Argonaut Equity Partners Pty Ltd v Moran - [2020] WASC 24

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   ARGONAUT EQUITY PARTNERS PTY LTD -v- MORAN [2020] WASC 24
CORAM:   ALLANSON J
HEARD:   29 JULY - 2 AUGUST, 5 - 7 AUGUST 2019
DELIVERED          :   5 FEBRUARY 2020
FILE NO/S:   CIV 3185 of 2016
BETWEEN:   ARGONAUT EQUITY PARTNERS PTY LTD
Plaintiff
AND
RUSSELL HAROLD MORAN
Defendant
RUSSELL HAROLD MORAN
Plaintiff by Counterclaim
AND
ARGONAUT EQUITY PARTNERS PTY LTD
First Defendant by Counterclaim
ARGONAUT CAPITAL LTD
Second Defendant by Counterclaim
ARGONAUT SECURITIES PTY LTD
Third Defendant by Counterclaim

Catchwords:

Practice and procedure - Where lenders advanced loan to borrower - Where lenders represented by facility agent - Where proceedings brought by facility agent on behalf of lenders - Whether facility agent authorised to bring proceedings - Whether the borrower may challenge authority of facility agent to bring proceedings

Practice and procedure - Where defendant applied to amend at trial

Contract - Where lenders advanced money to borrower pursuant to loan agreement - Where term of loan extended by extension letters executed as deeds - Where extension letters stipulated the default rate of interest under principal agreement as the interest rate under the extension - Whether extension letters separate agreement - Whether the interest rate a primary stipulation

Equity - Where extension letters stipulated the default rate of interest under principal agreement as the interest rate under the extension - Whether interest rate a primary or secondary stipulation - Whether interest rate a penalty and unenforceable

Contract - Where companies associated with facility agent entered engagement to act as strategic adviser to borrower - Whether breach of duties under engagement.

Legislation:

Australian Securities and Investments Commission Act 2001 (Cth), s 12DA, s 12GM,
Corporations Act 2001 (Cth), s 1041H, s 1325
Supreme Court Act 1935 (WA), s 31, s 32
Supreme Court Rules 1971 (WA), O 21

Result:

Judgment for the plaintiff
Counterclaim dismissed

Category: B

Representation:

Original Action

Counsel:

Plaintiff	:	G R Donaldson SC & R Young
Defendant	:	M L Bennett & N Ekanayake

Solicitors:

Plaintiff	:	Ashurst Australia
Defendant	:	Bennett + Co

Counterclaim

Counsel:

Plaintiff by Counterclaim	:	M L Bennett & N Ekanayake
First Defendant by Counterclaim	:	G R Donaldson SC & R Young
Second Defendant by Counterclaim	:	G R Donaldson SC & R Young
Third Defendant by Counterclaim	:	G R Donaldson SC & R Young

Solicitors:

Plaintiff by Counterclaim	:	Bennett + Co
First Defendant by Counterclaim	:	Ashurst Australia
Second Defendant by Counterclaim	:	Ashurst Australia
Third Defendant by Counterclaim	:	Ashurst Australia

Case(s) referred to in decision(s):

Andrews v ANZ Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205
Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175
Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279
Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350
Dunlop Pneumatic Tyre Company v New Garage and Motor Company Limited (1914) AC 79
Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486
Gould v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406
Moran v Atrum Coal NL [No 2] [2015] WASC 218
Moran v Atrum Coal NL [No 3] [2015] WASC 219
Nyoni v Patterson [2012] WASCA 171
Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28; (2016) 258 CLR 525
Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676
Rowe v National Australia Bank Limited [2019] WASCA 140
Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646

ALLANSON J:

Argonaut Equity Partners Pty Ltd (AEP) and Russell Harold Moran were parties to a suite of agreements, made in 2014 and 2015, including a loan agreement under which Mr Moran borrowed $6,000,000 from a group of private lenders represented by AEP. The loan was secured against shares held by Mr Moran in Atrum Coal NL.
The loan was initially for a short period. The term of the loan was extended on three occasions, also for short terms.
In December 2016, Mr Moran was in default and AEP exercised its powers to sell secured shares. Although $12,000,000 was realised, AEP claims that $6,089,924 in principal and accrued interest remained outstanding. That result was due to interest payable under two extensions of the loan at an interest rate of 5% per month, capitalised monthly.
The interest rate was initially agreed as the default rate in the Loan Agreement. In two extensions of the term of the loan, Mr Moran agreed to pay interest at the 'default rate' until the principal and accrued interest was paid.
In this action AEP claims for the outstanding principal and interest. The primary issue is whether the interest obligation is unenforceable as a penalty. The question is whether the interest at the default rate was a primary obligation under the extension letters, and whether the penalties doctrine is engaged.

