ANZ Banking Group Ltd v PA Wright and Sons Pty Ltd
Case
•
[1999] NSWSC 628
•25 June 1999
No judgment structure available for this case.
CITATION: ANZ Banking Group Ltd v PA Wright & Sons Pty Ltd [1999] NSWSC 628 CURRENT JURISDICTION: Equity Division
Commercial ListFILE NUMBER(S): 50198/96 HEARING DATE(S): 27.7.98, 28.7.98, 29.7.98, 30.7.98, 3.8.98, 4.8.98, 5.8.98, 6.8.98, 10.8.98, 11.8.98, 12.8.98, 13.8.98, 17.8.98, 18.8.98, 19.8.98, 20.8.98, 24.8.98, 25.8.98, 26.8.98, 27.8.98, 31.8.98, 1.9.98, 2.9.98, 3.9.98, 7.9.98, 8.9.98, 9.9.98, 10.9.98, 14.9.98, 16.9.98, 23.9.98, 28.9.98, 30.9.98, 2.11.98, 3.11.98, 5.11.98 JUDGMENT DATE:
25 June 1999PARTIES :
Australia and New Zealand Banking Group Ltd v P.A. Wright and Sons Pty Ltd; Wallamumbi Pty Ltd; Achill Pty Ltd; Yarrowyck Pty Ltd; Ostabrew Pty Ltd; Melrose Meats Pty Ltd; Esrolem Pty Ltd; Phillip David Arundell Wright; Margaret Du Moulin WrightJUDGMENT OF: Hunter J
COUNSEL : Plaintiff: Mr I Barker QC + Mr J Thomson
Defendants: Mr D Higgs SC + Mr L Aitken +
Ms R Sofroniou + Mr E FinnaneSOLICITORS: Plaintiff: Minter Ellison
Defendants: Jackson SmithCATCHWORDS: Banker/Customer: special relationship: whether fiduciary relationship: meaning of "basic" facilities: representations of financial support: whether actionable: leave to amend after conclusion of hearing: leave to adduce fresh evidence at conclusion of hearing. CASES CITED: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Legione v Hateley (1983) 152 CLR 406 DECISION: 1. Verdict for the plaintiff in the sum of $31,911,666.40 together with interest thereon in an amount to be calculated by the parties; 2. Orders in terms of pars 5, 5A, 6 and 7 of the Second Amended Summons save that execution of the writ of possession is stayed pending final orders as to interest and costs; 3. Judgment for the cross-defendant on the cross-claim; 4. The defendants/cross-claimants are to pay the plaintiff's costs of the proceedings.
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LISTHUNTER J
FRIDAY 25 JUNE 1999
50198/96 AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD v P A WRIGHT AND SONS PTY LTD & 8 ORS
REASONS FOR JUDGMENT
1 At the conclusion of the taking of evidence in these proceedings, a number of matters were left unresolved and the parties were given leave to present further written submissions. These were presented by counsel on behalf of the defendants/cross-claimants on 11 November 1998 and by counsel on behalf of the plaintiff/cross-defendant on 19 February 1999. Submissions in reply were presented by counsel for the defendants/cross-claimants on 29 March 1999. Included in that material is an application for leave to further amend the cross-claim to include a cause of action in contract based upon an alleged breach of an implied term of reasonableness in the exercise by the plaintiff of its contractual rights or powers. That application was opposed by the plaintiff. 2 As at the time of the filing of the second amended summons on 2 November 1998 (the summons), the claimed indebtedness of the defendants to the plaintiff was approximately $32,000,000, together with interest thereon from 11 October 1996. 3 The defendants have a common link through the conduct of a major grazing enterprise centred in the New England district in New South Wales in the vicinity of Armidale. It is convenient to treat the enterprise as one conducted by the eighth defendant, Phillip David Arundell Wright (Wright), and his family (the Wrights). Nothing turns on the corporate structure made up of the several corporate defendants which are Wright family companies. Throughout these reasons I refer, collectively, to members of the Wright family as “the Wrights” and to the general composition of the defendants as “the group”. 4 The ninth defendant, Margaret Du Moulin Wright, died after the commencement of the proceedings and her estate is represented by the two sons of her marriage to Wright, Phillip Arundell Wright (Phillip Wright) and David Andrew Wright (David Wright). 5 The principal trading entity is the first defendant, PA Wright and Sons Pty Ltd, sometimes referred to in the evidence as “PAWS”. The Wrights were also interested in meat works, principally boning operations conducted through the sixth defendant, Melrose Meats Pty Ltd (Melrose), and the seventh defendant, Esrolem Pty Ltd (Esrolem). 6 There are variances in the evidence of the acreage of the grazing properties on which the group’s grazing operations were conducted. The traditional homestead property was known as Wallamumbi and comprised approximately 11,850 acres. The other New England properties consisted of Achill of nearly 7,000 acres, Forglen, of approximately 5,700 acres, Yarrowyck, approximately 6,900, Paradise, approximately 14,800 acres, Woodburn, approximately 2,650 acres, Conningdale, approximately 2,150 acres, Thorpleigh, approximately 2,500 acres and Wards-Mistake, approximately 5,100 acres: excluding Wards-Mistake, which was a leased property, the collective holding was in excess of 50,000 acres. Reference has also been made in the evidence to properties known as Glanmire and Greenhills, each consisting of approximately 1,500 acres. However, that property does not appear to be expressly listed in the schedule of properties of which the plaintiff seeks possession. 7 The Wrights also acquired a north west plains property known as Boonaldoon, situated some 45 kilometres west of Moree and comprising approximately 36,580 acres. It had been sold prior to the institution of these proceedings. The Wrights had operated a major grazing aggregation in south west Queensland in conjunction with another branch of the Wright family, represented principally by Bruce and Richard Wright. That aggregation, comprising approximately 120,000 acres, was known as Kindon. That property had also been sold. 8 Ancestors of the Wrights had been engaged in pastoral pursuits in Australia since 1827. The Wrights’ V2V stock brand is the oldest stock brand in Australia, retained by descendants of its original owner. 9 There is no substantial issue remaining between the parties on the plaintiff’s claim other than that raised by the cross-claim. 10 By its summons, Australia and New Zealand Banking Group Ltd (the bank), seeks recovery of the sum claimed under facilities provided by the bank to PAWS as borrower under a written agreement dated 8 December 1995 and as against all defendants under a cross deed of covenant dated 8 July 1992. Possession is sought of the Wrights’ properties, more particularly specified in the schedule to the summons, under various mortgages given by the defendants to the bank between 1973 and 1990, as also particularised in the schedule to the summons. The bank seeks rectification of one of those mortgages which affects the property known as Achill. 11 By their amended cross-claim, as presently pleaded, the defendants seek the following relief:12 As to those damages, the defendants claim to be entitled to a set-off against the amounts claimed by the bank. 13 By the contentions set out in the amended cross-claim (the contentions), the group asserted that there existed between the bank and PAWS, a fiduciary relationship arising out of the relationship of banker and customer between PAWS and the bank or their predecessors which had existed “for around 150 years”: that during that period PAWS sought advice from the bank “in relation to all aspects of its business operations”, advice which the bank provided and upon which, to the bank’s knowledge, was relied upon by PAWS: further, that the bank held itself out as possessing special skills in the provision of advice in relation to financial assistance to farmers and related rural matters. 14 It was further asserted that, to the bank’s knowledge, PAWS reposed its confidence and trust in the bank to “behave prudently, fairly, honourably, competently and reasonably in its dealings with” PAWS and relied upon the bank to provide, from time to time, proper advice, as its principal banker, in respect of the enterprise conducted by PAWS and to exercise reasonable care and skill in the performance of its duties as banker and adviser to PAWS. 15 The group contended that certain representations were made by the bank to PAWS “from 30.06.88 until about 1992” in relation to the provision of loan facilities to PAWS. These representations were said to relate to a “ten-year plan” of PAWS which was described in the contentions as involving PAWS in the following way:
“1. Damages (including equitable damages) and pursuant to section s. 82 of the Trade Practices Act.
2. Equitable compensation.
3. The minimum equity pursuant to estoppel as pleaded.
4. An order under section s. 87 of the Trade Practices Act to the same effect as the minimum equity.
5. A declaration that the contract of loan between the Cross-Claimants and the Cross-Defendant is rescinded and a consequential order in favour of the Cross-Claimants, by way of compensation, indemnity, in equity or otherwise to restore the respective party in statu quo ante the said contract of loan at or prior to 30 June 1988.
…
8. Repayment to the Cross-Claimants of money paid to the Cross-Defendant under a mistake of law and/or mistake of fact.
9. Damages.
9A Damages for breach of contract .
10. Aggravated damages.
11. Interest.”16 The representations said to have been made by the bank were as follows:
“13. The ten-year plan involved PAWS;
(a) changing its business enterprise from a mixed cattle breeding and fattening business to an all breeding business by increasing the size of its herd from about 8,000 to 20,000 breeding cows by 1993 (or such extended period as would accommodate seasonal and market vagaries and the period necessary to market the progeny of the herd) - hereinafter referred to the “herd expansion stage”;
(b) acquiring further rural properties;
(c) acquiring further interests in meat processing operations and/or acquiring a new meat processing operation;
(d) securing, or attempting to secure, contracts for the sale of produce to large retailers;
(e) exploring the possibility of entering into a joint venture for the purposes of accessing international markets.”
17 The advice allegedly given by the bank was particularised in the following way:
“12. From time to time over a period from 30.06.88 until about 1992 the Bank represented to PAWS that it would support its ten-year plan (defined hereunder) by continuing and/or providing loan facilities to PAWS as requested until 30.06.98, in that:
(a) it would provide loan facilities to PAWS as requested subject to adequate security;
(b) in relation to loans then in existence, loan facilities that were provided during this ten-year period and/or requests for loans, it would not require the repayment of principal and/or interest other than from the surplus cashflow of PAWS subject to adequate security being maintained (loans and loan facilities refers to all loan agreements including overdraft facilities and commercial bill facilities, together with agreements to secure those loans);
(c) security was initially regarded as adequate for the actual and/or anticipated requirements of PAWS and from about April 1990 adequate security comprised a security loan ratio at a level equivalent to a minimum of 130% of the fair market property values together with livestock values (which needed to be calculated by discounting the market value of the livestock to 60%) regardless of circumstances affecting serviceability (i.e. the anticipated down-turn in the cashflow of PAWS during the ten year plan);
(d) regardless of any term and condition of any loan agreement or associated agreement (such as security) contrary to the above, the Bank would not in fact rely upon or assert any legal entitlement to require the repayment of principal and/or interest except from surplus cashflow as outlined above.”18 A discrete case of negligent advice was alleged in the contentions concerning the taking out of loans at a fixed interest rate by PAWS between February and May 1990 on the advice of the bank. 19 Paragraphs 28 and 29 of the contentions are of particular significance in the context of the outstanding application for leave to amend the cross-claim:
“14 … from time to time and over a period from 30.06.88 until about 1992, the Bank advised PAWS that it would support its ten-year plan by continuing and/or providing loan facilities for PAWS until 30 June 1998 as requested in that:
(a) it would provide loan facilities to PAWS as requested subject to adequate security;
(b) in relation to loans then in existence, loan facilities that were provided during this ten-year period and/or requests for loans, it would not require the repayment of principal and/or interest other than from the surplus cashflow of PAWS subject to adequate security being maintained (loans and loan facilities refers to all loan agreements including overdraft facilities and commercial bill facilities, together with agreements to secure those loans);
(c) security was initially regarded as adequate for the actual and/or anticipated requirements of PAWS and from April 1990 adequate security comprised a security loan ratio at a level equivalent to a minimum of 130% of the fair market property values together with livestock values (which needed to be calculated by discounting the market value of the livestock to 60%) regardless of circumstances affecting serviceability (i.e. the anticipated down-turn in the cashflow of PAWS during the ten year plan);
(d) regardless of any term and condition of any loan agreement or associated agreement (such as security) contrary to the above, the Bank would not in fact rely upon or assert any legal entitlement to require the repayment of principal and/or interest except from surplus cashflow as outlined above.”20 It will be necessary to return to those paragraphs of the contentions. For the moment it is sufficient to note that particulars of damage provided by the group did not extend to any quantification of damages for lost business opportunities, nor were statements of evidence filed and served in conformity with the court’s directions quantifying a loss of expectation case. 21 In addition to causes of action based upon misrepresentation, negligent advice and breach of fiduciary duty, reliance was placed by the group, in paragraph 36 of the contentions, upon a suit of economic duress and unconscionable conduct. This was said to arise out of a requirement by the bank of PAWS to enter into new loan agreements with the bank after the bank had withdrawn its financial support of the group, at a time when the bank was threatening enforcement proceedings and when PAWS was unable to secure substitute finance. I do not understand that basis for relief to be pursued outside of a claim based upon promissory estoppel. 22 The group pleaded a misrepresentation case in paragraph 45 and following of the contentions based upon alleged misrepresentations by the bank as to the effect of changed facility arrangements around 8 May 1992. Again, I do not understand that issue to have survived the hearing. I think the same fate has befallen a cause of action based upon s 60(1)(b) of the Corporations Law arising out of the alleged participation by the bank in the management of PAWS so as to subject it to the duties of a director. 23 When the matter of a further amendment of the cross-claim arose during the course of the hearing to include a count in contract, the cause of action was expressed in the following way:
“28. At the time of each of the aforesaid representations and advice the Bank knew, or ought to have known, that in the event of its representations and/or advice to PAWS being false or negligent:
(a) PAWS would not be able to complete the ten-year plan;
(b) it would be unlikely for PAWS to be able to obtain finance elsewhere so as to complete the ten-year plan and/or mitigate its loss;
(c) there would be a disruption of the development of a plan at such a time when PAWS had inadequate cashflow by reason of which it would be necessary for PAWS to sell off land, plant, equipment and/or stock in circumstances which would be unfavourable to PAWS in all likelihood; and certainly it would be likely that the disposal of such assets could not occur in a timely or optimal manner;
(d) an exclusive supply arrangement with Coles which was proposed and entered into in about mid-1990 (with the knowledge and approval of the Bank) with a view to Coles and PAWS entering into an exclusive supplier agreement between those parties with PAWS as the supplier, would in all likelihood be discontinued, resulting in the financial viability of Melrose and Esrolem being in jeopardy and PAWS failing to realise the otherwise probable opportunity of securing a lucrative exclusive supply agreement with Coles and entering into various joint venture agreements.PARTICULARS
At the time the proposed Coles contract was lost on or about 1 April 1992, PAWS was about to enter a joint venture agreement with Cargill. By reason of the actions of the Bank PAWS lost its proposed joint venturer, Cargill. Thereafter, further joint venturers were also lost arising from reactions of the Bank those other joint venturers being inter alia Derek Shaw and Bankers Trust.
29. By reason of the matters aforesaid:-
(a) On 01.04.92 Coles terminated its arrangements with PAWS and refused to enter into the proposed exclusive supply agreement;
(b) thereafter PAWS lost the opportunity of securing the various joint venture agreements;
(c) PAWS has suffered, and continues to suffer, loss and damage.
PARTICULARS OF DAMAGE
(i) Those damages referred to in Mr Cox’s report and his proposed supplementary report (which will include details of the likely expenditure that will need to be undertaken by PAWS arising from the conduct of the Bank in restoring its livestock and improvements including pastures, sheds, plant and equipment).
(ii) Loss of joint venture agreements.”
24 The damages said to flow from the alleged breach were unquantified. At the time that application was made, senior counsel for the group submitted that the amendment would not involve any further factual material other than that which had been the subject of statements of evidence exchanged by the parties. However, it became clear from closer enquiry of counsel that no statement of evidence quantifying loss of profits or expectation losses had been served by the group, although the particulars of loss provided in paragraph 29 of the contentions relied upon the contents of an expert report which had been served upon the bank and of a proposed supplementary report. 25 Notwithstanding the absence of quantification of damages, I was disposed to grant an application for leave to amend to include a count in contract, provided that the quantum issue could be accommodated without occasioning undue interruption to the proceedings or unfairness to the bank, notwithstanding some reservations concerning the formulation of the proposed amendment. 26 My reasons were that, as to liability, the ambit of factual issues would not be materially affected by the proposed amendment, as reflected in the assurance of senior counsel for the group that the granting of the amendment would not involve going outside the statements of evidence served by the group. 27 Moreover, the bank in its defence to the cross-claim had taken issue with the allegations set out in paragraphs 28 and 29 of the contentions and as at the time of the application to amend, extensive cross-examination of Wright and David Wright had taken place going to this question of expectation losses, particularly in relation to the “proposed Coles contract” and the joint ventures referred to in those contentions. 28 Further, senior counsel for the bank conceded that the bank’s attack on the group’s case as particularised in paragraphs 28 and 29 of the contentions would be maintained notwithstanding the failure of the group to quantify lost opportunity damages. 29 Partly because of what I perceived to be some unsatisfactory elements in the formulation of the count in contract and because of the lack of any precise statement by counsel on behalf of the group as to the extent of quantum issues raised by the proposed contract cause of action, I required the group to furnish particulars of loss to the bank. This was done by letter of 19 August 1998 which I have now marked for identification 16. 30 It was clear from those particulars that, while there was a significant overlap with the existing damages claim of the group, it was unlikely that the alleged breach of contract losses could be addressed without interruption to the continuity of the hearing. However, I did not regard that as fatal to the application as the view I held then, and maintain, was that if there was a reasonable, arguable case in contract, if at all possible, those issues should be dealt with in these proceedings, even if that meant at some stage an adjournment to enable the quantum issues to be properly addressed. Given the several weeks that the hearing of the proceedings was bound to take, I thought it was not unrealistic to anticipate that those quantum issues could be taken up in the ongoing interchange of expert reports which included a process involving joint conferences of experts: a matter to which I return in these reasons. 31 I also kept open the option of granting an amendment to include an alternative count in contract, other than the one the subject of the application made by the group. 32 The final application by the group for leave to amend the cross-claim is that accompanying the further submissions of 11 November 1998. That proposed amendment was pleaded in the following terms:
“51A Further and in the alternative, the Cross-Claimants say:
a. That by virtue of an ambulatory agreement (“the agreement”) made from June 1988 as particularised in the statements of mr. P.A. Wright and Mr. David Wright, the Bank agreed to lend moneys to the Cross-Claimants from time to time on the basis that, if such a facility were approved, the Bank would not require the facility to be repaid immediately but would capitalise interest payments provided that the loan to security ratio then applying to the total of the facilities extended to the Cross-Claimants did not exceed 65% during the duration of the 1988 strategy;
b. In the course of the agreement, the Bank from time to time did lend moneys to the Cross-Claimants up until mid-1991;
c. From a period commencing in about mid 1992, in breach of the agreement, the Bank refused to permit the Cross-Claimants to capitalise interest as agreed but rather required the Cross-Claimants to sell assets to reduce the total amount then owed by the Cross-Claimants to the Bank;
d. As a result of the breach, the Cross-Claimants have suffered and continue to suffer loss and damage.”33 I have understood from the final submissions on behalf of the group that the August application is no longer pressed. The objections of the bank to the later application for leave to amend correctly asserted that it was not reasonable to require the bank’s experts at that stage of the proceedings to revisit the damages claim based on a case of breach of contract or to meet an unquantified loss of expectation case. However, as the conduct of the bank from 1988-1996 was under scrutiny in the group’s representation case and in its allegations of unconscionability, I took the view that the reasonableness of the bank’s conduct in the exercise of its contractual powers could and should be addressed in final submissions, regardless of the absence of a ruling upon the application for leave to amend. I understand the parties to have accepted that course, consistently with the bank steadfastly opposing any leave to amend the cross-claim. 34 Further, the bank undertook written submissions in reply both as to the facts and law raised by the group’s case as formulated in its application for leave to amend. The bank’s submissions are those of 18 and 19 February 1999. 35 The bank’s submissions of 19 February 1999 criticising both the form and factual substratum of the proposed contractual cause of action are compelling. However, I think it is both desirable and practicable to examine the factual issues raised under the proposed further amendment, given that the particulars furnished by the group of the cause of action and of breach, are particulars which repeat, in substance, the factual matters relied upon by the group in its representation case. 36 The pivotal point in the group’s case lies in the significance of a meeting of 30 June 1988 at Wallamumbi (the June meeting). It is the group’s case that at this meeting that there was disclosed to the bank a proposed fundamental change to the operations of the group’s enterprise. There is no contemporaneous record of the discussion that took place at this meeting. There is some uncertainty as to the identity of the bank’s officers who were present. The bank does not dispute that a meeting took place, but has no diary note of it. 37 John Peter Nicholls (Nicholls), a rural manager with tertiary qualifications and experience in rural management from 1957, was employed by PAWS as the administration manager for the group’s rural enterprise. He was unable to attend the meeting, although, for the purpose of the June meeting, he forwarded the “May financial and several livestock returns” for the “assistance” of John Russell Punch (Punch), then a senior manager of the bank in its corporate department. The only direct reference by Nicholls to the agenda of that appointed meeting was a reminder to Punch of the July rollover of maturing commercial bills which Nicholls suggested should be raised by Punch at the June meeting. 38 John Hugh Robertson (Robertson), a member of the accounting firm of Roberts & Morrow, an Armidale firm which acted as accountants for the group, was present at the meeting. His recollection of it, at best, was sketchy. 39 While it is clear that a second officer of the bank accompanied Punch at this meeting, there is uncertainty as to the identity of that person. The Wrights thought it might have been Peter Meers (Meers), who, until 14 June 1988, had been a senior manager in the corporate sector of the bank and as such had responsibility for the bank’s facilities to the group (the group accounts). He had been replaced by Punch in that role, effective from 11 June 1988. I think it is clear from his evidence that he was not present at the meeting. 40 Punch thought it might have been Scott Armstrong (Armstrong). He was a manager in the business banking sector of the bank and acted as assistant to Punch in June 1988 and, before that, as assistant to Meers. However, I think it is clear from Armstrong’s evidence that he did not attend the meeting at Wallamumbi. 41 Whoever the second bank officer was, it is the evidence of Robertson that notes were taken of the meeting by that officer and, although senior counsel for the group toyed with the submission that there was a record of the meeting kept by the bank which had been suppressed, I do not understand such a submission to be made and in any event, I would not draw such an inference from the absence of any bank record of the meeting. 42 Although Phillip Wright’s evidence of the meeting was unhelpful, I place no particular significance on that. Phillip Wright’s forte was in stock management and meetings such as this June meeting were clearly not his long suit. This may have something to do with a dyslexic condition of which he spoke in his oral evidence. 43 By contrast, evidence of the June meeting discussions by Wright and David Wright was extremely lengthy and detailed. I think it is a reasonable observation to say of Punch’s evidence of this meeting that his recollection was quite limited. His general position was that there had been no mention at this meeting of a ten year plan or of a strategy which involved the building up of the breeding herd on the Wrights’ properties. The corollary to that was that no assurances of bank support of the kind alleged by the Wrights were given by him at this meeting. 44 I have had no occasion to doubt the truthfulness of the witnesses called by either side in these proceedings. When I say that I have no doubt at all that at the June meeting the Wrights disclosed to Punch a major change in the grazing operation which involved a building up of the group’s breeding herd from some 8,000 to 20,000 head over a five to ten year period, no criticism of the credibility of Punch is to be inferred. By the same token, while I am satisfied that the Wrights endeavoured to give their evidence truthfully, it does not follow that their respective detailed version of discussions with the bank’s officers at this and subsequent meetings should be unqualifiedly accepted. The Wrights do not claim to have exceptional memories and the extraordinary detail of the evidence of their unrecorded conversations with bank officers is more a reflection of the practice in commercial cases of taking evidence-in-chief in written statement form served prior to the commencement of the hearing. The approach I have adopted to such detailed evidence by the Wrights of unrecorded conversations which took place several years ago is to ascertain the substance or thrust of those discussions rather than to accept as reliable the detail of those discussions. 45 In my view, in order to properly evaluate the content and significance of the June meeting, it is instructive to have regard to the banker/customer setting in which it took place. 46 As at 30 June 1988, the indebtedness of PAWS to the bank was $10,885,000: not a particularly significant sum when compared with the level of the group’s facilities at 21 June 1991 of $32,600,000. Even so, it represented a very significant increase in borrowings in the eighties from approximately $2,200,000 in 1983. In turn, that has to be placed in the context of the considerable asset backing of the group. 47 Central to the relationship between the Wrights and the bank in June 1988 are two principal factors: one is the unique nature of a banker/customer relationship which extended back approximately 150 years, if one has regard to their predecessors. The second factor is the attitude of the bank to the Wrights as reflected through Punch as the senior manager of the corporate sector. He was not a stranger to the group account as at June 1988. As a corporate accounts manager, he reported to a senior manger with responsibility for the group accounts from May 1986 until 11 May 1987, at which point he took up the position as manager, commercial banking at the bank’s principal office. From that point until June 1988, he had no involvement with the group account. 48 After June 1988, he regained responsibility for the group accounts until about August 1991, when he relinquished control of the bank’s rural portfolio while still being in the business banking sector. From that time until September 1993, he ceased to have involvement with the group account, resuming connection with it with another change in portfolio responsibilities in September 1993, by which time, in one sense, the damage complained of by the group had been done. 49 The view I have formed is that Punch greatly respected Wright and admired his reputation and expertise as a rural businessman. I think he also placed considerable value on the worth to the bank of the group account. I think this attitude was reflected in an enthusiastic support of the group’s expansion activities which occurred in the two to three years following the June meeting. That was not an enthusiasm shared by John Buckley (Buckley), the bank’s regional executive in its business banking sector, to whom Punch, as one of five senior managers, reported. He did not have direct contact with the Wrights until June of 1991 and in the course of these reasons I have found it necessary to note unfortunate aspects attaching to his involvement with the group account. 50 There is no doubt that Wright placed considerable store on the value of the very long family association with the bank and its predecessors as the Wrights’ principal banker. I think, with some justification, he was proud of that association and respected the benefits of the financial assistance provided to the Wrights by the bank in that capacity. 51 In the broadest of terms, his evidence was to the effect that he looked to the bank exclusively for provision of banking facilities and took the bank into his confidence before making financial decisions of any significance. Indeed, it is his evidence that if the bank was opposed to a particular financial decision of moment, he would bow to the bank’s judgment. He was confident that the Wrights could look to the bank for financial support in times, for example, of adverse seasonal conditions and other vagaries that beset and adversely affect rural enterprises. There could be no question in his mind of the bank calling up facilities which he regarded as long term or revolving, regardless of the precise terms upon which facilities were provided by the bank to the group. He asserted that he trusted the bank in that context and enjoyed a social relationship with senior officers of the bank, with exchanges of hospitality by both parties. 52 Wright’s confidence in the Wrights’ enjoyment of a special banker/customer relationship with the bank was not misplaced. There are numerous records, principally in the form of credit memoranda, in evidence which lend support to that view. There are two in particular at this point that I think warrant mention. One is the credit memorandum of Brian Thomas Armitage (Armitage), whose first contact with the Wrights’ account was in the role of manager in the bank’s corporate sector from January 1989, at a time when his immediate superior was Punch. One of the rural accounts for which he was responsible was the group account. He prepared a credit memorandum, bearing date 9 September 1991, at a time shortly after Punch had ceased having contact with the group account. In that credit memorandum, Armitage recorded what he described as “Recent History of Developments”. Armitage gave evidence of the source of the information collected in the credit memorandum under that heading in terms which are quoted below and which I consider to be significant:
“3. Further, and in the alternative, the Cross-Claimants say that in the premises
(a) By reason of the matters particularised hereunder, it was an implied term of each of the contracts (including the security documents) relied upon by the Plaintiff in these proceedings that any right or power conferred upon the Plaintiff would be exercised reasonably .
Particulars of conduct
All and each of the conduct referred to in paragraph A of the written submission under the heading “Summary of Conduct of Bank (including representations) relied upon by PAWS” .
(b) In all of the circumstances, in breach of the implied duty and term of contract pleaded above, the Bank acted unreasonably in the exercise of its rights and powers conferred on it under the aforesaid agreements and security documents in that over the period from about mid-1991 until mid-1996, even though there was adequate security, the Bank failed and/or refused
(i) to permit and/or allow the continuation of the facilities available to PAWS as at 21st June 1991; and
(ii) further facilities so as to fund the necessary working capital requirements of PAWS .
Particulars
(i) In or about January 1992 the Bank acting through Mr Armitage required an increase in the price to be paid by Coles to PAWS under its agreement when he knew, or ought to have known, that such a price increase would seriously jeopardise the agreement’s continuation.
(ii) In or about April 1992 and from time to time thereafter , the Bank required the disposal of additional cattle in order to effect required reduction s in the facilities notwithstanding that this would mean PAWS would have to sell a large number of the breeding herd and/or large numbers of weaners before they were at market specifications.
(iii) In the period following 1992, by applying a 50/50 arrangement as set out in the statement of Bruce Hudson the Bank required the payment of moneys which constrained the operation of PAWS in a way which prevented it from preserving its properties and stock .
(iv) From about mid-1991 despite being within the relevant agreed security ratio the Bank declined to provide additional funds to provide working capital.
(v) In the period following June 199 1 , the Bank’s continuing requirement that the facilities available to PAWS be reduced in a way which prevented PAWS from adequately fertilising and maintaining the various properties and stock .
(vi) In or about February 1996, despite having the ability to do so, the Bank did not take over the sale of “Boonaldoon” and market it with a view to selling it to apply the proceeds to reduce the debt but rather put PAWS into default.
(vii) The circumstances referred to above included
- The determination of the Bank to limit and/or withdraw funding to PAWS which occurred in about mid-1991
- The on-going negotiations by PAWS with Coles
- The drought which affected various of the PAWS’ properties from time to time and consequential increased operating costs .”
53 The record to which Armitage referred was in the following terms:
“The information which I recorded under the heading ‘ Pre-1988 ’ in the credit memorandum, reflected information which I had gleaned from the file and from my discussions with other accounts officers concerned with the accounts and perhaps from the Wrights in relation to that period. The information recounted under the heading ‘ 1988 ’ was partly from the same source and partly represented what I had learnt when I first became acquainted with the accounts in early 1989 and I was furnished with the herd restructuring program going over some four years. The reference to that project being timed for completion in four years, reflects the period which was included in the herd restructure spreadsheets which were shown to me in early 1989. The number of cattle and the proposed number for production set out in this paragraph represent the figures which I believe were first given to me (at least approximately) in early 1989.”
54 I think that evidence of Armitage leaves little room for conjecture as to the disclosure to the bank by the Wrights of the major change in strategy in the conduct of their operations in 1988. To pick up Armitage’s reference to the family history being “well documented”, I think it is useful to have recourse to a credit memorandum of 2 July 1992, noting that this was at a time almost twelve months after Buckley had threatened Wright with receivership - a confrontation addressed later in these reasons. 55 The credit memorandum of 2 July 1992 was that of Richard Vaughan (Vaughan), a manager responsible for the day to day conduct of the group account at that time. The credit memorandum is a 28 page document. It is quite exhaustive and, clearly, is a collection of bank records seen to be pertinent to the memorandum. It recorded the following information under the heading “FAMILY HISTORY”, namely:
“ Recent History of Developments
To appreciate the current circumstances which are having an adverse impact on the financial position of the client it is considered appropriate to provide a history of our relationship and what is currently driving David Wright to achieve his ultimate goal of PAW being a very large fully integrated “cattle factory” with close liaisons with major players in the beef industry worldwide.
Pre 1988
Family history is well documented at BIR previously placed on file. During 1988 the P A Wright & Sons Pty Ltd Group (PAW) was looking at opportunities to reduce the impact of adverse seasonal conditions and the increasing influence that offshore markets were expected to have on Australian beef producers. At that time PAW was a very well respected, highly influential and successful farming enterprise with operations revolving around the family properties and the Hereford stud herd as well as the “Beefmaker” breed developed by PAW.
1988
Cognisant of the foregoing the total herd structure of PAW, comprising some 20,000 head, began to be altered. This change was to move away from being principally a cattle fattening operation to a breeding operation capable of producing 25,000 head pa and thus becoming a major force in not only the beef industry in the New England area but nationally. The long term plan was for a fully integrated cattle breeding fattening and killing operation capable of supplying a high quality product for end users in the domestic and export markets. Projected timing for completion of this change in structure was four years and PAW is nearing optimum herd numbers at present.
The projected herd size including retention of cattle fattening capacity to provide cash flow for operations, necessitated the acquisition of not only additional cattle, but substantial landholdings.
1989
To ensure that PAW had future access to a stable market for its end product, and to ensure that the significant capital expenditure required could be supported by a substantial corporate entity, David Wright Snr entered into discussions with Cargill Corporation of the USA on a “concept basis” and received a favourable response.
During this year a substantial cattle enterprise in Australia known as “King Ranch” came onto the market and David Wright endeavoured to obtain the support of Cargill to enable a tender to be submitted. The ANZ was involved in the intended acquisition and submitted a proposal for internal approval for the $97 million acquisition costs. Unfortunately the tender was unsuccessful however the exercise formed closer ties between PAW & Cargill. The latter moved too slowly in the transaction thereby failing to ensure that the proposal would have the best chance of succeeding.
1990
From what was recognised as a very lowly geared base, PAW entered an expansionary phase in an endeavour to fulfil the projections set down in 1988. Herd numbers increased from 22,000 head to 26,000 head as part of the long term plan which included the herd restructuring. The substantial grazing property known as “Boonaldoon” was purchased mid 1990 for approx $7 million. Additional stocking cattle were purchased totalling 17,000 head at a cost of $7 million.
Cattle numbers had grown to 40,000 head however total funding requirements also escalated to $27 million on the basis that debt would reduce by $6 million from sale of steers purchased for fattening.
During this year the meat processing activity of Melrose Meats was acquired by PAW again being part of the long term objective of the group. This exercise proved to be a drain on PAW’s financial resources and the cost was estimated to be in the vicinity of $1 million plus. Whilst the cost factor was acknowledged, this acquisition enabled PAW to actively market itself to Coles meat division as a fully integrated beef operation able to deliver a high quality product to meet consumers demand. Heads of agreement were reached for a twelve month trial period so that both Coles & PAW could ascertain the full benefits of a closer working relationship. The Melrose loss aforementioned has however been countered by the subsequent success of the Boning Room/Feedlot operation recording a NPBT to 6/91 of $1 million (Refer DRT report). Note that this was for a nine month trading period.
The Coles “contract” however required an alternation to PAW’s strategies and the cattle held for fattening were retained to fulfil the required numbers for the supply to Coles of 500 head per week. This led to the extension of CBAD $5 million which was due to retire 15/11/90.
1991
An additional property known as “Thorpleigh” was acquired for $1.22 million and this was seen as a strategic purchase as it is located between existing “Achill” and “Forglen” properties. Property was funded 100% by the Bank increasing debt to current levels.
The combined effect of the overall expansionary activity of the group together with build up in herd numbers saw temporary funding requirements extended into long term debt and position was exacerbated by the doubts as to the capacity of the group to service its burgeoning debt.
Consequent to the foregoing DRT were engaged in an endeavour to confirm the safety and long term viability of the total operations.”56 There follows in the memorandum an extensive description of the rural enterprise and the entities through which it was conducted. The following is how the bank viewed Wright:
“Charlotte May Wright moved from outback Queensland to Armidale in the 1880’s with her husband, Albert, and subsequent to the purchase of Wallamumbi in 1899 established the now famous V2V Hereford stud. Initial stocking of the stud was via the direct descendants of the first Herefords imported into Australia by the Wright family in 1827.
Following the demise of Albert, Charlotte ran the cattle property Wallamumbi alone and subsequently purchased an adjacent property known as Jeogla. At the age of fourteen their son Philip Wright (father of David and Bruce - who are half brothers) took over the running of the properties until control was assumed by PDA Wright (David), the current principal of Wallamumbi and BA (Bruce) Wright, now principal of Jeogla, in 1958.
In an endeavour to improve the meat producing capacity of the Hereford breed David commenced infusion of the German Simmental breed into his Hereford herd and the final composition of 75% Hereford 25% Simmental resulted in the formation of the Beefmaker breed in 1973.
Up until 1978 Wallamumbi continued to be run in conjunction with Jeogla as one family property. At this time, which represented some eight years after Phillip Wright died, David and Bruce decided to split the properties and go their separate ways. Reasons for the split are not advised however there is known to exist a substantial amount of “family rivalry”.
In the division, Bruce took Jeogla (which he still runs with his son R B A Wright (Rick) and David took Wallamumbi together with 1,067.5 ha property Woodburn which was acquired by the family in 1965, and Achill a 2,424 ha property which borders Wallamumbi and was purchased in 1972.
Since then David and his personal family companies have acquired the combined properties Forglen and Conningdale totalling 2,288 ha, Glenview 513 ha (all adjacent to Wallamumbi), Yarrowyck - 2,670 ha near Armidale, Paradise 6,098 ha situated near Glen Innes Boonaldoon Moree and recently Thorpleigh, adjacent to Forglen (see later re individual details).”
