 15 December 1998 states the customer to be Fritz Josef Walter and Ingrid Adelheim Rosa Walter as trustee for the Walter Family Trust. Relevant terms include:

* Clause 6 "Subject to Condition 7, The Balance Owing shall be repaid in full on the Maturity Date".

* By clause 10, "Events of Default" include (b) if the Borrower fails to pay any sum due under this Agreement on the due date".

* By clause 1: "Balance Owing means the Principal Sum, interest fees charges and all moneys owing or payable by the Borrower under the Agreement, including the amount of any Economic Cost; `Principal Sum' means the amount so described and set out in Item 2 of the Schedule, or so much thereof as may be owing from time to time;

* "`Maturity Date' means the date specified in Item 3 of the Schedule".

* Item 2 of the Schedule states the principal sum to be $1,000,000.

* Item 3 of the Schedule states the Maturity Date to be 12 months from the date of actual draw down of the loan.

* Item 7 states the guarantors to be Fritz Josef Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat Brewery Pty Ltd.

The Annexure states the securities to be:

* Guarantee and indemnity for $1,380,000 given by Fritz Josef Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat, Brewery Pty Ltd.

* Registered mortgage debenture over the whole of the assets of Palatinat.

* First registered mortgage over 13 Sanctuary Boulevard, Wodonga.

* First registered mortgage over property situated at Lincoln Causeway, Wodonga.

The further letter of NAB to Mr and Mrs F.J. Walter dated 16 December 1998 for the business combination instalment loan relevantly stated:

"We are pleased to advise approval of the following facility. Business Combination Loan - Instalment Loan Amount: $380,000 Term: 7 years The terms and conditions which will apply to your facility are set out in the attached Business Combination Loan Letter of Offer".

The Business Combination Loan Letter of Offer dated 15 December 1998 was addressed to "Customer - Fritz Josef Walter and Ingrid Adelheim Rosa Walter as Trustee for the Walter Family Trust".

The Attached Schedule provides:

"Item 1: Borrower: Fritz Josef Walter and Ingrid Adelheim Rosa Walter as trustee for the Walter Family Trust."

The principal sum is stated to be $380,000 and the loan to be drawn down by 15 February 1999.

The maturity date/loan term is stated to be seven years from the date of actual draw down of the loan.

Repayment details stated that interest is included in instalments.

The working account is Palatinat Brewery Pty Ltd's account No. 68-534 - 4737 Wodonga, Vic.

The guarantors are Fritz Josef Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat Brewery Pty Ltd.

The customer acceptance states "I/we accept the Loan upon the Terms and Conditions herein outlined". It is signed by Fritz and Ingrid Walter and dated 16 December 1998.

The securities listed in the annexure are the same securities as for the interest-only loan.

Ms Walter denied that the Walters received copies of any of the letters or loan documents prior to their execution on 16 December 1998.

At trial, Ms Walter stated that she and Mr Walter went to Mr Membrey's office on 16 December 1998. (Mrs Walter was delayed and arrived at the meeting somewhat later.) When the Walters arrived, Mr Membrey produced the loan documents. The Walters claim that it was the first time that they had been presented with the documents or had been aware of the split loans.

Ms Walter agreed that the meeting in Mr Membrey's office lasted for 30 to 45 minutes. When asked whether Mr Membrey went through the fundamental terms of the two loans, Ms Walter replied that "there were some discussions about it" and "she could not say that he went through it item by item".

She contended that Mr Membrey said that the interest on the interest - only loan was fixed for one year and that there would be a year by year renewal.

Ms Walter conceded that Mr Membrey discussed the total amount of $1.38 million and the reasons for the split into two loans.

She recalled that Mr Membrey said words to the effect that the split into the two loans was the best for the business. She "couldn't say" whether the Walters read the documents. She stated "we questioned Mr Membrey concerning the fixed term of the interest rate and it was explicitly expressed that it's fixed for the term of one year, so we understood that the term was fixed but it was not explicitly explained or stated that this would include that after one year we had to pay the principal back and it was expressed and apprehended of myself and also of my father that at the finish of that one year term the interest would be re-negotiated".