Background

The Argonaut Group is a corporate finance business. It includes:
(1)Argonaut Equity Partners Pty Ltd (AEP);
(2)Argonaut Capital Limited;
(3)Argonaut Securities Pty Ltd; and
(4)Argonaut Securities (Asia) Ltd.
In these reasons, where it is not necessary to specify a particular member of the Argonaut Group, I will refer simply to Argonaut.
AEP provides special situation financing, including bridge loans. Argonaut Capital is a corporate finance business, advising on mergers and acquisitions and primary equity capital markets. Argonaut Securities is the stockbroking division.[1]
[1] Exhibit 3 [9] - [12].
Mr Moran and AEP were parties to a Loan Agreement, made in June 2014; a subsequent Deed of Amendment and Transfer, made in December 2014; and two Extension Letters, both executed as deeds, made in June 2015.
AEP was a party to the agreements as Facility Agent for a group of lenders, and as Security Trustee under the Deed of Amendment and Transfer. Argonaut Securities was a party to the Deed of Amendment and Transfer.
By a further agreement with Mr Moran, made in November 2014, Argonaut was engaged as a strategic advisor to Mr Moran. Argonaut Capital and Argonaut Securities were parties to that engagement.
I deal with the formation and terms of these agreements in more detail below.

The Evidence

The non-expert witnesses

The Argonaut Group parties called five non‑expert witnesses:
(1)Edward Godfrey Rigg, the Deputy Chairman and Head of Corporate Finance at Argonaut Capital, and who described himself as running Argonaut Capital and AEP.
(2)Gregory Ryan Southee, Executive Director and Head of Asia for Argonaut Securities (Asia) Ltd, a member of the Argonaut Group located in Hong Kong.
(3)Matthew Peter Selby, Director, Corporate Finance, at Argonaut Capital.
(4)Nicholas John McDonough, Executive Director, Corporate Finance, at Argonaut Capital.
(5)Jon Biesse, Chief Investment Officer of Hoperidge Capital. Hoperidge Capital is an investment group and was the largest of the investors in the Loan Agreement with Mr Moran, through two other entities: Carjay Investments Pty Ltd and Hoperidge Enterprises Pty Ltd.
Mr Moran gave evidence on his own behalf.
Mr Moran did not directly challenge the credibility of the Argonaut witnesses, although the reliability of their recollection on particular matters was questioned.
The credibility of Mr Moran was more directly in issue although, as these reasons show, very little turns on his credibility.
There were occasions in the course of the evidence where the recollection of witnesses was shown to be faulty. But there was no basis for me to find that any of the witnesses was not truthful, either generally or on particular points.
AEP submitted that the court should draw inferences in accordance with the rule in Jones v Dunkel[2] from the failure of Mr Moran to call witnesses, including James Chisholm,[3] Peter Wall,[4] and Ron Forster.[5] The failure to call these witnesses was not, in my opinion, material to any question I was required to decide.

The expert witnesses

[2] Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, 320 ‑ 321.

[3] A director of Atrum.

[4] A lawyer at Steinepreis Paganin.

[5] A lawyer at MinterEllison.

Each party instructed an expert: Graeme Testar, Director of Corporate Finance and Capital Markets for PCF Capital Group Pty Ltd for Argonaut, and Andrew Bald, Director, Panthea Capital Pty Ltd for Mr Moran. Each expert produced a report and, following conferral, signed a joint memorandum of expert evidence.
The orders for the adducing of expert evidence required the parties to confer regarding the nature of the proposed expert evidence, and the specific questions on which the proposed experts would be asked to express their opinion.[6] The parties agreed orders that:
[6] Orders 17 August 2018.
1Nature of the proposed expert evidence (ie the field of specialised knowledge of the proposed expert)
1.1Evidence in relation to the terms on which a corporate adviser acting with reasonable skill and care could have refinanced the plaintiff's borrowings associated with the Loan Agreement.
1.2Evidence in relation to the terms on which a corporate adviser acting with reasonable skill and care could have sold all or part of the defendant's shareholding in Atrum.
The specialist field of the expert will be financial markets in Australia and realisation of security over listed securities.
2The specific questions on which the proposed expert will be asked to express his or her opinion…
2.1.1What steps should a reasonable and prudent corporate advisor in Argonaut's position under the terms of the Engagement have undertaken in relation to maximising the value of Mr Moran's shareholding in Atrum Coal NL? [7]
2.1.2During the term of the Engagement, what alternative funding arrangements were available to refinance Mr Moran's borrowings associated with the Loan Agreement and if there were any such arrangements, on what terms?
2.1.3During the term of the Engagement, what options were available to effect a sell down of part or all of Mr Moran's shareholding in Atrum Coal and if there were any options, on what terms?[8]

The documents

[7] Both experts agreed this question should be recast to consider the steps that should have been taken to maximise Mr Moran's investment in Atrum.

[8] Minute in relation to expert evidence filed 20 March 2019.

The parties tendered 12 volumes of documents, including the relevant agreements, although the volume of documents was substantially reduced following the trial.