57 A less attractive side of that special banker/customer relationship may be seen in the Buckley memorandum to the senior general manager of business banking of 16 September 1992 which was in the following terms:
“Management:
Phillip David Arundell Wright AM
Born: 22nd February 1933
Married: 4 Children
Principal of the long established and internationally recognised family pastoral company of P A Wright & Sons Pty Limited which owns and operates eight cattle and sheep properties in northern NSW carrying approximately 41,000 cattle and 34,000 sheep. Also principal in the extensive Queensland beef cattle and cereal grain growing enterprise of P A Wright & Sons (QLD).
Founding Chairman of Austim International, an investment management organisation based in Australia for the purpose of identifying, acquiring and managing investment opportunities globally and particularly in Australia on behalf of individual and corporate interests there.
Runner up in the Ronald Anderson Memorial Trophy National Farmer Achievement in Agriculture Award in 1986.
Awarded the AM (Member of the Order of Australia) in 1988 for services to Agriculture and Primary Industry.
Extra Curricular Activities (Present and Past)
Inaugural and current Chairman of Computer Aidded Livestock Marketing (CALM) Board since 1984. CALM, an electronic market place and national network for computer auctioning of livestock Australia wide, also collates and disseminates market intelligence for Australia’s livestock industries.
Formerly a member of the Board of Directors of Compass Airlines Limited.
A member of the Board of the Commonwealth Scientific and Industrial Research Organisation (CSIRO) for eight years from 1979 to 1986 and Chairman of its Internal Audit Committee for two years.
A member of the Australian Meat Research Committee for ten years from 1976 to 1985 and its Chairman for the last two years of this period. During those two years, represented this body on the Australian Meat and Livestock Industries Policy Council.
Member of the Producers Consultative Group (PCG) to the AMLC from 1978 to 1981.
Member of the Australian Meat Board for twelve years from 1966 to 1978 and its Deputy Chairman for the last seven years of that term.
Served on Government Trade delegations to Japan, Middle East, Europe and North America. Also led and served on numerous AMB delegations surveying all major meat producing and meat consuming countries around the world.
Initiated and was a delegate to the inaugural meeting of all major beef producing and exporting nations in Bermuda in 1974, sponsored by the AMB, which was the forerunner of today’s Four Nations Beef Conference.
Initiated and was inaugural delegate to the tripartite Lamb Promotion and Co-ordination Committee comprising Prime Lamb Producer interests from Australia, USA and New Zealand.
Inaugural member of the Commonwealth Council for Rural Research and Extension for four years from 1978 to 1981.
Member of the Australian Academy of Science “Science and Industry Forum” from 1978 to 1986.
Member of Council of the Graziers’ Association of NSW for twenty years from 1960 to 1980 and during that time also a member of the Association’s Cattle Council, Meat Marketing Committee and Shipping Committee.
President of the Australian Hereford Society for three years and member of its Federal Council for twenty two years from 1964 to 1986.
Former Chairman of New England Aviation Pty Limited (air charter and training) for twenty five years and former Deputy Chairman of Superair Pty Limited (agricultural aviation and aircraft maintenance enterprise) for twenty five years.
Former Chairman of East West Airlines, for two years.
Member of the Council of the New England Girls School (NEGS) for eleven years.”58 To the extent that Wright gave evidence to the effect that he placed himself and the group’s interests in the hands of the bank in the making of management decisions of any significant financial implication, that picture would jar very uncomfortably against the reality of a highly experienced rural businessman prepared to exercise his own judgment in such matters. However, I fully accept that he adopted the almost invariable practice with the bank of keeping it informed and of consulting it in relation to proposed business decisions. That is not to say that there were not times when the bank may have been informed after the event. 59 At the same time, his prominence in the rural industry, which I think Wright correctly believed to extend beyond Australian shores, gave him access to levels of commercial influence that, naturally, he was prepared to explore. For example, when consideration was given by Wright to the attractions of borrowing in foreign currency, he had the benefit of the opinions of Hugh Morgan, a prominent industrialist. 60 Bank records indicate that Wright sought to use his personal contact with the chairman of the Primary Industry Bank of Australia (PIBA) in relation to a proposal for PIBA finance of $1,000,000. The diary note of 3 February 1983 recorded a proposal by Wright that he and the bank manager of the group account meet with the bank’s representative on the PIBA board. This met with a cold reception from the bank. 61 The following is an extract of the diary note of Colin Francis Joseph Priddle (Priddle), who had contact with the Wrights from the mid seventies as a corporate accounts manager. In February 1983, he had become a senior manager responsible for the conduct of the group account. The following is his record of the PIBA proposal:
“Following submission of CM advices for PAWS on 21st July 1992 and response received thereto of 4th September 1992, a formal letter of extension has been provided to above clients which encompasses the terms and conditions imposed by the Bank. The client has been banking with ANZ for over 100 years however the current requirements imposed may see the termination of our relationship.
Advices are submitted to appraise of the possibility of Mr. David Wright contacting most senior officers of the Bank given that Mr. Wright has the substantial backing of, and holds a pre-eminent position in “Agri Politics” in this country. A copy of Mr. Wright’s CV is attached for information.
Also attached are details for connected account Jeogla Pty Ltd & Associated Accounts (Principals being Mr. David Wright’s half brother, Bruce, and his son Richard).
Similar difficulties have been encountered with Jeogla with possible repercussions along the same lines as PAWS. Richard Wright is also a very well known “Agri Politician” and the combined parties have the capacity to severely damage our profile in rural Australia.”62 In keeping with the level of financial activities involved in the Wright enterprise, Wright looked to consultancy advice outside of banking circles, particularly concerning the benefits of borrowing in foreign currency. I have in mind the engagement of consultants by Wright in 1986. The consultant, John Cherry (Cherry), was also involved in advising Wright in relation to the group’s interest in gaining an option over extensive rural holdings held by the Angliss group in 1986. 63 The diary note of 24 February 1986, signed off by Priddle, recorded the rather sophisticated level at which Wright was approaching the structuring of the group’s rural interests:
“David Wright and John Robertson called to discuss long term financing of “Forglen” purchase. Vendor finance $1.48m due for take out 5.4.83. Our CBA facility for purchase $1.5m drawn to $0.8m with take out required by 31.3.83.
Earlier this week John Robertson advised me David had spoken to Walter Ives (Chairman of PIBA) who had given him a good hearing and that Ives was going to speak to ANZ representative on the PIBA board. I had been asked to arrange for our representative to meet with David Wright and myself to discuss proposal for $1m PIBA finance, which I flatly refused, informing John that if I was prepared to put a submission to PIBA it would be handled in this office by me.
…
Should Achill and/or Woodburn have to go to AMP, I have informed David that I will require Wallamumbi, to which he is agreeable albeit reluctantly. Told him he has no choice.”64 It appears from an earlier diary record of discussions with Wright, Robertson, Nicholls and Cherry, that Wright’s interest in foreign currency transactions extended to futures or forward buying contracts in sterling in which Wright appears to have taken a speculative position, gaining him a profit of several hundred thousand dollars. 65 Going back a little, I think Priddle’s diary note of 22 June 1984 provided probably the best insight into the relationship between the bank and Wright and probably recorded a significant commercial background to the events that followed and which embraced the June 1988 meeting:
“Further to D/N 14/1/86 John Cherry has now proposed that a round robin borrowing arrangement be set up as follows:-
1. A new company, David Wright (UK) Ltd, be formed and registered as a foreign company in UK with Directors being resident in Europe. This will ensure that the company does not have to pay UK tax on profits derived from activities outside the UK. Cherry is able to locate suitable Directors who will act for the shareholder(s), probably V2V Trading Pty Ltd.
2. PAWUK borrows CHF equiv. of AUD 4.7M from ANZ Singapore with security being a GOB from NSW CD.
3. On the same day PAWUK converts CHF to AUD and invests on T/D with Singapore.
4. On same day Singapore uses the T/D as security for a AUD loan of $4.7m to P A Wright & Sons P/L who will use funds to repay CBA “Paradise” line.
Advantages
PAWUK accumulates tax free income via interest rate differentials which can be disbursed via dividend payments to V2V and absorbed against accumulated losses.
PAW continues to pay interest at AUD rates which is claimed against Australian income as is the case at present.
Disadvantages - PAWUK have a CHF/AUD exchange risk - a significant devaluation of the AUD could erode the benefits of the whole exercise, particularly in the first couple of years.
Compencey (sic) of and controls on European Directors are unknown at this stage.
Although this proposal does not avoid Aust tax we were concerned that ANZ may be seen to be assisting in avoidance of tax in the UK.
Proposition has been discussed with Gary Simon of Delfin who is quite certain the scheme is legitimate … ”
66 In my view, that state of affairs reflected considerable independence of thought, as one might expect, in Wright’s commercial decisions and in his dealings with the bank. It was at this time that Wright had discussions with Hugh Morgan concerning borrowing in foreign currency. Wright lost no time in advancing the matters under discussion in June as is recorded in the diary note signed off by Priddle of 28 September 1984 recording annual review discussions with Wright and Robertson. It noted that contracts had been exchanged for the purchase of Paradise on a ‘walk in, walk out’ basis for $3,700,000 and that a $5,000,000 foreign currency loan would be utilised for the completion of that purchase. The diary note also recorded an interest of Wright in another property called Tobermore. The diary note recorded the following after a review of the security position of the Wright facilities, namely:
“ David Wright & John Robertson called for general discussions involving principally, FCL-NT borrowings .
The discussions emanated from a seminar attended by the gentlemen at Walcha conducted by Westpac on foreign currency borrowing.
SM-ICS, Rod Gallagher outlined the basic pros and cons of such borrowings and detailed at some length the interest costs advantages and the exposure to exchange fluctuations.
Having digested Rod’s explanations and advice, David then advised of his serious interest in such a loan. David has always intimated to us in the past that his sizeable assets $16/18m have not been utilised to best advantage in the past and the time is at hand to put into practice his thesis.
In particular, he is looking at 2 properties : -
1. Property known as “Paradise” (15095a) which he formerly part owned before selling to Powder River Pastoral Co. Sale price WIWO is $4.2m and includes 2100 head cattle. David believes the owners are keen to sell and he proposes to offer $3.5m.
2. Property of 2500 adjoining “Woodburn” for which he will offer $100,000.
Both properties will be used primarily to fatten cattle. Soil contains high levels of phosphate thus fertiliser costs will be negligible.
In addition he proposes to purchase additional store cattle for fattening on subject properties. Present breeding stock on Paradise would be transferred to other holdings.
In essence David is looking to $5m in FCL-NT for 5/7 years, on basis of bullett repayment at end of this period, from either resale of the Paradise property, which he says based on land appreciation in the New England area over the past 20 years will double in value within that period or from refinance and/or cattle sales .
Rod indicated to David that he could expect CHF to cost in the order of 6% or slightly more all up and rely on savings in interest plus the capital gain to offset any exchange rate fluctuation which may go against him.
Rod recommended that borrowings be on a 180 day rollover basis rather than a fixed interest term of say 5 years as this may not be to his benefit if early repayment is required. Clawback agreement was explained and was not well received as Westpac do not seek clawback during currency of their lending . We indicated we are not inflexible but we wish to be in a position to control any adverse situation which may arise.
It was pointed out in respect to Westpac (we hold copy of seminar documentation etc) that they are more conservative on the security side and would insist on security ratios being maintained in the event of exchange rate going against the customer.
We have informed David that if the Bank is to favourably receive a formal application, he will have to accept our requirement for a loan/security rate of 65/70% which could well involve him in having to recharge his homestead property, Wallamumbi. Naturally he is loathe to have to do so and has requested revaluation of our securities together with those held by AMP over which 2nd charges can be taken, namely Forglen, Conningdale, Achill loch Abba. Other stations to be valued include Wallamumbi, Woodburn, Yarrowyck and the properties being considered for purchase.
AMP loan funds are $1.75m.
John Robertson is to prepare cashflow forecasts for year 1/7/84 to 30/6/85 and forward asap.
Preliminary budget for Paradise property indicates interest cost can be serviced from income of that property alone.
Action by MCAS
1. Obtain revaluations/new valuations of all properties.
2. Obtain consent from AMP to second charges.”
(emphasis added.)67 I have no doubt that, in practical terms, the relationship between the bank and Wright was such that the principal facilities provided were on a revolving basis. That was doubtless, in part, due to the highly respected position of the Wrights, the substantial security cover for borrowings and the practical certainty of the Wrights’ continued long term involvement in pastoral activities, particularly in the New England and south west Queensland districts. 68 The possibility of the bank calling up its facilities, I think, would be quite unrealistic. It would simply mean the group taking its account and its extensive assets elsewhere, to be welcomed with open arms. 69 The independence of Wright in relation to the taking of business decisions, which is completely unsurprising, is reflected in the diary note, signed off by Priddle, of 7 November 1984:
“David is aware that we wish to see a period of consolidation following this latest acquisition which he acknowledges.”
70 There were a number of commercial steps taken by Wright in the lead up to the June meeting that I think have some bearing on the approach one should adopt to the significance of steps taken by Wright following the June meeting and, in particular, steps which I think show Wright in a decisive, largely independent and acquisitive role. In mid 1985, Wright was exploring the acquisition for several million dollars of a 12,000 acre property called Goonoo Goonoo. It was situated in the north west slopes country south of the New England district where the majority of the group’s holdings were situated. 71 It is interesting, I think, to note that Wright contemplated repayment of further borrowings to acquire Goonoo Goonoo by subdivision and sale of that property into 2,000 acre blocks. The diary note of 22 May 1985, signed off by Priddle, recorded these matters and the interest of Wright in a syndicate considering the purchase of a cattle property and meat works in Vanuatu. The Goonoo Goonoo proposal did not meet with Priddle’s enthusiastic support as conveyed to the Wrights by him. 72 The diary notes of Priddle of that period, I think, are instructive. It is clear he did not see the Goonoo Goonoo purchase as “a viable proposition unless purchased for a ‘song’” and that this was conveyed to Wright. It is also clear that Wright was not dissuaded from pursuing the purchase of Goonoo Goonoo and indeed sought, and obtained, the bank’s approval to increase borrowings by $6,200,000 to enable him to bid for Goonoo Goonoo at auction. I note that the repayment terms proposed were as follows: within one year, repayment of $2,000,000 “from outside finance, e.g. AMP”; $1,000,000 from cashflow within 12 months and $3,200,000 by October 1988 from subdivision sales or cashflow. As it happened, the property was purchased by another. Undeterred by that unsuccessful exercise, it appears that Robertson informed the bank shortly after that Wright was looking at a 60,000 acre property, known as Meeleebee, situated north of Roma in Queensland. 73 The bank memorandum of Priddle recommending the increase in facilities of $6,200,000, which went to senior management and bears their note of support, described the “Background” to the application in the following terms:
“John Robertson rang to advise that David Wright now wants to purchase a 1000 acre property adjoining “Achill” for $270,000. Terms are vendor finance of $200,000 for 12 months. Requests our assistance to finance balance and takeout vendor finance when due. Our view which was made clear to David during recent A/R discussions and which still stands is that he should refrain from further borrowings and enter into a period of consolidation . John agrees but feels that Davids argument will be that we had originally agreed to FCL $5m which was reduced to $4.7m only because he was not successful at auction for the “Tobermorey” property. John will suggest that David contact us direct if he wishes to pursue the matter.
CASH FLOW 19/9/84 - 30/6/85
John pointed out that there has been a misunderstanding with the budget as cattle purchases for Nov. do not represent “Paradise” purchases which have been deferred to 4/85. The amount of $1.05m represents normal purchases, most of which are as follows:
1. 15,000 sheep @ $24 ph = $360,000 (payment has however, been deferred until 7/85)
2. About 1,500 cattle worth .5m from Jeogla next week.
Our understanding at A/R was that no large purchases were planned as prices were too high; David has changed course again! .
Draw down of FCL later this month should provide sufficient funds to cover cattle purchases, however, John will prepare fresh cash flow to confirm.”
(Emphasis added.)74 Among the matters noted on this recommendation was the following:
“The Wright connection dates back to 1880 and forms a significant part of our Armidale Branch business. David Wright interests own 7 prime properties in the New England area worth $14.3m on our land values. Existing stock of 18000 cattle and 39000 sheep are worth $7.1m. In addition David shares 2 properties in Queensland with a brother and it is estimated that his half share is worth $3/4m.
The net worth of David would be in the vicinity of $16/18m. David was concerned that he has not been utilising his sizeable assets to his best advantage and accordingly purchased the “Paradise” property in 10/84 for a total outlay of $3.7m which we financed on a 5 year interest only FCL-NT/CBA facility . Acting on the advice of S.M.I.C.S. this loan has remained on shore to date.
David is a well known identity in NSW being on the committee of AMLC and an executive of CSIRO. In addition he is Chairman of Australian Meat Research Council and President of the Hereford Society.”
(emphasis added)75 The only discordant note of senior management was the observation that the Wrights were “constant hard core borrowers’. There was a comparatively minor further acquisition of property by Wright in September 1985 with the purchase of Greenhills, a 1,500 acre property which adjoined Wallamumbi. 76 The diary note of 27 September 1985, signed off by Priddle, recorded Wrights’ interest in Meeleebee at a level of $6,500,000. The same record noted that Wright was also considering an offer of $1,100,000 for another grazing property known as Glanmire: this, I might note, at a time when interest rates were in the order of 20% per annum. It was shortly after this that Cherry appeared on the scene. It appears from bank records in the second half of 1985 into February 1986 that there were fairly extensive discussions involving Wright, Robertson, Nicholls and Cherry over the prudence of engaging in borrowings in foreign currency. I suspect that those discussions were fuelled partly by the fact that a forward buying contract for sterling equivalent of $4,700,000 in November 1985 had resulted in a windfall profit of $324,000 to the group. That favourable trading result was not reflected in 1986 when significant losses were incurred through speculative currency trading. 77 In February 1986, Priddle received a confidential communication from Wright reflecting the latter’s interest in the rural properties of Queensland Stations Limited, referred to earlier in these reasons as the Angliss group. 78 The nature of the transaction is worth noting as I think it reflected the business activities of a pastoralist at a comparatively elevated commercial level. The diary note of Priddle recorded the following:
“ Mr Wright is following a pattern of building up land holdings and stock values while maintaining profitability at low levels for taxation purposes. Projected surplus cash flow after allowing effective capitalisation of interest to 30/6/86 gives support to servicing of debt overall .
Proposed reduction in debt is supported but is dependant on Wright actually proceeding should he be successful with purchase. While this is open ended stock held provides ability to substantially reduce debt at any time should adverse conditions arise.
Submission is considered safe and our support as detailed for Mr Wright will further enhance our dealings in the New England area even if anticipated price at auction goes beyond Mr Wright’s $350pa.”
(Emphasis added)79 Wright’s business activities in 1986 included dealing in steer futures which I assume were hedge transactions to support the physical livestock sales by PAWS. 80 Punch’s remarks in the diary note of 31 October 1986, signed off by Meers as recording the outcome of discussions at the annual review of the group account with Wright, reflected a commercial relationship which formed a setting to the June meeting. It was in the following terms:
“David Wright advises confidentially that Queensland Stations Ltd (Anglis Group) is disposing of 7/8 breeding properties carrying about 140,000 head of cattle. Because of the tax value of livestock, tax impost on profit of their sale would be prohibitive. Hence the only way they can be disposed is by sale of the owning company shares.
David is not looking to take a personal equity but rather as agent in the sale but that he will need to take an option to purchase. The option would contain a clause that the option holder (P A Wright & Sons Pty Ltd) can pass/transfer its option in the event PAW did not proceed.
He has located a rural company with tax losses of $35m whose principals are keen to examine the Anglis properties and supposedly have the wherewithall (sic) to handle an acquisition of this size; said to be in the region of $25/30m.
David will take an option but it will be only activated on if he can organise an unconditional back to back deal with the tax loss company and its principals.
The reason he is informing me of the above is in case I am contacted for opinion on worth of P A Wright & Sons Pty Ltd and its capacity to handle an acquisition of $25/30m should he seek to execute such an option. Indicated that if I am approached it will be from either Len Heineman of Dalgety Real Estate or Adrian Gibson, Ch. of Q’ld Stations.
Told David that the gentlemen should be informed to seek bankers opinion through normal channels. If they do come direct I would require his written authority to discuss. Agreed.”81 In my view, the year 1987 did not reflect any lessening of Wright’s interest in further property acquisitions. In that year, funds were expended in the acquisition of shares in Melrose and in mid year he expressed interest in the purchase of a property known as Milo Station, albeit for onsale, or as the subject of a joint venture with an overseas investor. 82 The credit memorandum of Meers of 4 December 1987 following the annual review in November, I think, provided the immediate setting for the June meeting as far as it recorded discussions with Wright, the bank’s attitude to the safety of the security provided by the Wrights and the high regard in which Wright was held by the bank: matters which I think were conveyed to Wright. It contained the following comment on the group’s management, namely:
“ General
Mr Wright is acutely aware of his current exposure and the crippling effect the interest bill is having on his overall operation. He has identified 5 methods whereby some relief could be forthcoming:-
1. Off-Shore Borrowing
Professionally managed to incorporate the $5M FCL-NT/CBA exposure relating to CBA-Special Line. We have however indicated our objection to such a proposal in view of the strong possibility of incurring further losses with no underlying trade transactions evident to act as a natural hedge.
We would ask Mr. Wright to refinance elsewhere in the event he insisted on exercising FCL-NT option which was previously accorded at original approval of CBA-Special Line. This option is to be withdrawn as stated in our annual review letter - see later.
2. Sale of Assets
Must be considered as a strong possibility although in the current economic climate it is argued as to the return that would be achieved.
3. Fixed/Floating Borrowing
An option we are watching closely with a view to locking in a portion of the $5M facility. This would at least have the effect of providing an accurate measure of interest rates for the fixed component.
4. Export Market
Through a venture currently in train where Mr. Wright is looking to shareholding in Melrose Meats Pty. Ltd. (Qld). This incorporates meat processing/exporting and would provide returns in USD against what would be USD borrowing. The proposal is currently before Qld. Corporate although establishment of overseas markets as far as Mr. Wright is concerned could take some time.
This is a long term project and in our view will provide no relief to our customers interest overheads in the short term.
5. Overseas Investment in Australia
Mr. Wright has commissioned several contacts in various parts of the world in an endeavour to attract overseas investors into Australia (mainly in the rural environment) He would act as the “spotter” and ultimate manager of any investments. Returns would go towards reduction of core borrowing although again this seems some time off if indeed it were to succeed.
Each proposal has its merits (with the exception of unhedged off-shore borrowing) however even allowing for the present position we remain adequately secured and satisfied as to Mr. Wright’s ability in the rural scene. His net worth would be in the vicinity of $10M and there is no chance of him walking away from his responsibilities. Exposure is therefore considered quite safe with further margin in security expected following revaluation of properties. (It should also be noted that the prime Wallamumbi family property remains unencumbered. (total worth $4,120,000 - 1984).”83 Meers noted in his diary note, under the section “Strategy/Future Action”, the following, which I think lends considerable weight to the Wrights’ version of the discussion at the June meeting with Punch:
“Third generation farmers who are well experienced in the industry and of undoubted integrity.”
84 In summarising the position, Meers recorded the following, which again I think has particular significance in relation to the June meeting:
“The company’s cash flow forecast reflect Mr. Wright’s strategy/belief that the rural industry is about to enter a return to economic prosperity, with commodity prices (particularly beef and wool) to continue to improve.
Mr. Wright’s outlook it also supported by the Bureau of Agricultural Economics through a report compiled as at September 1987 - Refer attached Addendum Marked ‘A’.
Mr. Wright’s strategy involves the continued build up of livestock on the Group’s properties and increase productivity in order to meet the proposed increased demand for Australian beef and wool which should return the Group to a profitable base. All the Group’s land holdings are well maintained and the infrastructure is geared to support his strategy.
In outlining his strategy, Mr. Wright has also acknowledged the unknown effect that the recent share market crash may have on worldwide commodity prices. However, despite this he believes only selected commodity prices would be effected with good beef and wool prices to continue due to:
* A shortage of beef in North America.
* The continued demand for Australian wool in Russia and China, which should not be effected (sic) by the Western world’s share crash.Despite Mr. Wright’s bullish outlook, he also remains cautious of the world economic situation and its effects that could compound the problems his own operations are currently experiencing. Accordingly, he has outlined the following courses of future action to be taken if a downturn in livestock and wool prices were to occur and the group net worth was to deteriorate . Mr. Wright believes he has the following saleable assets within the group to achieve such an objective:
(i) Sell off a large number of his livestock holdings to reduce the current debt position. This would also mean that no additional livestock purchases provided in Group’s cashflow will proceed.
We estimate that a sell off of approximately half of the group’s livestock would result in a reduction of company’s debt to say $4m.
(ii) Introduce equity capital into group farm operation via Mr. Wright’s connections through AUSTIM. All group properties were purchased before capital gains tax was introduced and Mr. Wright would not wish to see a complete sell off of any of these properties.At our annual review discussion we questioned whether sheding (sic) of stock/land should not occur now, notwithstanding, the encouraging commentary on world beef and wool commodities.
Mr. Wright was advised that his present strategy was susceptible as it required maintenance of a high level of stock to service interest and operating costs. On the current basis of operation there is no room for principal repayments .
It is apparent that his operations are exposed to adverse climatic conditions and volatility in market prices particularly for beef. The operations are also exposed to interest rate changes but to a lesser extent as we have encouraged Mr. Wright to utilise fixed rate commercial bills .
Accordingly, we have informed Mr. Wright that we are not prepared to support his requirement for additional facilities in 1988 for stock purchases. Mr. Wright has asked us to review this decision in early 1988 in light of market trends in commodity prices and the general economic outlook .”
(Emphasis added.)
“Mr. Wright is one of Australia’s most experienced cattlemen. Management of his operations are supported by the services of a rural consultant and experienced farm managers. Mr. Wright has two sons engaged in his operations.
85 I think it is clear from those records that, by June of 1988, Wright had embarked upon a course of property expansion aimed at utilising the Wrights’ very substantial asset backing with the conviction that, notwithstanding very high interest rates, borrowings would be justified through capital gain. Further, that his extensive knowledge of the domestic and international cattle market satisfied him that a strategy of herd build-up was justified on the basis of a return to attractive commodity prices underpinned by shortages, in particular, in beef markets. 86 Notwithstanding the group’s proposal that a review by 30 April 1988 should be undertaken to reconsider the group’s strategy, no such review appears to have occurred prior to the June meeting and the suggested “rethink” of a strategy involving a herd build-up does not fit comfortably beside the strategy which, on the Wrights’ evidence, they unfolded to the bank in the June meeting for the first time. I would have expected the Wrights’ account of the June meeting to have included a reference to the bank’s unfavourable response to a similar proposal by the Wrights at the end of 1987. I think those considerations reinforce the approach I have adopted to the Wrights’ evidence of conversations; concentrating on the substance and not the detail. 87 There is an extraordinary paucity of bank records relating to the group account in the first half of 1988. The records concerning the Queensland account of Melrose noted the movement of the Wrights into a 51% holding. There is a diary note of Meers of 10 February 1988 which noted Wright’s interest in acquiring a commercial property in Pyrmont, Sydney. A diary note of Meers of 16 February 1988 recorded some concern with the Wrights’ overdraft position which, it was said, was conveyed to Nicholls and in which the bank sought information of the Wrights’ “ongoing strategy concerning the sale of … cattle stock in order to reduce the debt burden ...”. A letter from Nicholls to the bank of 26 February 1988 envisaged preparation and supply to the bank of a two year forecast, but that does not appear to have eventuated. Other than that, there is the letter, earlier referred to in these reasons, from Nicholls to Punch of 27 June 1988, forwarding financials and stock figures to the bank in anticipation of the June meeting. 88 It is almost impossible to accept that there were no communications diarised by the bank in that six month period other than those to which I have referred - leaving aside the Melrose account. Yet, so far as I am aware, the only records in evidence are those to which I have referred. Still, I have no reason to think, nor do I, that any records have been suppressed. 89 There is some artificiality in analysing in detail the evidence of Wright and of David Wright in relation to the June meeting as contrasted with the evidence of Punch on that subject which was unaided by any record. Punch’s memory of the occasion, by his own admission, is poor. His position is that there was no ten year plan presented to him at that meeting involving a build-up of breeding herd from 8,000 to 20,000. I would put that down to poor memory as distinct from a convenient one. I am quite satisfied that such a proposal was put in front of him. 90 Wright has given two versions of the discussion that took place at the June 1988 meeting. The first, an affidavit sworn 19 November 1996 (the Wright affidavit), filed and served pursuant to directions of the court of 28 October and 15 November 1996, which required the group to file their defence and cross-claim together with affidavits of facts and circumstances on which they relied. The second statement was that of 2 March 1998 (Wright’s first statement). Wright’s first statement gives a more detailed description of the June 1988 meeting than is found in the Wright affidavit. I accept his explanation for this, in that the Wright affidavit was prepared in circumstances of urgency. 91 The statement of David Wright of 2 March 1988, devoted ten pages of detailed conversation which, to his recollection, occurred at the June meeting. Wright’s first statement devoted twelve pages of detailed conversation which he recalled having taken place at this meeting. Given my acceptance of the truthfulness of the Wrights, the detailed nature of their recollections of the content of this discussion presents something of a challenge in the absence of any contemporaneous record in the form of minutes that may have assisted the exercise. In one sense the task is made a little easier by the evidence of Wright in cross-examination that the only commitment made by the bank on this occasion was “to agree to capitalise interest or to allow (the group) to pay interest out of working capital from time to time (and that ) additional capital requirements for acquisitions of any further expansion (would) be subject to close analysis and would stand on their own merits” (T48). 92 The evidence of Wright and David Wright was that Wright began the discussion with a description of the mixed grazing operation conducted by the Wrights, with emphasis upon the cattle grazing enterprise which included some 8,000 breeding cows in a commercial herd, in addition to a stud herd. He described the manner in which the steer offspring were fattened to be sold as bullocks at two to three years of age, while heifers were sold as weaners where not required as replacement heifers, or retained to be sold as joined and tested in calf breeders. Wright expressed confidence in the future of the beef industry, principally on the basis of declining national herd numbers and favourable overseas factors. 93 He described options open to PAWS, included amongst which was a ten year plan aimed at controlling the production line of beef through to the retailer. Involved in that was a change in management principles by which the breeding herd was to be built up to 20,000 cows with the progeny sold off as calves. The build-up was to be achieved through the retention of suitable heifers rather than by purchase. It was thought the build-up could be achieved over a five year period subject to adverse market or seasonal conditions which might extend the program another two years or so. 94 Wright envisaged the acquisition of the outstanding interest in Kindon and possibly the purchase of other properties suitable for backgrounding cattle in preparation for fattening for sale. He also contemplated further involvement in the meat processing side of the industry to gain the benefit of profits available down the beef production chain. Melrose was seen to play a possible part in the activity. 95 Wright thought that once the operation grew to the desired size, that would open the opportunity for supply contracts to outlets such as the major supermarkets. 96 So, in summary, there were four aspects to the plan: one, the increase in the breeding herd, through retention of heifers with the consequent changes in marketing strategy; two, involvement in the meat processing activity in the marketing of beef; three, acquisition of further properties, including Kindon, to fatten and background offspring; and, four, obtaining long term supply contracts with major retail outlets. 97 In support of this ten year plan, David Wright, at the invitation of Wright, tabled a computer printout entitled “Herd structure gross margin analysis - target 20,000 breeders”. Without decrying the amount of work that may have gone into the production of this schedule, it is fair to describe it as a basic analysis. It identified parameters such as joining rates, retention percentages, culling rates and the like. It identified the number of cows at the commencement of the ten year period which was consistent with the description of 8,000 breeders and the composition of the herd at the end of ten years which was consistent with the build-up of the breeders to 20,000. It provided a schedule of marketing numbers and values over that period. In broad terms it was consistent with a sell off of steers in the first year and the downturn in income in the early years as a result of the retention of the heifers, as described by Wright. 98 It did not deal with costs. During cross-examination of the Wrights it was explained that computer limitations was the reason for the omission of costs projections. Gross income projections did not take into account the disposal of sheep or of the stud herd or of any discrete steer trading activity. 99 The evidence of David Wright is that he described the analysis to Punch. However, if it is reasonable to describe the analysis as a basic one, David Wright’s description of it was simplistic. He drew attention to the particular projected gross income projections for each of the ten years which he said reflected the retention of heifers and the sell off of steers and he explained that the model assumed that offspring would be sold off in mid winter in relation to spring weaners and in late summer, early autumn in the case of autumn weaners. There was no attempt to analyse expenses. It was assumed that they would “essentially remain the same”. According to David Wright, his father sounded a note of caution in relation to the possible effect of adverse seasonal conditions on the plan’s timing and emphasised the need for additional funding for “the acquisition of backgrounding and feedlot operations, which hopefully would be at Kindon”, and further “funding and working capital to expand … meat processing interests and to develop market outlets”. Wright also emphasised the problems that a reduced cashflow could create, particularly if there was a drought and then stated:
Based on existing security position including Mr. Wright’s guarantee, we feel that our position is safe.
However, in sight of a difficult year ahead, particularly in major beef markets - Australia and USA, we consider his strategy is susceptible to adverse changes in climate and market prices. We have requested a rethink in his strategy to reduce borrowings through reduction in stock numbers now (in sight of favourable market prices) or realisation of farm properties/joining with equity partners.
Mr. Wright has been advised that the Bank will not support the additional stock purchases in 1988 and will assist with short term/liquidating requirements pending our next interim review.
In view of the customers planned approach and our alternate view we have :
- requested that monthly results (income/expenditure) be provided to enable us to assess actual to budgetted (sic) positions .
- established an interim review by 30.4.88 to review his strategy .”
(Emphasis added)100 As David Wright recalled, the response of Punch was in the following terms:
“It would be very important if we were to embark on this strategy that we can rely on the support of the bank to cover working capital requirements and interest throughout the 10 year period until we are in a position to make capital repayments. If the Bank was not prepared to agree to this we would not embark on it.”
101 To the recollection of David Wright, the only other matter discussed was the possible acquisition of the outstanding interest in Kindon and that objective, he said, was also supported by Punch. Although expressed in more detail, I think Wright’s first statement is much along the same lines as that evidenced by David Wright with perhaps more emphasis on the possible involvement of joint venturers and the extent of the integration of activities along the beef supply line. He attributed to Punch the following response:
“The Bank regards your family as an extremely important customer. Your profile in the industry has significant benefits for the Bank as your family’s Bankers. It is pleasing to see that you have analysed your options in this way. The 10 Year plan makes a lot of sense and has been very well thought through. Whilst there will be cash flow constraints until the benefits flow after 1993 I understand that this will be dependent upon the season. I understand the assumptions and agree with the change in strategy and we won’t require debt reduction until you have surplus cashflow during the 10 year period. It is a long term program which requires our support which we are happy to provide. If drought occurs, or in the event of market vagaries, then we will address those as they arise. However, you can take it that we will cover your working capital requirements to cover interest and overheads as we have in the past for the duration of the 10 year plan. We look forward to the steer sale. Keep us posted in the meantime.”
102 Having read the internal memorandum of the bank in the year prior to the June meeting, it is difficult to reconcile that material with the last statement attributed to Punch. After the herd analysis schedule had been explained by David Wright, according to Wright’s recollection, the response of Punch was in the following terms:
“The concept that you have talked about today is very exciting and it is one that the Bank fully endorses. I acknowledge that you have an amount of debt outstanding. The Bank’s attitude to its relationship with your family is that you are a valued and preferred client of high standing and the Bank is anxious to assist you to achieve your growth objectives. I can clearly see that your enterprise growth will be a phased process. However, the principle supporting our relationship is that the Bank is very comfortable in advancing you loan funds providing your asset growth continues in the future to maintain adequate relativity with your borrowings thus providing the Bank with adequate security as it has to date.
As you are aware, the Bank is not uncomfortable with the level of debt that you have. We regard your family as leaders in the cattle industry. We want to support the family in the growth of its enterprise as this will be beneficial to both parties.”103 The evidence of Wright was that he then told Punch that the Wrights would “definitely need the Bank’s support” and that they could not “embark on this program unless (they had) the unqualified support of the Bank”. 104 The final statement of support was attributed to Punch in the following terms:
“It is a well-conceived programme supported by logic and fact. There is no doubt that it is a good idea to make this change in your production strategy for the longer term. The Bank will support you in this programme and provide ongoing working capital, as it relates to any shortfall in cashflow. I agree that you should proceed.”
105 According to Wright, he stressed with Punch the necessity of having the bank’s support for this change in business strategy and informed Punch that if the bank did not regard it as a “prudent and logical strategy then (they) would not proceed along these lines”. He said he emphasised this by saying:
“Yes we will support it. I understand what the basis for the strategy is, and the benefits from it. We recognise there will naturally be cashflow restraints during the period of herd growth, but the benefits will flow, as you have shown, some time after 1993. The initial reduction in income is justified given the substantially increased income generated during the last half of the programme by which time the asset volume of the larger breeding herd will also have substantially increased.”