She did not have any difficulty in conversing with Mr Membrey during the meeting. She agreed that she could have asked Mr Membrey any question which arose. If it were necessary to explain anything to her parents, she could have translated it into German. She could not point to anything more that a professional interpreter could have done.

She did not dispute that she and her father looked at the two loan agreements. She denied that they had not requested an interpreter because they understood the documents. Rather, she stated that it was "because we had to get this deal over and done with as fast as we could".

In an affidavit sworn 22 February 2001 Ms Walter deposed that she and her parents had not read or understood the letters of offer "except for the fundamental conditions". At trial, she stated that by "fundamental conditions" she meant "the ongoing nature" of the loan, although conceding that that was not a written term.

In an affidavit sworn 19 April 2001 Ms Walter deposed to the production of the two letters of offer at the meeting in Mr Membrey's office for the first time. She stated that "after looking at the loan contracts, Fritz and I asked Barry Membrey as to why there were two loans and why the interest-only loan was for 12 months? When I asked these questions Barry Membrey indicated that the interest rate would be refixed at the end of the 12 months and by fixing it only for 12 months this loan could also be restructured as a Principal and Interest Loan to reduce debt. Barry Membrey said words to the effect, `Maybe next year interest rates will go down or up.' At no stage did Barry Membrey advise us that the fixed rate loan must be repaid within/after 12 months nor that the defendant had the right to force the full repayment at all. It was always our understanding that the interest rate would be refixed automatically after the 12 months according to the then actual interest rate and that the loan would be automatically rolled over and continue for an extended period".

The affidavit indicates that Ms Walter clearly noted the one year term. She did not depose that Mr Membrey represented that it would not have to be repaid within that term. Rather, she deposed that he did not positively reiterate that the 12 month term meant that the loan was repayable at the end of a 12 month period.

In the affidavit Ms Walter further deposed that Mrs Walter arrived at the meeting somewhat later than Mr Walter and Ms Walter and observed the two separate loan documents. Mrs Walter immediately noted that the date of 15 December 1998 was incorrect and amended it to 16 December 1998. Mrs Walter also noted that the "interest rate of the loans was only for 12 months". She asked why. Ms Walter then gave her the explanation that "I had understood from Mr Membrey's explanation of the loan facilities". She told Mrs Walter in German that the period of the loan was fixed for one year and that it was going to be rolled over or renewed, which is "what was said to us". Ms Walter deposed that the Walters then signed the documents. The affidavit stated: "At no stage was there any discussion with Barry Membrey about repayment of the principal".

At trial, Ms Walter denied that Mr Membrey told the Walters that the $1 million loan was for 12 months with interest fixed for one year, which could be renewed if the NAB was satisfied with performance. She stated "He never explicitly, or never explained this to an extent".

Ms Walter was evasive in cross-examination as to what Mr Membrey did say. Rather, she referred constantly to the Walters' understanding that the loan would be renewed indefinitely and eventually converted into an amortising loan at "some stage".

Ms Walter, during the course of 2000, met with and wrote to a number of NAB officers to protest about the bank's refusal to renew or increase funding. She did not state, in the course of any meetings or correspondence, that Mr Membrey had promised an unconditional year by year renewal of the loan. It was not until the writ was issued that the Walters made the allegation of that representation. Ms Walter explained that she had not had legal advice at the relevant time.

At trial, Ms Walter initially stated that she did not believe that the Walters would obtain a renewal regardless of financial performance. Rather, she had assumed that the business would become more profitable, and the loan would be adjusted. When cross-examined on whether she believed that the $1 million loan would be renewed indefinitely, regardless of trading performance, Ms Walter was evasive. She did not respond to the question. She stated that she "could not say yes or no". She conceded that she could not say for how long the automatic renewal would be made but "this would be a very indefinite time ... the indefinite time would probably be reasonable to think on a seven year basis ... ".