106 In his evidence Punch did not attempt to give his recollection of the detail of the discussion, as a result, principally, of his faulty recollection of the content of that discussion. He was clear that he gave no assurances of bank support of endorsement for a ten year plan. Indeed, he was clear that no such plan was put to him, although he agreed that a printout was presented by David Wright which “contained a large number of figures organised into columns and rows” which was simply described as a computer printout “modelling possible future strategies for cattle retention and backgrounding on the properties”. 107 According to Punch, the thrust of the discussion was not in terms of discussing a plan of the Wrights: it was more of a case of looking at “options for the future”. With some justification, he pointed to the improbability of him giving the undertakings attributed to him on the strength of a schedule as simplistic as the herd structure analysis produced by David Wright. Punch denied his attention was drawn to any impact on cashflow of any retention of heifer offspring implicit in the herd analysis shown to him. He also emphasised the fact that the absence of bank records of the meeting was significant for an account that was classified as “C” grade. Such a grading imposed on him particular requirements to report to head office in Melbourne on any significant developments with the account. 108 He outlined his practice in a situation as presented by the Wrights in their evidence of the June 1988 meeting as follows:
“We need to be sure that you understand every aspect of the strategy so that hopefully it can receive the unqualified support of the Bank. Unless we can avoid paying principal and interest other than from cashflow we are not interested in pursuing the strategy.”
109 I have no doubt that the Wrights had formulated in their own minds a strategy aimed at a substantial build-up of the breeding herd along the lines set out in the herd analysis of David Wright. I am also satisfied that, in brief outline, that strategy was explained to Punch, much along the lines evidenced by David Wright. I am also prepared to accept that Wright sought the bank’s support for this program in the sense that the bank understood the plan which the Wrights were contemplating. In that context, I accept that he referred to the possibility that unseasonal conditions and other trading vicissitudes could require temporary financial assistance from the bank. I am also prepared to accept that Wright informed Punch that PAWS would not follow this course without bank approval. 110 I have no difficulty in accepting that Punch reassured the Wrights of continued bank support and that he gave some expression to the respect that the bank had for the position of the Wrights as longstanding, prominent customers of the bank. 111 I also accept that Punch included in that line of support the possibility of financing further acquisitions by the Wrights, whether it was stated expressly or was implicit in the discussion. I am also satisfied that the occasional need to supplement cashflow with working capital to meet other commitments was contemplated as falling within the sort of financial support that the Wrights may have needed from time to time. 112 It does not follow that I accept that the Wrights would not have pursued the build-up of the breeding herd in the absence of approval from the bank. I am satisfied that Wright was convinced that the prospects of the cattle industry were bright and that PAWS, with the substantial holdings under its control, was in a unique position to take advantage of that situation, in particular, through the build-up of the female herd. While accepting the value that Wright placed upon his family’s longstanding relationship with the bank, I have no doubt that, albeit reluctantly, he would have moved elsewhere for banking services had he seen the attitude of the bank as thwarting this business strategy. 113 While I accept the importance that Wright placed upon the approval of Punch for the general direction in which PAWS was heading, I do not accept that PAWS embarked upon a business course which it would not have pursued in the absence of that approval. The June meeting, in my view, was an example of Wright keeping the bank informed of significant management decisions affecting PAWS. I am also satisfied that Wright regarded the bank’s approval in principle as important as committing the bank to some level of support for the group’s strategy. I am equally satisfied that a withholding of support by the bank would have seen the group account go elsewhere. 114 The four phase aspect of the ten year plan is difficult to identify in the activities of Wright in the immediately following years. The herd build-up, as proposed, was by natural increase from progeny of the existing herd on existing properties. The concepts of a major supply contract and the acquisition of backgrounding properties, I would have thought, were phases that, in the ordinary course, would have occurred after a period of substantial build-up of the breeding herd in the manner contemplated. 115 For reasons that follow, the subsequent activities of Wright cannot be reasonably equated with the ten year plan as outlined at the June meeting. It is possible to recognise elements in those activities which were conceptually similar to the subject of discussions at the November 1987 annual review and at the June meeting. However, I think it is quite unrealistic to translate any of the assurances gained from Punch at the June 1988 meeting as a commitment of the bank upon which the group relied in its major expansion, particularly in 1990. 116 In my view, Wright was confident of the soundness of his judgment as to the future direction of the cattle industry in Australia. I am also satisfied that he was confident in the wisdom of a policy of the acquisition of properties, financed fully from borrowings on the security of the very substantial assets under his control and which he considered to be considerably underutilised. 117 I am equally satisfied that, absent that support, Wright would have sought, and obtained, however regretfully, facilities from another bank or lending institution. 118 As examined in these reasons, the financial crisis that, in time, confronted the group was a combination, in my view, of heady support by the bank of the group’s expansion; the adverse affects of a persistent, severe and, in this case, disastrous drought; an ambitious expansion of the group’s grazing interests by way of fully bank financed acquisitions of major pastoral holdings; and a failed marketing venture with Coles New World Supermarket (Coles). Not unreasonably, Wright saw himself as pursuing a business strategy that would see the Wrights as Australia’s pre-eminent pastoralists, or as gaining dominance in eastern Australia. 119 I think that the bank’s role in that crisis should not be underestimated. At each step along the way until the first half of 1991, the bank lent significant support to Wright in the pursuit of his ambitious business strategies, which involved increased indebtedness to the bank. 120 On 24 October 1995, Roger Fenton (Fenton), whose designation with the bank was that of group general manager, recorded his views to Buckley on the bank’s role in the group’s straitened financial circumstances in the following terms:
“55. Having regard to my practices, and the procedures of the Bank then in place, I am satisfied that had a presentation of the type and with the content alleged by Mr Wright Senior and Mr Wright Junior been made to me, then a detailed diary note would have been prepared. Moreover, a fundamental change in the business of a customer to whom the Bank had loans then outstanding of more than $10.5 million, incorporating features of the kind referred to in the preceding paragraph of this statement, with the resulting commitment and support which would have been required of and from the Bank, would have lead me to initiate an immediate review of the Bank’s existing lending to the Wrights and the plan as it was presented. To conduct that review I would have required and sought from the Wrights copies of their most recent management accounts and cash flows, copies of the material said to have been presented at the meeting on 30 June 1988 and a written statement of the plan. This information would then have been analysed by me and my assistant, and a formal submission prepared to Mr Roger Fenton, State Manager Corporate Banking, if it was deemed appropriate to proceed. The submission would have contained my recommendation to either support or reject the plan and a statement of the conditions that should apply if the Bank’s support was to be forthcoming. Once the Bank’s response had been obtained then it would have been recorded in a diary note and communicated to the Wrights by letter from me to them. This entire process would have taken some weeks to complete. None of the steps I have just described took place in connection with any plan of the type alleged to have been presented to me at the meeting on 30 June 1988, after either that meeting of any later meeting I had with the Wrights.”
121 I regard that as a reasonably realistic acknowledgment by senior management of the situation that the bank had allowed to arise. 122 For the reasons that I have so far given I am satisfied that there was no fiduciary relationship existing between the group and the bank. Conventionally, the banker/customer relationship is not a recognised category of fiduciary relationship. I am satisfied that the comparatively unique circumstances which, I think, attached to this relationship were not of a kind that elevated a conventional commercial banker/customer relationship into one into which was imported a fiduciary element. 123 In final submissions the case on behalf of the group for breach of fiduciary duty was put as follows:
“From my reading of the Wrights (sic) response their shift in attitude to an acceptance of the Banks (sic) revised stance is heartening & more accommodating than I anticipated.
They have given quite considerably - which must have caused some internal hurt; however, it provides a framework in which to go forward together & we should do this on a client/Banker relationship basis, after all the Wrights did not get to the crippling exposure without the bank facilitation . I am of the view that provided they achieve what is required then this could be a success story for the Region & the Bank.
This is a powerful family who are one of the Banks (sic) oldest continuous clients if not the oldest, & in my view we should not alienate totally a relationship that has been & probably continue to be very worthwhile to the Bank despite some personality differences that no doubt have occurred in the past & will occur in the future - before & past current players on both sides. We should accept their compromise in good grace & get on with the relationship - but mainting (sic) control. In act of good faith, - I would support marginal reduction in rate.
- not closing off hope of interim support provided it is clearly in both interests to do so & can be seen as a viable proposition.
- we were criticised as a Bank in not showing an interest in properties - I understand & accept reasons from our side at the time - this should be rectified at a convenient time when free from undue influences/pressures. I would be happy to participate if Region manager saw any value in doing so.
Happy to discuss any of above.
In view of level negotiations of 6/10 & areas covered it may be appropriate for JB (or RNF) to sign our mutually agreed formal response.”124 However, I think it is clear from the evidence that the relationship between the bank and the group, more particularly PAWS, was not analogous to a joint venture or quasi-partnership such as to warrant the importation of a fiduciary element of the nature contemplated in United Dominions. I think that much is reasonably clear from the nature of the relationship at the time of the June meeting and becomes clearer from the nature of the dealings that took place in following years. 125 I am also satisfied that the representation case, based upon the June meeting communications, fails upon the issue of reliance. In that context, I note a typescript error at line 54 of transcript 1682 where the word “seemed” has been recorded in error for the word “need”. 126 I am satisfied for the reasons so far expressed that Wright was committed to an expansion strategy which had at its core:
“It may be there is no fiduciary duty arising from the relationship between PAWS and the Bank. However, with respect to the issues in these proceedings, at the very least there was a fiduciary obligation owing by the Bank to PAWS similar to the obligations owed by joint venturers, UDC v Brian Pty Limited 157 CLR 1.”
127 I am unable to reconcile Wright’s expressed belief that he would not have embarked upon this strategy without assurance of bank support with the view I have formed of his commitment to an expansion strategy for the group. It was not a case of impulsive, ad hoc decision making. He possessed a wealth of industry knowledge and had formed the judgment that the group was in a unique position to capitalise on the commercial implications of historically low numbers in the national cattle herd. 128 I accept that the Wrights sought and obtained the general imprimatur of the bank for the change in the group’s commercial strategy outlined by them at the June meeting to the point where the group could confidently anticipate the provision of loan funds by the bank, upon acceptable commercial terms, to facilitate the implementation of that strategy: that blips of financial setbacks would be met sympathetically by the bank in the provision of adequate working capital, but no more than that. 129 I am satisfied that Wright was intent on keeping the bank informed of the direction in which the group was heading and the reasons therefor. I have no doubt that he did not want to be in a position where the bank was opposed to the group’s commercial decisions. In that sense, I think it is true to say that Wright was not in a position to embark upon a dramatic expansion of the group’s operations without that support of the bank. However, had the bank withheld that support, it is equally clear that the Wrights would have, with regret, gone elsewhere for the required funding. 130 If one has regard to a) the circumstances in which the June meeting was held, including the history of the group’s dealings with the bank in the preceding twelve months; b) the absence of any forewarning to the bank of the group’s strategy outlined by the Wrights at the June meeting; c) the absence from that discussion of any dollar figures which could have given any inkling of the magnitude of the increased indebtedness that the Wrights may have had in contemplation; d) the simplistic nature of the financial analysis presented by David Wright at the June meeting; e) the very concept in that analysis of a gradual breeding herd build-up from natural increase on the group’s existing holdings; f) the magnitude of the commitments later undertaken by the group, I think it flies in the face of reality to construct on Punch’s statements at the June meeting a case of reliance sufficient to found an equitable estoppel against the bank in relation to those commitments. 131 Furthermore, in my view, the nature of Punch’s statements, and the circumstances in which they were made at the June meeting fall short of the standards which equity demands of a case of promissory estoppel. 132 In particular, the representations relied upon must be clear. Of that requirement it was said in the joint judgment of Masons and Deane JJ in Legione v Hateley (1982-1983) 152 CLR 406 at 436 as follows:
(a) the exploitation of what he considered was to be underutilised group assets, by recourse to their security value for borrowed funds.(b) Wright’s confidence in his judgment of the effect of the depletion of the national herd which, in his mind, provided the potential for rewards to the owners of large breeding herds as a source of replenishing the shortfall in the national herd.
(c) Wright’s objective to extend the group’s control over the beef supply chain from breeding, processing and sale of beef to retail outlets. Wright envisaged that such control would immunise the group from the vicissitudes in beef commodity prices at the various points of supply.
133 It then remains to consider the group’s representation case in the circumstances in which the rapid increase in borrowings took place in 1990. The nature and extent of those borrowings are captured in the terms of the bank’s schedule of facilities of 2 January 1991 as follows:
“The requirement that a representation must be clear before it can found an estoppel is, in our view, applicable to any doctrine of promissory estoppel (see Woodhouse A.C. Israel Cocoa Ltd. S.A. v. Nigerian Produce Marketing Co. Ltd.; China-Pacific S.A. v. Food Corporation of India . In the Woodhouse Case Lord Hailsham of St. Marylebone L.C. (with whose speech Lord Pearson agreed) commented:
“Counsel for the appellants was asked whether he knew of any case in which an ambiguous statement had ever formed the basis of a purely promissory estoppel, as contended for here, as distinct form estoppel of a more familiar type based on factual misrepresentation. He candidly replied that he did not. I do not find this surprising, since it would really be an astonishing thing if, in the case of a genuine misunderstanding as to the meaning of an offer, the offeree could obtain by means of the doctrine of promissory estoppel something that he must fail to obtain under the conventional law of contract. I share the feeling of incredulity expressed by Lord Denning M.R. in the course of his judgment in the instant case when he said: ‘If the judge be right, it leads to this extraordinary consequence: A letter which is not sufficient to vary a contract is, nevertheless, sufficient to work an estoppel - which will have the same effect as a variation .’”
In the Court of Appeal, Lord Denning M.R. had proceeded to refer to the higher standard of clarity required of a promissory representation relied upon to found an estoppel if compared with that required when a representation is put forward as an agreed variation of contract:
“… If the representation is put forward as a variation , and is fairly capable of one or other of two meanings, the judge will decide between those two meanings and say which is right. But, if it is put forward as an estoppel , the judge will not decide between the two meanings. He will reject it as an estoppel because it is not precise and unambiguous. There is good sense in this difference. When a contract is varied by correspondence, it is an agreed variation. It is the duty of the court to give effect to the agreement if it possibly can: and it does so by resolving ambiguities, no matter how difficult it may be. But, when a man is estopped , he has not agreed to anything. Quite the reverse. He is stopped from telling the truth. He should not be stopped on an ambiguity. To work an estoppel, the representation must be clear and unequivocal. That is clear from Low v. Bouverie and Canadian and Dominion Sugar Co. Ltd. v. Canadian National (West Indies) Steamships Ltd .”
The second of those rules is that a person will not be estopped from departing from an assumption or a representation “unless, as a result of adopting it as the basis of action or inaction, the other party will have placed himself in a position of material disadvantage if departure from the assumption be permitted” (per Dixon J. in Thompson v. Palmer ; and see Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. ; Grundt’s Case; Fontana N.V. v. Mautner ). Again, we are of the view that this general rule is applicable to any doctrine of promissory estoppel (see Ajayi v. R. T. Briscoe (Nigeria) Ltd. ; Spencer Bower and Turner, Estoppel by Representation , 3rd ed. (1977), pp. 391-394).”
134 It will be seen that all of the principal facilities are described as “basic”, representing $21,150,000 of a total of $30,633,000. Further that $21,150,000 represented a “terminating line” which had been converted to “basic”. In my view, for reasons that follow, that record is the clearest contractual evidence of the bank’s support of the commercial undertakings to which the group became committed or embarked upon in 1990: it is the strongest corroborative evidence of the expressions of support by Punch of the group’s preparedness to take on a dramatically increased debt burden in 1990. 135 How that situation came about may be placed in context by an examination of the dealings between the group and the bank in the intervening period following the June meeting. On 20 October 1988, Nicholls forwarded to the bank notes by way of adjustment to a cashflow budget which the Wrights had provided previously to the bank. Of interest, I think, in that facsimile, is the schedule of livestock numbers provided as being of possible “assistance in (the bank’s) assessment of the current livestock plan”. One assumes that the reference to a “current livestock plan” was a reference to the Wrights’ plan to expand the breeding herd. I think of particular significance in that schedule are the figures provided for “Natural Increase” and the figures for stock on hand as at 30 June provided in respect of the actual figures for the year ended 30 June 1988 and as budgeted for the year ended 30 June 1989. Those figures showed a growth in the natural increase from 6,063 to 8,708 and stock on hand at 18,322 and 24,092 respectively. 136 That increase was described by Nicholls as being the result of the “breeder proportion of the group’s herd (continuing) to increase ...”. Although the figures are obscured to some extent by the opportunistic purchases budgeted for the year ended 30 June 1989, I think the sales figures are consistent with the earlier disposal of steers contemplated in the change in breeding herd outlined by the Wrights at the June meeting. 137 I think the diary note of 21 October 1988 signed off by Punch is noteworthy for a number of reasons:
“ SCHEDULE
Borrowers: P.A. Wright & Sons Pty. Limited, Esrolem Pty. Limited and P.D.A. Wright.
Provider: Australia and New Zealand Banking Group Limited
Facilities: Overdraft $ 1,000,000
Commercial Bill
Acceptance/Discount $28,150,000
Lease Finance $ 613,000
Indemnity Guarantee $ 310,000
Payroll $ 560,000
Total $30,633,000
=========
Terms and Conditions
P.A. Wright & Sons Pty. Limited
Overdraft $1,000,000
- Availability
Fully fluctuating “Basic” facility available for working capital needs of the Group. To be reviewed 15/03/1991.
…
Commercial Bill Acceptance/Discount
Line 1 $5,000,000
- Availability
Fully drawn 8th March, 1990 and subject to fixed rate arrangement out to 9th March, 1993 at a yield rate of 14.75% p.a. with quarterly rollover. Facility is regarded as Basic but subject to Annual Review in line with Group limit availability.
…
Commercial Bill Acceptance/Discount
Line 2 $19,150,000
- Availability
Currently drawn to an amount of $17 million which incorporates stock (including Boonaldoon) and previous property purchases. Increased limit reflects $2.15 million increase in funding for the transfer of Melrose overdraft ($350,000) and commercial bill line ($800,000) from ANZ Brisbane and purchase of Thorpleigh ($1M). Due to a bookkeeping error Line 2 was previously advised as $16 million whereas correct figure was $17 million and at the same time Line 3 was previously advised as $5 million whereas correct amount was $4 million.
Facility was regarded as a terminating line but following recent discussions is now a basic facility subject to Annual Review next due 15th March, 1991.
…
Commercial Bill Acceptance/Discount
Line 3 $4,000,000
- Availability
To facilitate the acquisition of the steer trading herd for stocking of Boonaldoon.
Facility is now regarded as a basic line subject to Annual Review next due 15th March, 1991.
…
Security
As security for total facilities, the Bank will continue to rely upon the following:-
- Cross Deed of Covenant by and between:-
- Phillip David Arundell Wright
- Margaret du Moulin Wright
- P.A. Wright & Sons Pty. Limited
- Wallamumbi Pty. Limited
- Achill Pty. Limited
- Yarrowyck Pty. Limited
- P.A. Wright & Sons Pty. Limited as Trustee D.A. Wright Trust
- P.A. Wright & Sons Pty. Limited as Trustee P.A. Wright Trust
- Ostabrew Pty Limited in its own capacity and as Trustee for the Wallamumbi Trust.
- Registered Guarantee Mortgage freeholds over the following properties:-
- *“Kindon and Wondul”
- “Yarrowyck”
- “Paradise”
- “Wallamumbi”
- Second Registered Guarantee Mortgage over the following properties:-
- “Conningdale”
- “Forglen”
- “Achill”
- “Glenview”
- “Woodburn”
*N.B. The above securities also cover facilities extended to Jeogla Pty. Limited and Associated Accounts and Wright Family Partnership.
- Registered Mortgage over “Thorpleigh” property.
- Registered Mortgages over titles in the name of Ostabrew Pty Limited over Boonaldoon property.
- Registered Mortgage Debenture over P A Wright & Sons Pty Limited.
With regard to the above requirements, the Bank’s minimum security cover required during the term of all loans provided to P.A. Wright & Sons Pty. Limited and associated parties equates to a security/loan ratio of 130% i.e. $10 of debt requires $13 of security. In this regard when assessing security values the following will apply:-
i) Valuation of properties is to be assessed at their then current market valuation and in line with the Bank’s assessed “Fair Market Value”.
ii) Value of stock is also to be assessed at the then current market value discounted by a factor of 60% i.e. if cattle were valued at $400 per head security value would be $240 when assessing security/loan ratio as above.
Additional facilities provided have resulted in this requirement no longer being met. At current lending level security cover needs to equate to $39.8M which equates to a shortfall of some $3.9M
I am confident that this situation can be resolved quickly on these figures do not include Thorpleigh or Kindon which should add a further $3.3M cover. Please contact me to discuss this matter further as you may not be aware that current security documentation and agreements relative to Kindon and Wondul properties are not yet completed to the satisfaction of the Bank.
Monitoring
The Bank will require quarterly (31/3; 30/6; 30/9 and 31/12) performance to budget cash flows to be provided in addition to the end of month stock schedules now provided.
Please note that cash flow performance figures are to be provided by the end of the month following the reporting date e.g. 30/6 data required by 31/7 with monthly stock schedules required by the 15th of the following month e.g. 31/8 data due by 15/9 ...”.
138 Punch observed in recommending the bank’s approval of the increased facilities that the “Bank can rest comfortably with adequate security held and (with) the fact that over the past 12 months the company, although reporting a loss, has not had to arrange increased financing to cover its operating losses”. 139 The annual review of the group account was conducted by Punch and Armstrong on 23 November 1988. The bank’s diary note of that review noted that the profit and loss figures of the group showed a loss to the group of nearly $1,000,000 for the year ended 30 June 1988 and the gradually increasing level of indebtedness of the group. However, in line with the change in strategy outlined at the June meeting, there was a forecast reduction in debt at the end of the financial year of over $2,200,000. I think of particular interest is the following diary summary note:
1) It reflected Wright’s willingness to take the Wright group further into debt by seeking increased facilities for a fully financed property purchase, in this instance, a beach property at South West Rocks.2) Recognition is recorded by the bank that the accounting standards adopted in the group’s financials utilised an averaging costs method for the valuing of the herd and an historic costs method for land and buildings. In noting that shareholders funds had moved further into deficit by approximately $1,000,000 for the year ended 30 June 1988, it was observed that adoption of market value would see the “current shareholders funds deficit transfer to a surplus of $3,928,000”.
3) The favourable reception recorded by Punch of the proposal for increased borrowing which in his view could be “approved without further additional security (and) could be easily incorporated within the Bank’s existing ratios at QSV to lending”.
140 While this could be seen as a reference to the 1987 approach by Wright of generally building up herd numbers, taking advantage of the perceived national herd shortage, I am more inclined to the view that it is also a further reflection of the 30 June 1988 strategy, particularly in the context of Nicholls’ facsimile of 20 October 1988 referring to the increase in the “breeder proportion” of the herd. 141 Wright gave a detailed description of this annual review meeting which, in substance, I accept. I think the emphasis is on the substance of that evidence, as the detail of the discussion, as provided in the evidence of Wright, would be beyond normal recollection. However, I am satisfied that Punch was informed of the method of accounting adopted by the group in its financials and that it was likely that Wright confirmed the 1989 figures would be boosted by the sale of bullocks and stud dispersal as part of the move towards a build-up of female numbers. I also accept that Wright explored with Punch the use of the group’s interest in Kindon as a security for further borrowing. 142 Throughout 1988 it is apparent that the group’s interest in Melrose was a matter of concern to the bank. Melrose was referred to as amounting to “nothing more than pouring money into a bottomless bucket”. Throughout these proceedings the Wrights continued to maintain that the investment in Melrose had been a prudent and successful one. That is a view that I think can only be sustained on the basis of the experience it gave the Wrights in relation to the slaughtering and boning process phase of beef marketing. From a cold financial viewpoint it clearly was a costly exercise in racking up debts in 1988, eventually requiring the Wrights to take complete control of the asset in 1989 - again at a cost which the group seeks to lay at the door of the bank in these proceedings. 143 At the beginning of the calendar year 1989, Wright was faced with the decision of getting out of Melrose and “cutting his losses” or taking it over. It was decided in January to adopt the latter course. That was accompanied by a foreshadowed requirement of increased facilities of $500,000 for working capital to support that operation. That additional facility was approved on 27 January 1989 in the sum of $520,000 described as “basic and subject to Annual Review”. With that change in interest in Melrose, it was decided that the account, which had previously operated from the bank’s Queensland sector, should come under the control of Punch. 144 The history of the group’s involvement and investment in Melrose, which predated the June meeting, places the commitment well outside the boundary of the group’s representation case. On any view of the group’s case, it is quite inappropriate to characterise those commercial decisions of the group as ones for which the bank bears responsibility. For reasons later addressed, I place this head of claim in the same box as the group’s claim for losses said to have been occasioned by negligent advice of the bank leading to the group taking out a fixed interest loan. 145 The bank’s security appendix dated 27 January 1989 presumably related to the provision of the Melrose facility last referred to. I think it is a record of some significance, given the criticism of the group’s rural operations offered by the bank’s expert witnesses in these proceedings. 146 In general terms, the appendix described the group’s grazing properties as being well improved, well maintained and not suffering from evidence of mismanagement, for example, in the form of erosion, noxious weeds or vermin. Improvements were all noted as being in good or excellent condition. It was noted that all properties had been inspected by the bank’s rural services manager on 1 September 1988. 147 The formal letter of approval of facilities following the annual review was that of 31 January 1989 which showed a total limit of $11,095,000. Interest rates were high, around the 17% mark. It included an indemnity guarantee in the sum of $290,000 provided in support of Wright’s underwriting membership of Lloyds. 148 In my view, nothing is more indicative of the commercial ambitions of Wright at the times relevant to the subject matter of these proceedings than the letter of Punch to Wright of 7 February 1989 which is set out in full below:
“Notwithstanding possible variations to cashflow caused by market fluctuations it appears that Mr Wright is now in a position to capitalise on his strategy of building herd numbers.”
149 Although the letter is clearly one solicited by Wright, it is in terms which I think reflect the very considerable support which the bank was prepared to consider seriously in connection with Wright’s expansion ambitions for the group. 150 The letter was tied up with Wright’s interest in a joint venture with Cargill Australia Limited (Cargill) as part of his plan to take a prominent position in the whole production line in the marketing of beef. At that time, an American based organisation known as King Ranch had placed its Australian grazing properties on the market for tender and Wright estimated that a successful buyer would be looking at approximately $100,000,000. It is his evidence that he conveyed this to Punch in the following way:
“Dear David,
I refer to our recent discussions concerning the possibility of your acquiring various farming interests for a consideration of approximately one hundred million dollars ($100,000,000).
The ANZ Bank, in its capacity as principal banker to your company, is prepared to give favourable consideration to financing proposals connected with the above acquisition. Financing would of course be subject to satisfactory credit assessment and in particular the financial considerations and viability of the assets being acquired.
To assist with your ongoing deliberations in this matter and should proposed vendors or their bankers require further information in regard to the above please feel free to contact me on (02) 227-1810.
Regards,
J.R. Punch”
151 Wright envisaged Cargill as going into such a venture on a 50/50 basis. According to Wright’s evidence, this possible direction in the affairs of the group was discussed by him with Punch and met with enthusiasm. I am reasonably satisfied that the substance of Wright’s evidence on this matter is correct and that Punch has a poor recollection of the discussion. I am satisfied that, in broad terms, Wright’s interest in that set of assets and his general proposal for Cargill were made known by him to Punch prior to Punch’s letter of 7 February 1989. 152 Wright was in contact with Cargill representatives about this time and I am satisfied that he kept the bank generally informed of what was going on. Later in the year, Wright visited the United States to discuss his plans with the representatives of Cargill’s parent corporation. It was his evidence, which I accept, that on his return he kept Punch informed of developments. 153 In any event, the evidence of Wright in relation to his disclosure of joint venture proposals to Punch, represent a good indication of the magnitude of Wright’s plans, which, if commercially sound, would have offered considerable rewards to the group and, I expect, would have been extremely attractive to the bank. 154 The acquisition of the King Ranch properties was the subject of preliminary discussions with the bank at a meeting on 13 June 1989 attended by Punch, Armitage, Wright, ANZ McCaughans and Charles O’Neill, a commercial associate and financial adviser to Wright. The subject holding comprised some nine properties spread throughout Queensland and the Northern Territory amounting to approximately 7,900,000 acres. Wright was working on acquisition costs of approximately $100,000,000, to be reduced by subdivision and resale of part of the property known as Tully Station after a development period of two years. Acquisition alternatives were listed as follows:
“The effect of such a joint venture would be that the production of our NSW cattle herds would be relocated onto the Kindon property after we had acquired full ownership of it and the production of the King Ranch herd from North Queensland would also be relocated on Kindon. The joint venture would establish greenfields abattoir at Inglewood, which is a small township near the Kindon boundary. Kindon could then act as a depot to supply the abattoir 52 weeks of the year. The product would then go to Brisbane for distribution into the chain stores in the other capital cities, on the one hand or go into export for distribution via Cargill’s International network to both USA, Japan and elsewhere.”
155 An extraordinary feature of the proposal was the time frame of four weeks in which the bank was being asked to perform. This, and like proposals of Wright, demonstrated the high stakes with which he was playing and the extent to which he was prepared to expose the group’s assets. 156 Wright maintained an interest in joining with Cargill in the venture and this was conveyed to the bank. Details of the possible joint venture were furnished by Punch to the Chicago office of the bank for the purpose of verifying the capacity of Cargill’s parent to provide a standby letter of credit for $40,000,000 and, eventually, equity capital of $50,000,000 by July 1990. 157 By letter of 7 July 1989 to Wright, Punch set out the nature of the proposal as understood by him as a record “to express the Bank’s interest in considering the proposal outline”. A fee of $25,000 was noted by the bank as the cost of its involvement in establishing financial facilities to support the proposed tender for the King Ranch properties. 158 The attraction of the proposal to the bank, I think, is captured in its letter to Wright of 14 July 1989 in which the bank confirmed that it had “indicated a strong interest in the provision of a substantial Australian dollar facility to assist the joint venturers named … to tender” for the King Ranch properties. That letter concluded with the following:
“i) Acquisition to be financed to maximum allowed under security valuations and servicing capacity. Shortfall would need to be covered by equity injection.
ii) Divestment of Tully River Station with residual properties being able to service debt levels of approx. $40mio (to be confirmed).
iii) Possibility of a public float being used to raise capital.
iv) Introduction of equity partners as identified through ANZ McCaughans.”
159 By the end of July, the proposal involving King Ranch and Cargill had faltered and this was confirmed in the bank’s letter to Wright of 22 August 1989. While that proposal did not eventuate, it is clear that Wright continued to pursue his interest in a joint venture with Cargill. The bank’s attitude to that continued interest was recorded as follows:
“ANZ is delighted to have been approached to be involved in this prestigious project and trust that you can develop your discussions with the principals of King Ranch Inc. thus enabling us to make an offer to finance the joint venture’s funding needs.”
160 The Wrights, in the these proceedings, have placed considerable emphasis on the interest expressed by the bank in providing major facilities in support of the group’s joint venture plans and I think the Wrights were justified in their expectation that significant further borrowings would be made available to the group to assist in other expansion of the group’s commercial interests. 161 Consistent with that expectation, Wright brought to the bank, in early 1989, a proposal involving the acquisition by him of an abattoir business in Dorrigo in New South Wales for which a further $750,000 facility was required. It is clear that Punch supported the provision of that facility, if required: although others in the bank were, clearly, less than impressed with the commercial soundness of the proposition for reasons which I think were very persuasive. A similar proposal was brought forward by Wright in September 1989 seeking a further facility of $1,000,000 for Esrolem, which had been incorporated by the Wrights with the view to involvement in beef wholesaling in association with Melrose. That proposal was also favourably viewed by the bank. 162 One further feature of 1989 lies in the excess overdraft position created by Wright. In March 1989 the excess was approximately $300,000. According to Wright, he had a conversation with Punch at that time. He explained to Punch that the change in herd structure had “exacerbated our cashflow position until such time as” a dispersal sale of steers had taken place. According to Wright he informed Punch, at that time, as follows:
“We have … been advised by David Wright that (Cargill) are still extremely interested in acquiring similar types of operations to King Ranch in Australia thereby giving a strategic holding to assist with the company’s thrust into South East Asian beef markets. It is planned for (Cargill) … executive to visit Australia within the next month and we have requested that the Bank be placed on their calling programme so that we may express our interest in assisting with any funding needs that Cargill may require.”
163 According to Wright, Punch had stated that he understood the position and recognised that an excess situation was likely to be repeated. I have some difficulty in accepting the accuracy of that statement in so far as the facility provided in January 1989 envisaged the reduction in the overdraft to $200,000 in March of 1989. Far from the change in strategy causing an excess in the overdraft account in early 1989, I think it is reasonably clear that at the annual review and, subsequently, Wright anticipated a reduction in overdraft in the 1989 year. 164 At the same time, I have no doubt that Punch conveyed to Wright the willingness of the bank to accommodate the group’s temporary excess. Indeed, given Punch’s view about the safety of the lending, it is difficult to understand why the temporary excess would not be accommodated. In fact that is what occurred at the end of the 1989 calendar year with a $400,000 excess accommodated by an approval on 22 December 1989 of an additional bill facility of $500,000 until 15 February 1990. I note that the interest rate at that time was 21%. 165 The final bank record of the calendar year 1989 noted that the May 1989 update of PAWS’ herd movements were based on assumptions which included “Heifer Retention” in relation to various herd groups in the vicinity of 80%: further confirmation, in my view, of the change that was taking place in the herd structure of the group’s operations. 166 The movement in borrowings by the group in 1990 is reflected in the facilities limit of $11,541,960 as at January 1990 and a limit at 2 January 1991 of $30,633,000. 167 In my view, the events of 1990 should be viewed on the basis that the decisions of Wright which led to this increased indebtedness were consistent with the general thrust of the strategy as revealed to the bank in 1987 and at the June meeting. However, in no realistic sense, were they decisions made in reliance upon Punch’s statements at the June meeting. The only real reliance was that which led the Wrights to look to the bank for the required facilities in 1990 rather than some other institution. It is the uncontradicted evidence of Punch that substantial funds would have been available to the group from major lending institutions had the group been minded to obtain finance elsewhere. 168 The bank’s credit memorandum of 15 March 1990 evidenced that a ten year projection had been provided by PAWS which showed a break up of the group’s herd and, in particular, included a breeding herd model. In relation to projected cashflow, it was noted as follows:
“I find it curious that you should be questioning us as I believe we are absolutely on line with the commencement of the 10 year programme as indicated last June. John, I remind you again that we are anticipating a substantial shortfall in cashflow from reduced sales from now until at least 1993 ...”.
169 Punch’s recommendation was as follows:
“Cattle income in 1990 is greater than 1991 due to the changes in herd structure (increasing heifer numbers for breeding rather than steer numbers) requiring dispersal of part of the Hereford Stud herd at $400,000 and 1,880 head of yearling steers ...”.
170 There is no doubt, in my view, that that support was conveyed to Wright by Punch during 1990. 171 In similar terms is the credit memorandum of 17 April 1990. The general remarks recommending increased facilities noted the following:
“Given the satisfactory trading performance for FYE 6/89, projected improving position for current and future years and the fully secured position of PAW’s debts extension of facilities for a further term has been recorded.
It is worthy of note that PAW itself is constantly on the lookout for possible acquisitions that would enhance existing operations and such would necessitate 100% finance being provided. Our continued involvement with PAW will no doubt prove very beneficial to both the company and the Bank and provided the benefits/profitability of any intended acquisition can adequately demonstrate a viable farming operation it is our intention to support such transactions.”
172 I think the “concept paper” was that which was supplied to the bank by PAWS on 9 November 1989. That “concept paper” noted that the outlined strategy “should in no way be regarded as superseding the original concept of acquiring over time and developing selected livestock breeding enterprises (a la King Ranch) which, because of the built in benefits and lead time required should run in parallel with the proposed subject matter of this paper”. 173 The concept paper then set out five steps. The first envisaged the construction of a “modern hi-tech” abattoir. Step two involved the acquisition of the outstanding interest in Kindon and the establishment of a feedlot with a capacity of approximately 2,500 head per week, which involved a total head capacity of 20,000 to 30,000 - no small enterprise. Step three related to the acquisition of land for a “small, … hi-tech modular feedlot/abattoir”. Step four envisaged an aquaculture enterprise in conjunction with the feedlot/abattoir and step five involved the identification and acquisition of additional properties to provide the required livestock. 174 It was noted that the scheme requirements were in the vicinity of 100,000 to 150,000 head of cattle per annum “ready as required for entry into feedlot”. What was envisaged and disclosed to the bank was a multi-million dollar scheme on a scale of considerable magnitude. I have no doubt, as Wright has given evidence, that these concepts of the group’s strategy impressed Punch and elicited favourable indications of the bank’s interest in providing loan funds to assist in the implementation of these objectives. 175 There is no doubt in my mind that Wright’s commitment to expansion of the group’s operations was intense and taken in the knowledge that the bank would favourably consider the provision of loan funds sufficient to satisfy costs of acquisition of properties, subject to acceptable commercial terms. 176 The relationship between the bank and the Wrights during 1990 was one of general support by the bank for the dramatic expansion in the activities of the group. The major commitments involved the acquisition of Boonaldoon together with its related livestock, plant and equipment; substantial opportunistic stock purchases; the acquisition of Thorpleigh; beef supply arrangements entered into with Coles and the bringing of the Melrose account into the fold of the group account. Underlying those activities there was continued interest by Wright in yet further major property acquisitions which, as it happened, did not eventuate. 177 A convenient starting point for the examination of the circumstances relating to the group’s acquisitions, I think, is Punch’s diary note of 29 January 1990. It reviewed the objectives of the “concept paper” provided by Wright concerning the possible Cargill joint venture and noted the continued interest of Wright in the Dorrigo abattoir together with the possibility of the purchase of Boonaldoon and yet anther property, Kotupna, a property of approximately 2,500 acres in the vicinity of Wallamumbi. It was estimated that it would command a price of approximately $3,750,000. 178 The prospect of the Boonaldoon purchase was presented to Punch either at the end of 1989, or, more likely, in January 1990 and there followed the submission of details by Wright to the bank concerning this proposed acquisition and that of Kotupna. 179 Wright saw the envisaged acquisitions as part of the possible creation of a joint venture with Cargill or as acquisitions by the group, in the event that agreement was not reach with Cargill. I think this much is clear from the letters of Armitage, as manager, corporate banking, to the senior vice president of the Chicago branch of the bank and from the bank to Wright each of 12 February 1990. Armitage’s letter was as follows:
“As part of P.A. Wright & Sons Pty. Limited (PAW) ongoing strategy of gearing up for increased supply of Australian beef into South East Asia, as well as for continuation of supply to traditional export and local markets, David Wright is constantly on the lookout for additional properties to enable sizeable increases to be built up in his herd breeding numbers. A substantial part of this strategy involves possible joint venture property acquisitions with Cargill Inc (USA) and a copy of PAW’s concept paper in this regard was attached to BIR at last advices.”