Mr Walter also gave evidence on the execution of the loan documents on 16 December 1998. He said that he had been contacted and asked to come in and sign the loan. He could not recall what Mr Membrey said at the time of executing the documents. He did not ask his daughter any questions. He did recall asking Mr Membrey questions. He was presented with documents to sign. He heard Carmen Walter speaking with Mr Membrey but could not understand it.

In cross-examination, Mr Walter appeared to agree that he had noticed that the $1 million loan was for a 12 months term. He also stated that Mr Membrey had indicated that it did not matter that the loan was for 12 months, because "after then we negotiate, we roll it over or we make a new loan with principal and interest, but it depends how the business go ... ". He agreed that he knew that the bank required security for the loan.

Mr Walter was evasive and unco-operative when cross-examined on what Mr Membrey said at the execution of the documents on 16 December 1998.

A letter of Mr Membrey to Fritz and Ingrid Walter as trustees of the Walter Family Trust advised draw down of the interest-only loan on 24 December 1998. It stated the term of the facility to be 12 months. The maturity or expiry date was stated to be 31 December 1999.

A letter of Mr Membrey to Fritz and Ingrid Walter as trustees of the Walter Family Trust dated 30 December 1998 advised the details, including the draw-down date of 24 December 1998, of the business combination loan of $380,000 and the maturity date of 31 December 2005, (being seven years from the drawn down date).

As a result of the restructuring of their loans and facilities in December 1998, the Walters' monthly repayments were reduced to about $14,200.

The principal loan of $1 million was repayable on 31 December 1999. The pre-existing sale and lease-back agreements had been repayable over a five year term. The Walters, at trial, submitted that the exchange of a five year term for a one year term of repayment was wholly disadvantageous to them and they would not have knowingly agreed to it. It is clear, however, that the reduction in the monthly repayments entailed by the restructure was necessitated by their urgent cash flow problem.

Subsequent Dealings with NAB

The Walters made the reduced monthly payments of about $14,200 on time. However, they continued to experience problems with the business and its financial affairs. By October 1999 the NAB was sufficiently concerned to attribute a "Listed" status to the Walters' account. From that point, Mr Harris, the officer who had replaced Mr Membrey in September 1999, was required to report on the account to the NAB's Asset Structuring Unit.

The Walters were requested to provide financial information in order to permit the NAB to review their loans. They informed Mr Harris that, due to the financial pressures, they had decided to sell the restaurant and function part of the business.

In February 2000 a letter of Mr Harris of the NAB notified the Walters that the interest rate had risen from 9.25% to 12.25%.

After some delay, the Walters provided the requested financial information which, in Mr Harris' opinion, did not justify a renewal of their facilities. The NAB put in place an "exit strategy" for the Walters' accounts. On 12 April 2000 Mr Harris informed the Walters that the NAB would allow them until 30 June 2000 to re-finance or to sell. The Walters informed Mr Harris that the brewery and their residence was on the market. They nevertheless continued to maintain that the business could succeed given time and banking support. They sought additional funding to develop the brewery further and to improve facilities on several occasions.

The Walters did not meet the NAB's scheduled deadline of June 2000 to sell or re-finance. They met with Mr Harris in July 2000 and renewed a request for additional funding. Mr Harris agreed to consider their financial statements and cash flows, which were provided to him in late August 2000. The financial information revealed an annual turnover of approximately $550,000 for 1998/1999 and $477,000 for 1999/2000. The annual turnover required to break even was $850,000 on Mr Dubois' estimate. That was almost double the actual turnover of the business.

By letter dated 15 September 2000 Mr Edney, head of the NAB Asset Structuring Unit, informed the Walters that their facilities would not be renewed and required them to re-finance by 18 November 2000.

The Walters did not re-finance by the required date.

Although they had paid the monthly repayments on time they were in default under the interest-only loan, which had been scheduled for re-payment on 31 December 1999 and extended on several occasions. Default on the interest-only loan constituted a default under the home loan.

Ms Walter had discussions with Mr Poulter, the customer service officer of NAB and arranged a meeting with Mr Hunter who visited Wodonga to inspect the brewery.

On 6 September 2000 Ms Walter met with Mr Ben Edney, the head of the NAB's Asset Structuring Unit in Melbourne. Ms Walter presented Mr Edney with a business plan, aimed at stabilising the business. According to Ms Walter, at the meeting Mr Edney informed her that NAB did not want to continue the banking relationship with the Walters. He indicated that the bank would take action. The letter of Mr Edney to the Walters dated 15 September 2000 provided:

"Notwithstanding the representations made at the meeting, we remain very concerned about Palatinat's short and long term viability and your own personal equity being eroded to fund trading losses. Accordingly: 1. The Bank is not prepared to continue providing facilities and requires you to refinance Palatinat's and the Walter Family Trust's facilities by 18 November 2000 (ie. 60 days). 2. The Bank will continue to make available the existing facilities which formally expired on 31 December 1999, until 18 November 2000 provided you operate within your facility limits. 3. The Bank will maintain the current interest rates and not the default rates...".

Ms Walter wrote to Mr Frank Cicutto, the managing director of the NAB, complaining of Mr Edney's conduct and requesting a meeting, which never ensued.

She arranged to meet Mr Ray Pridmore, the NAB's Global Head of Asset Structuring, in November 2000. At the meeting on 8 November 2000 with Mr Pridmore and Mr Hunter, Mr Pridmore stated that the figures presented to him by the Walters in the balance sheets did not add up. He suggested that an investigative accountant be appointed. As an investigative accountant would cost around $12,000, which would be paid by the Walters, Ms Walter rejected the proposal. Mr Pridmore mentioned the appointment of a receiver at the meeting.

On 30 November 2000 the Walters received a notice of demand under the debenture from NAB.

Receivership and Sale

On 30 November 2000 NAB appointed Mr Geoffrey Handberg receiver over the property of Palatinat under the Palatinat debenture and agent for the mortgagee in possession under the brewery mortgage. Palatinat was the lessee of the property. For the avoidance of doubt, on 21 December 2000 Mr Handberg was appointed receiver over the brewery land pursuant to the brewery mortgage.

Mr Handberg took possession on 1 December 2000. He determined to auction the property in March 2001 but permitted the business to continue to trade. He employed the Walters to run the business. He introduced the Walters to Tally Konstas, a person with expertise in hospitality business management. With the receiver's agreement, Mr Konstas attempted to negotiate a joint venture with the Walters with a view to obtaining re-finance and averting the scheduled auction. The negotiations did not result in an agreement and re-finance was not obtained.

Mr Handberg obtained a valuation dated 6 December 1998 of the Palatinat chattels and equipment from Taylor Lockwood and a valuation of the brewery property dated 5 December 1998 from G D Sutherland Pty Ltd.

On 2 March 2001 the brewery property and the restaurant equipment were sold at public auction for $1,030,000. Mr Handberg paid $600,000 to NAB from the proceeds of sale at auction. That sum was applied rateably to the two loans. The costs expenses and outgoings of the receiver's administration totalled $719,476.

Mr Handberg gave evidence at trial that he had made at least twelve appearances in court proceedings or applications initiated by, or in relation to, the Walters. He stated that the amount of staff time required by the receivership had significantly exceeded his expectations. It had been necessary to obtain legal advice on many occasions. The legal costs incurred in relation to the receivership were between $200,000-$250,000.

I am satisfied that the litigious and uncooperative conduct of the Walters, to which Mr Handberg testified, significantly contributed to the high costs and burdens of the receivership.

As at 12 June 2003 the shortfall on the relevant loans was estimated at $1,063,942 which remained unpaid.