180 The bank’s letter to Wright stated:
“ BANK OPINION ON P.A. WRIGHT & SONS PTY. LIMITED
We have been requested to provide an opinion on the abovementioned company’s capacity to source financing of up to AUD25 Million for the acquisition of a yet to be identified grazing property/ies.
P.A. Wright & Sons Pty. Limited, of which David Wright is the principal, is a long established and internationally recognised family pastoral company owning and operating eight cattle and sheep properties in northern New South Wales carrying approximately 25,000 cattle and 50,000 sheep. Family operations have been associated with the ANZ Bank and its precursors for over 140 years.
P.A. Wright & Sons Pty. Limited, is seen to be trading profitably and expertise of principal suggests this position will continue.
We consider the company safe for normal trade engagements. Principal of company would be unlikely to enter the company into a commitment it could not fulfil including the aforementioned acquisition. Finance would of course be subject to satisfying the normal considerations of viability etc. essential in such an acquisition.
The information furnished and the opinions expressed herein, which are subject to change without notice, are supplied in strict confidence in answer to your request and are to be used or availed of only on the condition that no responsibility in connection therewith shall attach to this Bank or any of its officers and on the understanding that our name will not be disclosed as the source of information.”181 It is not difficult to identify the basis for the choice of $25,000,000 in the bank’s comfort letter of 12 February 1990. Immediately prior to the provision of that letter, David Wright, at the request of Wright, had prepared a financial projection for four properties, namely: Boonaldoon; Jambaroo Station, a property of some 4,235 acres estimated to cost $360 an acre; Burraki Station, a property of 8,500 acres, estimated to cost $390 an acre and Kotupna of $1,200 an acre. Boonaldoon Station at $150 an acre made up a total estimated cost of those properties of approximately $25,000,000. 182 Those projections, in the case of Jambaroo, showed a net profit after tax for all of the thirteen years of projections except the first, with retirement of the debt in 1998 and an increase in net worth from the negative figure of approximately $435,000 at the commencement of the period to $7,452,804 by year 2003. A similar presentation was reflected in the Burraki Station analysis. In that instance, the net worth was shown as increasing from a negative figure of approximately $860,000 at the commencement of the period to a net value of $15,690,178 at the end of the period. In the case of Boonaldoon, the same progression in wealth was demonstrated, with a net profit after tax in each of the years forecast, apart from the first, and an increase in net worth from a negative figure at the commencement of the period to a value of $24,418,196 at the end of that period. In the case of Kotupna, the assessment of net worth showed an increase of over $5,000,000 in that period. 183 Wright gave evidence of his meetings and discussions with Punch during early 1990 which included the bank’s annual review in February. His evidence of conversations, now some several years past, is quite detailed and, as before, I think one should approach that evidence on the basis that the substance of the communication should be accepted. However, I have some doubt about a reaffirmation by Wright in that conversation of there being a shortfall in cashflow for the following few years as a result of the group 1988 strategy, given the optimistic cashflows provided to the bank about this time, to which reference is later made in these reasons. According to Wright, Punch confirmed the bank’s likely support for the proposed acquisition of Boonaldoon. 184 David Wright also gave detailed evidence of the annual review meeting. While I accept the substance of his evidence, I think one has to be careful about the detail into which he goes, by reason of the fact that it relates to conversations that took place several years ago and of which he had no contemporaneous record to aid his memory. However, I think David Wright’s evidence established that the bank was appraised of the objectives of the Wright group in relation to the joint venture with Cargill and the role which Boonaldoon would play. I think it also showed that projections relating to the acquisition of properties at a cost of $25,000,000 were provided to the bank’s representatives at the meeting and that the bank supported, in principle, the path that the Wrights were embarking upon. 185 As stated, I have some hesitation in accepting that there was a reference back to the strategy, the subject of discussion at the June meeting. However, to the extent that there was any such reference, I regard such an exchange as being of little value in ascertaining the positions adopted by the Wrights and the bank in 1990, it being more in the nature of background references of historical significance. 186 The annual review took place at Armidale between 12 and 14 February 1990 attended by Punch, Anton Archer and Armitage from the bank. Armitage’s diary note of 12 February 1990, which was signed off by Punch, recorded the activities involved in that review, including inspection of Wallamumbi and Paradise, and noted the substantial redevelopment which had been undertaken since the bank’s last visit: again a matter of significance when contrasting these observations with the attack on management practices levelled against the group in the bank’s case. 187 The review continued at the offices of Roberts & Morrow. The diary note of this meeting recorded the discussion concerning the acquisition of Boonaldoon and of other properties as follows:
“ ACQUISITION OF BOONALDOON STATION
I refer to our recent discussion concerning the proposed Joint Venture acquisition of the abovementioned property which is situated 44 kilometres west of Moree and comprises some 14,803 hectares.
Whilst we have been advised the acquisition would proceed on a Joint Venture basis it is understood that P.A. Wright & Sons Pty. Limited may at a later date be seeking refinance of the total project. ANZ Bank in its capacity as principal banker to your various company enterprises for well over 100 years is prepared to give favourable consideration to financing proposals connected with this or any other acquisition. Finance would of course be subject to satisfying the normal considerations of viability etc. essential in such an acquisition.
Should you or your proposed Joint Venturers wish to further discuss our possible involvement in this project please do not hesitate to contact me.
188 There has been a considerable body of evidence, both documentary and oral, concerning the presentation by Wright of the financial implications of the purchase of Boonaldoon and Kotupna, leading up to the Boonaldoon purchase. I think it is sufficient to observe that a number of alternative financial analyses were supplied by Wright to the bank, some in response to particular requests by the bank, which included analyses at various levels of the cost of acquisition. A “worst case” analysis was included which, in my view, was intended to be equated with a downturn in operations, for example, through the effect of drought. 189 I think it is fair to observe that each of these assessments in varying degrees provided comfort to the bank that the group’s operations would not be adversely affected by the proposed acquisitions, that they would enhance the viability of the existing operations and be capable of supporting the anticipated level of financial commitment involved in completing these acquisitions. 190 An initial feasibility study of 1 February 1990 provided for a loan repayment schedule on a premise of a purchase price of $210 per acre of Boonaldoon. Except for the year 1990, that showed an ever increasing surplus after interest from approximately $360,000 to $4,500,000 in the year 2003. In addition, it provided for principal repayments over a ten year period with debt extinguished in year ten. 191 On 28 February 1990, David Wright forwarded two analyses to the bank. The parameters were set out in his letter to Punch of 28 February. One was a Boonaldoon Station financial assessment on a stand alone basis, the other was on an amalgamated basis, with all proposed and existing borrowings dealt with. The assessment of Boonaldoon on a stand alone basis at a purchase price of $180 an acre showed a net profit after tax after the first year of approximately $211,000 increasing to $2,100,000 by the year 2000. It also provided for capital repayments over an eight year period to extinguish the loan. 192 A not dissimilar analysis result was reflected in the amalgamated projections, with each year revealing a substantial increase in the surplus after payment of interest and the extinguishment of losses being carried forward after the third year. A surplus after tax was shown to be in an ever increasing amount over the ten year projection. 193 A further set of financials for the group was forwarded by David Wright by another facsimile of 28 February 1990. That was based upon existing indebtedness of approximately $11,500,000. They showed a net profit after tax of about $500,000 in the first year, increasing to approximately $3,400,000 in the fourth year and settling at about $5,600,000 in the tenth year. 194 Similar projections were provided for Kotupna in early March. The stand alone projection for Kotupna at a purchase price of $1,000 an acre showed negative profit and loss situation throughout the ten year analysis. Other bases of projection showed a net profit after tax commencing in the seventh year with retirement of borrowing required for Kotupna being achieved by year nine. 195 There were many permutations and combinations of costs and income in the acquisition and operation of Boonaldoon alone and Boonaldoon within the group’s properties, all of which, in my view, show a capacity to meet interest payments and, over time, a retirement of the proposed facility. 196 Of particular interest in that context, I think, is the facsimile from Armitage to David Wright of 11 April 1990, clearly sent for the purpose of gaining further material for the upcoming credit memorandum of 17 April 1990, seeking approval of increased facilities to enable the group to acquire Boonaldoon. The facsimile raised certain budget questions and then included a requisition of budgets described as follows:
“Mr. Wright was told that the Bank would not be in a position to give an answer on the funding or otherwise of the property within a period of some 4 hours and that prior to any further funding considerations the Bank needed to be totally comfortable with the existing P.A. Wright & sons Pty. Limited Group and its capacity to service existing levels of debt.
At that time David Wright then informed executives present at the meeting that they were considering acquisition of a number of other properties and individual sensitivity analysis were being undertaken.
We were later to be informed that P.A. Wright & Sons Pty. Limited was considering acquisition of the Kotupna property adjacent to Ebor and approximately 60kms from Wallamumbi Station. Subject property was in a very high rainfall area and was expected to command a premium price.”197 Of particular note in those requisitions are the items 2 and 7. Without going into the details of the projections provided in response to those requisitions, I think it is sufficient to note the following summary from the credit memorandum of Punch of 17 April 1990 as follows:
“To date, I have a couple of queries with regard to my submission
1) What is the timing of the new dam on the Gwydir
2) Cost of purchase of irrigation licen. $200K
3) Income streams on budgets, to be provided, will need to be substantiated especially sheep/lamb/wool income give current state of the industry
4) Budgets will be required as follows:
1) P A Wright & sons - Alone (Increase 5%pa)
2) P A Wright & Sons - Worst Case prolong drought scenario
The above items have been provided to the Bank previously
3) Boonaldoon - Alone (assets, costs 5%pa)4) Boonaldoon - Alone (assets + costs + Inc 5%)
5) Combined PAW/Boon. (assets, costs 5%pa)
6) Combined PAW/Boon. (assets + costs +Inc 5%)
7) Combined PAW/Boon - worst case prolong drought scenario
Items 3, 5, 7 are the items necessary to progress the application together with initial twelve month cash flow. Remaining items 4, 6 are not critical in our assessment.”
(Emphasis added)198 Commenting on that statement, one may read into it some elements of the bank’s approach as it was conveyed to the Wrights, namely:
“Whilst it can be argued that in a prolonged drought situation property/stock values would reduce, thereby reducing the Bank’s security ratios, it is proposed to make continued provision of facilities subject to maintenance of security/loan ratios of at least 130% during the currency of facilities provided by the Bank. It should however be noted that PAW have provided 10 year projections based on average carrying capacities of existing operations as well as Boonaldoon (see comments elsewhere herein), and even in these circumstances interest serviceability is maintained and principal reductions achieved resulting in full clearance of Group borrowings within an eight year period.
The Bank’s involvement is therefore assessed as safe.”
199 Robertson was cross-examined on the worst case projections presented by the Wrights in relation to the Boonaldoon acquisition and he identified the worst case forecasts, both in relation to Boonaldoon standing alone and Boonaldoon as part of the group’s properties. In the latter case that showed a total indebtedness at year end of 1990 of nearly $23,000,000 reducing to $1,664,082 in 1997 and showing an extinguishment of debt in 1998 with a surplus of $2,940,443 increasing to one of $13,956,499 in the year 2000. Robertson agreed that it offered “a very attractive budget to a banker” (T722.11). 200 This reflected some of the difficulty in the group’s case. Favourable projections of this kind, even on a worst case basis, were common in the forecasts provided by the Wrights from time to time in support of increased facilities up to 1991. Expressions of bank support for the group’s expansion should be viewed in the context of those favourable projections. The significance of that support is to be found in the facilitation by the bank of the enormous increase in indebtedness incurred by the group to a point where the attraction of the group account to another banker must have been considerably dulled. Of more significance, in my view, was the fact that the facilities which came to be provided in 1991 were facilities of an ongoing nature: a subject that is addressed later in these reasons. 201 As earlier noted, up to 1990 the group had adopted a tax orientated policy towards expenditure, which was aimed at minimising their tax exposure at the same time as enhancing the value of their holdings through expenditure on maintenance and improvement programs. As a result, it could not be said that there was an abundance of cash in the system at any one time. 202 With the level of borrowings in contemplation, it must have been readily apparent that a severe downturn in trading conditions brought about by market or unseasonal conditions, could soon confront the group with a rapidly increasing shortage of working capital and of funds to provide for interest commitments. Interest rates on overdraft at the commencement of 1990 were running at 21% and fixed interest rates were in the vicinity of 16% and over. While the Wrights believed that they had structured their projections on a conservative basis, in my view, that could provide small comfort in a severe and enduring drought. 203 The Boonaldoon proposal involved an increased borrowing of about $14,000,000, on a ‘walk in, walk out’ basis. The Wrights intended to augment the herd on Boonaldoon by developing a grazing crop to fatten nearly 10,000 head of steers over a 120 day period. In addition, it was anticipated that it intended to increase the breeding herd by some 5,659 head at a cost of $2,858,075 to be offset in part by the sale of stock and equipment. The bank appraised the proposal at interest rates of 17.5% for overdraft and 16.5% for loan funds. 204 In the credit memorandum of 17 April 1990, Punch paid particular attention to the possibility of the effects of drought on forecasts provided by the Wrights. Those comments were optimistic in tone. It was noted as follows:
a) A prolonged drought could impact adversely on the group’s property and livestock values.b) A safety net for the bank against such a contingency lay in the maintenance of a security to debt ratio acceptable to the bank.
c) The bank was looking at no transient dry spell - its focus was on a prolonged drought and its effects.
d) The viability of the group’s enlarged enterprise would remain sound over the long term (ten years), based upon figures supplied by the bank.
205 The recommendation of the increased facility of approximately $14,000,000 was based on the following factors:
…
“- DROUGHT In a drought year, Cotton Seed would be purchased as fodder from nearby gin (15km) being an excellent feed ration and a very cheap source of protein. In such a year, the forage oats would still be planted giving some relief for the cows before it was necessary to feed cotton. Either action should ensure cows conceive and therefore income would still be received from the sale of offspring.
Additional to that provided at CM 15/3/90, PAW have undertaken an assessment of their possible performance given a prolonged drought situation and based on their peak carrying capacity through such a situation the total group also evidences debt servicing/amortisation capabilities inclusive of Boonaldoon.”
206 The letter of offer from the bank was that of 18 April 1990. It was for $14,000,000 on a commercial bill facility on terms, as to the first twelve months, on an interest only basis, with $4,000,000 being cleared from the sale of the opportunistic purchase of steers, the proceeds of which were to come through by 15 November 1990. The provision of all the facilities was noted as subject to the maintenance of a security/loan ratio of 130% based on “current property/stock market values”. 207 I think for the first time mortgage security over Wallamumbi was required to support the bank’s facility. It was noted that a failure to clear the $4,000,000 bill facility for the purchase of steers by 15 November 1990 would attract a fee increase of 1% per annum. A similar penalty applied to an earlier agreed upon amortisation program. 208 A follow-up facsimile from Armitage to David Wright of 19 April 1990 explained that the approval was limited to $14,000,000 due to “discretionary restrictions with regard to total borrowing limitations for Boonaldoon”. That involved a reduction in the expected cost of the steer purchases from in excess of $5,000,000 to a little over $4,130,000. 209 The overall review of facilities was the subject of the further letter from the bank to Wright on 23 April 1990 which showed a total limit of $26,400,000 made up as follows:
“Increased facilities now sought are recommended given the following:
i) Long and satisfactory banking relationship with the Wright Family for well over 100 years.
ii) Experience and reputation of our customers in the industry.
iii) Projected group profitability subsequent to acquisition.
iv) The Bank’s involvement will continue to be subject to Annual Review to ensure projections are achieved in line with forecasts otherwise penalties in the form of increased fees will apply.
v) Boonaldoon would provide a fattening location for steers and heifers, weaned from 20,000 breeders on existing properties, which would otherwise have been sold into the market or sent to a feedlot.
vi) Seasonal variations over total property holdings would reduce the drought risk on the total grazing operation.
vii) Substantial opportunities to fatten large numbers of steers in good winter seasons such as that which is now evident.
viii) Close proximity to other group properties for ease in transfer of stock but subject to varying seasonal influences.
ix) Diversified source of income through possible ventures into sharefarming or cotton cropping.
x) Boonaldoon would contribute significantly to any proposed joint venture with Cargill should the concept proceed. (previously covered in recent ARM)
xi) Drawdown of facilities to be subject to formal request being provided to the Bank with evidence of expenditure being provided prior to formal approval being conveyed to company.
xii) Assessed safety of our involvement.”210 Of those facilities, the stated terms and conditions included the following:
“Facilities: Overdraft $ 1,000,000
Commercial Bill Acceptance/
Discount Line 1 Basic $ 5,000,000
Commercial Bill Acceptance/
Discount Line 2 Terminating
15/03/1991 $16,000,000
Commercial bill Acceptance/
Discount Line 3 Terminating
15/11/1990 $ 4,000,000
Lease Finance $ 110,000
Indemnity Guarantee $ 290,000
$26,400,000”211 The other facilities do not call for comment. The special conditions included the statement that:
1. The overdraft was described as basic.2. Commercial Bill line 1 was described as “Basic but subject to Annual Review ...”.
3. Commercial Bill line 2 was described as “terminating … to be reviewed by 15th March 1991”.
4. Commercial bill line 3 was terminating facility “due for repayment by 15th November, 1990 otherwise penalty rates will apply”.
212 I regard that term as corroborative of the evidence of the Wrights that repayment of borrowings and interest would be geared to cashflow as discussed on several occasions with the bank. 213 To round off the increase in facilities provided by the bank in relation to the Boonaldoon and related livestock acquisition, on 18 May 1990 the bank approved an increase of $1,000,000 to the commercial bill line 3. 214 Wright and David Wright gave evidence of conversations they had, mainly with Punch, during March, April and May of 1990 which related the proposed acquisition of Boonaldoon to the 1988 strategy and, on occasion, to the ten year strategy. 215 The evidence of Punch in relation to those conversations again reflected a comparatively poor recollection of those discussions and for the most part was dependent on diary notes. An example of this is his evidence in response to very detailed evidence by Wright of an inspection of Boonaldoon with Punch on 1 May 1990. The evidence of Punch was limited to that which was recorded in his diary note of 3 May 1990 which was extremely brief and would have provided little assistance as an aide memoire. 216 I have set out below a portion of the detailed evidence-in-chief of Wright of the statements he made to Punch at this meeting to illustrate my approach to the evidence of the Wrights and also to demonstrate the way in which the Wrights showed a comparative indifference to the need to strictly adhere to the basis upon which facilities were provided by the bank. The passage follows:
“all facilities outstanding at Annual Review (scheduled for 15th March, 1991 and yearly thereafter) will be subject to a satisfactory principal and interest repayment arrangement being implemented. Such would of course be in terms of cash flow projections current at that time however should a Principal and Interest arrangement not be implemented to the satisfaction of the Bank all line fees applicable at time of review will be subject to penalty increase of 1.00% p.a.” (Emphasis added.)
217 With the level of borrowing approved, and having regard to the importance of the ability of the bank to act upon the reliability of cashflow projections submitted by the Wrights in relation to the group’s acquisition of Boonaldoon and related livestock, I think it is surprising that such significant changes were put in place by Wright immediately after the acquisition of Boonaldoon. I accept that topics of that nature were discussed during the course of what must have been a lengthy inspection. However, the meeting was not one set down for the purpose of announcing significant changes in working capital requirements of the group. 218 According to Wright, the response of Punch to these announcements was as follows:
“… There are a number of issues that I need to raise with you but in particular you have raised the projected increase in cashflow at a minimum in 1992 and I acknowledge that was the view reflected in the budget that was presented to support the funding for Boonaldoon when it was first produced. As we drive around you will see that the season has dramatically changed from severe drought that I reported to you earlier to potentially an excellent season. As a consequence we have reviewed our intentions regarding the purchase of 4,000 or 5,000 mature cows and replace them with steers to fatten on these excellent pastures. You will recall that we were initially going to increase the breeding herd level to 20,000 cows as covered by the 1988 strategy to 25,000 cows under the enhanced programme for the 1988 strategy after the acquisition of Boonaldoon. It is still our intention to now achieve a breeding herd of 25,000 cows consistent with that last budget but instead of purchasing mature cows which would deliver a cashflow from the sale of their progeny in 1992 we now plan to revert back to the original intent of building the herd internally which will in turn mean that 1993 will remain as the first year we anticipate the escalated cashflow.
The next thing I want to advise you of is that we have been talking for some time of dispersing our Hereford stud which was intended to happen this year. Because it is currently dry on the table lands, it seems sensible for us to postpone the sale one more year which will result in the sale proceeds for that dispersal of something less than $500,000.00, being delayed for one year. One of the benefits of delaying the sale will be that there will be a larger offering through the growth in numbers of the herd between now and then. This hopefully should return us a bigger gross simply by being a larger offering. However, as you know the sale will be of such a special nature that there can be no certainty about what gross figure will be gained on the sale.
Additionally we have decided in line with the decision not to purchase more breeding cows is our intention to retain our cast for aged cows for one more year. This will result in a short fall of approximately $500,000.00 as projected in the current budget for this year, but will be reflected as a similar return in next years budget, but we will in the mean time reap the benefits of all of their progeny.
You will notice also in the budget that there are approximately 900 to 1,000 steers which were scheduled for sale in the near future. We intend to place them in feedlots and feed for 180 days for the Japanese market. Our calculations show that will generate a far greater return per head. However, we will have to outlay a large sum maybe as much as $500,000.00 to feed them to achieve that profit potential. This will be returned to us on the ultimate sale of the cattle and there is no doubt in our mind it is a commercially sound strategy.
There are a number of minor alterations to that budget which will alter the bottom line for this year but the principles remain the same, in so far as they relate to the 10 year strategy. Perhaps the most significant of these changes is our preference now to hold the Boonaldoon sheep flock until next year as opposed to selling them immediately. This will also result in a delayed income activity but on the positive side we will receive the proceeds of their wool clip in October or November this year plus the sale of their lambs probably next March or April. John, providing you approve in principle these budgetary changes, we intend to detail them in writing for the purpose of the record.”219 I accept that in general discussion about the flexibility in operations that Boonaldoon offered to the group, various decisions by Wright were revealed to Punch on this occasion. I regard the meeting as falling into the category of one keeping the bank informed of current matters. 220 I accept that, in general terms, Punch responded enthusiastically to what was outlined to him by Wright. However, that enthusiasm by Punch in relation to the group’s major expansion does not, in my view, translate in any fashion to the group’s representation case against the bank. Clearly, the major commercial operation which Boonaldoon represented was treated on its own commercial merits and as an adjunct to the group’s then existing enterprise. All that should be said of those circumstances, and of the terms upon which the additional facilities were provided, is that the group was entitled to expect the continuation of “terminating” facilities on review on acceptable commercial terms, provided that adequate security cover, in the bank’s opinion, was in place and the confidence of the bank in the long term commercial viability of the group remained. 221 As a matter of construction, I think the express terms of the facility acknowledged the circumstances that the group’s cashflow would govern the terms upon which principal and interest would be paid. I have occasion to address the significance of the provision of “basic” facilities later in these reasons. The foregoing is intended to cover my views of the series of communications between the Wrights and the bank, during the first half of 1990, relating to the Boonaldoon acquisition. 222 The settlement of the Boonaldoon purchase, which took place on 16 May, coincided with rapidly developing negotiations between the Wrights and Coles with the view to reaching agreement on a beef supply contract to Coles. Later in these reasons, the nature and significance of the commercial relationship between the Wrights and Coles is examined in some detail. I think it is sufficient to note at this stage that the bank was being kept abreast of Wright’s dealings with Coles which included provision to the bank of a detailed proposal, as submitted by PAWS to Coles on 10 June 1990. 223 Prior to that, Punch provided a banker’s opinion of PAWS by letter of 4 June 1990. It was in highly favourable terms and emphasised the nature of the “long established and internationally recognised family pastoral company” which owned and operated the grazing properties of the Wrights, an operation which it was noted was “reinforcing its position as a market leader and major producer in the beef cattle industry”. 224 Of particular note, I think is the following:
“After seeing Boonaldoon I can understand the logic behind of (sic) all of the proposals that you have spoken and can see that they are commercially sensible. The long term strategy that you have envisaged for the change in your enterprise activity will certainly be enhanced by the Boonaldoon acquisition. It is a most impressive property and I can see how it will compliment in a direct sense all of your original thinking. The bank endorses the changes that you have made as they should consolidate your long term planning which is now well advanced. Make sure that when you get home that you record all of these changes, as they will impact on the budget, so that I can place them on the file.”
225 Some measure of the commercial ambition of Wright and of the extent of the bank’s support of Wright in that context may be extracted from the approach by Wright for bank finance for the purchase of Nockatunga at an estimated price of $10,600,000. The property was listed for auction on 8 August 1990. 226 At a meeting on 15 June, between Wright and Punch, Wright brought up the subject of his interest in Nockatunga. Punch’s diary note of that meeting recorded the information provided to him by Wright in relation to Nockatunga in the following terms:
“P.A. Wright & Sons Pty. Limited, is seen to be trading profitably with detailed financial projections provided and expertise of principal/management suggesting position will continue.”
227 At this meeting, Wright provided Punch with projections which indicated that the property acquisition was “viable on a fully financed basis”. It was Wright’s evidence that Punch received the proposal favourably on the assumption that PAWS secured the Coles contract. It was Wright’s evidence that he submitted this proposal as a development of the group’s ten year plan. This was denied by Punch and, in my view, nothing turns on resolving that conflict. However, in keeping with my general approach to the evidence of Wright, I am satisfied that he presented the Nockatunga proposal in the context of his overall plan to greatly increase the group’s breeding herd and to effect a long term supply contract with Coles utilising the group’s boning room facilities. 228 I place no significance on the fact that Punch has no recollection of any reference to a ten year plan. According to Punch’s diary note, he expressed some reservations about providing 100% finance. It is clear, however, that Punch was willing to examine the proposal and I think it is of interest that he recorded the need to examine the possibility of further finance as a matter of some urgency for the reason that he “would anticipate that Mr Wright would be looking at funding from an alternative source should ANZ not be prepared (to) follow the deal through”. 229 There is no suggestion in Wright’s evidence that he made such a suggestion to Punch. However, I think the record is of significance in reflecting the attitude of Punch as to the value of retaining the group account. I treat it more as a reflection of Punch’s assessment of Wright’s determination to pursue commercial objectives which involved a major expansion of property and herd assets. In any event, the meeting did not deter the Wrights from inspecting Nockatunga over a three day period in July 1990. 230 The credit memorandum of Punch of 18 July 1990 I think is a significant document. It came at a time when Melrose had posted a significant loss for the year ended 30 June 1989 and was recorded as continuing to trade at an operating loss. Punch’s credit memorandum of 18 July was for the purpose of seeking approval of increased facilities amounting to $10,915,000 which, if approved, would bring total borrowings to $38,315,000, in addition to the group’s liability under the unlimited guarantee given in respect to the Melrose debt then standing at $1,373,000. The purpose of the increased facility was to enable the Wrights to acquire Nockatunga. Punch described the existing facility arrangements as either “basic subject to annual review” or “as a terminating line however repayment terms to be subject to annual review and then in terms of cash flow projections/requirements. Principal and Interest repayment schedule … to be implemented at Annual Review 15/3/1991 and to be in terms of cash flow projections … which must be acceptable to the Bank.” The value of the account was noted as being 32.74% per annum or 19.97% per annum on a basis of “before/after tax return of (sic) notional capital” (emphasis added). 231 The whole tenor of the memorandum, in my view, fully corroborates the evidence of the Wrights of the strong support they received from the bank in their dealings up to 1991. Under “general remarks”, Punch made the following observations:
“Preliminary cash flows have been provided together with a long term loan schedule which incorporates 100% borrowing although stocking of the property would be initially from the stock purchase in conjunction with land, plant and equipment. Mr. Wright believes that the property is drought proof and would add considerable value to the P.A. Wright & Sons operation in that the company would have 2 large breeding properties being Wallamumbi and the property Nockatunga together with a fattening property at Boonaldoon.
Mr. Wright will provide all necessary information together with financials and the Elders publication on the upcoming auction and at this stage is seeking the Bank’s views as to whether or not to proceed for what would be a fairly lengthy inspection of the property.
Indicated to David that the Bank would be looking at total debt to equity in the overall operation and was not overly enthusiastic about 100% finance given that we have only just recently finalised the Boonaldoon purchase.
Undertook to examine cash flows and all necessary information that will be provided in due course and if we can get comfortable with the deal same will be referred to our credit people with a view to indicating to Mr. Wright as to whether or not the Bank is prepared to proceed. This will need to be done in the short term as I would anticipate that Mr. Wright would be looking at funding from an alternative source should ANZ not be prepared follow the deal through.”232 The description of Nockatunga that followed was glowing. The projections provided by the Wrights had followed a format similar to that produced in relation to Boonaldoon, namely, by presenting a series of alternatives which were intended to include a conservative, worst case basis. In line with earlier projections, those provided in relation to Nockatunga showed a retirement of the facility progressively over a ten year period and the capacity of the Wrights to service interest from the cashflow projections. 233 There is little doubt in my mind that Punch viewed the group’s financial prospects favourably and that this resulted from his being satisfied that Wright’s eminence in the industry justified confidence in his predictions and commercial judgment. In describing the highly advantageous aspects of the acquisition, Punch made the following observations:
“Since purchase of rural property “Boonaldoon” earlier this year the P.A. Wright & Sons operation has concentrated on maximising the potential of the property through development of on-farm management and taking advantage of the earning capacity through short term steer fattening. In relation to the acquisition of additional stock following purchase of property (CBA $5M) the repayment of this temporary facility by 15/11/90 from sale of trading steers will present no difficulty to the Wrights and cashflows provided at last advices (CM 17/5/90) have been maintained and remain pertinent …As part of PAW’s continual assessment of its long term objectives and direction which has, to some extent, been influenced by the possible involvement of Cargill Inc., some considerable progress has been made with Coles Limited in relation to supply of both beef and lamb through a centralised facility on a contract or cost plus basis. PAW believes it is able to achieve this more efficiently and cost effectively than the current procurement methods employed by Coles who, in addition, would enjoy significant improvement in the uniformity, consistency and quality standards of their range of meat products.
A proposal has been put to Coles on the basis that PAW are capable of “fast tracking” supply of a large proportion of Coles Queensland’s volume requirements from within their own herds and eliminate the costly profit taking of the middleman. Currently under consideration by Coles Queensland, adoption of the PAW concept would have a most positive effect on existing operations with a guaranteed market for beef produced. (A decision is anticipated within 2 - 3 months)
In line with David Wright’s ongoing strategy of gearing up for increased supply of Australian beef into South East Asia and with the possibility of the Coles chain sourcing supply from the PAW operation, breeding capacity is continually looked at in conjunction with available acreage. The acquisition of “Boonaldoon” was based on this criteria and has proven to be a most worthwhile purchase even when considering the relatively short period of ownership. Another suitable property has now come onto the market and presents a rare opportunity to secure an outstanding station.”234 As to safety of the proposed lending, Punch expressed the opinion that the security to loan ratio was adequate at 162.4% based on what was thought to be the current market value. He assessed the bank’s exposure as “safe”. Punch supported his recommendation for approval of the increased facility on the following bases:
“(b) The acquisition of Nockatunga would allow a doubling in size of the current PAW breeding herd to approximately 50,000 breeders. This would compliment existing livestock through the addition of a large, high quality commercial herd of hereford cattle rarely available in such numbers.
A breeding herd of this scale would enable PAW to be virtually self sufficient as a supplier to premium outlets such as the Coles Supermarket Chain or Cargill (USA).
(c) The Coles proposal referred to earlier, if enacted upon, would require between 500 and 1,000 quality cattle per week. The multiplying factor of a breeding herd of this size combined with yearling turnoff would enable PAW to rapidly breed the quality of cattle required, or alternatively to quickly respond to changes in market requirements.(d) The addition of Nockatunga would add greatly to the diversity of different climatic regions already enjoyed by the present operation. This would enable PAW not only to take advantage of opportunity fattening of cattle (not budgeted for) on large areas of naturally irrigated pasture but would also virtually drought proof the current operation.
…
(f) The positioning of Boonaldoon Station between Nockatunga and the New England properties as a major winter and opportunity summer fattening operation should enable PAW to be self sufficient in the grass finishing of livestock for slaughter as seasons allow. The addition of the Nockatunga breeding herd to the New England operation would significantly reduce the current requirement to purchase large numbers of weaners for fattening at Boonaldoon.”235 The financial projections referred to by Punch were augmented by a further projection dated 24 July 1990 which showed a net profit after tax commencing in the year 1992 of approximately $700,000, increasing to approximately $7,300,000 in the year 2000 on an amalgamation basis of all New England properties, Boonaldoon and Nockatunga. The same projection showed a retirement of the debt by the year 1999. Wright maintained his interest in Nockatunga until 3 August 1990 when it was revealed that the property had been sold prior to auction. 236 While the events of mid 1990, in my view, demonstrate, clearly, the strong support the Wrights received in their dealings with the bank, they also demonstrate the insignificance of the June meeting upon which so much reliance has been placed by the Wrights in these proceedings. In all of the financial submissions to the bank during 1990, including projections on a ‘worst case’ or conservative basis, the acquisitions were shown as financially attractive both on a stand alone basis and as an integral part of the overall operations of the group. It is completely unrealistic, in my view, to treat any understanding taken from the June meeting that the bank, in appropriate circumstances, would capitalise interest on the group’s borrowings as having any application to the considerations surrounding the group’s acquisition of Boonaldoon and its attempt to purchase Nockatunga. 237 Agreement, in principle, was reached between Wright and Coles in terms of Coles’ letter to David Wright of 31 July 1990 which contemplated an initial supply of approximately 500 cattle and 5,000 lambs per week in a form described as “boned and boxed beef and lamb”. The quantity was described as one “required to test arrangements” for a year with the view to holding a comprehensive review after that time. It appeared from that letter that “equitable mechanisms for determining relevant prices and costs” were unresolved at that stage. 238 The view I have formed is that failure of the group’s negotiations with Coles for a long term contract, together with the devastating effect of a severe drought, commencing at the end of 1991 and continuing, in varying degrees through to 1995, were responsible for the group’s desperate financial need from 1992 until the bank acted to put the group account into default in February 1996. It follows that crucial to the group’s case is the extent to which the bank may be said to have contributed to the failure of the group’s dealings with Coles. I have deferred a detailed consideration of the cause of that commercial breakdown to a later section of these reasons. 239 An immediate consequence of the group’s entry into the Coles supply arrangement was the decision by Wright to retain for that contract the steers which had been the subject of the opportunistic purchase in mid 1990 in connection with the acquisition of Boonaldoon. Those steers were to be fattened, sold and the proceeds used to repay the commercial bill line 3 of $5,000,000 on 15 November 1990. 240 On 1 August 1990, David Wright had a discussion with Punch which was followed up by his letter to the bank of 2 August 1990. In that letter, David Wright described the significance of the arrangement with Coles in the following terms:
“i) Long and satisfactory banking relationship with the Wright Family for well over 100 years.
ii) Experience and reputation of our customers in the industry.
iii) Projected group profitability subsequent to acquisition.”241 The letter concluded with the following observation concerning the acquisition of Nockatunga:
“Regarding our conversation yesterday on the impact of Coles Myer as an outlet as it relates to the P.A. Wright & Sons Pty. Ltd. enterprise, coupled with the acquisition of Nockatunga, we submit the following :
The acceptance by Coles Myers Ltd of our proposal to supply Beef and Lamb on a weekly basis, 52 weeks of the year, represents probably one of the most important events in the history of the P.A. Wright & Sons livestock enterprise. It will represent the culmination of the long term objectives targeted by our company management over recent years with ANZ bank cooperation in support of our expanding enterprise.