APPREHENDED BIAS

At the outset of the trial, the Walters submitted that the Court had no jurisdiction to hear the proceedings on the ground of apprehended bias, by reason of my interest as the beneficiary of a trust which held approximately 8,000 shares in the NAB and a standard banker-customer relationship. I disclosed those matters at the commencement of trial.

In reliance upon the principles expressed by the High Court in Clenae Pty Ltd v ANZ Banking Group Ltd[2] and Ebner v Official Trustee in Bankruptcy[3], for reasons expressed in detail at pp.12 - 14 of the Transcript, I concluded that a fair-minded observer with knowledge of the material facts would not reasonably apprehend that I might not bring an impartial mind to the resolution of the questions to be decided in the proceedings. I therefore declined to disqualify myself.

NAB - STANDING TO SUE - ULTRA VIRES

By paragraph 1 of the defence in the enforcement proceeding, the Walters denied that the NAB is duly incorporated. They sought "particularised details pursuant to the plaintiffs incorporation and certificate of authorisation to act as a Bank".

Late in the course of the trial, the Walters filed and served a proposed amendment in relation to the allegation that the NAB lacked corporate status. They argued that the NAB was incorporated pursuant to an 1859 Act which prohibited it from lending on the security of land, and which remained in force.

The National Australia Bank of Australia was incorporated pursuant to An Act to Incorporate the Shareholders of the National Bank of Australasia, 22 Victoria, No. 74 (24 February 1859) ("the 1859 Act"). Section 8 of the 1859 Act provided that (subject to certain exceptions) it was not lawful for the Bank to lend, inter alia, on the security of land. The Walters argued that the 1859 Act (including the prohibition on lending on the security of land) remained in force and was applicable to the NAB. Their argument appeared to be one of ultra vires in the traditional narrow sense, rather than an allegation of want of corporate status. They contended that the NAB lacked the constitutional power to lend on the security of land. The various lending and security transactions at issue in the proceedings were therefore said to be unenforceable.

"An Act to Amend an Act intituled "An Act to incorporate the shareholders of the National Bank of Australia and for other purposes" No. DCXLI 29 September, 1879 ("the 1879 Act") repealed an interim Act amending the 1859 Act. It also introduced an amendment to a section of the 1859 Act.

Section 4 of the 1879 Act stated that the passing of the 1879 Act should not be deemed to exempt the National Bank of Australasia "from the operation of any general Act which is now in force or which may be hereafter passed relating to banks or banking in Victoria."

An Act to Facilitate the Carrying Out of the Reconstruction Schemes of Certain Companies and the Compromise Schemes of Certain Societies, No. 1356, 6 November 1893 ("the 1893 Act") referred, in its preamble, to compromises and arrangements of several companies under the Companies Act 1890, sanctioned (in the case of companies incorporated by an Act of the colony of Victoria) by the Supreme Court of Victoria and (in the case of other companies) by United Kingdom Courts. The preamble further provided that "whereas each of the companies so reconstructed is now an incorporated company incorporated under the Act specified in the third column of the schedule to this Act opposite the name of the company . . . "

The third column of the schedule to the 1893 Act lists the company prior to reconstruction, National Bank of Australasia, as incorporated under the Companies Act 1890. The fourth column lists the company after reconstruction as "The National Bank of Australasia Limited".

Therefore, pursuant to a statutorily-effected and curially-sanctioned scheme of corporate reconstruction, the company incorporated under the 1859 Act was reconstituted with an altered name, incorporated under a different Act (which was the general incorporation Act then in force).

The Acts Enumeration and Revision Act 1958 (Vic) was passed in order, inter alia, "to provide that certain enactments of the Legislature of Victoria shall be repealed".

Section 7(b) of the Acts Enumeration and Revision Act provides that the enactments set out in chronological order in the Second Schedule to the Act shall continue to have statutory force and effect.

Section 9 of the Acts Enumeration and Revision Act provides that "save as aforesaid, every enactment enacted before 1 September 1958 so far as the enactment is at the commencement of the Act in force in Victoria shall be repealed in and for Victoria." The Second Schedule refers to only three 1859 Acts, which are saved by force of s.7(b). The National Bank of Australasia's incorporating Act is not included in the Second Schedule. It is hence repealed.

In summary, having been initially incorporated under an individual Act of Parliament, the bank was, following reconstruction in 1893, incorporated pursuant to the general incorporation legislation which was then in force.

The NAB is now certified as having been registered under the Corporations Act 2001. A certificate issued by ASIC notes that the date of commencement of its registration is 23 June 1893.

Section 1274(7A) of the Corporations Act 2001 provides that a certificate issued by ASIC stating that a company has been registered under the Act is conclusive evidence that:

(a) all requirements of the Act for its registration have been complied with; and (b) the company was duly registered as a company under the Act on the date specified in the certificate.

Section 9 of the Corporations Act 2001 relevantly defines "company" to include "a company registered under this Act."

Section 124 of the Corporations Act 2001 provides that a company has the legal capacity and powers of an individual both in and outside this jurisdiction. It also has all the powers of a body corporate.

That provision confirms the abolition of the narrow corporate doctrine of ultra vires. The NAB, as a company registered under the Corporations Act 2001, has the capacity to make loans on the security of land. Section 125 of the Corporations Act 2001 recognises that the individual constitution of a company may contain a restriction on the company's exercise of its powers. The Walters do not point to any such restriction in the present case.

There is no basis for the contentions that the NAB lacks corporate status, is prohibited by statute from making loans on the security of land or otherwise lacks the power or capacity to make such loans.

The Walters' contention based on the NAB's want of corporate status, and (in so far as it is relevant) the doctrine of ultra vires, fails.

TRIAL BY JURY

The Walters sought, at the outset of the trial, to have the proceedings tried by jury. They submitted that the denial of a trial by jury was contrary to Rule 47.02 of the Supreme Court Rules and to s.80 of the Commonwealth Constitution. Further, they contended that they were entitled to have the proceeding tried by jury pursuant to Magna Carta.

Master Evans, by order made on 27 April 2001, ordered that the principal proceeding was to be tried by judge alone without a jury. The Walters contended that at the hearing of their application for a trial by jury, Master Evans had declined, in response to their enquiries, to disclose whether he was a Freemason. (This is discussed below).

Although they did not appeal from Master Evans' order, the Walters claimed that at the time, they were ignorant of the possibility of an appeal. At the commencement of the trial, they renewed their application for a trial of both proceedings by jury.

For reasons set out in the Transcript, pp.23 to 28, I ruled at the outset that both proceedings should be tried by judge alone. The order of Master Evans had not been appealed within the time permitted by the Supreme Court Rules. Further, the order of Master Evans was soundly based. The nature of both proceedings rendered a trial by jury inappropriate. There was no constitutional entitlement or any entitlement under Magna Carta for a trial by jury of the proceedings in question.

FREEMASONRY

The Walters contended that the Court lacked jurisdiction to hear and determine the proceedings and was unlawfully constituted because certain judges and other Court officials are, or are suspected to be, Freemasons. They alleged that Freemasons administer and swear unlawful oaths, including oaths of allegiance to a foreign power, contrary to s.316 of the Crimes Act and s.321 of the Crimes Act. Further, the Walters contended that Freemasons are party to conspiracies to commit criminal acts and are otherwise implicated in criminal conduct.

Ms Walter read to the Court some oaths allegedly administered to, and taken by, Freemasons. The Walters served a subpoena on an associate of a judge of the Court, requiring him to produce documentation which would reveal the identity of any judges, masters or other Court officials or employees who were Freemasons.