In general terms, this relationship with a national, high quality retail chain will represent a guaranteed weekly outlet at predetermined premium prices for our total turnoff of offspring, within the year in which they are born. This marketing strategy will protect us from the vagaries of the open market as well as international currency movements.
Initial volumes as indicated by Coles are 500 cattle and 5000 lambs per week with increases as mutually agreed per the letter of intent. (See attached). At this level of throughput of steers, we would require a breeding cow herd of approximately 50,000 females to be able to satisfy these requirements from within our own resources, being the targeted herd size after the acquisition of Nockatunga.
Conservatively assuming a net $20 processing profit after costs and interest, this will represent a weekly profit for beef alone of $10,000 per week. Further, P.A. Wright & Sons produced livestock will have a market outlet into the system at prices which reflect a premium of approximately 5 to 10 cents per kilogram liveweight, over and above the going market values of the day, regardless of drought forced sales etc.”
242 David Wright had been deeply involved in the earlier submission of the Nockatunga proposal to the bank. He had taken part in the property inspection between 22 and 25 June 1990 and this had been followed by a meeting with Punch on 11 July 1990. 243 David Wright’s evidence of his telephone conversation with Punch of 1 August 1990 was quite detailed. He informed Punch of the successful outcome of the Coles negotiations which he linked to the strategy outlined at the June meeting. He foreshadowed the need for additional working capital to fund the Coles cattle pipeline. That would entail significant feedlot costs which he said had not been quantified so as to enable him to put a figure on the group’s working capital requirements. He expected it would be several months before those figures were known. David Wright also announced that the $5,000,000 facility would not be retired in November as had been agreed as the steers for which that facility had been raised would be retained to supply boxed beef to Coles. 244 According to David Wright, Punch assured him that additional working capital required to satisfy the Coles supply arrangement would be made available by the bank, given the adequate security held by the bank. It was his evidence that Punch also agreed to the retention of the steers on Boonaldoon for use in the Coles pipeline. He said that Punch had informed him that there would “be no problem with the non-repayment of funds in November”. Punch, he said, anticipated the bill facility would be rolled over into a basic facility repayable in line with cashflow. 245 Punch denied that he gave the Wrights any assurances as to the provision of working capital or relieved the Wrights of providing financials in accordance with the terms of the bank’s facilities. However, I accept the substance of David Wright’s evidence. 246 At the same time, I am satisfied that Punch did not give the group carte blanche in respect of working capital requirements, then, or at any other time. As in the case of most of the evidence, I think the conflict in evidence lies more in the sphere of emphasis. I do not regard the evidence of David Wright as amounting to an assertion that the Wrights were given an open cheque to perform the Coles contract, nor that they were excused from providing appropriate financial statements generally or in the long term. I am satisfied that it was understood by Punch that in the immediate term the Wrights would have difficulties in adapting their financials to meet the cost impact of the Coles supply arrangement. I am also satisfied that it was recognised by Punch that adjustments to working capital requirements would have to be addressed and that neither the Wrights, nor Punch anticipated that that would create any significant problem. 247 Much of this was, I think, confirmed in the diary note of Punch of 23 August 1990 at which time there was an “excess position on working accounts” of the group of approximately $230,000, partly due to the effect of preparing for the Coles supply contract. That diary note also recognised the impact of the Coles contract upon working capital requirements as follows:
“The successful acquisition of Nockatunga would enable our operation to be virtually self sufficient in the supply of cattle for Coles requirements. It will add to our strength in the international market in the supply of quality manufacturing beef and will allow us to select superior genetics and compound them rapidly across an extremely large genetic base of cattle.”
248 The evidence also is a strong indication, in my view, of the absence of understanding by the group of the precise costings and returns to the group related to the Coles contract. The bank’s willingness to support the group’s expansion activities was further emphasised by the provision of funds by the bank to enable the Wrights to acquire Thorpleigh in September 1990 and in the approval of lease facilities of approximately $180,000. Thorpleigh was purchased for $1,200,000 with settlement taking place on 21 November 1990. 249 The diary note of 13 September 1990, signed off by Punch, envisaged an “increase in facilities of up to $2.0m.” The same note recorded that Punch anticipated receipt of detailed cashflows showing the change in requirements which it was acknowledged “should also substantiate deferment of the repayment of $5m line due November 1990 from the sale of fattened steers” on the basis that they were “now required as part of the Coles transaction and (would) not be sold in the short term”. 250 The willingness of the bank to accommodate the vicissitudes in the group’s working capital requirements was further emphasised by the bank’s records for October 1990 in which the overdraft account was in an excess position of approximately $1,800,000: this at a time when cashflow statements provided by the Wrights to the bank showed an operating deficit for the quarter to 30 September 1990 of approximately $830,000. The position was not much different in November with the cashflow statements to 31 October showing an operating deficit of $1,155,593 at a time when the overdraft was in an excess position in early November of approximately $1,500,000. Punch’s diary note of 8 November 1990 recorded that excess position and, presumably within his discretion, approved a temporary increase in the overdraft limit to $3,000,000 noting that “facilities (would) increase to $29.4M ...”. 251 There was an important meeting of the Wrights and the bank at Wallamumbi on 14 November 1990. The Wrights have given detailed evidence of this meeting. There is a lengthy diary note of that date which has been signed off by Punch and Vaughan. 252 The meeting was attended by Wright, Phillip and David Wright, Hudson, Nicholls and Robertson, with Buckley, Punch and Vaughan representing the bank. The evidence of Nicholls, Robertson and Hudson was scant compared with the detailed evidence of Wright and David Wright concerning the meeting. The recollection of the bank’s representatives, I think, was very much confined to the record of the diary note of the meeting. 253 The main bone of contention between the witnesses lies in the emphasis placed by the Wrights upon the linking up of those most recent activities of the group with its “1988 strategy” and “10 year plan”. The bank’s representatives denied that there were references to any such strategy or plan. In my view, nothing turns on that conflict. 254 Each of Wright and David Wright gave extensive and detailed evidence of the discussion that took place at this meeting. I think it came down to this: the Wrights anticipated considerable benefits from the Coles contract which enabled the group “to take a profit margin at whatever point in the supply pipeline (of beef) where profit becomes available”: the Wrights envisaged becoming the sole meat supplier to Coles “for all the species handled over their meat counter”: while breeding herd numbers had risen substantially there would still be a shortfall in supplying Coles from the group’s herd: this deficiency could be “satisfied with the acquisition of properties similar to Nockatunga … including the other half of Kindon”: it was confirmed that bill line 3 “had been rolled over into working capital … for the Coles supply”: it was impossible at that stage to state realistically what the group’s requirements for working capital would be: the developments of 1990 were recognised by the bank as the implementation of the group’s 1988 strategy: dealing with the Melrose debt was deferred until a decision was made in relation to the disposal of that business: an increase in working capital of $2,000,000 was required: there would be some delay in providing financials which accurately reflected the requirements of the Coles contract. 255 According to David Wright this information was met with the following response of Punch:
“With the obvious requirement for retention of stock to enable the Coles supply to commence mid September the proposed reduction in debt of $5M due 15/11/90 will need to be reassessed. Credit Memorandum of 17/5/90 which approved additional facilities of $15.905M to enable acquisition of Boonaldoon and stock incorporated $5M reduction and implementation of a P & I repayment schedule at A/R 15/3/91 in line with cash flow projections acceptable to the Bank.
In view of existing excess and what will certainly be a change to original approval terms I have requested as a matter of priority, provision of cash flow to incorporate any further increased requirements and the impact of supply of meat to Coles.
This will enable a formal submission to be put forward prior to 15/11/90 when the original $5M reduction was schedules (sic).”
256 I accept the substance of the Wrights’ evidence, although I doubt the accuracy of their recollection of the emphasis placed upon the 1988 strategy or 10 year plan of the group. As to the statement attributed to Punch, I accept that the Wrights received some comfort from that statement in terms of continued bank support for the group in the sorting out of requirements for the Coles contract and that some reference in that context may have been made to the adequacy of security cover held by the bank. I think it is clear from the evidence that the Wrights were left with the expectation that the additional working capital requirements of $2,000,000 would be approved by the bank. I am satisfied that it was not intended at that stage that the Melrose debt would be taken into consideration in relation to that additional borrowing. 257 I do not regard the meeting as absolving the group from providing satisfactory financials to the bank to enable it to maintain an appropriate supervision of the account. At the same time I think it was recognised by the bank that the considerable change in the group’s operations would occasion accounting problems to the group, particularly due to the imprecise state of the group’s costing of the Coles requirements at the time of this November meeting. 258 During the course of the hearing, I noted the conduct of witnesses at the time they were giving evidence and I have no cause to doubt the veracity of any of them on the basis of their presentation in the witness box. In the case of one or more of the experts, there was clearly, I thought, some degree of bias, but with the bank’s witnesses and the group’s witnesses, I have no occasion to doubt their veracity and any conflict of evidence I have put down to the different emphases placed by witnesses on oral communications from time to time; to a failure of recollection and to a breakdown in precise communication. That is not to say that there was not, in one or two instances in relation to the bank officers, an impression given of defensiveness that may have further impaired an already impaired recollection of the details of events long past. In the case of the Wrights, I think their evidence of discussions in such detail challenged their actual capacity to recall events. 259 The bank’s diary note of the meeting is a detailed record which recounted Wright’s views about the rural economy and his optimism about the beef industry in the context of the Coles supply arrangement. The group’s cattle numbers were said to be about 40,000 head, which involved a purchase of some 16,000 cattle during the year to supplement the group’s supply of meat to Coles. It was noted, without comment, as follows:
“We have discussed the working capital requirements for Coles on previous occasions. The Bank is very comfortable with the contract which you have with Coles, and if that means the provision of additional working capital in order to effectively operate that arrangement then the Bank will support you in that regard on the basis of the 130% loan security limit. If additional funds are required for steer trading, property purchases or to complete the buildup in the breeding herd let us know. In the meantime I will process an application for additional funds and send you up a new facility letter.”
260 The diarist noted Wright’s continued interest in a joint venture with Cargill and that Wright envisaged, if that negotiation was not successful, that the aim “would be to develop export markets in the US, Japan and/or Korea”. The note confirmed discussion concerning Melrose and that it was “agreed that the current funding arrangements (would) formally be transferred to SMBB Punch’s control”. The Melrose debt was approximately $1,100,000. With that transfer the bank was to take over from the Queensland branch direct control of the Esrolem account. 261 It was recognised that the commercial bill line 3 for $5,000,000 due to clear that month would “require extension as the Coles venture (required) that cattle numbers be increased not sold off”. It was also acknowledged that cashflows and budget projections provided by the Wrights indicated an additional $2,000,000 of funding was required. Of the additional funding that was required, it was noted that as the “budgets had only recently been prepared … it was unclear as to where the additional funding need was to be allocated”. Nicholls was to provide those details. 262 In the light of confusion over the provision of facilities that I think existed in early 1991, I think the evidence of the Wrights and the record of this meeting make it clear that the transfer of the indebtedness of the Melrose account to PAWS was not taken into account by either party in calculating the required $2,000,000 of additional funding. 263 I think some measure of Wright’s appetite for borrowing may be taken from his interest in a development proposal at Lane Cove which Wright brought to the attention of the bank in December 1990. Vaughan’s diary note of 20 December 1990 of a meeting with Wright is not without interest in relation to this subject as he noted that Wright required 100% financing of the proposal. Vaughan recorded Wright as informing him that if “the Bank was unable to support him then he (had) alternative arrangements already in place”. 264 It was also recorded in the diary note of 20 December 1990 that Wright had conveyed to Vaughan that the Lane Cove venture was “the fore runner of a number of similar arrangements and (that) was one reason why he was keen for the ANZ to be involved”. It is difficult to understand the thinking of Wright in looking for increased borrowings at this time and, in my view, it is consistent only with the observation made earlier in these reasons that Wright was bent on borrowing to the extent possible against the extensive holdings of the group which he regarded as underutilised capital. 265 I think the beginning of the confusion which surrounded the provision of a further $2,000,000 facility is to be found in the diary note of 6 December 1990 which commented on cashflow statements, provided by the Wrights, to 30 November 1990 which showed an operating deficit of $558,367. The diary note concluded with the following:
“(Wright) hopes that within 3 years he will be able to supply 66% of Coles requirement inhouse. To do this he is on the look out for acquisition of suitable land i.e. property adjacent to Paradise.”
266 At that stage, as far as the evidence goes, Nicholls had not provided the bank with details of where “the additional funding needed was to be allocated”. 267 On the bank’s file is a limit adjustment worksheet record dated 20 December 1990 which noted approval of an increased overdraft of $1,000,000 to $3,000,000. It was noted that “Full CM currently being prepared”. It referred back to Punch’s diary note of 8 November 1990 which recorded the excess in the overdraft position mentioned previously in these reasons. It will be remembered that that diary note was made at a time when the bank was awaiting cashflows to accommodate the Coles supply requirements and contained the following note that in “the interim and to cover existing excess, temporary limit is to be recorded to a level of $3M … pending exact requirements being ascertained”. The expiry date was noted as being 15 December 1990. I think it is quite clear that the additional accommodation of $2,000,000 was approved within the discretion of Punch and on 20 December 1990 was confirmed, as I read the record, with the review date of 15 March 1991 along with the other facilities. 268 When Punch came into the picture in relation to the Lane Cove development, I think it is fair to say that he was not unfavourable to it, an attitude which was not entirely shared by the other bank officers associated with the matter. I think this much is justified by his letter to Wright of 28 December 1990, which, however, concluded with the caution that the “letter (was) not an approval but merely a starting point for further discussion”. 269 The approval of the increase of the overdraft facility by $2,000,000 raised at the meeting of 14 November 1990 was formally notified to the Wrights by the bank’s letter to Wright of 2 January 1991 earlier reproduced in these reasons. A covering letter, however, referred to the 14 November 1990 meeting and expressed pleasure in confirming “approval of an increase in lines of $2,000,000 to assist with the Thorpleigh property purchase and transfer of debt from Melrose Meats Pty. Limited to PA Wright & Sons Pty. Limited”. The way in which the then existing facilities were described placed the additional accommodation in the commercial bill line 2, which was previously noted as $16,000,000. However, a note accompanying the description of that bill line shown as having a limit of $19,150,000, is repeated below for the ease of reference:
“Budget has still not been prepared to allow comparison. We have, however, been presented with detailed cashflow including Coles and Boonaldoon in which company requests a further $2M to assist with the purchase of Thorpleigh and transfer of Melrose debt to PA Wright & Sons.”
270 In the light of the history of the facilities traced earlier in these reason, I have difficulty in identifying any “bookkeeping error”. However, I am reasonably satisfied that confusion reigned within the bank in identifying the transfer of the Melrose overdraft and bill line as being related to the additional funding of $2,000,000 notified by the Wrights at the 14 November 1990 meeting. 271 There was also included in the terms of approval a requirement of a minimum security cover of 130% on the basis of valuation of properties on “current market valuation and in line with the Bank’s assessed ‘Fair Market Value’”, while the value of stock would be discounted down to 60% of market value. However, it was noted as follows:
“Currently drawn to an amount of $17 million which incorporates stock (including Boonaldoon) and previous property purchases. Increased limit reflects $2.15 million increase in funding for the transfer of Melrose overdraft ($350,000) and commercial bill line ($800,000) from ANZ Brisbane and purchase of Thorpleigh ($1M). Due to a bookkeeping error Line 2 was previously advised as $16 million whereas correct figure was $17 million and at the same time Line 3 was previously advised as $5 million whereas correct amount was $4 million.
Facility was regarded as a terminating line but following recent discussions is now a basic facility subject to Annual Review next due 15th March, 1991.”
272 I have been unable to reconcile that statement with a reference in Punch’s credit memorandum of 14 January 1991 which dealt with a proposed increase in borrowings of $3,233,000 which he observed would “see a total security/loan ratio of 164.25 based on total CMV (Current Market Value) of $50.284M ...”. However, nothing turns on that in light of the findings made in these reasons. 273 As earlier noted, of particular significance in that review of facilities, in my view, was the provision of all major facilities as basic facilities which involved converting terminating facilities to basic. The sole reason in the bank so acting arose out of the bank’s recognition and acceptance of the importance of the Coles supply contract to the long term viability of the group. That the bank was prepared to convert non-basic, major facilities to basic facilities in the circumstances that arose post July 1990 is of central significance, in my view, in the proper understanding of the bank’s obligations to the group in respect of those facilities. 274 In my view, the bank should not bear any responsibility to the group on the group’s representation case in respect of its dealings with Coles. Those dealings were pursued by the group as part of Wright’s vision of controlling the supply of beef from breeding, through processing, to delivery of processed beef to major retail outlets and of assuming a dominant role for the group in eastern Australia. For the reasons I have given, I consider it quite unrealistic to attribute the group’s embarkation into that venture to any reliance upon any support of the bank other than in accordance with the terms of the facilities provided by the bank for that purpose; leaving open the question of reasonableness in the bank’s enforcement of those terms. In my view, the statements of the bank at the June meeting should not be treated as a foundation for that commercial decision of the group and no basis for the group’s representation case can be reasonably extracted from the evidence of the communications between the parties during 1990. In brief, the group’s representation case, in my view, is unfounded. 275 That leaves the “contract” case which the group seeks to raise by way of amendment. One of the more serious implications of granting the application lies in the need to re-open the hearing to receive evidence of damages, in the event of the group being successful in contract. 276 A matter of equal concern is the manner in which the group has particularised the contract and breaches of contract in the proposed amendment. The contracts are simply identified as “each of the contracts (including the security documents) relied upon by the Plaintiff (bank) in these proceedings”. The proposed amendment does not identify the powers of the bank which it is alleged were unreasonably exercised in breach of the implied term of reasonableness. The “conduct” of the bank relied upon is particularised as “the conduct referred to in paragraph A of the written submission under the heading “Summary of Conduct of Bank (including representations) relied upon by PAWS”.” That happened to embrace, at least (as the description is not free from ambiguity) twenty-three pages of narrative submissions commencing with the “long association” between the parties over a period of one hundred and fifty years, the relationship between them in the “early 1970s” and the “early 1980s” followed by a description of events from 24 October 1986 to 19 July 1991. The only saving grace about particulars of liability provided in the proposed amendment was their confinement to the evidence that had been adduced in the proceedings. 277 In the ordinary course, before embarking upon a consideration of the amendment, I would have required a more conventional and unambiguous formulation of the group’s proposed contract case before determining the application and, that achieved, examined the bank’s objections based upon prejudice to it occasioned by the granting of any such amendment. 278 The approach I have decided to take is to examine the conduct of the bank in 1991 and following years in terms of its reasonableness in the context of:
“Additional facilities provided have resulted in this requirement no longer being met. At current lending level security cover needs to equate to $39.8M which equates to a shortfall of some $3.9M
I am confident that this situation can be resolved quickly on (sic) these figures do not include Thorpleigh or Kindon which should add a further $3.3M cover.”
279 That done, I propose to revisit the application to determine whether justice demands that some amendment should be granted and the group allowed to quantify a case of expectation loss. 280 I have chosen that course for the following reasons:
(b) the unique circumstances of the subject banker/customer relationship which had survived for a period of some one hundred and fifty years.
(a) the powers, rights and obligations of the bank under the express terms of its facilities, properly construed; and
281 The proper construction of the express terms of the 2 January 1991 facility letter, in my view, is the starting point in examining the bank’s subsequent conduct, as it represented the agreement reached with PAWS in relation to the additional facilities provided by the bank in 1990, as varied to accommodate the requirements of the group under its additional commercial commitment to the Coles contract. In order to understand the importance of the conversion of all major terminating lines to basic so as to provide basic facility terms for all major borrowings by the group, it is necessary to turn to the parties, understanding of that term. 282 The evidence of Wright was that basic facilities had no specific repayment date or dates: they were ongoing and repayment had been dependent upon the group’s cashflow. There had been no occasion prior to 1991 in which the bank had required a reduction in a basic facility in other circumstances. They were long term facilities with any review provisions being related to interest rates, and fee charges. Punch, Buckley and Meers gave evidence of the banking meaning of the term. The evidence of Punch was as follows:
(a) No court, in my view, should be insensitive to the financial and social consequences to the Wrights should they fail in these proceedings to the point where, I think, the Court should be quite certain when judgment is delivered in the matter that all reasonable avenues of relief open to the Wrights have been fully examined, consistent with extending fairness to the bank.(b) Limiting the consideration of a “contract” case in the manner outlined in the preceding paragraph will not trespass onto ground which has not been vigorously turned over by the parties in the group’s equitable estoppel case.
(c) In the event that the conclusion is reached that there were grounds upon which relief of some kind should be extended to the group, no prejudice to the bank, in my view, could arise that could not be cured by:
(i) providing the bank with the opportunity to be further heard on the question of the amendment and any liability it may have under any such amendment before making final determinations as to liability;
(ii) providing the parties the opportunity to adduce further evidence to enable the completion of a hearing on quantum;
(iii) an appropriate order for costs.
283 In re-examination he offered the further description:
“Q. In relation to that, you had indicated in the letter to Mr Wright or to the Wrights on 2 January 1991 that the $5 million referred to in this memorandum had in fact been switched over from terminating to basic, subject to annual review on 15 March 1991. That is right, isn't it?
A. That is correct.…
Q. And you recall the exchange between yourself and his Honour earlier today that basically meant in the normal course of events from past experience and the like to the Wrights, as you understand it, would have anticipated that facility to continue beyond 15 March 1991?
A. It was approved until 15 March 1991.Q. It wasn't approved to that date, there it was approved so that there would be a review on 15 March 1991?
A. On 15 March 1991.HIS HONOUR: That is not even correct. It was for an annual review on that date, which I certainly draw some significance from.”
(T952.13-18 … T952.35-50.)284 The reference to “tab 193” was one to a credit memorandum of Punch of 7 February 1991 which has an added significance referred to later in these reasons. The purpose of the memorandum was to obtain approval of an increase in limits, inter alia, “to … transfer terminating facilities to revolving”. As already noted in these reasons, the major terminating facilities had already been converted to basic in the bank’s letter to the group of 2 January 1991. However, the passage in the memorandum to which I drew Punch’s attention was the following:
“Q. Earlier today, Mr Punch, you agreed that there was a distinction in your mind between a facility which is basic terminated 15 March and basic subject to annual review 15 March. What was the difference to your mind?
A. If it is basic subject to annual review it is reviewed, to be undertaken at the date that the facility becomes reviewable, in which case it would be 15 March. If it is terminated, it is 15 March.Q. So basic terminated 15 March?
A. If there is an indication of terminating it would be normal to be repaid.HIS HONOUR: Q. I don't know if there is an issue about this. Loans described as basic, it is my understanding that those loans are ongoing, subject to annual reviews?
A. If they are ongoing, yes, but to the extent that they are reviewable on that date, and the reason for that is obviously things that can happen within a 12 month period.Q. Right, but in the ordinary course of events those loans are ongoing?
A. In the normal course of events, yes.Q. In fact I think if you look at your in tab 193, that is I think your credit memorandum, the last page, you use that terminology distinguishing terminating facilities with funding required on an ongoing basis?
A. That is right.THOMSON: Q. In that context, as you understand it, how long is the ongoing basis, or is that also subject to review?
(T987.46-988.26.)
A. Well, I think the date 15 March was the date that was put in place to enable the review of the position to be undertaken in the light of what was going to happen.285 It appears to have been Buckley’s understanding of the position:
“All facilities are regarded as basic … These lines were previously as terminating facilities. However due to changed circumstances … funding is required on an ongoing basis … Loan Approval Fee: $15,000.”
286 I think it is significant that Buckley had been made familiar with the terms and the nature of the facilities provided by the bank in its facility letter of 2 January 1991 and approved of those facilities and those terms. 287 Meers gave similar evidence as follows:
“Q. Do you see, "All facilities are regarded as basic subject to annual review" - that is as you understood the position?
(T1147.58-1148.3)
A. That is what it says.”288 The evidence of Meers in his statement of evidence-in-chief, which was admitted without objection, was to the effect that “in accordance with the practice and procedures … in place within the Bank (and subject to default), these facilities would be provided, until the occurrence of the next annual review, after which the Bank’s decision to maintain them would be reconsidered.” Meers added a further piece of evidence which I regard as irrelevant, namely:
“Q. I just want to ask you some questions about facilities first of all - you describe there facility terms and payment arrangements. Now, the overdraft and the bill facility are both described as basic subject to annual review?
A. Um-hm.Q. What was your understanding as to what that term meant, in terms of the bank's terms of payment or terms of the money advanced?
A. At that time as what it does now within a basic range the facility could move within the limit throughout the course of the year but it was subject to an annual review at the 12 month time frame.Q. It is essentially a revolving facility, is that right?
A. That is correct.Q. Other things being equal the customer would expect it to be rolled over at the annual review?
A. It was a question was it, the answer is, provided financial arrangements were in order.Q. It is possible is it not for the bank to have an arrangement that is basically subject to annual review and for it also to be a condition that repayments with rural borrowers would be made out of cash flow from time to time as the cash flow allowed?
A. Yes.…
Q. If you would look at the bottom of page 17 of your statement and over to the top of page 18, you see here dealing with the notion of basic subject to annual review?
A. Yes.Q. You remember at the very beginning of my questions to you I asked you whether, all other things being equal, a basic facility would continue to revolve or be extended to the point after each annual review?
A. Yes, I do.Q. And you agreed with me that it would?
A. Yes; subject, as I think I said at that time, to a financial ability of the customer to satisfy a lender, such as a bank, to maintain the obligations for the coming 12 months.Q. I want to explore very concerning the tension of briefly those two concepts. At the top of page 18, you talk about the bank having a complete discretion as to whether or not those facilities would be continued?
A. Yes.Q. And, if so, in what amount and on what terms and conditions and if the bank made a decision not to continue with those facilities they could be called up and demanded for repayment?
A. I don't know about the tension. What that infers, there were covenants - normally banks put covenants in the facilities and if there is a breach during the 12 months of that covenant, its creates an ability for the bank to demand repayment in part or full.Q. Unless those breaches are waived?
A. Waived, that's correct.Q. That is not an infrequent occurrence, is it?
(T1228.51-1229.20 … 1241.22 - 1242.1)
A. To be cured, no.”289 To the extent that the last quoted passage purported to construe the meaning of the phrase, I would reject it as a plainly wrong construction. 290 Clearly, as understood by the parties, in the circumstances in which the 2 January 1991 facilities were provided, “(a)ll facilities (were) regarded as basic” as “funding (was) required on an ongoing basis”. Further, I think that is the plain meaning of the terms ‘basic subject to annual review’ when viewed in the context of the surrounding circumstances referred to in that letter which led to the conversion of all major facilities to basic. I think that that is how the bank regarded its terms. 291 In the context of the relationship which had existed between PAWS and the bank, the clear intention of the bank was to provide an ongoing facility:
“I also intended to convey the Bank’s intention that following the occurrence of such ‘ annual review ’, the Bank would have a complete discretion as to whether or not those facilities would be continued and, if so, in what amount and on what terms and conditions and that if the Bank made a decision not to continue those facilities, they could be called up and demanded for repayment following the occurrence of that ‘ annual review ’.”
292 Clearly, in those circumstances, the default conditions could not be exercised capriciously. It is in that context that I consider the bank’s conduct should be viewed post 2 January 1991. 293 The justification for the conversion of the principal facilities to “basic subject to annual review” was described by Punch in the credit memorandum of 14 January 1991 as “due to changed circumstances whereby the Group has secured a contract to supply all Coles supermarket stores in NSW and Qld with chilled beef cuts funding is required on an ongoing basis”. 294 In referring to the November visit to Wallamumbi, Punch recorded that at that time “the Group’s overdraft liability increased substantially to accommodate increased cattle purchases occasioned by the Coles deal and payment of $122,000 Thorpleigh deposit”. He went on to record that the “excess was covered in the interim period by a temporary limit to a level of $3M (i.e. Basic $1M/Temp $2M) pending exact requirements being ascertained”. That is how the Wrights saw it. 295 As earlier noted, I think there was a degree of confusion within the bank, as reflected in this memorandum, which confused the requirements of the group in relation to the Coles supply arrangement with the “formal” transfer of the Melrose debt from Queensland. 296 The events of the first quarter of 1991 bear close examination, for it is a period in which the strongest evidence emerged of a materially different approach by the bank in the treatment of the group account. The credit memorandum of 14 January 1991 appears to be a belated submission by Punch in relation to the major changes which were reflected in the terms of the group’s facilities in the 2 January 1991 letter. It is noted in the credit memorandum as follows:
(b) subject to:
(a) during the continuity of the purpose for which it was provided;
(i) there remaining, in the bank’s opinion, adequate security cover for its loan;
(ii) the bank’s continued confidence in the long term viability of the group’s underlying enterprise;
(iii) the group’s capacity to maintain, in the long term, interest repayments as agreed upon from time to time;
(iv) the default conditions of the loan; and
(v) the commercial capacity of the bank to continue its facilities in place;
297 I have some difficulty in accepting the accuracy of that statement. Punch’s credit memorandum of 14 January 1991 ran into something of a wasp’s nest in the form of the reaction to it of the credit sector of the bank. 298 During the period that Punch had the responsibility in the business banking sector for the group’s account, the structure of reporting involved the following: Punch was one of five senior managers reporting to the regional executive of business banking who, from the end of 1990, was Buckley. At the same time, lending decisions were subject to review, where lending exceeded the senior manager’s discretion, and to approval by the bank’s credit department, consisting at that time of PJ Lucas (Lucas), WT Rodricks (Rodricks), Raymond Charles Brennan (Brennan) and above them, Alistair Fotheringham (Fotheringham). References to the credit department would be direct, with copies being provided to the regional executive. 299 On 23 January 1991, Lucas submitted a memorandum to Punch in the following terms:
“Delay in formal advices is regretted, however, information sought from customer as to exact amount and allocation of increased funds has only recently been received.”
300 It is difficult to criticise any of those concerns. The only problem, in my view, is that those concerns were completely at odds with the relationship which had been created by the bank with the Wrights to that point and, in my view, with the terms of the approval of facilities of 2 January 1991. 301 From the various handwritten notes on the memorandum, it can be established that it did the bank rounds. It clearly reached the attention of Fotheringham and Buckley. The general tone of the comments is caught by one note as follows: “This is not good enough”. 302 That tone was taken up by JV Helisma (Helisma), a senior credit inspection manager, in his credit inspection comment, undated, but made some time after 14 January 1991 and prior to 20 February 1991. 303 Its timing is fixed by Buckley as having been produced shortly after the 15 November 1990 meeting. I think that is clearly incorrect. 304 At the time of this credit inspection comment, Wright was still pursuing, it seems with the concurrence of Punch, involvement in a Lane Cove development which, if it was to proceed, would require further financial assistance by the bank. This did not go unnoticed by Helisma. His “Summary/Recommendation” was in the following terms:
“The proposal as presented has a number of detracting features viz:
- The connection has undergone a rapid expansion recently with facilities almost trebling in 12 months.
- No capital contribution by Wright in purchasing Thorpleigh (indeed most other properties recently acquired have been fully debt funded).
- Proposal to convert facilities to revolving contradicts previous approval conditions which sought implementation of amortisation program. Mr. Wright has a record of not adhering to reduction arrangements.
- Unaudited 1989 financials presented with no interims.
- Previous poor record in achieving forecasts.
- Cashflow forecast presented indicates only small surplus with no sensitivity analysis.
- Short term of Coles contract and ability to terminate within 3 months. Can Wright deliver? Has the contract been vetted? Maybe independent assessment is appropriate.
- Experience with Melrose Meats also raises questions. Extent of financial difficulties appears to have worsened from previous advices.
- Volatility of industry”
305 I think it is fairly safe to say that Helisma’s view that Wright “should be told in the strongest terms the Bank does not condone further financial commitments ...”., particularly referring to the Lane Cove development proposal, to a large extent went unheeded in the following dealings by the bank with Wright. I think the same comment should be made of the recommendation that Wright “should acknowledge in writing no further major expenditure other than normal operating costs (would) be incurred without first the specific written confirmation from the Bank”. That message does not appear to have reached Wright. 306 Helisma’s comments, I think, were justified by the fact that the bank records include diary notes signed off by Vaughan and Punch, dated respectively 31 January and 4 February 1991, recording further involvement of the bank in the Lane Cove development proposal involving Wright. 307 Notwithstanding Helisma’s recommendation that the group account be downgraded to risk C, the credit memorandum of Punch of 7 February 1991 recommended retention of risk grade B, the credit memorandum being submitted in relation to a proposed increase “in limits to assist with property purchase, transfer of Melrose Meats … facilities and transfer of terminating facilities to revolving”. 308 I regard this memorandum as corroborative of the Wrights’ case so far as it was asserted that the group had enjoyed the warm support of the bank in the major decisions taken by the group in 1990 and that this support continued into 1991 and that it was unknown to the Wrights that that support was under severe scrutiny within the bank’s credit sector from the beginning of 1991. 309 In the body of the memorandum, the opinion was expressed that the risk grading B remained appropriate and, as to terms of the facilities, it was stated that they were “regarded as basic subject to annual review”. It was noted that the major facilities amounting to $21,000,000 had previously been terminating facilities but that “due to changed circumstances”, referring to the Coles contract, the “funding (was) required on an ongoing basis”. 310 In the general remarks that accompanied that credit memorandum, the group’s activities and account were described in terms which did not reflect the highly critical comments of the credit sector and could be described as strongly defensive of the group. It reasserted the safety of the proposed lending limit of $30,600,000 as reflecting “a total security/loan ratio of 164.2%”. 311 On 27 February 1991, the annual review of the group account took place. It is difficult to reconcile the bank’s record of this review with the stance taken by the credit sector. It noted, without any apparent adverse comment, that the “Group (was) studying the idea of leasing an additional 10,000 acres to assist with self sufficiency with regards Coles requirements however should purchase of Kindon … proceed then this would not likely eventuate”. It was noted that the feedlot activities of the group were such as to create significant difficulty in correctly accounting in a way which gave “a reliable guide as to the profitability of the operation”. This, I consider, lent confirmation to the substance of the Wrights’ evidence of their dealings with the bank at that time. I think it was also confirmation of the group’s lack of grip of the full cost implications to the group, as distinct from Esrolem, of the Coles contract. 312 The major demand upon the group imposed by the Coles arrangement was noted as follows:
“At time of writing, memorandum dated 14/1/91 has been submitted to CMC recommending further increase to $30.663M.
The major concerns regarding this customer are seen to be the level of debt and present and future servicing. Critical Assessment and close monitoring of cash flow is essential (actuals against budgets) and it is considered customer should acknowledge in writing no further major expenditure other than normal operating costs will be incurred without first the specific written confirmation from the Bank.
File also evidences Director is involving himself in proposed or actual property developments (e.g. Lane Cove) and it is considered he should be told in the strongest terms the Bank does not condone further financial commitments at this stage irrespective of whether financing is sought from ANZ or otherwise. It is not a question of whether we finance or not, rather, can the Directors manage the additional servicing and inherent risks?
Certainly it is considered the customer must now consolidate and not enter into further property purchases/large capital improvements etc.
Possible avenues to enable reduction of debt need to be fully explored.
Acknowledgment of increased lending should be obtained from all guarantors/mortgagors.
30/6/90 Balance Sheets and up dated budgets/cashflow forecasts are to be tabled.
Please respond to these comments by report to CMC by latest 20/2/91.
Down grade risk to C.”
313 Far from recording any dissuading of the group from further financial commitments, it was recorded that Wright was considering joining in the purchase of a failed crop dusting enterprise. 314 At the annual review meeting, it was the evidence of Wright that he drew to the attention of Punch the bank’s confusion between the need for temporary additional facility on the overdraft with the transfer of the Melrose debt from the Queensland section of the bank. This evidence was confirmed by David Wright and, according to the Wrights, Punch acknowledged that there had been a mistake. While Punch does not accept that there was any confusion within the bank over the purpose of the required additional funding, nor that he acknowledged that there was any mistake in that regard, I am reasonably satisfied that there was some confusion within the bank and that this was brought to Punch’s attention at the review meeting. 315 There can be no doubting the seriousness with which the state of the group account was viewed within the bank when regard is had to the memorandum of 12 March 1991 from Brennan to Buckley as regional executive. In that memorandum he noted the substantial increase in facilities over the previous twelve months and, while accepting that the safety of the facilities did not appear to be in question, expressed concern over the effect of the volatilities associated with the rural industry. He saw an increased need to “closely monitor the performance” of the account and criticised the absence of “up-to-date audited financials”. 316 Of particular significance, I think, was his expression of concern as to the “short term nature of the new Coles contract”, observing that Coles were “well known for “squeezing” suppliers margins”. It was his view that a “full and thorough review” was required by 31 March 1991. He declined approval of the transfer of the facilities from terminating to revolving and expressed disappointment that additional facilities had been approved by Punch, notwithstanding the failure of the group to retire the $5,000,000 bill facility in November 1990. 317 Brennan’s concern about the precarious nature of the Coles arrangement was timely. By letter to Wright of 15 March 1991, Coles expressed dissatisfaction with the arrangement and notified them “that as from two weeks from Monday 18th March 1991, our company will cease purchasing boxed beef from your company”. To the credit of Wright, he wasted no time in informing the bank of this development. As it happened, shortly after that time, the notice of termination was withdrawn as confirmed by letter of Coles to Wright of 4 April 1991. 318 The credit memorandum of Punch of 12 April 1991, in my view, is further corroboration of the Wrights’ evidence that they had been given no warning of any adverse position being taken within the bank to the group account up until June 1991. I think the memorandum was expressed in terms which fully supported the group’s operations and treated the loan facilities as safe with a security to loan ratio of 173%. His comments on the credit sector’s hindsight remarks of 12 March 1991 were, I think, very defensive of the group’s position. The memorandum also responded to Helisma’s ‘formal comment’ of January 1991 and, again, the response was defensive of the group account. 319 So far as I have been able to ascertain, no further communication went to the group to inform it that the principal facilities were regarded as terminating and that the approval of them as ongoing had been withheld by credit. Of Helisma’s suggestion that some written acknowledgment should be obtained from Wright that no “further major expenditure” would be incurred without bank specific approval, Punch advised that such an acknowledgment was unnecessary as Wright was “aware of Group position regarding debt”. 320 The concern within the bank would not have been alleviated by the provision of the group’s financials to the end of March 1991, which showed a year to date deficit of $958,000. 321 Brennan’s response to the credit memorandum of 12 April 1991 is that of 6 May 1991 to Buckley as regional executive. If one puts aside the terms of the bank’s approval of facilities of 2 January 1991, I regard the response of Brennan as essentially reasonable, given the extent of concern within the bank as to the trend reflected in the group’s activities over the previous twelve months or so. He acknowledged that there was “no prospect of (the facilities) being amortised in the short/medium term” as the debt had been incurred for property purchases, improvement and herd build-up. He also accepted that the fulfilling of the Coles arrangement would impose further demands on the funding in the form of working capital. 322 Not surprisingly, Brennan expressed some concern that the bank could be asked to provide an additional $10,000,000 to assist acquisition of the outstanding Wright interest in Kindon “and increased herd restocking”. In this regard he stressed the importance of having a “clearly defined formula of how much working capital (would) be available for herd restocking”. He expressed alarm at the absence of signed and audited financials for the year ended 30 June 1990 and of anything to explain a “$3.5M trading loss for the Y/E 30.6.90”. He noted with some justification that it had not been demonstrated to the bank “what the Coles “contract” (was) worth to the Group.” He stressed the need for the bank to “urgently address” the following: “How this Group’s debt (was) to be appropriately funded”; a “detailed assessment of (the group’s) future funding requirements”; “comprehensive financial analysis”; and a “detailed safety assessment, … to include revaluation of all properties by an independent professional valuer”. 323 I think it is reasonably clear from the record of the conversation between Punch and Wright of 17 May 1991 that even at that point Wright had not been informed that the terms of the letter of approval of 2 January 1991 had run into opposition within the bank, particularly in regard to the conversion of the facilities to basic. The Wrights were only informed that increased facilities of $2,000,000 were to be limited to 30 June 1991. 324 It was not until 21 June 1991 that the bank confronted Wright with the changed approach to the account brought about by the criticism of the credit sector. Somewhat ironically, I think, the facsimile of 21 June 1991 was marked “urgent”. The facsimile was in the following terms:
“Between March and December 1991, Group will require some 22,000 cattle. From their own resources Group can provide 8,000 requiring a further 14,000 from the market. As previously discussed these purchases will be spread over a 3 month buying program. Total amount required to assist is $5M.”
325 The events immediately preceding that facsimile, I think, are worth noting. In the second half of May there were a number of communications or meetings between the Wrights and the bank in which the Wrights resisted the suggestion which had emanated from the credit sector that the group submit its affairs to an independent financial investigation. As appears later in these reasons, that resistance led to unfortunate repercussions in the second half of 1991. 326 Wright was also in discussion with Punch and Vaughan concerning the possibility of the group purchasing additional property in the form of the outstanding interest in Kindon; a south west Queensland property known as Milo, listed for auction and expected to bring about $3,000,000, and another property known as Dynevor Downs, also situated in south west Queensland. It was the evidence of the Wrights that these matters were raised without any intimation from the bank that additional borrowing would not be tolerated and I accept this evidence. 327 There was a diary note of Vaughan, signed off by him and Punch, of 21 May 1991, which recorded the fact that at a meeting that day with Wright, he had informed them of the listing of Milo Station for auction. That is recorded in the following terms:
“It is appropriate given the current circumstances with regards your facility level, that I raise a number or specific concerns being felt by the Bank. This is particularly important as we are confused as to the Group’s future direction concerning the Coles relationship, a possible Cargill relationship and the property acquisition strategies. Our major concerns are as follows:-
- Group facilities are now at a considerable level i.e. $32.6M. Whilst I acknowledge considerable progress has been made with regards to your accounting system, the Bank is still not in a position to accurately assess the Group’s operations. Specifically we require the provision of audited signed consolidated accounts encompassing the whole of P.A. Wright’s operation. Additionally, cashflows (budgets) and monthly monitoring should also be provided on a consolidated basis. Far greater emphasis on quality financial information is needed, especially given the 30th June, 1990 $3.584m loss.
- In the past budgets have not been met. Again I appreciate there have been good reasons for this, however, it does not provide a good track record to present to our Credit Department.
- Monitoring information as previously requested has not been provided. It is now considered a firm requirement that consolidated actual results for comparison to budgets be provided no later than 3 weeks after the end of each month.
- We are also aware that the Group is continuing to purchase backgrounding cattle. While we appreciate the potential future benefits to the Group from this activity, until we can be convinced that this is a profitable exercise, we cannot offer our support. In any event one of the approval conditions for the additional $2M granted last month was that this temporary increase is to expire on 30th June, 1991. We are not in a position to extend this approval and therefore expect this obligation to be honoured.
- The Milo financing request was unsatisfactory in terms of timeliness of data and supporting commentary regarding strategies and how the operation was to be incorporated into the Group’s business plan. It was not appropriate to just assume the Nockatunga date could be superimposed.
In summary, the Bank is concerned by the speed of the Group’s developments, particularly given the inadequacies of the accounting system. We have been virtually asked to support the Group on a security basis alone because of the inability to provide supporting cashflow information.
Obviously, as in the past, we are more than happy to continue to support Group’s endeavours. However, the time has now come whereby we need to take stock of the situation before further commitments are made.
Please feel free to call me to discuss any aspect of this letter.”
328 If Wright had been informed that his borrowing days were over, this is the record where one would expect to have that communication noted. The diary note reflected the trouble the Wrights were experiencing in providing reliable financials to the bank, mainly as a result of the difficulty in costing the effect of the supply to Coles. This record confirmed the evidence of David Wright that the group had been unable to put in place an “appropriate methodology for producing monthly accounts in the feedlot, which … (had) held up the production of meaningful reports for the group”. This information was given to the bank at a meeting of 27 May 1991 at Armidale which was attended by Punch and Vaughan, on behalf of the bank, and Wright, Phillip Wright, Nicholls, Eric Bruce Hudson (Hudson) and David Wright, on behalf of the group. Hudson had been engaged by PAWS as a financial controller in September 1990 whose “prime responsibility”, initially, was “to develop a computer model to enable PAWS to track livestock produced by it, or acquired by it, and subsequently placed on feed for the purpose of slaughter and supply to … Coles.” 329 It is this state of affairs that has led me to the conclusion that the group’s involvement with Coles moved far too quickly for its financial health and, with the admitted inability of the group to provide “meaningful reports” to the bank, it is difficult to see how the group could be regarded as having the costs to the group of the Coles supply under control. 330 There followed a meeting with Punch and Buckley at Wallamumbi on 11 and 12 June 1991, they having attending the property on the occasion of the dispersal sale of the stud cattle. It was the evidence of Wright and David Wright that the possibility of the group acquiring Milo or Dynevor Downs and of the Wrights’ intention to inspect those properties was raised with Punch and Buckley. David Wright, in fact, was at Dynevor Downs on 21 June 1991 when Hudson relayed to him receipt of the bank’s facsimile of 21 June 1991. According to the Wrights, neither Buckley nor Punch raised any objection to their proposal to visit those Queensland properties and, more particularly, there was no suggestion that the bank would not countenance further borrowings by the group. 331 Buckley’s version of his attendance at the stud dispersal sale does not accord with the recollection of the Wrights. He disputed that there was any reference to the 1988 strategy or the group’s ten year program. More particularly, in relation to the Milo and Dynevor Down properties, it was his recollection that in discussion on the possible acquisition by the group of those properties, he “cut the presentation short”, having had a private aside with Punch highly critical of the suggestion that the bank should consider 100% financing of such an acquisition. 332 I think it is necessary to look at the substance of the Wrights’ evidence rather than the detail, given the absence of contemporaneous records and the effect of the lapse of time upon the memory of those involved in the conversations. However, mindful of the fact that inspection of the properties by the Wrights followed the stud cattle sales, I doubt that the bank voiced any opposition to the proposed inspection with the view to the group exploring further acquisitions. 333 Wright, David Wright and Phillip Wright had inspected Milo on 15 and 16 June 1991. On that trip they were accompanied by a real estate agent and Nicholls. Immediately following that inspection, David Wright submitted an application to the bank for a further facility of $3,000,000 to fund the acquisition of Milo and related livestock. Accompanying that application was a financial projection which David Wright described as “conservative” and, on a stand alone basis, reflected a profit in every year over a 13 year forecast, save for the year 1992. It also showed extinguishment of debt by 2001. 334 While it is clear that no commitment had been made by the bank to provide additional finance for the acquisition of Milo Station, it is plain, I think, that the Wrights had not been informed of the hardened attitude which had developed within the bank and which would have made the inspection of Milo Station and Dynevor Downs pointless. 335 Against that background, the terms of the bank’s facsimile of 21 June 1991 may be contrasted. It is not surprising that Wright and David Wright in separate dealings with the bank, upon receipt of that facsimile, expressed their strong indignation to the change in attitude by the bank as reflected in the facsimile. 336 On 22 June 1991, Buckley visited Wallamumbi, while travelling north on vacation with his family. Wright took the opportunity of taking him to task on what Wright saw as the injustice of the requirements of the bank which he considered threatened the ability of the Wrights to supply Coles under the current arrangement. David Wright travelled to Sydney and had a meeting with Punch at which similar concerns were expressed. It is plain enough that neither meeting assisted the group’s cause. 337 In the face of that situation, the group explored, apparently without success, the possibility of replacing the ANZ facilities with a borrowing from the National Australia Bank. 338 An acrimonious meeting took place on 1 August 1991 in Armidale attended by Wright, David Wright, Philip Wright, Nicholls, Robertson, Hudson, Buckley, Armitage, Vaughan and Keith Skinner (Skinner), a partner in Deloitte Ross Tohmatsu (Deloitte). Skinner was present, at the request of the bank, preparatory to conducting an independent investigation of the group’s affairs. It was at this meeting that Buckley threatened to appoint a receiver if Wright did not accede to the bank’s requirements. I doubt whether the bank can be fairly criticised for insisting upon such an investigation: the way in which it was handled by Buckley, I think, left a lot to be desired. 339 Nicholls, Robertson and Hudson corroborate the thrust of the Wrights’ evidence of this meeting. Each of those witnesses gave evidence in a straightforward way and, I thought, to the best of their recollection. Notwithstanding some of the detail of Hudson’s statements of evidence-in-chief, I thought his memory in the witness box did not match that level of detail. Robertson may have been disposed to advocate the group’s case. However, I found each of Nicholls, Robertson and Hudson to be frank in response to cross-examination. 340 I accept that, at this meeting, the Wrights remonstrated with the bank’s representatives over the about-face of the bank in relation to the group account. They contrasted the bank’s then current approach with the past support of the group’s 1988 strategy. In general terms, that fell on deaf ears. Buckley voiced the bank’s insistence on the appointment of Skinner to conduct an investigation in terms that were far from conciliatory. He described the history of the group account in deprecatory terms which seem, in part, unjustified and, I think, antagonistic. He could not be accused of a lack of clarity in conveying the level of the bank’s insistence on the appointment of Skinner: the group either agreed to it or faced the appointment of a receiver. 341 In the context of Wright’s resistance to such an appointment earlier in 1990, there was justification for the expression of some firmness in setting out the bank’s requirement which, in my view, was a reasonable one. 342 On 9 July 1991, Buckley had communicated with Wright by facsimile in which he stressed the importance which the bank would place upon Skinner’s evaluation of the group’s performance. In that facsimile, Buckley set out the bank’s requirements which, I think, were unexceptional in the sense that they concentrated on the much improved level of financial reporting by the group. 343 The evidence of David Wright was that the bank did not understand or fully grasp the detail of the financial information provided to them, particularly following the meeting of 27 May 1991. However, I have no doubt that the level of financial reporting by the group, particularly in late 1990 and during the first half of 1991, had been inadequate, mainly due to the difficulties in identifying the costs to the group associated with the requirements of the Coles contract: particularly was that so in relation to the costs of feedlotting and of purchase of cattle where the group’s herd did not satisfy the Coles specification. 344 Buckley described in the witness box his sympathy with the Wrights’ position, and the unsavoury nature of the task confronting him in protecting the bank’s interests in relation to the group account. However, I think the evidence of the Wrights of their dealings with him, particularly from 1 August 1991, reflected little of that attitude. 345 Where I think the bank is open to criticism is in the stand taken in the facsimile of 21 June concerning the group’s funding requirement for purchasing and “backgrounding cattle”. In that facsimile, the Wrights were notified that the bank would not support that requirement and that the temporary facility of $2,000,000 was required to be retired at 30 June 1991. Given the circumstances in which that facility was initially raised, in my view, that requirement was both unreasonable and contrary to the express basis upon which it had been provided by the bank. As it happened, that requirement was relaxed in circumstances that I think reflected much of the way in which the bank, thereafter, handled the group account. 346 In a memorandum from Punch to Lucas of 3 July 1991, Punch sought approval for the extension of the $2,000,000 temporary bill line, in addition to “further temporary assistance of $550,000 for a two week period expiring 15/7/91 pending receipt of full CM by no later than 15/7/91”. It was noted that the additional assistance was required for “urgent purchases of cattle” for the Coles contract. I think the general terms of that memorandum reflected Punch’s continued sympathy with the group’s objectives. One must take the terms of his facsimile of 21 June 1991 as an expression of the credit sector’s view of the group account. 347 The response of the credit sector to Punch’s memorandum is a strong reflection of the gulf between the way in which the account had been handled by the bank in dealings with the group prior to June 1991 and the credit sector’s view of the account. Lucas’ memorandum to Punch of 4 July 1991 is set out below to that point:
“David has his eye on Milo Station in south west Queensland. Auction date is 26 June 91, expected price is $3 to $4M. David believes it would compliment (sic) the Coles business because it could carry 20,000 breeding cattle. He wants to take (Punch) on a trip to view this property.”
348 In substance, I regard that memorandum as unreasonable, while accepting the legitimacy of the bank’s concern over the failure of the group to satisfy the bank of the financial benefit to it of the Coles contract. 349 However, in a manner which was somewhat typical of the way in which the bank dealt with the group account, further accommodation was provided to the Wrights in the following circumstances. The overview comment of Lucas, as senior manager, and Brennan, as chief manager of credit, of 16 July 1991 on the group’s request for further accommodation was in the following terms:
“Your request for further temporary assistance of $550K is declined. The extension of the CBAD facility of $2M expiring 1/7/91 has already been rolled over until 31/7/91 with the authority of SMBB. We do not confirm your action but it is noted.
Mr Wright has once again demonstrated his absolute contempt for arrangements with this Bank. The temporary CBAD facility of $2M was to be repaid from the sale of its stud cattle. Without consultation with us he has elected, unilaterally, to utilise these proceeds to purchase other cattle and having already committed the proceeds, tells us, only upon maturity, that his facility repayment will not be effected.
Behaviour such as this puts at risk with us Mr Wright’s business ethics and credibility.
We are not satisfied that Mr Wright’s contract with Coles is profitable nor indeed any other part of his business activities yet we still do not appear to have had these matters investigated.
We will await your further advices, due no later than 15/7/91, to decide what further action may be required with this account.”350 The approval facsimile of 19 July 1991 was in the following terms:
“We reluctantly support the increased limit facility but only to ensure that Mr Wright’s business reputation within the livestock industry is not impaired to the detriment of our involvement as his banker. The increased facility is to be cleared by 26/7/91 in line with CFF and Mr Wright is to give us his written undertaking not to undertake any further cattle/property purchases or other major capital investments until we have DRT’s investigating report.”
351 By that approval, the overall facilities of the group totalled $33,033,000. Wright challenged the condition of approval requiring his undertaking not to purchase any further cattle pending the Deloitte report. In this, I think, his stand was reasonable. However, notwithstanding my criticism of the bank’s approach to temporary funding of cattle purchases for the Coles supply, the evidence is clear, I think, that the stand taken by the bank in relation to that matter did not impede the flow of beef to Coles. It appears that the additional $400,000 temporary facility approved on 19 July 1991 was not drawn upon and, as at 19 July 1991, the evidence suggested that the Wrights had sufficient background cattle to service the Coles contract until the end of the year. 352 That statement needs some qualification in that there remained the possibility of the need to purchase additional cattle when the group’s herd earmarked for the Coles contract did not meet specification. However, the tightening of credit by the bank did not cause any interruption of the supply of beef to Coles: a matter which is addressed later in these reasons. 353 At the end of July 1991, Punch relinquished control of the bank’s rural portfolio, although he remained within the business banking sector in which he reported to Buckley. As a result, he did not have any direct involvement with the group account and that position remained so until September 1993 when he resumed involvement with the account following another change of portfolio responsibilities. 354 Commencing in August 1991, Armitage assumed responsibility of the account and, I think, in line with the approach to the group account adopted by Punch, he sought and obtained approval for an increase in the overdraft limit to $3,000,000, representing an increase in $650,000 as recorded in the diary note of 2 August 1991. 355 Wright bowed to the bank’s insistence upon an immediate review of the group’s affairs by Skinner following the 1 August 1991 meeting and that report was produced on 2 September 1991. It is the contention of the group that the devotion of the Wrights’ time to the provision of information for the purpose of that report deprived them of valuable negotiating time with Coles’ representatives for the continuation of supply on a long term basis. That is also addressed later in these reasons. 356 The Deloitte report, on balance, I think was favourable to the group’s position. For the purpose of the report, Deloitte prepared an “estimated consolidated statement of assets and liabilities as at 30 June 1991”. That was done in order to assess the bank’s security position and, in summary, the statement indicated a realisable value of $58,460,136 compared with the then indebtedness to the bank of $30,980,290. That statement excluded the Kindon interest of the group. 357 It was noted that the statement based property values “at an estimated realisable value equivalent to the latest fair market valuations conducted by the Bank”, while livestock was included “at current market value”. The report noted that Wright viewed the statement as an undervaluation of assets by approximately fifty per cent. A “reconstructed estimated livestock trading profit and loss for the 12 months to 30 June 1991” was prepared by Skinner which indicated a loss of approximately $2,500,000. 358 Similarly, a projected profit and loss for the twelve months ended 30 June 1992 was constructed which showed a loss of approximately $220,000 “projected on substantially reduced expenses” amounting to approximately $1,190,000. 359 In commenting on the ten year forecast provided by the group, it is significant, I think, that Skinner considered that although the model had not been examined in detail, it demonstrated “that after breeding herd numbers reach targeted levels and offspring are sufficient to turnoff say twenty to twenty one thousand head per year sufficient profits would be generated to enable the Group to repay the majority of its existing indebtedness over the ten year period”. 360 Cashflow projections prepared by Skinner showed a peak overdraft requirement of $3,750,729 which represented an excess over the then current overdraft facility of approximately $1,400,000, with no allowance for further livestock purchases from August 1991 onwards. In that regard, the group provided Skinner with projected requirements totalling $3,190,000 arising during the months of March, April and May 1992. I think it is clear from the report that the feedlot operation was still causing difficulties to the group in implementing an adequate system of reporting. 361 After recounting the group’s management strategy, the view was expressed that the “Group’s strategy of attempting to eliminate adverse movements in livestock numbers and prices and to control meat product prices is sound”, but sounded a warning that risk “must be associated with having predominantly one customer, Coles”. It was the general view that the “Group may experience difficulty in servicing its current indebtedness if any adverse movements to budget (were) experienced or if profitability (was) not enhanced in the forecast period through its strategy of increasing its business by strengthening its relationships with Coles and Cargill. There (was) little or no scope to absorb any adverse contingencies that may arise”. 362 In my view, the report furnished insufficient basis for the bank’s withdrawal of support, for example, by reversing basic facilities into terminating facilities or by withholding funding of a temporary nature necessary to meet the vicissitudes in the financial requirements to fund the Coles supply. 363 In fact, in line with the report, a credit memorandum was submitted by Armitage on 9 September 1991, the purpose of which was expressed as seeking an “increase in credit limits beyond own credit approval discretion and update recent developments”, presumably referring to the Deloitte report which was attached to the memorandum. In “general remarks”, the “Current Position” contained the following observation:
“Approval of extension of $2M funding (originally due to be repaid 30/6/91) until 31/8/91. This $2M has been drawn as $1.2M on overdraft and $800,000 on Commercial Bills.
Approval of a further $400,000 facility to be drawn as overdraft, until 26/7/91. Written confirmation from P A Wright & Sons Pty Ltd undertaking not to undertake any further cattle/property purchases or other major capital investments until the Deloittes investigative report is to hand are conditions of approval. Loan approval fee is $4000.”
364 In an observation concerning the “Future Direction of Group”, Armitage summarised the Wright’s position, in my view accurately, as follows:
“Obviously the major concern of the Bank is not as to safety of its exposure in the short term … but the long term viability of operations ...”.
365 The total limit of borrowings proposed in the memorandum was $34,057,000. I think an example of Armitage’s “moving target” was the fact that at this time Wright was still involved in negotiations with Cargill which contemplated the supply by the group of up to 100,000 head of cattle per year which would require agistment on properties, transport to abattoir, boning and export to the United States, in addition to supplying the Coles requirements. 366 Brennan’s overview comment of 24 September 1991 in relation to his credit memorandum, I think, was reasonable and was reflected in the bank’s letter of offer of 30 September 1991. 367 I think my view of the Deloitte report as being, on balance, favourable to the Wrights is reflected in Brennan’s overview comment. While regarding the “request for further working capital assistance (as) most unwelcome”, Brennan acknowledged that the Deloitte report confirmed that “the Group (remained) viable and that its strategy of vertical integration (was) sound”. At the same time he noted the adverse aspects of the report, particularly in relation to the vulnerability of the group to adverse contingencies and the inadequacy of financial reporting systems as commented upon in the report. 368 The letter of offer of 30 September 1991 offered overdraft facilities of $2,000,000, commercial bill lines totalling $28,800,000 which, together with other facilities, including a $2,000,000 overdraft facility for Esrolem, brought the total limit to $34,310,000. The overdraft facility of $4,000,000 was to be reduced to $3,000,000 on 15 November 1991 reducing to $2,500,000 at 1 January 1992 and was subject to review on 13 June 1992. 369 The letter of offer was qualified by a further letter from Armitage to Wright of 1 October 1991, informing him that the letter was subject to the approval of the credit department. This tension between business banking and the credit department, I think, was most marked at this period and it brought forward a memorandum of Armitage of 3 October 1991 in the following terms:
“The biggest difficulty with this connection is that since 1989, substantial expansionary activity has not been followed by a period of consolidation to enable performance to be monitored accurately. Mr Wright is not however the type of individual that sits on his hands for too long and the group is therefore a constantly moving target.”
370 It was not until 24 October 1991 that the bank formally advised the Wrights that the Melbourne credit department had confirmed the terms of the facility of 30 September 1991. 371 While not underestimating the difficulties which the bank’s control over borrowings visited upon the group, it is my view that it had no lasting effect upon the group’s ability to run the properties under its control and to service the Coles contract. As earlier noted, the group’s case is that Wright’s commitment to the preparation of the Deloitte report and the behaviour of the bank towards the account in this period proved fatal to negotiations with Coles. This is addressed later in these reasons. 372 I think it is a matter of considerable misfortune that towards the end of 1991 the group’s operations began to be affected by dry conditions which developed into a persistent and severe drought. Armitage adverted to this in his credit memorandum of 9 September 1991 in which he noted that “(d)espite drought proofing of total operation continuation of current dry conditions will depress the cattle market generally thereby impacting upon the pastoral profitability”. 373 On 29 October 1991, Hudson forwarded the group’s monthly report for September 1991. In that report it was noted that sales from feedlots to third parties were well below budget “due to depressed market conditions”. It was further noted that “Administration and overhead expenses for P.A. Wright exceeded budget for the month mainly due to fodder purchases to cope with the worsening drought”. Clearly the effect of the drought was a major factor in the inability of the group to effect the required reduction of the overdraft on 15 November 1991. 374 On 1 November 1991, Hudson provided Armitage with a cashflow projection for November with a commentary which noted “market uncertainty” and the necessity to re-estimate budget forecasts to increase costs of “feed and cartage of feed, for drought affected stock on New England Properties”. The commentary closed with advice that the overdraft reduction could not be met as a result. 375 There followed a meeting in Armidale on 11 November 1991 attended by Wright, Phillip and David Wright, Nicholls, Hudson, Robertson, Armitage and Vaughan. It covered a wide range of topics and it is clear from the record of the group’s feedlot activities that the drought was having an adverse effect on the group’s trading. The audited accounts which were required four months after year’s end were not expected until “end December 91 at the earliest”. In relation to the overdraft, it was “agreed to delay a full discussion of the cash flow until (the) next meeting due 26/11/91”. 376 A follow-up facsimile of Hudson to Vaughan of 20 November 1991 noted drought costs of cartage and feeding in the vicinity of $200,000 to mid November. While the overdraft was reduced within the required limit as at 20 November 1991, Armitage’s memorandum of that date anticipated an excess position arising due to the drought conditions prevailing. 377 The parties met again on 26 November 1991 and it is clear from the information provided by the group that the drought had pushed feeding costs well beyond budget by some several hundred thousand dollars. Throughout this period, negotiations with Coles and Cargill were continuing and on both fronts the bank was being kept informed by the Wrights. 378 As at 9 December 1991, the Wrights had refrained from signing the bank’s previous letter of offer and that was replaced by a fresh offer of 9 December 1991 for acceptance by Wright. That was accompanied by a note from Armitage which observed that the previous terms had been maintained, except as to a requirement in relation to the obtaining of a further independent accountant’s report. The Wrights were advised that business banking was
“I refer to the above and your comments thereon requesting clients to refrain from issuing cheques until approval or otherwise is obtained from DHQ.
It is important to note the following:
i) CM was submitted 9/9/91 seeking an increase in facilities to cover essential working capital requirements with expected peak of $3.75mill to reduce by 15/11/91 from trade receipts. Almost four weeks have passed since submission of advices and we cannot expect a client to close down his operation for that period of time given the nature of the operation.
ii) It is difficult to inform a group that is vertically integrated to stop purchasing the stock required to maintain future sale commitments. This is particularly important given that stock acquired take some 90 days to be fattened and processed for sale to Coles. Should client stop purchasing it will create a substantial gap in their throughput capacity and cattle cannot always be purchased to fill those gaps at a later date. Additionally, this would have an impact on the overall profitability of operations through non utilisation of the groups substantial asset base.
iii) The relationship with this long standing group has become severely strained due to our inability to come to grips with the factors that influenced the substantial change in the direction of this group. This change in direction/strategy commenced in 1988 and the full impact of those changes were not fully understood by the Bank.
Additionally the current (1991 FYE) trading losses have been alluded to in early 1990 yet substantial growth has been supported by the Bank to date.
Client is therefore of the opinion that we do not truly understand his business, a position which we can only hope to improve over time.
We are now in a position whereby we believe we are able to control the growth of the client, and they have been informed that if we cannot support that growth we will advise our situation at the earliest opportunity. Client has no difficulty with this concept and to use his words “that’s all I want”.
In summation it is felt that the position we are now faced with has been brought about by a number of factors not all of which can be blamed on the client. Accordingly we seek an urgent response to our CM of 9/9/91 to enable client to be advised of our decision and remove the current uncertainty of his relationship with ourselves.
With regard to comment on deposits outstanding T/R of 1/10/91 indicated that large deposit of $341,401 was processed to account as indicated at T/R of 30/9/91.”
379 The attitude within the credit department, in my view, lacked recognition of the role the bank had played in the debt situation confronting the group, and the nature of the facilities provided to the group as at 2 January 1991. However, in its dealings with the group account, the bank continued to support the group’s requirements. 380 The evidence does not justify a conclusion, in my view, that the group was unable to effectively operate the group’s properties in 1991, nor was the group prevented from servicing the Coles contract: a matter which is further addressed later in these reasons. At the same time, the tight rein on the provision of working capital imposed by the bank would have made the conduct of those operations, in trying drought conditions, extraordinarily difficult. 381 I think the evidence disclosed that despite continuing criticism of, or, at least, a lack of sympathy for, the Wrights’ position within the credit department, Armitage maintained support for the account, as reflected in his favouring the move by the Wrights to gain control of Kindon with Cargill finance. The credit department met that proposal with “surprise that the company (was) prepared to enter additional commitments … given that its resources (were) stretched ...”. 382 On 9 December 1991, the credit sector required business banking to “submit advices covering this acquisition, particularly addressing overall serviceability aspects, by say 15/1/92”. Armitage responded to that requirement in his memorandum of 10 December 1991 describing it as “unrealistic” and seeking deferment “on the basis that analysis (would) be undertaken when Mr Wright (made) a decision re acquisition”. Of the proposal, Armitage expressed the view that “commercially (the credit department) would have to consider providing lending” if the acquisition could be shown to be justifiable on a “stand alone basis”. 383 In Armitage’s credit memorandum of 12 December 1991, in line with his communication to Wright of 9 December 1991, he recommended further temporary overdraft accommodation until 16 February 1992. He maintained the position that the security position was safe and he opposed the credit sector’s requirement of full scale evaluation of the group’s properties as being of secondary importance and unduly burdensome to the group. It was his recommendation that there be a valuation of Wallamumbi as representative of land values in the New England area, in which most of the group’s properties were situated. 384 The stringent control over the provision of funds for working capital was maintained by the bank in the first quarter of 1992. That has been the subject of strong criticism by the Wrights, particularly for the effect it was said to have had on their negotiations with Coles, as dealt with later in these reasons. 385 Continued tension between the credit department and business banking over the handling of the Wrights’ account continued on much the same lines into 1992. However, I think the evidence disclosed that the bank maintained support of the group throughout that period, although the process was laboured and effected only after extensive communications between the bank and the Wrights. 386 The first significant meeting in the new year took place on 17 January 1992 in Armidale. It was attended by the three Wrights, Hudson, Nicholls and Robertson with Armitage and Vaughan representing the bank. The plight of the group in the continuing drought conditions remained a significant topic with feeding costs over the previous six months noted as being $500,000, subject to a rebate. It was held at a time when it was thought the Cargill joint venture was close to realisation and the Wrights were pursuing long term arrangements with Coles. 387 Those arrangements with Coles, as disclosed to the bank by the Wrights, were not without difficulties. The price at which boxed meat was being supplied by the group had been arrived at on the basis of a weekly supply volume of some 1,000 head whereas, in January and February 1992, the supply volume was half that rate and represented, I am satisfied, a losing proposition to the group. 388 The point of difference between the bank and the group over this state of affairs was the Wrights’ unwillingness to seek an increase in price from Coles for fear of jeopardising the negotiations with Coles for a long term supply contract. The bank took the position that it was not reasonable for the group to expect bank support for the propping up of that losing arrangement: albeit, in the Wrights’ eyes, a temporary arrangement until such time as a fixed term supply contract with Coles could be put in place. 389 There was some inconsistency in the evidence of the Wrights and of the bank as to the extent to which the bank involved itself in this problem. I think it is sufficient to say that the bank’s attitude, in practical terms, left little alternative to Wright other than to seek, against his wishes, an increase in the supply price to Coles. This aspect of the Coles negotiations is further examined later in these reasons. 390 Further evidence of Armitage’s assessment of Wright, as somebody who would not sit on his hands for long, is recorded in the January 17 meeting with the note that Wright was in discussion with Smorgon Consolidated Industries (Smorgons), an organisation with extensive experience in the beef industry, with the view to entering into a deal similar to that being negotiated with Cargill. Something of the grand scale of expanded operations in Wright’s mind was the role envisaged for Kindon “as a mega feedlot to 80,000 head (i.e. 60 day turnover) ...”. 391 In relation to the group’s proposed purchase of the outstanding interest in Kindon, Wright posed what must have been a challenging suggestion that the bank fund $3,200,000 towards the acquisition cost: this was in the context of the provision of projected results for the year ended 30 June 1992 which reflected a deteriorating position due to drought and drought related conditions. 392 Armitage’s response to the Kindon acquisition and the difficulties associated with servicing increased debt facility was “that the preferred option for the acquisition of Kindon should be through equity injection rather than debt increase … in accordance with … discussions over recent months”. 393 In reviewing cashflow requirements, Armitage noted that an increase in bill line facility by $1,200,000 would allow “YTD actual receipt to closely match budget”. 394 As recorded in Armitage’s diary note of the meeting of 17 January, the stand taken by the bank at the meeting, in my view, was reasonable, given the level of concern within the bank as to the viability of the group’s operations. In particular, it was expected by the bank that cashflows would be under “extreme pressure”, prompting the view that cattle sales should be accelerated “to the earliest possible time” and “Coles pricing mechanism should be activated to bring the Esrolem returns in line with budget ...”. It was noted that the audited accounts, well overdue at that stage, were still not available. Nor was any draft. 395 In line with the subject matter of the discussion at that meeting, Armitage’s credit memorandum of 21 February 1992 sought approval of an increased overdraft facility of $1,700,000. I think it is clear from the credit memorandum that Armitage recognised the need to assist the group in the face of the continuing drought conditions which he recorded as costing the group something in the order of $5,200 a day, with hundreds of cattle destined for the Coles pipeline being forced into the open market due to the effect of the drought on their condition. At the same time, it was noted that calving rates were down by nearly 3,000 head and stock deaths exceeded estimates. 396 The group’s monthly report for January of 24 February 1992 could only have tested the nerve of Armitage, devoted as it was, to a cashflow under strain, largely due to drought related factors. In relation to Esrolem, the cost detriment to the group from 1 January 1992 was noted as likely to be in the order of $135,000. 397 The credit department’s response to the credit memorandum of 21 February 1992 was predictable. Rodricks, as senior manager, credit, responded to it on 2 March 1992. He commented unfavourably on the absence of audited financials for the year ended 30 June 1991. After reviewing all of the negative aspects of the account, it contained the following response to the request for increased funding:
The request for extension of overdraft facilities was the subject of Armitage’s credit memorandum of 12 December 1991.
“pursuing the following:-
- Review of the fee levels.
- Review of the valuation requirement [referring to valuation of properties requirement].
- Extension of $3m Overdraft due to reduce to $2.5m on 31/12/91 until 15/02/92.”
398 He recommended that the bank’s policy should be “to pursue downsizing”, recording nervousness over the group’s dependence on one major customer, Coles. He concluded with the comment that the bank’s “involvement (was) at a peak”. It is difficult to criticise the apprehension expressed over the dependence of the group on Coles. It was a matter that had been raised by Skinner and Brennan. The successful negotiation of the one year supply contract had been the telling factor in the bank converting facilities from terminating to basic. The profitability and extension of that supply arrangement was, in my view, a crucial element in the bank’s relationship with the group. 399 On 3 March 1992 there was a meeting with Wright, Robertson, Buckley, Vaughan and Armitage in which accounts to the year ended 30 June 1991 were presented which showed a “consolidated loss of $3.429m”. 400 In relation to the credit memorandum of 21 February and Rodrick’s comment on it, Brennan as chief manager, credit, in his memorandum of 9 March 1992, favoured a strategy which was not entirely adverse to the group and, in my view, was not unreasonable. It was expressed in the following terms:
“We are not disposed to expanding our involvement, and in this regard, are willing to only fund the feed and admin costs of $0.5M. Principals are to be clearly advised that the sale programme should be accelerated, so that OD facilities revert to the basic $1.15M as soon as possible.”
· all loose-ends as set out in your reply
“Your comments at page 4 summarise the overall position ‘… we are uncomfortable with the current level of our involvement and we should pursue downsizing’ (assumably of debt).
I support this view, however the reality of life is that we have the asset on the books and short of a fire-sale, which would generate a large loss to the Bank, we have no option but devise, implement and monitor a sound work-out strategy.
The group have made mistakes and have bitten off a lot, but their strategy, apart from the growth in debt, is sound. They have unfortunately suffered at the hands of the drought, the effects of which will impact cash flows for a few more months.