The Walters contended that Freemasonry is a brotherhood of persons who habitually take unlawful oaths and who owe obedience to foreign powers. They alleged that in the course of their dealing with the NAB, Mr Fritz Walter (who is not a Freemason) failed to respond to a secret Masonic handshake made by an unidentified bank officer. The Walters claimed that in consequence, the NAB thereafter acted to the Walters' detriment and ultimately sold their property. No evidence of the alleged handshake incident was adduced at any stage. However, the Walters asserted that alleged Freemasonry within the Court precluded a fair trial of their claims. Ms Walter stated: "If the judge hearing the case were a Freemason, and the other party was a Masonic member as well and they had discussed the court case previously and made their decision while they were in the lodge" then "a litigant could not win."

Master Evans, whom the Walters believed to be a Freemason (as he would neither confirm nor deny membership) had made an order in the principal proceeding for trial by judge alone. Master Evans' order was said to be of no effect, due to his alleged status as a Freemason.

Although I stated that I was not, and had never been, a Freemason, the Walters contended that the status of the individual judge hearing the proceeding was irrelevant. They claimed that the Bench of the Supreme Court of Victoria was infested with Freemasons who were guilty of criminal acts, indictable offences and other unlawful conduct which contaminated the entire Court. Although Ms Walter preferred to characterise it as a "question", she essentially submitted that the Court lacked jurisdiction to determine the proceedings on the ground of Freemasonry.

In reliance upon Re Shaw & Another[4], in which the Court of Appeal considered almost identical arguments about Freemasonry to those raised in the present matter, I ruled from the outset that Freemasonry had no bearing on any legitimate issue to be determined in the case. The reiteration of such allegations and the associated baseless attack on the Court's personnel and processes were, in my view, irresponsible and regrettable.

FRACTIONAL RESERVE BANKING

Paragraph 25 of the Walters' amended statement of claim states -

"Fractional Reserve banking is illegal - Particulars - The defendant is a private banking institution governed by the Federal Reserve Act, the Banking Act, the Credit Act and others. None of these Acts provide a statute which allows the defendant to pursue fractional reserve banking."

The Walters served a subpoena on Mr Frank Cicutto, the managing director of the NAB, requiring him to attend to give evidence concerning fractional reserve banking and "credit creation". They contended that Mr Cicuitto was an expert on those practices.

The term "fractional reserve banking" was not defined in the Walters' pleadings. There was no allegation, in terms, that the NAB engaged in fractional reserve banking. No legal consequence of engaging in it was alleged in the pleadings.

The conduct comprehended by the term "fractional reserve banking" and its alleged legal consequences were identified incrementally in oral submissions by Ms Walter during the course of the trial.

Broadly, she submitted that fractional reserve banking is a term applied to the practice of making loans and advances to customers which exceed the value of a bank's shareholder equity or other reserves. In such circumstances, the loans made in excess of the bank's beneficially owned funds are said to be mere book entries, and "artificially created". Therefore, it is contended that the bank gives nothing of value in making such loans. There is thus no consideration given by the bank in the loan transaction, which is unenforceable on the dual bases of illegality and want of consideration.

The Walters called Mr Smart to give evidence on their behalf. Mr Smart had experience as a litigant in person against a major bank. Mr Smart stated that he had researched fractional reserve banking and had discussed the practice with the Walters. During the course of the trial, he met them daily. He testified that the practice of fractional reserve banking and credit creation was "the most evil face in this country". He stated: "Credit creation is the greatest evil. Credit creation has many names. It is commonly referred to as fractional reserve lending, fractional reserve banking, Douglas credit, manufactured credit, social credit. It has many pigeonholes. I prefer to use the word credit creation". Mr Smart further stated that "what I do have trouble with is the corruption of the judiciary supporting the banks and allowing the banks to do what they do. Without a corrupt judiciary, then the banks would be nothing ... ". He attributed the existence of credit creation to the complicity of a corrupt judiciary.

The Walters pointed to the NAB annual financial report for the year 2001 which showed the NAB to have made loans and advances of approximately $207 billion, compared with its equity of $23 billion.