Accordingly, provision of facilities to 15/4/92 is supported, but well before that date we have to finalise:
· facilities for six months
· monitoring procedures for the relationship
· a strategy plan which we will support and they will not deviate from.401 The response of credit was to restrict the approval sought in the credit memorandum of 21 February 1991 of a temporary overdraft facility of $1,700,000 to $500,000 as representing the feed and administration costs of the group for which assistance was required. The balance had been earmarked for cattle to go into the Coles pipeline: it being noted that a fixed term contract with Coles was still being negotiated. 402 Armitage submitted a further credit memorandum of 11 March 1992 in which he continued to seek approval of the $1,700,000 temporary facility. In his review of what he described as a disappointing group loss of $3,429,000 for the year ended 30 June 1991, he saw something of a silver lining in the form of “non recurring expenditure” in 1991 in respect of several items totalling $3,342,723, which he “considered achievable”. On that basis, the group’s operations could be treated as having “recorded a roughly break even result for FYE 06/91”. He also noted the “increased income earning potential of the group through changed breeding herd (programme of the group) during the years 1988-1993” involved a loss of “trading stock income during this period (which would) be more than offset by the natural herd increases and almost doubling in income”. 403 Armitage’s review of the group’s strategy was expressed in terms which emphasised the possible benefits of the Cargill joint venture and of the Coles supply contract, allied to the acquisition of Kindon. At that stage, negotiation between Wright and Cargill were well advanced with draft partnership agreement documents under review. 404 The credit memorandum of 11 March 1992 contained a comment by Armitage that, I think, indicated business banking’s level of support of the group’s position, namely:
In essence, this relationship has to be bedded down. It is not harmonious at either level, ie Customer/Region or Region/Credit - enough is enough, we must agree a plan and when all parties have given their imprimateur (sic), make it work within agreed parameters. Credit must be pro-active with the Region as in the recent Vickery episode.”
405 This approach was conveyed to Wright in the facsimile of Armitage of 19 March 1992 in the following terms:
“It is acknowledged that cash flow situation is disappointing however such is drought influenced. To require client to sell cattle out of condition or cattle which are part of the breeding herd will severely impact on future cash flows and can be likened to selling a manufacturers plant and equipment to reduce working capital borrowing.”
406 Armitage’s support of the Group account was further evidenced in his memorandum to the credit sector of 24 March 1992 in which he stated:
“In summary the last thing that ANZ wants is to have to tell you to sell property therefore it is imperative that PAW endeavour to lock in the Cargill cash flow for Kindon.”
407 There followed in that memorandum a number of observations by Armitage about the Coles contract which I think fairly reflected the position as advanced by Wright. 408 In anticipation of obtaining approval for the group’s temporary requirements, Armitage had forwarded to Wright a draft facilities letter by facsimile of 16 March “For Discussion Purposes”. The draft provided for an overdraft facility of $3,000,000 reducing to $1,300,000 from 15 April 1992 until the review date of 30 June 1992. It resulted in the submission of a letter of offer of 26 March 1992 providing for a total of $34,510,000 which included an overdraft facility of $3,000,000 upon terms requiring its reduction to $1,300,000 on 31 October 1992. 409 Wright’s note to the bank in response to that draft is, I think, significant in the light of the Wrights’ evidence of discussions with Armitage at that time. In relation to the proposal of a $1,700,000 temporary overdraft until 15 April 1992, Wright’s note was “Require extension from 15.4.92 to Friday 1.5.92.” In general comments in the draft, Armitage had included the following:
“It is considered imperative that PAW be able to maintain the Coles throughput and therefore continuation of $1.7 mio sought at recent CM is integral to that requirement.”
410 Wright’s response was:
“If the Coles contract is not in place by 15 April 1992 the Bank reserves the right to alter the above mentioned repayment schedule ie. the Bank would look to see over a 3 month period from 30/03/92 a reduction in facilities of up to $3,000,000.”
411 A further proposed term was as follows:
“Extension from 15.4.92 to 1.5.92 per above
We presume that the reduction of $3,000,000 referred to is $1,700,000 over and above the reduction to $1,300,000 referred to in page 2 amount.”
412 Wright responded in the following terms:
“5. The Customer to produce, by 15/04/92, revised Cash Flow Forecast for 12 months to 30/03/93 reflecting Coles contract/Kindon operation.
6. If Cash Flow Forecast cannot in the Banks opinion substantiate interest serviceability, the customer agrees to liquidating sufficient assets (land/stock) by 30/6/93 to reduce total indebtedness to a level so that interest serviceability and principal repayments can be easily demonstrated.
Assets that at this stage could be listed for sale are:
Directors Valuation
Woodburn 2,100,000
Yarrowyck 3,800,000
Achill 4,500,000
Forglen 5,800,000
Stock on properties 4,400,000
20,600,000
The customer to advise order of assets to be liquidated should such be necessary.”
413 In his closing comment, Wright noted that the group had ceased buying livestock for the Coles pipeline on 6 March 1992 “because of working capital restraints, thus creating a dangerous gap in supply of product in the near future which could seriously jeopardise (the) Coles relationship”. As considered later in these reasons, I am reasonably satisfied that the bank’s conduct did not cause any breakdown in supply leading to the loss of the Coles contract. 414 There followed a facsimile of 23 March 1992 from Armitage to Wright as follows:
“We feel that to dispose of the assets listed on page 7 would need to be carefully marketed rather than simply sold. We would propose to sell Yarrowyck and Woodburn plus associated livestock within the required time frame but would prefer to have the flexibility to continue the liquidation programme within the next 12 months thus avoiding the risk of depressing land values in the Armidale area through over supply.
It should be our object to market any real estate at the time of optimal seasonal conditions.”
415 That note reflected the importance to the bank of the successful negotiation of a long term contract with Coles. The bank’s facilities letter of 26 March 1992 provided the required overdraft assistance of $3,000,000 with reduction by $1,700,000 deferred until 31 October 1992. 416 The Wrights’ evidence of their dealings with the bank, and in particular with Armitage, in the first half of 1992 is difficult to reconcile with the records. It is the evidence of Wright and David Wright that the terms of the facilities letter of 26 March 1992 unreasonably imposed upon the group the need to sell some 6,036 females in order to effect the overdraft reduction to $1,300,000 on 31 October 1992. Wright’s evidence is that on 16 March 1992 he had a telephone conversation with Armitage in which he remonstrated with Armitage over the unreasonableness of the proposed terms of offer which had been sent in draft form by Armitage. 417 He gave evidence of a further telephone conversation with Armitage on 26 March 1992 after receipt of the letter of offer of that date in which he insisted that the debt reduction required by October 1992 was unreasonable and out of line with the group’s strategy which involved an increased cashflow from the herd build-up in late 1993. 418 David Wright gave evidence to a similar effect. It was his evidence that as a result of the bank’s requirement for the reduction of the overdraft, he provided the bank with two cashflow budgets on 18 May 1992 which reflected the need to sell some 6,036 females. 419 The difficulty I have with the evidence of the Wrights concerning the terms of the 26 March 1992 letter of offer is that it is not reflected in the remarks of Wright in his commentary of 17 March 1992 responding to Armitage’s invitation to comment on the draft letter of offer. The only comment on the reduction in overdraft was to require an extension of the time for reduction to 1 May 1992 and there is nothing in the terms of that commentary to suggest that the proposed reduction would involve a forced sale of part of the breeding herd. 420 Also, according to the evidence of Wright, upon his receipt of the letter of offer of 26 March 1992, in a telephone conversation with Armitage of that day, he challenged the October date for reduction of the overdraft on the basis that until “the increased cashflow from the herd buildup beginning in late 1993 (the Wrights) cannot commit to the debt reduction required by October 1992”. 421 In my view, at that time, a strategy of herd build-up which had been effected by large scale property and stock purchases bore little resemblance to the gradual increase in breeding herd under discussion in June 1988. What was pertinent to the group’s financial position in March 1992 was finalising negotiations involving Cargill and Coles. I have little doubt that the financial welfare of the group depended upon the outcome of those negotiations: particularly amidst the cost impact of the continuing drought. 422 Further, all of the memoranda of Armitage to the credit sector in that period reflected a banking officer striving to meet the needs of the customer and firmly opposing a strategy that would unreasonably deplete the group’s female herd. 423 On 1 April 1992, the position of the group was dealt a serious blow when Wright was informed by Coles that it was “not prepared to proceed further with negotiations for the proposed boxed beef supply arrangement”. 424 In that connection, Coles made the following proposal:
“To assist with further progression of your finance extension, the following will be appreciated
Current Creditors (As Per List) $
Cattle Purchases (Coles Contract) $
Current OD Balance $
Funding Requirement $
Current Group OD Limit $1,800,000
Increase Sought $1,200,000
$3,000,000
To facilitate recording an appropriate expiry date of facility increase could you please advise expected reduction programme through cattle sales. ie permanent reduction in facilities
David I would also assume that should Kindon be sold funds would be utilised in debt reduction. Also Cargills acquisition of 50% of Esrolem may also see a reduction in borrowings of $1,500,000.
It is also now imperative that the Coles contract be consumated (sic) as soon as possible. If no contract is forthcoming will Coles allow run off of, pipeline or could they simply stop buying?”
425 It is the evidence of David Wright that following this termination letter, there were discussions with Coles that resulted in a facsimile of 10 April 1992 which confirmed a reduction in the price being paid by Coles for the Esrolem product from $4.75 per kilogram plus freight to $4.02 per kilogram delivered which involved a “substantial loss … over the ensuing period of approximately three months”. That may, in part, explain the inability of the group to reduce debt by retiring any part of the facility in bill line 3 which had been treated as basic to enable the group to supply beef to Coles. 426 It is difficult to see how the group could expect to enjoy the continued treatment of the group account as though it consisted of basic facilities with the termination of the negotiations by Coles. The principal terminating lines had been converted to basic on the strength of the Coles one year contract and an anticipated long term arrangement with Coles. The Deloitte report clearly put in question the group’s viability in the event that the Coles supply arrangement fell down. With the group’s long term viability under a cloud with the termination of negotiations by Coles, there is little or no room for criticising conduct of the bank aimed at reduction of debt, if necessary by a sale of some of the group’s properties and livestock. 427 There was a meeting in Armidale on 5 May 1992 attended by Wright, Phillip Wright, Hudson, Nicholls, Robertson, Vaughan and Armitage which considered the effect of the Coles rundown. The diary note of that date reflected the loss of confidence in the account. Under the heading “Cashflows” there appeared the following:
“We are aware that you have acquired stock anticipating the completion of our negotiations and that you currently hold approximately 5,000 head of cattle. In order to ensure that you are not unduly inconvenienced by our decision, we are prepared to assist you in clearing these cattle subject to you meeting our quality and other specifications, over a period of time for Queensland and New South Wales stores.”
428 The Wrights gave detailed evidence of this meeting. In the case of David Wright, in his affidavit sworn 14 November 1996, he said that he attended the meeting at which were present Wright, Phillip Wright, Nicholls, Robertson, Hudson and, he thought, Vaughan. He gave detailed evidence of the discussion between Armitage and Wright. However, in his later evidence, he recalled that he had not attended that meeting and that he had received a conference telephone call from Armidale in which he participated that day. 429 I think it is reasonably clear from the evidence of Armitage that he had little recollection of the detail of that meeting beyond the bank’s diary record. In the absence of contemporaneous records of the Wrights, I think the detail of the evidence given by them of this meeting should not be taken literally. According to Wright, at that meeting he informed Armitage that it would be impossible to effect the reduction in the overdraft in the face of the Coles development and that debt reduction would involve the sale of breeding cows. Armitage’s response, he said, was that the bank was “absolutely determined” to have the debt reduction agreed upon, whether that meant the sale of breeding herd or not, and required the submission of cashflows to demonstrate the sales required to meet the debt reduction in October 1992. Armitage, while having no recollection of the detail of discussion, denied any specific discussion of the sale of the group’s breeding herd. 430 Robertson, Nicholls and Hudson all corroborate the fact that at this meeting, Armitage had insisted on debt reduction, notwithstanding the remonstrations of the Wrights that it would involve the sale of females. I have had no occasion to doubt the veracity of those witnesses. 431 Given the admitted absence of recollection of this discussion by Armitage, I accept that the bank did require the submission of a cashflow that supported the required debt reduction and that Armitage acknowledged that if that involved the sale of part of the breeding herd, then that was the inevitable consequence of the need of the group to comply with the terms of the facilities provided by the bank. In the face of the considerable change in the group’s anticipated cashflow which the loss of the Coles long term contract represented and Wright’s statements that the October reduction in overdraft would not be met, I would not regard the bank’s insistence upon recourse to livestock sales, if necessary to enable the group to meet its obligations to the bank, as unreasonable: particularly if one bears in mind that the group’s cattle livestock count in April 1992 was in the order of 36,500 head, of which approximately 21,500 were females. 432 David Wright has identified the cashflow projections submitted to the bank at Armitage’s insistence as being those dated variously 14 and 15 May 1992. The cashflow comprised some 62 pages. It disclosed sale of the cattle for the period to December 1992. However, it did not, in my view, identify any breeding herd earmarked for sale. It does not follow that females forecast for sales were part of any breeding herd numbers or requirements. The schedules contained forecasts for “normal season” and for “drought case”. 433 The facsimile of Hudson to Armitage of 15 May 1992 accompanying those projections made no comment about the involvement of the breeding herd in the proposed sale of cattle and simply noted that Nicholls would “‘walk’ (Armitage) through the two projection sets … and (would) outline the various assumptions .. made”. That was followed by a facsimile of Hudson to Armitage of 18 May 1992 enclosing a note “covering some of the assumptions used in the forecasts” for the purpose of the meeting referred to in the earlier facsimile. So far as is relevant, that note contained the following:
“As a result of the above dynamic changes a new cashflow for the 12 month period to June 1993 has not been prepared.
We have requested a 6 week cashflow detailing the run off of the Coles contract ie. we expect facilities to reduce by approx $3m. This is to be available prior to 15/05/92.
PAWS were also requested to begin urgent work on a 12 month budget for the Pastoral operation which could later be overlaid by any deal struck with Cargill.”
434 This strengthens my strong view that in evaluating the evidence in this matter dealing with the details of discussions at the numerous meetings between the parties, it is preferable to distinguish between the substance and the detail and to realise that there may not have been the same emphasis placed upon particular matters as the detailed evidence could now convey. I am satisfied that Armitage was not indifferent to the shortsightedness of requiring sale of part of the breeding herd that would produce temporary relief but impact adversely on later cashflows. 435 In any event, a glance at the stock figures throughout the remainder of 1992 does not suggest a blind sacrifice of the group’s breeding herd. Although cattle numbers had dropped significantly from approximately 34,000 in May to 25,000 in December (back to 29,000 in January 1993), the drop in the female numbers was only 3,900 (all approximate figures). Part of that female decline was represented by some 2,700 cows, some of whom, presumably, would be CFA cows. By year’s end the properties were in the grip of bad drought conditions and figures of that kind, in my view, are not particularly surprising. 436 The Coles set back did not extinguish Wright’s pursuit of joint venture proposals to Smorgons. On 17 June 1992, PAWS submitted a “Presentation” to Smorgons, described as a “strategic alliance” between the two entities. The proposal involved the acquisition of six Queensland and Northern Territory properties running some 85,000 head, at that time in the hands of the Angliss group. It excluded from consideration three “Rockhampton properties”. It envisaged an acquisition cost of approximately $52,000,000. 437 At about that time, the group’s credibility in the eyes of the bank was under considerable pressure. That was reflected in Vaughan’s facsimile to Wright of 10 June 1992 concerning an appointed meeting of 16 June 1992. It included the following comments on the “Coles rundown”:
1) Nine weeks to June 26, 1992.
“Some brief notes on the Cash Flow Forecasts.
Receipts and payments are same under both scenarios with exception of early receipts from sales of stock from N.E. Properties in event of drought.
Both forecasts reflect close-down of Boning Room on cessation of Coles business and outflow of termination payments approx $211,000 last week in June.
Payout of lease residual on sausage filler included as Capex in w/e 3 July.2) Six months ending December, 1992
Receipts and payments; comments same as above.
Both forecasts reflect remainder of cash inflow from Coles following closure of Boning Room plus hides and fat & bone $372,000, as well as proceeds of remainder of ’out of spec’ feedlot stock $241,000. Also, proceeds from sale of surplus vehicles $23,000. Esrolem expenses represent payout of creditors including feedlots. Payout of residual on lease of panel van and on-going lease payments for 1 vehicle, conveyors and Computer systems for Boning Room.
No costs, or income have been included for any Cargill business which may eventuate in Brisbane, nor, any income from the existing Cargill agistment activity which is being managed by John Weston.”
438 As I understand it, there had been several thousand cattle in the Coles pipeline in 1992, so I think this comment had some point. The main problem seems to have been that sale of beef to Coles was being made at a loss and sale on the open market was at greatly depressed prices, reflecting the effect of the drought. The sale of the cattle dedicated to the Coles supply, in better times, should have permitted the Wrights, to retire at least part of the $5,000,000 facility raised in 1990. Originally, the facility was provided as a temporary facility to fund an opportunistic purchase of steers. It was then converted into a basic facility to service the supply of cattle to Coles. 439 It appears that the proposed meeting between the Wrights and the bank did not take place until later in June, either on 22 or 26 June. It was held in Armidale and was attended by Wright, Phillip and David Wright, Nicholls, Hudson, Robertson, Vaughan and Armitage. According to the evidence of the Wrights, and in this respect they are supported by the evidence of Hudson and Robertson, David Wright took the opportunity to complain of the forced sale of breeding herd and the adverse consequences to the long term viability of the group. I think it is clear from the evidence of Armitage that he has no independent recollection of that meeting beyond his diary note. That note contained the following statement:
“Back in April/May 1990 some $5M was advanced to PAWS for additional cattle purchases to assist with backgrounding of cattle on Boonaldoon.
The agreement was for these funds to be repaid in November 1990. At this time repayment was deferred due to the start up of the Esrolem/Coles supply arrangement. It was our understanding that these cattle would be part of the Coles pipeline and that if the Coles contract was ever terminated then the rundown would be sufficient to generate the $4M repayment deferred from November 1990.
It would appear from the cashflow provided that the run down in debt will not be close to the $4M. In fact on the normal seasons cashflow the run off of debt to 30 June 1992 is approx. nil from 30 March 1992.”
440 In referring to cashflow assumptions, the diary note was to the following effect:
“PAWS because of sound management practice have not compromised their livestock production through a sell off of the breeding herd. This concept has since been confirmed by Rick Wright and Peter McKeon of Chapman & Eastway.
…
Optimum breeding herd size has now reduced from 25,000 to 19,500 head. The implication is that cashflow will be boosted one year earlier (ie. 1993 rather than 1994) because herd is at this level now.
By holding steers rather than increasing the breeding herd cashflow benefits from the faster turnover.
…
Despite the fact PAWS have no firm cattle disposal arrangements in place at the moment they have no intention of selling their cattle through the open market auction system. To reduce costs and maximise value PAWS will in the future sell stock by private treaty. They feel that to sell by any other means puts them at risk to market forces which at the moment are depressed. PAWS believe because of their large stock numbers they have the economies of scale, quality of cattle and management/admin ability to make such a system work.”
441 Quite clearly the meeting discussed the sale of female cattle, some of which could have been retained to build-up the breeding herd. In the light of the facsimile communications of Hudson in May concerning projected sales, I would not place too much emphasis on the detail of this meeting as evidenced by the Wrights, beyond accepting that the sale of cattle under distressed market conditions involved the sale of breeders. 442 The sale of property to effect a reduction of debt had been a subject of discussion with the Wrights as earlier noted in these reasons and, at that time, it was in contemplation that Yarrowyck and Woodburn would be suitable properties for sale. However, in 1992, the spotlight fell on Kindon. The possible disposal of Kindon was built into budgets provided by the Wrights to the bank in June of 1992 and was the subject of a memorandum of Armitage to Wright of 17 July 1992 which was in the following terms:
“Livestock sales are well spread. The majority of the budgeted sales to March 1993 ($2.4m) were originally scheduled for late 1992 but due to seasonal conditions have been pushed back. October and November sales are budgeted to aggregate $4.461m. Significantly higher cattle numbers available for sale highlights the decision to hold the breeding herd at 19,500 head rather than retain all female stock to build up the numbers to 25,000.”
443 September 1992 is a significant point in the consideration of the conduct of the bank in relation to the orderly rationalisation of the group’s activities. In that month Rodricks submitted a memorandum to the regional executive of business banking dated 4 September 1992. The general tenor of the credit sector’s memorandum was the seeking of “the maximum reduction in … debt from the sale of assets, including ‘Kindon’ ...”. The memorandum set out requirements for the granting of continued financial assistance to the Wrights. 444 Armitage’s response to this was as follows:
“- Cashflow is dependent to a major degree on the sale of Kindon Station (included in the budget to occur October 1992). We understand that no arrangements for this sale are yet in place and therefore have severe doubts that this forecast is achievable.- If Kindon is not sold PAW will require increased Bank assistance in December 1992 and January 1993.
- Cashflow is based on a yet to be tested sales program of selling by private treaty.
- If continuation of severe seasonal conditions occurs this would seriously adversely affect budgeted sales programming and income. Only minimum allowance for this has been taken into account.
- Sales programs forecast for calendar 1993 through to 1996 does not appear sufficient to ensure interest serviceability when you consider interest costs are likely to approximate $3.0m (if Kindon is not sold) and property expenses approx. $3.0m (includes fertilizer expense).”445 Armitage’s diary note concluded with the following “overview”:
“Overall, everyone agrees that PAWS’s total gearing position is unsatisfactory and must be reduced. Given the current drought situation, sale of additional livestock will not provide sufficient breathing space in the short term without impacting upon future serviceability. Accordingly, sale of Kindon/other assets to reduce gearing should be pursued but within an orderly disposal time frame so that returns can be maximised.”
446 The approach adopted by Armitage was to submit a letter to Wright of 11 September 1992 which set out the revised terms and conditions upon which the bank was prepared to provide facilities to the group. Those terms and conditions were introduced with the comment that “[t]he revised requirements of the Bank are likely to have a substantial impact on (the) group’s operations and accordingly it is requested that you arrange to meet with Mr. Buckley and (Armitage) at (the bank’s) offices to discuss the contents … at (Wright’s) earliest convenience”. 447 The total facility offered was $34,510,000, which included an overdraft of $3,000,000 reducing to $2,000,000 on 31 October 1992 as to which it was noted that “additional cattle sales will be required to maintain account balance within limit availability”. It was noted further that excesses would “not be allowed and cheques (would) be dishonoured to control the account”. 448 Among the conditions sought to be imposed was the requirement that Kindon was to be sold, with a reservation of the right of the bank to implement a sale by auction after 31 December 1992 if the bank was not satisfied with progress towards sale. The bank foreshadowed the need for a principal debt reduction of $2,000,000 per annum from either trading or asset divestment. It nominated Woodburn, Yarrowyck, Achill and Forglen as appropriate properties to be sold along with stock holdings on those properties. Deferred cattle sales of November/December 1991 were to be effected by 31 October 1992. A minimum security cover of 60% of market value was stipulated. 449 The requested meeting with Buckley and Armitage took place on 25 September 1992 in the bank’s office. It was attended by Wright, David Wright, Robertson, Buckley, Armitage and Brian Davis (Davis), a manager in business banking. The diary note of that meeting took the form of itemising the various conditions in the bank’s letter of 11 September and noted the result of the meeting in relation to each such item. 450 In relation to the condition concerning the sale of Kindon, it was noted that Wright objected to the manner of sale proposed and outlined an alternative offering by private negotiation which the bank considered to be “practical and acceptable”. As to the foreshadowed need to dispose of assets to meet a yearly debt reduction of $2,000,000, the diary note recorded an acceptance of this condition by Wright with a proviso related to the group’s ability to revive the arrangement with Coles. 451 Of particular interest is the record of the requirement to achieve “deferred cattle sales” by 31 October 1992. The diary note recorded Wright as explaining that the deferment had been the result of the drought and had nothing to do with the possibility of resuming supplies to Coles and that the cattle were at feedlots simply to improve quality prior to sale. 452 Armitage recorded that the bank agreed “to sale of cattle in terms of cashflow presented at (the) last meeting ie. sale of cattle by 06/11/92, subject overall to the confines of limit availability”. That record is difficult to reconcile with the evidence of that meeting by the group’s witnesses. The diary note also recorded the presentation by the Wrights of a cashflow forecast for the period from October 1992 to December 1993 which revealed that the group would not be able to operate within the bank’s arrangement until April 1993 due mainly to the “continuation of the drought”. On that basis, Wright sought extension of facilities until April 1993. 453 The bank’s response, as recorded, was that they would “revert back early next week with (the) answer”. Wright’s evidence of this meeting is in extraordinary detail and extends over some seven pages of his first statement of evidence and consists almost entirely of the details of the discussion that took place. Again, I think the only way that evidence should be approached is by not taking it literally but extracting the substance of the material evidenced. In that respect, the evidence of Wright is consistent with the diary record of the discussion concerning the sale of Kindon by private negotiation. He also evidenced the discussion of the position of the cattle on feedlots in southern Queensland and I think that is consistent with the diary note of Armitage, particularly in relation to the fact that the cattle were not related to a possible resumption of supply to Coles and were there simply to improve their condition for sale. 454 Wright confirmed that Armitage agreed that “the cattle be sold in line with the cashflow discussed in the last meeting that is by the 6 November”. The outcome of the meeting was the subject of confirmation by Armitage and Buckley in their jointly signed letter to Wright of 30 September 1992 which was in terms similar to the contents of the diary note of Armitage. In particular, in relation to the proposed sale of cattle it was stated as follows:
“It is obvious that the short term poor outlook for PAW does not sit comfortably within the Bank and the restrictions to be imposed on the client are a round about way of saying that we do not want their business. Accordingly account executive will actively pursue the termination of this relationship.”
575 The credit memorandum of 20 May 1993 raised by Armitage gave an extremely detailed review of the group account, primarily aimed at reviewing “in detail the events since … 7 October 1992, in particular the findings of Ernst & Young … (and) was prepared as a result of … discussions ...” at meetings on 2 March and 13 May with the Wrights. 576 At the latter meeting, Wright raised with Armitage the decision of the group to pursue equity capital for the group’s enterprise. This had been mooted by James in a discussion with Wright. In James’ facsimile to Wright of 27 May 1993 he further outlined such a possibility and named a particular business interest located in the United Kingdom as a possible interested equity participant. That business interest turned out to be one represented by Derek Shaw (Shaw). 577 In my view, the credit memorandum of 20 May 1993 of Armitage represented a reasonably balanced appraisal of the facilities and the banking relationship with the group. It did not favour debt reduction through “a simple herd reduction” and explored the recent discussions concerning the sale of Kindon and Boonaldoon. Armitage acknowledged the change in herd strategy dating back to 1988 and was mindful of the dilemma created by the drought conditions current at the time of his memorandum. He referred to the possibility of the group obtaining an equity participant as:
Whilst the Ernst and Young report contains many assumptions with which we strongly disagree, we had already ourselves reached the conclusion that the properties Boonaldoon and Kindon should be disposed of as soon as possible when market and seasonal circumstances are appropriate.”
578 The memorandum is in strong contrast to the hard line reflected in Buckley’s memorandum of 3 June 1993. That was one which I think reflected much of Buckley’s disenchantment with the group account. Expressed in ways in which I have had occasion to question, he made a number of observations which are uncomplimentary of Wright’s conduct of the account. 579 The general tone of Buckley’s memorandum is in keeping with Wright’s evidence of his Sydney meeting with Fenton and Buckley in early June which, according to Wright, was held to discuss the “seriously deteriorated relationship with the Bank”. 580 Wright’s complaint was that the bank’s demands were continuing to have the effect of a forced sale of the group’s breeding herd and was at odds with the approach adopted by Fotheringham in the meeting with him. According to Wright, that drew the response from Buckley as follows:
“not seen as another tactic of “changing the goal posts” once again, or buying time but as a serious alternative to reduce debt (substantially in one hit) and retain the group’s long term objective by maintaining its competitive advantages by its size/economies of scale and realising the benefits of years that have been invested in building up to their optimum breeding herd structure/size which is the key to generating the group’s profitability in the medium to long term.”
581 According to Wright, Fenton dissociated himself from that remark. I have no reason to doubt that something along those lines was expressed by Buckley, having regard to the contents of his memorandum to Armitage of 3 June 1993 in which his recommendations gave the group little room to move and concluded with the following observation:
“It will only be over my dead body that the Bank will give you any further consideration.”
582 This increase in facilities was gained as a result of negotiations between the parties which included agreement upon completion of some sales of livestock by 30 September 1993 and planned sales in November and December of that year. Those sales did not eventuate, at least, not as then contemplated. I think that much is evident from the monthly reports of Hudson. His report for July 1993 recorded the sale of 4,396 head, mainly weaner cattle, the sale of which the group had been “decided to bring forward … from October” as “Boonaldoon was not ready to receive the weaner cattle from the Tablelands for value adding in late June”. The monthly report for August simply noted that those sales were “uplifted” in that month. I do not regard those as forced sales by reason of any unreasonable conduct of the bank as presently complained of by the group. 583 Hudson’s facsimile of 15 October 1993 to the bank submitted a revised cashflow forecast in what he described as the “Preferred Case”, which reflected a withholding of the sale of female cattle. This had followed a meeting with Wright, Phillip and David Wright, Robertson, Nicholls, Hudson, Buckley, Punch and Davis on 13 October 1993 at which a feasibility study was presented to the bank in relation to a joint venture proposal involving Shaw. I doubt whether anything turns on the detail of the discussion that took place at that meeting as to which there was some disagreement between the witnesses for the bank and those called in the group’s case. 584 It was implicit in the group’s joint venture proposal involving Shaw that there would be no sale of the female herd until “year end”, when the livestock would pass into the proposed joint venture. 585 The joint venture proposal was the subject of an overview diary note of Davis of 20 October 1993. It is clear, both from the Wrights’ evidence of the meeting of 13 October and Davis’ diary note of 20 October 1993, that the joint venture proposal received a favourable response from the bank’s representatives, with the business banking sector in favour of varying the timeframe for debt reduction to accommodate it. 586 The consequent credit memorandum of 4 November 1993 and the bank’s letter to Wright of 24 November 1993 reflected that response. The bank deferred reduction of the overdraft to 31 January 1994 and approved an increase in the overdraft of $1,050,000 pending clearance from deferred cattle sales. It also extended the timeframe for property sales under consideration to 31 January 1994. 587 The diary note of Davis of 6 January 1994 noted favourable variance from budget in relation to livestock sales and observed that the “[r]eason for selling additional 634 head which partly represents cattle earmarked for December sales is due to current good prices being achieved and feed at Boonaldoon is dwindling”. 588 Although the evidence disclosed that the group’s properties were being adversely affected by drought for most of the period prior to the group’s account being put into default, there were vicissitudes in the weather pattern and, in the last quarter of 1993, Boonaldoon was enjoying favourable early summer seasonal conditions, in contrast with the tableland properties which had not been so favoured. 589 By year’s end, the bank had become aware through sources outside Wright’s circle that Shaw was not immediately interested in a joint venture arrangement, although maintaining an interest in Kindon. I doubt whether Wright was fully aware of this. However, the dissolving of Shaw’s interest in the joint venture proposal could only have had an adverse impact on the bank’s attitude to the deferral of property sale. 590 At the beginning of 1994, the group account came under the administration of the department of the bank which was concerned with “asset management” with Daraius Bilimoria (Bilimoria) assuming responsibility for the day to day dealings with the group account. He reported to Mark Sample (Sample) who was the senior manager in asset management. Bilimoria was assisted by Pidcock and Malcolm Ferdenanz. The group account remained in that administration within the bank until 10 May 1995 when it was transferred to the corporate banking department with Ralph Allen (Allen) becoming responsible for its administration, reporting to the senior manager in business banking, Geoffrey Kevin Bond Pilley (Pilley). The evidence of Sample as to the transfer of the account to asset management, was that this was a consequence of the downgrading of the group account to “C2”. 591 This period, during which the group account was under the control of group credit management, was marked by prolonged negotiations between the group and Bankers Trust Australia Ltd (Bankers Trust) aimed at gaining access to equity capital and the reduction of debt. It involved the transfer of the group’s assets into a vehicle for the purpose of raising capital by way of a public float of shares. 592 The period opened with the Wrights’ presentation of this proposal to the bank, the Shaw negotiations having lapsed. The period ended with the demise of the Bankers Trust proposal and its replacement in April 1995 with a similar proposal under the auspices of Prudential-Bache Securities (Australia) Ltd (Prudential-Bache) which involved “a private placement” with Rural Property Trust (the trust). That proposal involved the ‘injection’ of the group’s assets into the trust and the undertaking of the management of the trust’s rural assets by the Wrights. It is, I think, something of a tribute to the group’s persistence that at the meeting of 10 May 1995 between Wright, David Wright, Pilley, Bilimoria, Allen and Pidcock, the Wrights opened up the possibility of the bank financing the group’s acquisition of units in the trust: a proposal that met with no favour by the bank. 593 These negotiations were the basis upon which Wright sought deferment of property and livestock sales, particularly any part of the breeding herd, so as not to jeopardise fulfilment of the proposals under discussion. There were numerous meetings between the Wrights and the bank’s representatives during this period which I have found unnecessary to note in any detail. There is a lack of accord in the evidence of the two camps upon the content of those discussions, particularly in relation to references by the Wrights to the 1988 strategy, the failure of the bank to support the group and the bank’s requirement to sell cattle forming part of the breeding herd. I prefer to treat those differences of recollection on the basis of the degree of emphasis placed upon those matters in discussions; the need to approach the Wrights’ evidence of conversations as conveying the substance of communications rather than the detail of them and the heavy dependence of the recollection of bank officers upon contemporaneous records. The period was marked by the sale of Kindon and efforts to dispose of the coastal property at South West Rocks. 594 There is some support for the Wrights’ evidence in David Wright’s letter to Bilimoria of 20 September 1994 which provided the draft financials for the 1994 year. In that letter, he acknowledged the need for debt reduction in the following terms:
“We are not adverse to directors now making alternative banking arrangements.”
I think when Buckley wrote that he could not have been unaware that such an alternative was no longer open to the group. Buckley had also recommended capping the overdraft facility at $2,850,000. That attitude did not prevail. As a consequence of the credit memorandum of 30 June 1993, the limit was increased by $700,000.
595 The 1988 change in the group’s strategy was described in the following terms and does not appear to have been challenged by the bank at the time:
“Accumulated losses in recent years and subsequent borrowing levels has resulted in a situation where the gearing of the enterprise means it is highly vulnerable to movements in commodity prices, interest rates and the effect of drought. This fact has been apparent to both ourselves and the ANZ for some time. As a consequence, major asset rationalisation has already occurred and additional debt reduction is necessary for the enterprise to safely service it’s (sic) liabilities and reduce debt through normal trading activity.”
596 Of further interest is David Wright’s further comment in relation to the breeding herd: a comment which sits uncomfortably beside a forced sale of females as a result of the bank’s debt reduction requirements:
“A decision taken in 1988 to move from a breeding and fattening enterprise to breeding only, has seen growth in breeding females rise from 8500 at the beginning of ’88 to 20,000 at the end of this calendar year. This decision, made with the support of the Bank, forecast a reduction in cashflow whilst female offspring were retained to enable this growth to occur.”
597 A further statement which I find difficult to reconcile with a forced sale of the breeding herd is the comment by Hudson in his letter to Bilimoria of 10 November 1994, forwarding review of the group’s cashflow forecast which noted as follows:
“Despite the effects of the drought and contrary to the majority of other cattle operations, P.A. Wright & Sons has been able to maintain very high fertility levels, achieve substantial market premiums for it’s (sic) livestock at the time of sale and has significantly increased the size of it’s (sic) breeding herd.”
598 The bank’s response to that communication was a facsimile from Bilimoria of 14 November 1994 which sought information concerning the “Number of cattle (not including breeding herd) that are available for sale now and approximate price”. I think that response is indicative of the bank’s acknowledgment of the undesirability of forcing a sale of livestock including productive females. 599 I am not satisfied that the bank specifically called upon the sale of part of the group’s breeding herd as distinct from seeking to obtain reduction of debt which necessarily involved a sale of livestock. I think it is reasonably clear from the evidence that the business banking sector was mindful of the futility of indiscriminate sale of female livestock to reduce debt, having regard to the adverse mid to long term impact on cashflow through depleted sale of progeny. 600 In my view, the bank’s treatment of the group account in this period was reasonable, given the deferment of sales of properties other than Kindon and South West Rocks and the granting of additional overdraft facilities in the third quarter of the year of $1,200,000 until 15 February 1995. 601 I think, so far as it was consistent with his duties to the bank, Bilimoria supported the group's objectives. The Wrights acknowledged that on a number of occasions. 602 David Wright observed to the bank on 8 May 1994 that with “the bank’s support, and despite the impact of drought and resulting impact on profitability, the enterprise is now one of the 20 largest beef cattle producer’s (sic) in Australia and arguably has the most fertile and productive herd”. 603 In David Wright’s letter of 20 September 1994, referred to above, he concluded with the following remark:
“We should also point out at this time that despite some incidental losses as a consequence of the drought, we have been fortunate to have been able to maintain our breeding herd intact. We anticipate that once the drought breaks, our breeding herd will be invaluable due to the desire of others to restock their properties ...”.