They submitted that the loans and advances shown as assets of the NAB were "manufactured" and "simply made by book entry. They are not funds that the bank has readily available to make them as a loan". In that context, the Walters submitted that it is necessary first physically to possess an amount of money in a material form before it is possible to make a valid and enforceable loan. That submission is evidently based on the view that the chose in action constituting the right to repayment of the loan is valueless, as it lacks a tangible form. On that basis, a bank which has made multiple advances has no assets corresponding to those advances.

The Walters relied upon the decision of First National Bank of Montgomery v Jerome Daly[5], a decision of one Martin V. Mahoney, a Justice of the Peace in the Township of Credit River, State of Minnesota.

It appears from the brief reported judgment in First National Bank of Montgomery v Jerome Daly that a "jury of talesmen" in that case concluded that the plaintiff bank had not provided lawful consideration in making secured advances to the defendant. The jury accepted the defendant's argument that the bank "created" the money and credit upon its own books by bookkeeping entry, as the consideration for the defendant's promissory note and mortgage.

Justice of the Peace Mahoney declared that the mortgage was null and void, due to a failure of lawful consideration. An attached memorandum by Martin V. Mahoney, dated 9 December 1968, stated that the plaintiff bank had admitted that it created the amount advanced in money or credit upon its own books by bookkeeping entry. It noted that "The money and credit first came into existance (sic) when they created it". It further noted that the plaintiff bank admitted that "no United States Law or Statute existed which gave [the bank] the right to do this".

The memorandum concluded that the bank's "act of creating credit is not authorised by the Constitution and Laws of the United States, is unconstitutional and void, and is not a lawful consideration in the eyes of the Law to support anything or upon which any lawful rights can be built."

The Walters submitted that the NAB likewise merely creates book entries of loans instead of providing lawful consideration for the promise to repay. They say that the practice amounts to "credit creation" and "fractional reserve banking", because the NAB keeps in reserve funds which amount to only a fraction of the total amount of loans and advances made. The loans and advances made by the NAB are thus simply book entries ... ". Ms Walter pointed to an NAB account statement for the Walters' home loan in which the "purported loan" was not shown as a credit to the borrower, but immediately shown as a debit and submitted "So there was no credit given at any time ...".

Ms Walter did not, however, dispute that the loan amounts in question were paid either to the Walters or to third parties at the Walters' direction or order, so that the NAB provided moneys to pay the vendor of the Walters' residential property and to discharge the Walters' liabilities to their creditors.

A similar argument based on "credit creation" was advanced in National Australia Bank Ltd v McFarlane.[6] In that case, the defendant mortgagor contended that unless the lender in a security transaction hands over "bullion, banknotes or coin", the mortgage is invalid. Byrne J stated:

"It is apparent to me that this is arrant nonsense. It has no regard to the legal obligations created by a bank loan; it ignores the reality of modern commerce where it is money, in the broad sense of the term, including choses in action, and not only gold, banknotes and coin, or indeed legal tender, which plays a most important part."[7]

Byrne J noted that he had read the Daly[8] decision and considered its logic "bizarre". He was neither bound by the decision nor persuaded that its reasoning was valid. His Honour noted that, in so far as the Daly decision depended upon the impact of provisions of the United States Constitution, the Constitution of the State of Minnesota and other United States laws, such provisions had no application in Victoria.[9]

In Smart v ANZ Banking Group Ltd[10] the appellant, Mr Smart, who gave evidence in the present case, contended that the loan secured by a mortgage was not a real loan but "a paper transaction. Actual money doesn't change hands, cash money". Batt JA at p.4 observed that:

"The argument thus seemed to be that no moneys were lent, but only credit was created by book entry, which, it was said, was unlawful because the only mode of payment was by legal tender .... Mr Smart's argument overlooks banking and credit altogether. Indeed, it seems to take no regard even of an undoubted fact of commercial life, the use of cheques and bills of exchange. It may be that in economic terms, the respondent bank "lends" its credit by way of fractional reserve banking but it cannot be doubted that in point of juristic analysis money was lent. That is so even in the case of the housing loan; some funds 