604 In his further letter to the bank of 23 September 1994 he commented in the following terms:
“To date and fortunately for us, the Bank has always taken a long term view of our business, the quality of the assets and the integrity of the principals.”
605 Much the same sentiments were expressed by Wright in his letter of 21 December 1994 as follows:
“We wish to sincerely thank you for the flexibility and support provided by the Bank during this difficult time and are most pleased to accept your offer of a temporary increase in Overdraft Facility … We cannot emphasise enough how grateful we are for the Bank’s understanding under the current circumstances. We are fully aware of the issues you have raised in your letter ... Once again thankyou for your invaluable support and cooperation.”
606 They were “difficult times”, for the most part severely affected by drought. The difficulties were exacerbated by the failure of the Kindon winter crop. 607 Further, on 25 January 1995, Wright responded to Bilimoria’s letter of 23 December 1994 by once again expressing the group’s “gratitude for the continued cooperation and support from the Bank” emphasising his “determination to substantially reduce debt levels over the course of 1995”. 608 Although I think it would be unreasonable to take those statements literally, given the financially precarious position of the group, I do think that they are an indication of the tone of the approach by the Wrights to the bank in meetings during this period which may go a long way to explaining the failure of the bank’s officers to recall some of the more critical comments made by Wright during those meetings in relation to the bank’s support of the group in the previous two or three years. 609 I think the relationship between the bank and the group during this period is captured in Sample’s handwritten comment on Bilimoria’s diary note of 7 June 1994 in which the latter recommended an extension of the time for the reduction of the overdraft facility to July 1994. Sample’s comment follows:
“First of all, let me say how appreciative we are of your cooperation and the Bank’s continuing support to the organisation during these difficult times.”
610 Briefly tracing the history of dealings between the parties in that period of control of the group account by group credit management: the bank submitted a draft of proposed facilities letter on 14 February 1994 and followed that up with a formal letter of 4 March 1994 which confirmed an increase in the overdraft of $900,000 essentially on the strength of the then current discussions with Bankers Trust which had confirmed its interest in merging operations with the Wright group by letter of 7 March 1994. In line with that approach, the bank agreed to a revised timetable for the planned sale of Boonaldoon and some 7,000 head. 611 Wright’s letter of 24 March 1994 confirmed that strategy and anticipated that board approval of the proposed Bankers Trust float “should be available by 31.5.94 at the latest”. As I read that letter, it envisaged the sale by the end of June or early July of 7,900 head which did not include any females required for breeding. The letter concluded with a caveat on that program that the group would need to be convinced that the float option did not remain a possibility in the short to medium term. Given the escape hatch that that caveat represented to a program of sale of assets, I think it was a little surprising that it was accepted by the bank as “a suitable letter” and “as per (the bank’s) requirements”. 612 On 28 April 1994 the Kindon property passed into the hands of Bankers Trust. In mid 1994, another proposal presented to the bank by Wright involved the transfer of the group’s assets into the trust with a request for the bank to provide additional facilities in the form of bridging finance to enable the group to purchase sufficient units in the trust to head off any other competitor in the market. The outcome of that proposal was, I think, predictable. The trust proposal was said to have “evolved over the past six months with the encouragement of Prudential-Bache”. Bankers Trust was also said to be interested in this proposal. 613 The asset management strategy report of 8 July 1994 reviewed the then current strategy, noting it as one partly agreed with the group. It recorded the sale of Kindon, the failure to sell the South West Rocks property at auction and outlined a scheme which gave the group until the end of July to pursue the Bankers Trust proposals. 614 Hudson’s monthly report dated 14 July 1994, reporting for the month of May, referred to the sale of some 1,669 head at prices averaging $333.30 per head. In like terms was his report of 10 August 1994 for the month of June, noting the sale of 2,109 head averaging $311.99. A follow-up letter of Hudson of 24 August 1994, after a meeting with the Wrights and the bank in Armidale on 18 August, enclosed the group’s forecast cashflows. In commenting on those forecasts, Hudson noted that “the 3,299 empty cows scheduled for sale in February, 1995 following the planned sale of Boonaldoon (were) not included in the Sales Forecast … These females (were) currently unjoined and almost unsaleable owing to drought. It (was) intended to mate them prior to their proposed sale in February, thereby more than doubling their current value”. These forecasts he observed were “in the unlikely event that the BT proposal … does not proceed”. 615 It was at this time that the bank became aware that the Bankers Trust interest in the proposal under discussion with the Wrights had waned. In addition, the pressure upon the group was heightened by the severe drought conditions which were noted, in relation to Boonaldoon, as involving the lowest annual rainfall for 120 years. 616 Bilimoria’s diary note of 30 August 1994 recorded his acceptance of the fact that the “ability (of the group) to generate cashflows and future profitability (was) wholly dependent upon maintaining their breeding herd”. His recommendation was that the bank “assist the customer” and he observed that the bank “would not wish to be seen to be forcing cattle sales under the present circumstances”. His recommendation involved increasing the overdraft by $1,200,000 up to mid February 1995, a recommendation which was accepted by the credit sector. The negotiations with Bankers Trust collapsed with a letter from Bankers Trust to Wright of 10 October 1994. 617 In the following month, there was an inspection by bank officers of Boonaldoon which underlined the struggle the group faced with the prevailing drought conditions. It was noted that the property was barren and that there were some 1,100 head of cattle and 5,000 sheep being handfed and 2,500 head on the stock route. Hudson’s letter to the bank of 18 November 1994 recorded that the drought affected the New England properties along with Boonaldoon. 618 I think of particular interest in that letter is Hudson’s recognition of the need to dispose of stock in the face of continuing drought conditions given the cost of handfeeding. He expressed the opinion that “should the drought not be over in (the New England) region by the end of March, 1995, when the New England Tablelands growing season normally finishes, we would not have sufficient grass to carry all the stock through the late Autumn and Winter months. We would be forced to substantially destock the properties irrespective of the price and condition of stock”. He anticipated that this “decision (would) be reached well before the end of June, and (the group) would commence a selling program from late March”. 619 In the knowledge that drought conditions did persist in 1995, the sale of livestock in that year should, in my view, be considered in the context of that opinion. 620 I endeavoured to elicit from Wright whether the group possessed a rule of thumb policy in relation to the retention of stock in the face of mounting and continuing cost effects of drought. I was unsuccessful in eliciting any clear evidence of such a policy. However, I think, as a matter of logic, there has to come a time in an enterprise such as that conducted by the group, when the cost of maintaining a herd in drought conditions outweighs any other consideration so as to dictate recourse to forced sales. In expressing that view, I am mindful of the evidence that the group had developed a core herd which was considered to be superior to that available from the group’s competitors. That factor, I think, may only be taken so far. 621 Hudson’s monthly report for December recorded no sales of any consequence and I think by year’s end the group had successfully managed to defer sales of further properties and to avoid excessive forced sale of livestock, notwithstanding severe drought conditions. However, in the bank’s letter of 15 December 1994 varying the facilities by the provision of a temporary increase in the overdraft of $1,000,000, it was noted in relation to Boonaldoon that the bank “would wish to see the property placed on the market as soon as improvement in conditions (was) evident.” 622 The period from December 1994 to the end of group credit management’s control of the group account was marked by a series of revisions by the bank of facility requirements. That ending coincided with a meeting held on 10 May 1995 in which the Wrights brought forward an inauspicious proposal that the bank provide further funding of $3,100,000 to permit the group to invest in the trust proposal advanced by Prudential-Bache. It appears that the bank was prepared to take cognisance of the proposal to the extent that it accepted that Boonaldoon may not be sold prior to mid year, while cautioning that the Prudential-Bache proposal “should not be used to delay any cattle sales past June and consequent debt reduction by 30/6”. 623 Given the strategy of asset sales, including sale of Boonaldoon, recommended in the James reports and the group’s acceptance, in principle, of that situation, the group had successfully staved off sale on the strength of negotiations involving Bankers Trust and Prudential-Bache and by gaining bank recognition of the difficulty of marketing Boonaldoon in the depth of drought conditions. 624 Between 10 May 1995 and 2 February 1996 the group account came back to business banking when the day to day administration of the account became the responsibility of Allen, who reported directly to Pilley. At that time credit restrictions on the group account were subject to the control of Ron Miller (Miller) who was regional credit executive. He assumed conduct of the accounts as the senior officer to Pilley and Allen. 625 The group account was put into default with the group’s inability to comply with the bank’s demand of 2 February 1996 to pay the interest instalment of $242,934.34 due on 5 February 1996. At the time of that notice, the group’s overdraft facility was in an excess position and the group had little prospect of meeting the demand. 626 During this period, notwithstanding an agreed strategy to reduce debt by orderly sale of assets, the only property sale that was effected was the sale of South West Rocks for $550,000, settled on 18 May 1995. For the most part during this period the group struggled under the continued debilitating effect of drought upon the rural property market, upon the market value of livestock and upon the physical condition of both livestock and properties. 627 There were numerous meetings between the parties during this time. The subject matter of discussion at those meetings in my view was not particularly noteworthy in the context of the issues in this case. The group successfully staved off the sale of Boonaldoon, the principal target for sale, largely by recourse to dealings with Rabobank with the objective of refinancing the group’s borrowings and by continuation of proposals involving the group’s investment in the trust. 628 In relation to the Rabobank negotiations, it appears that in mid 1995 those approaches looked like resulting in the provision of a long term facility of $36,000,000. However, by mid July 1995, that proposal appears to have fallen down. 629 The Wrights also retained consultants, Bird Cameron Partners, who explored alternative asset disposal propositions on behalf of the group. I think it is an understatement to say that their efforts were singly unattractive to those bank officers engaged in overseeing some debt reduction strategy. 630 Although a tight rein was held by the bank over the group’s finances during this period, the bank, nevertheless, provided temporary increases in overdraft at various times during the year and progressively extended times for reduction of overdraft. By year’s end, the overdraft facility had increased to $5,700,000. 631 It is evident from the diary note of Allen of 22 May 1995 that there was a growing hardening of the bank’s attitude to the group account and to the deferral of asset sales. The diary note was circulated to Pilley, Miller, Buckley and Lucas. In relation to Allen’s proposal to adopt a “firmer tone”, Miller noted “I would suggest an iron fist”. At the same time, I think it is clear from Allen’s diary note and the comments upon it by other bank officers that the aim was “to leave the group with a viable operation based around the “home” properties”. At that stage, the core assets were seen as consisting of “Wallamumbi, Forglen/Conningdale/part Thorpleigh” with an estimated realisation on sales of $30,000,000. Other records suggested that the core assets included Achill. However, of that strategy it was generally recognised that “while a sell down to a viable structure (was) possible, it (was) not certain, due to the erosion of equity that has taken place while the client has resisted taking action.” To that Miller had noted: “However sell down is now necessary”. 632 The general position of the bank was summarised as follows:
“Extension to 15/7 NOT to be advised to PAWS - Pressure to be kept ON .”
633 Allen’s concern with the viability of the proposed “sell down programme … over an extended period” was that “if the current conditions (prevailed, the bank) could be faced with further increases in debt of at least $1M p.a. and no certainty in the properties being sold and at acceptable prices”. 634 Allen saw the strategy of selected asset sales in the context of the James reports in the following terms:
“ Summary
The credit has deteriorated and is no longer an automatic “hold”.
The Bank thus far has not taken any meaningful steps to protect its position. We do not wish to increase our exposure on speculative ventures such as investment in RPT units.
A structured sales programme may leave a viable operation based around the core properties.
This should be reconfirmed by Geoff James of Ernst & Young.
Split banking that leaves us with the same risk profile is unacceptable.
The Bank should indicate its continued willingness to support the client through a sales programme but indicate it is a firm requirement. If the group does not wish to proceed along this path, it should seek refinance and/or we will undertake legal process.”
635 I think the significance in the change of control of the group account in May 1995 is caught in the following comment of Allen in relation to the bank’s strategy under consideration:
“It is noted that we hold investigating accountant’s reports which clearly show that the group is not viable given volatilities in price, seasons and interest rates; over the past twelve months debt has escalated substantially.”
636 The strategy was taken up in the letter from the bank to Wright of 24 May 1995 which envisaged the sale of Boonaldoon by 31 August and with the property being “placed formally with an agent by 30th June”. As earlier noted, that sale was progressively deferred during 1995. 637 In keeping with Wright’s strategy of deferring property sale pending the outcome of the group’s proposals involving third parties, the group achieved deferment of cattle sales in mid year. Forecast sales provided for only 313 head being sold in July with further sales deferred to August/September. Miller’s response to the deferment of sale was recorded in his note of 25 July 1995 which included the following:
“To this end as a new team without any loyalties to the client we can insist on a workout strategy which must meet agreed targets.”
638 Increased overdraft facilities were provided in the bank’s letter of offer of 31 August 1995 which increased the overdraft to $5,000,000. It was at about this time that Bird Cameron Partners appeared on the scene and as far as I have been able to ascertain, they remained until shortly prior to the bank’s letter of demand in February 1996. 639 As previously noted, it was somewhat ironic that the attempted marketing of Boonaldoon was frustrated in late 1995 with the incidence of rain in November causing an extension of the sale date to 22 December 1995. There was a further delay in the sale of Boonaldoon attributed to the failure to clear with the authorities approval of certain development activities considered necessary to enhance the value of Boonaldoon. That was referred to as the “SEPP 46” submission which was required to obtain approval for land clearing, in this instance for cropping purposes. 640 The relationship closed on a sour note. A meeting of 24 January 1996 was arranged at the request of Wright between consultants retained by the group, Beerworth & Partners Ltd, Allen and Buckley to explore the possibility of repayment of the bank debt “at a discount to its face value” or “to see if there was a possibility of pursuing … other refinancing options”. In the course of the approach, the consultants apparently submitted a document described as “Investment Opportunity” which was dismissed by Buckley on the basis that the consultants’ “time would be better spent “practising (their) golf swing”.” 641 Much the same attitude was adopted by Buckley in the very little time that he afforded the Wrights at their requested meeting with him and Allen on the afternoon of 5 February 1996. There may be some disagreement as to the comments that passed on that occasion, but there was little disagreement, I think, in terms of the attitude adopted by Buckley to the Wrights. 642 It was following that meeting that the bank notified the group by letter of 6 February 1996 of an ‘Event of Default’ requiring the group to remedy the default by 8 February 1996, failing which, the group was notified that the bank would be entitled to terminate the bank’s obligations and declare all outstanding amounts due and payable. 643 I think it should be recognised that the approach I have adopted to the issues in this matter embrace what I consider is the most favourable basis for examination of the group’s case, howsoever pleaded. For the foregoing reasons, I am satisfied that no case of actionable representation sounding in equitable compensation or damages has been substantiated by the group. Further, I am satisfied that the group suffered no expectation losses which call for quantification and that any amendment of the group’s pleadings to found a case in contract, would be futile. 644 In relation to quantum issues, there may be some utility in the identification of the approaches which should be adopted had different conclusions on liability been reached. 645 An underlying problem in addressing those issues arises out of the fact that at the commencement of the proceedings the parties were still in the process of preparing statements of evidence on quantum. 646 To forestall some of the difficulties related to that situation, directions were given on 9 September 1998 in the following terms:
“The essential reason why little has been achieved on the debt reduction side is failure to set and stick to deadlines and face the hard options when the borrowers ignored conditions. Customers have been left to control the situation and us.
Whilst it makes no sense to force sales at the wrong time of the year or in drought conditions where large capital losses result, it does make sense to test the market formally when conditions are suitable. The latter is the case now with Boonaldoon and Yarrowyck and we must not let borrowers off the hook this time. A tender is appropriate here not an auction in the first instance as it is more flexible and likely to bring out genuine buyers. The option of unlimited time to achieve … sales is not on!”
647 That direction resulted in several joint reports being incorporated into what became Ex AS and Ex 59. I think that exercise of joint reporting was of considerable assistance in the evaluation of points of differences in the respective approaches adopted by the parties’ experts. Where it was unsuccessful was in the failure to head off the tendering of further reports by both parties after the preparation of Ex AS. 648 That resulted in objection being taken by the bank to some of the statements of evidence tendered in the group’s case on the basis of prejudice arising out of the lateness of serving those statements. There were several such statements objected to and the procedure I adopted was to admit the statements with the view to reconsidering the objection in the light of any prejudice to the bank that survived my reasons for judgment. I am satisfied that there is no prejudice to the bank in the admitting of those statements, given my findings on liability. If it should ever become necessary to revisit quantum issues, the bank will have ample opportunity to meet the subject evidence admitted in the group’s case. That approach, however, precludes me from making ultimate findings which are dependent upon that material. 649 Furthermore, I think the nature of the group’s case makes it impractical to second guess which of the permutations or combinations of claims may ever require further examination: particularly where there is interrelationship amongst the major elements of claim. 650 The group’s losses were quantified as the minimum equity to which the group was entitled. The ‘minimum equity’ was measured on the premise that the group would not have embarked upon its expansion plan and change in herd strategy, with the attendant ballooning of debt, had the bank not represented that repayment would be governed by the group’s cashflow and its maintenance of an adequate security cover. 651 The claimed relief was summarised as follows:
“In the case of the subject matter of the reports of Messrs James, Black and Cox, I direct the experts to confer forthwith and to produce by 4pm, 14 September 1998 a joint report including the following:
1. Accepting the assumptions the other has made, the experts are to identify their agreement upon the accuracy or validity of the calculations and conclusions so reached and where there is disagreement identifying that disagreement and the reason therefore;
2. In respect of assumptions made or methodology adopted by the other, each expert should identify the areas of agreement in relation to those matters, and where there is disagreement identifying that disagreement and the reasons therefore;
3. Finally, in bullet form, a schedule should be produced identifying the perceived deficiencies in each other’s reports and the consequences of those deficiencies, including monetary consequences when it is practicable to do so.
In the case of Messrs Guinness, Black, Hatton and Evans, I direct that a joint report is produced in the same manner and form as that set out in relation to the joint report of Messrs James, Black and Cox, noting that it will not be necessary for the final reports of each of those experts to be available prior to the commencement of joint conferencing which, as I have directed, is to take place forthwith.
By way of explanation, I think it is preferable to proceed to a joint report, notwithstanding the incompletion of the preparation of opinion evidence by one or other of the experts, particularly where the form of the joint report envisaged will overtake the necessity, I think, to produce final reports other than the joint report.
In the case of Messrs Fitzgerald and Watson, I give similar directions to the foregoing.
In the case of Messrs Gardiner and Stewart, the same.
In the case of Messrs Button and Rowlands the same, noting that the latter’s report is the only in draft stage.”
652 The claim for “[l]oss arising from entering fixed-rate loan” is without any merit, in my view, and little was heard of it at the conclusion of the case. It was based upon the bank’s allegedly negligent advice that favoured the provision of a fixed rate of interest loan, as opposed to a variable rate, to assist in the acquisition of Boonaldoon. 653 Earlier in these reasons I have noted the extensive business activities of Wright, his comparatively wide business experience beyond the narrow confines of a grazing enterprise and his recourse to consultants and social contacts of commercial prominence to assist him in the formulation of views about such things as movement in interest rates. 654 Wright acknowledged, during the course of his evidence, the vagaries of the interest rate market. While it is clear that the bank provided Wright with information concerning that market, I think it is unrealistic to seek to impose upon the bank the adverse consequences of a commercial decision by the group based upon a prediction of the possible movement in the cost of borrowing. 655 In the quantification of loss, the group, initially, sought compensation on what may be described as a complete indemnity basis, making no allowance for an analysis based upon a reduction of debt within a reasonable time of becoming aware that the bank support upon which it relied was no longer available to it. 656 James, in his report of 20 July 1998 (the James 20 July report), raised an issue of importance in the proceedings by making an assumption that, upon the group being made aware of the bank’s attitude to the group account in the first half of 1991, it should have acted immediately to reduce debt by the sale of Boonaldoon, together with its related stock, plant and machinery. On this basis, he reduced the claim for cost of borrowing to $3,010,147 and allowed nothing in respect of the claim for lost profit. 657 As I think I indicated to James during the course of his evidence, the bail out date of 30 June 1991 was quite unrealistic on any reasonable approach to the evidence. However, I am equally satisfied that in the face of the communication by the bank of 21 June 1991, and the confrontation with Buckley of 1 August 1991, the group could not have been left in any doubt that the bank support, as they understood it, was no longer available to it. 658 The most obvious step to be taken involved the disposal of Boonaldoon and its related livestock and plant and equipment. A consequence of that action, as a matter of practicality, I think, involved pulling out of negotiations with Coles at the end of the one year supply contract, or, at least, treating the supply arrangement as at an end as at 1 April 1992, leaving only the sale of livestock in the Coles pipeline to be completed. 659 Partly, I think, at my instigation during the course of the proceedings, a series of analyses were then carried out by James and Stuart Alexander Black (Black), a partner in a firm of chartered accountants practising as Chapman & Eastway. On a variety of bases, these analyses assumed sales as at 30 June 1992 and other dates through to the actual sale of Boonaldoon in 1996. It was what the Black analyses described as scenarios 3.2, 3-2A, 3.3 and 3-3A which drew the objection of the bank on the grounds of prejudice arising out of their late formulation. The report was admitted as Ex 72 on the basis earlier noted that I would re-examine the question of prejudice in the context of my findings on the issue of liability. 660 While no prejudice has resulted to the bank in the admitting of that evidence, it is clear that no ultimate findings should be made as to quantum based on that material prior to the bank being given the opportunity of addressing that material. However, I think it is open to me to say that I consider the Black analyses, noted as versions 4, 6, 3.2 and 3-2A, indicate the range of analyses indicative of the effect of a minimum bail out which I consider the Wrights were obliged to undertake, they being analyses predicated on the sale of Boonaldoon in 1992, adjusted for the actual sales of Kindon and South West Rocks (analysis 4); a similar bail out with Boonaldoon being sold in mid 1993 (analysis 4, 3.2 and 3-2A). On each of those bases, Black estimated that the earning before interest and taxation would have been increased and he estimated the debt level in relation to the value of security as being within reasonable limits. 661 However, in carrying out those analyses, Black relied upon the valuations of George Bruce Gunning (Gunning) and of Terrence Stewart (Stewart). In the case of the Stewart valuation, Ex AS, the joint report provided a comparison between his valuations of the group’s New England properties and the valuations of Robin Gardiner (Gardiner). Stewart’s valuations were approximately double those of Gardiner, if one was to take into account Stewart’s “premium” which he applied to the “total holding” of the group. That brought his total valuation to $34,500,000 compared with Gardiner’s total of $17,075,000. 662 I think it is sufficient to say that of the two valuations, Stewart’s were the most favourable that could be placed upon the group’s properties, ascribing to those valuations the full effect of the claimed DSE capacity of the properties. That can be measured by his use of a DSE equivalent of 219,670 as compared with Gardiner’s 128,450. I think the group’s estimated DSE involved considerable stock pressure on the group’s properties which would be capable of supporting that capacity only through vigilant improvement of pastures. While those estimates were on the high side, I would be prepared to act on the group’s estimate of the carrying capacity of its properties. 663 Moreover, I think Stewart has probably placed too high a value on the DSE value of the properties which has resulted in a valuation range of $1,299 to $1,945 per hectare for Wallamumbi. In substance, those valuations are not supported by comparable sales. At the same time, if it came to the point of assessing the group’s loss, I would favour the general approach of Stewart based on the enhanced carrying capacity of the group’s properties and reflecting, in part, the status of the group’s properties and of its livestock in the industry. Still, a significant discount would be called for to give some expression to what I think is the extreme of the range of reasonable valuations which his valuations represent. I would not regard 20% as too heavy a discount, given the range of property sales evidenced by Gardiner. 664 When that discount is built into the Black analyses, I think it would bring into question the capacity of the enterprise to sustain the operation at the reduced level of debt as hypothesised by Black. James has not prepared an analysis which can be compared directly with Black’s analyses 3.2 or 3-2A, for the reasons earlier referred to. He has prepared analyses which may be compared with analyses 4 and 6. To the extent that different modelling techniques have been used by those two experts, I prefer to make no finding, given the absence of a reasonable opportunity for the bank to fully examine Black’s modelling computer aid. 665 While it is clear that the James’ model, in principle, is a reliable tool for an exercise of this kind, I have some difficulty with the comparative inflexibility of it as a “Steady State” model. Further, I think there are deficiencies in the model in terms of the data base adopted by James in using that computer tool, as more particularly identified in the joint report, Ex AS. 666 In any revisiting of the quantum issues seeking compensation in relation to cost of borrowing or loss of profits, I anticipate a significant issue may arise as to the true cost of the group’s dealings with Coles. If, contrary to my finding, it was held that the group embarked upon that commercial arrangement in reliance upon bank representations of financial support as alleged by the group, it is still difficult to see how that led to any quantifiable loss during 1990 and 1991. If one assumes that the commercial arrangement was financially beneficial to the group, there should have been no loss attributable to the bank’s conduct. As at the end of 1991, the Wrights should have been in a position to retire borrowings which had been obtained for the purpose of purchasing livestock for the Coles supply agreement. The persistence in negotiations after the one year supply agreement and any decision involving the supply of boxed beef to Coles at an unprofitable price, were commercial decisions which, I think, are solely the responsibility of the group. 667 The restoration costs represent a major area of claim. However, it is my view that, in the event that the group established some bank liability for the group’s losses, the group still faces a considerable hurdle in recovering restoration costs. Essentially, that is a claim based upon several years of depletion and destruction of pastures and deterioration of property and improvements said to have been occasioned by the withdrawal of the bank’s support which resulted in the group being deprived of financial resources necessary for the maintenance and improvement of those properties. 668 The difficulty with that aspect of the case lies in my conclusion that by mid 1992, or at the latest mid 1993, the group should have effected a recovery of its expansion strategy by reverting, as far as practicable, to its pre 1988 strategy. 669 On that basis, it is difficult to see what serious deterioration of property and improvements would have been sustained. A general and gradual catch up in maintenance works should have overcome any drop in maintenance works that occurred in 1992-1993. I think that consideration applies particularly to the application of fertiliser and seed for pasture improvement. 670 In that context, I note that there is a conflict of evidence of the discussion at the meeting between the Wrights and the bank of 22 June 1992 concerning planned fertiliser application to the group’s properties. It was the evidence of Wright that the expenditure for fertiliser had been dropped from the group’s forecast at the suggestion of the bank. The diary note of that meeting recorded the following:
“ Summary
Capital loss on Boonaldoon plant
and equipment $ 777,318Expenditure on improving Boonaldoon $ 257,739
Loss resulting from the acquisition of Melrose $ 1,663,794
Cost of borrowing with respect to the
post-1988 strategy $ 20,380,131Loss of profits $ 4,294,849
Loss arising from the sale of South West Rocks
and Kindon $ 440,065Cost of restoration of the PAWS’ properties $ 12,572,000
Loss arising from entering fixed-rate loan
for Boonaldoon $ 1,333,481Total $ 41,796,685
Plus
Damages comprising expectation loss with respect
to the Coles' contract - to be ascertained; and interest
on the above losses where appropriate.”671 Whatever the circumstance of the omission of the application of fertiliser in the 1993 budget, the effect of that omission would have been readily redressed in the following year or years. I think the evidence is reasonably clear that the pastures were doing reasonably well in the dry conditions that were prevailing at the time of that meeting, such as to avoid supplementary feeding of livestock. 672 The principal witness in the group’s case on restoration costs was Dennis Leslie Watson (Watson), a highly qualified rural consultant who was retained to estimate the costs of restoring the group’s properties to a condition they would have been in had they been subjected to prudent maintenance and operating expenditures in the years following 1991. In making his assessment, Watson relied upon the evidence of John Godby Weston (Weston), who had extensive personal knowledge of the group’s practices and testified to the high standard of management and maintenance adopted by the group. I think Weston’s evidence should be accepted. There has been an attack on those standards in the bank’s case which, I think, lies very uncomfortably beside the various reports obtained by the bank from inspection of the group’s properties in years past, including very favourable observations in McMichael’s report to James of 19 November 1992 following his inspection of the group’s properties. 673 While I think the evidence leaves little room for doubt that the group tested the capacity of its holdings to support livestock, and made shrewd use of the ‘long paddock’, I am satisfied that the group’s properties were highly improved and capable of sustaining an above average carrying capacity. As a corollary to that method of operation, I think it follows that the properties stood to be hard hit by a prolonged drought. However, as reported by McMichael towards the end of 1992, the properties were surviving well. Watson did not address improvements in the nature of buildings or the condition of plant and equipment. 674 A builder, Paul Marquardt (Marquardt) reported on the cost of restoration of improvements. Marquardt’s evidence bordered on the useless, not because of any failings of Marquardt as an expert, but by reason of the irrelevant basis upon which he was retained to carry out his costing report. 675 Watson’s total estimated costs of restoration was $16,113,200. After allowance for maintenance costs which would have been incurred in the ordinary course, the figure came down to $12,572,000. Dr R D Fitzgerald (Fitzgerald), an agricultural consultant with considerable experience in agricultural research, mainly in the field of pastures, made a like analysis which allowed restoration costs in the sum of $5,385,726, before allowing for an adjustment for agistment, which brought his net costing down to $3,825,726. 676 The points of difference between the two are precisely stated in appendix B to Ex AS. In general terms, I think the significant observation of Fitzgerald is that Watson’s quantification amounts to $791 per hectare which rather confirms the strong impression given during the course of Watson’s evidence that his method of quantification reflected a ‘Rolls Royce’ approach to the task. 677 The bank relied upon the evidence of Dr Brian J Button (Button), a professor in earth observation systems, whose counterpart in the group’s case was Dr Nick Rollings, who possessed expertise in the field of remote sensing techniques. Both used satellite imaging of the group’s properties to express views as to their state at the time of inspection of analysis. 678 The bank’s case was further supported by Anthony Jack Guinness (Guinness), a rural management consultant with extensive experience in rural management. His counterpart in the group’s case was Dr David Evans. The approach of Guinness to the depleted state of the group’s properties is reflected in the following passage from his report of 16 July 1998:
“1993 budget does not include fertiliser expense which is 1992 cost, $662,000. PAWS believe the super levels are satisfactory and therefore to over super in seasonally unfavourable conditions is uneconomic.”
679 In my view, there is little difference between the opposing sets of experts as to the state of the group’s properties in 1998. Fitzgerald, who conducted a three day inspection of the properties in June 1998, noticed that the pastures were “short, ranging from almost bare ground with only a cover of lichens”, with a particularly low estimated yield of dry and green matter. This was consistent with the evidence drawn from satellite images. I think the essential difference in approach reflected in the two cases lies in the attribution by the bank’s experts of the degradation to severe overgrazing, the result of poor management practices of overstocking during a prolonged drought. In principle, I think the Guinness approach is correct, in that there must come a time in prolonged drought when it is uneconomical to retain livestock. To that extent, restoration costs as assessed by Watson would have to be discounted. 680 While recognising that the above average quality of its commercial herd may have dictated a decision by the group to retain livestock, I think the retention of the group’s herd through a severe and prolonged drought was dictated mainly by a combination of a misplaced anticipation of an early end to the drought and the desirability of retaining the herd while the group endeavoured to explore the availability of equity capital to relieve debt pressure. To that extent, property degradation should not be attributed to the conduct of the bank. 681 For those reasons, I am of the view that the relevant time for considering any entitlement to restoration costs would be limited to the period ended 30 June 1993 at the latest: that any degradation of pasture, property or improvements could be gradually accommodated in following years: that the retention of the herd through the drought, though an understandable commercial decision by the group, nevertheless, was one the consequences of which must rest with the group. 682 The claim for capital loss and expenditure in relation to the purchase and sale of Boonaldoon was predicated in the group’s case on the assumption that the 1996 sale of Boonaldoon was the time when it was reasonable for the group to divest itself of that property and its related stock, plant and equipment. The claim is quantified on the basis that the group is entitled to a “complete indemnity” in relation to that loss. However, as in the case of the claim for restoration costs, I am of the view that any entitlement to loss arising out of the purchase and sale of Boonaldoon and its related stock and equipment should be measured by a sale by 30 June 1992 or, at the latest, mid 1993. 683 This head of loss was supported by the evidence of Phillip Charles Edmond Cox (Cox), a chartered accountant of considerable experience in his profession. He assessed the loss at $777,318, in addition to $257,739 in the nature of unrecouped expenditure by the group on Boonaldoon. James accepted the methodology adopted for this calculation of loss and the accuracy of the calculation. 684 In the James 20 July report, James concluded that any capital loss was attributable to the general decline in land values in the Moree district and to the effect of overstocking. As at mid 1992, and possibly 1993, it is doubtful whether any devaluation through overstocking would have been in evidence or played a part in the sale price of Boonaldoon. There was evidence of a general decline in values of wheat properties in the Moree district of between 15% and 20% between 1990 and 1992. However, I think the approach adopted by Cox is correct in comparing the total price on purchase and sale, in each case, on the ‘walk in, walk out’ basis. In the way in which the group presented its ‘minimum equity’ case, I would have regarded the movement in land values evidenced by James as no basis for discounting the loss as calculated by Cox. 685 The Wrights’ unrecouped expenditure on Boonaldoon falls into a similar category. James maintained that costs of that nature should be discounted on the basis that those expenses would be treated “as an outright deduction or as depreciation” for taxation purposes. However, I do not regard that as a factor to be taken into account in any assessment of compensation. 686 The claim in respect of the Melrose loss, I think, is insupportable. The group’s initial investment in Melrose took place in 1987 prior to any change in group strategy. In my view, the move by the group to total shareholding in 1988 and 1989 was a decision which flowed from that initial involvement and was, in part, dictated by the commercial disadvantage of having a minority shareholding in an enterprise that was struggling financially. 687 The evidence disclosed that from the Melrose financial statements for the year ended 30 June 1988, and from losses recorded in management accounts to January 1989, there was a deficiency in shareholders’ funds of over $700,000 and trading losses were showing no real signs of abatement. Clearly, I think the group made a commercial decision to stem that flow by taking control of the business substratum of the share investment. 688 The assessment of loss said to have been associated with the sale of South West Rocks and Kindon is in a different category to the sale of Boonaldoon, in my view. In substance, the Wrights’ case is that the net selling price of those interests is to be measured against valuations of those properties. However, Cox, in his assessment of loss, used directors’ valuations. In the case of Kindon, the directors’ valuation was said to be based upon an “Independent Valuation 19 May 1991”. There was no such expressed basis for the directors’ evaluation of the South West Rocks property and I would not regard that valuation as an acceptable measuring stick for any loss said to have been suffered by the group on sale. 689 I have considerable doubt about that method of evaluation of loss. The group advanced a case of loss through forced sale. However, I think that would call for some evidence of the long term value of these properties against which could be measured the prices obtained by the group upon their sale. 690 In the case of Kindon, the 1991 valuation valued the group’s interest at $5,391,060 against which the contract price for the group’s share represented $5,325,000. In those circumstances, I would treat the sale price as reflecting no measurable loss attributable to a concept of forced sale. 691 I have referred to the manner in which I have treated the admissibility of the Black report, Ex 72. In the same category is the affidavit of Wright sworn 27 October 1998, Ex 62, Watson’s report of 30 October 1998, Ex 61, and the report of Bruce Gunning of 18 September 1998, Ex 66. Without examining any element of prejudice that may have existed in the late admission of that material, in the face of my findings on liability, I am satisfied that there was no surviving element of prejudice to the bank in the manner in which that material has been admitted. 692 Accordingly, there is to be a judgment for the plaintiff in the sum of $31,911,666.40, together with interest thereon. I will hear argument, if necessary, on the date from which and the rate at which interest is to be calculated. 693 The cross-claim is dismissed. The defendants are to pay the plaintiff’s costs of the proceedings and of the cross-claim. I will hear argument, if necessary, on the basis upon which costs are to be assessed. 694 I make orders in terms of paragraphs 5, 5A, 6 and 7 of the claims in the plaintiff’s second amended summons, save that, in relation to paragraph 7, execution of any such writ shall be stayed pending the making of final orders in relation to interest and costs. The parties are requested to bring in short minutes of order in accordance with these reasons, together with submissions in respect of any outstanding matters.
“It is acknowledged that PAWS were concerned about having to reduce expenditure on fertiliser. However, if it were a condition of the Bank to reduce discretionary expenditure - and fertiliser was viewed by PAWS in that category, they had a number of options, including (but not exhaustively):-
1) Continuing to run 20,000 females and turning off young stock would have required fertiliser/seed inputs. As such it would be reasonable to expect PAWS, as a prudent manager, to advise the Bank that fertiliser was an essential , and should not be treated as a discretionary expense.
2) Reduce the program to the pre-1988 strategy and use part of all of the proceeds from reduction in numbers to fund a fertiliser/seed program. (It is noted that PAWS claimed that the value of the herd increased as a result of implementing the strategy).
3) Reduce the program to a point where there is equilibrium between pastures and livestock which would require some maintenance fertiliser applications.
From the evidence in the livestock analysis, PAWS continued their strategy of 20,000 cows. In my opinion, this management decision was fundamentally flawed in that it had no regard to the obvious consequence of degradation of pastures and ultimately economic unsustainability, in a climatic environment which is extremely variable.”
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