The facts

Much of the evidence regarding the background to the dispute was unchallenged.
In 2011, Mr Moran incorporated and ultimately became a founding director and equal largest founding shareholder of Atrum Coal NL (Atrum), a company established for the purpose of acquiring and developing a coal project in British Columbia, Canada.[9] The other founding shareholders were Gino D'Anna and James Chisholm.[10]
[9] Exhibit 7 [19].
[10] Exhibit 7 [20].
Initially, Mr Moran and Mr D'Anna were issued with a combination of fully paid ordinary shares and partly paid ordinary shares. The partly paid shares were paid up to approximately $0.0001, and had an issue price of $0.20.[11]
[11] Exhibit 7 [21].
Atrum was listed on the ASX in July 2012.[12] At the time of listing, Mr Moran held 16,652,500 fully paid ordinary shares, and 16,652,500 partly paid shares.[13]
[12] Exhibit 7 [25].
[13] Exhibit 7 [27].
Atrum was underfunded. Mr Moran described the financial situation of Atrum in late October 2013 as 'dire', with approximately $3 million in outstanding invoices and no cash in the bank.[14]
[14] Exhibit 7 [48].
To raise capital Mr Moran and Mr D'Anna sought a solution to enable them to pay up the partly paid shares, to the extent permissible at law.[15] Mr D'Anna suggested that he and Mr Moran approach Argonaut, where Mr D'Anna had an existing relationship with Mr Selby.[16]
[15] Exhibit 7 [37].
[16] Exhibit 7 [38].
In November 2013, Atrum completed an $18.5 million equity placement through Blackwood Capital.[17]
[17] Exhibit 7 [50].
Mr Moran had several discussions with Mr Chisholm about paying up the partly paid shares. He approached Mr Richardson of Blackwood Capital, and some other people attempting to find a lender.[18]
[18] Exhibit 7 [55].
In March 2014, Mr Moran sent an email to Mr Selby asking if he knew of any parties that would loan him funds to pay up his partly paid shares.[19]
[19] Exhibit 1.7.
Mr Moran said in evidence that, in 2014, he had no debt experience.[20] He was not financially inexperienced, however, having previously worked as a corporate advisor with a finance broker[21] and as a consultant.[22]
[20] Exhibit 7 [60].
[21] Exhibit 7 [7].
[22] Exhibit 7 [14].
On 9 April 2014, Mr Selby sent Mr Moran a 'Bridge Loan Term Sheet' which outlined the terms of a proposed loan.[23] In or about April 2014, Mr Moran signed a Summary of Indicative Non-Binding Terms, prepared by Argonaut, in relation to a proposed loan of $4.5 million, described as a 'Bridge Facility'.[24] The loan was to be for the purpose of funding payment of partly paid shares in Atrum to fully paid shares, and to purchase shares in Kuro Coal Ltd and Ebony Coal Ltd. The terms provided for a Drawdown Date in May 2014 - the loan was not, however, finalised until June.
[23] Exhibit 1.13, exhibit 1.14.
[24] Exhibit 1.22.
On the redemption date, Mr Moran was to pay the lenders a Redemption Premium 'equal to 15% of the Facility Amount'. The indicative terms referred also to a penalty interest rate of 5% per month.
On 2 May 2014, Mr Selby advised Mr Moran, by email, that Argonaut had received verbal commitments for the loan and would start to prepare formal documentation.[25] Mr Moran said he had numerous conversations with Mr Selby in the course of May 2014, and that Mr Selby was 'very positive and repeatedly highlighted the advantages that paying up my partly paid shares would have for me'.[26]
[25] Exhibit 1.53.
[26] Exhibit 7 [75].
On 8 May 2014, Mr Moran received a draft copy of the Loan Agreement.[27] He advised Mr Selby that he would have Mr Wall, from Steinepreis Paganin, look at the document, but said that he would need an outside legal opinion.[28]
[27] Exhibit 1.63, exhibit 1.64.
[28] Exhibit 1.63.
Steinepreis Paganin acted for Atrum. Mr Moran said in his witness statement that Mr Wall reviewed the Loan Agreement 'for myself and Gino [D'Anna]'.[29] It is not possible to make any detailed finding about the extent of the advice that Mr Moran was given.
[29] Exhibit 7 [81].
Mr Moran also asked Mr Ron Forster at Minter Ellison to review the proposed loan documents.[30] Mr Forster told him, in effect, that he had to look at the matter on behalf of Atrum.[31]
[30] Exhibit 7 [83].
[31] ts 499.
Mr Moran suggested the advice from Mr Forster was not independent advice. Whether Mr Forster was acting for Atrum or Mr Moran, he did review the terms of the Loan Agreement. On 27 May 2014, Mr Moran forwarded to Mr Selby an email from Mr Forster, suggesting changes to the Loan Agreement.[32]
[32] Exhibit 1.75.
On 28 May 2014, Mr Moran advised Mr Selby that he did not wish to proceed.[33] Mr Selby telephoned him and urged him to reconsider his position.[34] Mr Moran did not allege that Mr Selby in anyway pressured him.
[33] Exhibit 1.75.
[34] Exhibit 7 [98].
On 4 June 2014, both Mr Moran and Mr D'Anna confirmed to Argonaut that they wished to proceed with their loans.[35]
[35] Exhibit 1.94, exhibit 1.95.
At the time he applied for and entered the loan, Mr Moran had no capacity to repay it, or even to pay the Redemption Premium, from his own financial resources or from property other than the shares in Atrum and the two other coal companies. Mr Moran was reluctant to part with those shares.

The Loan Agreement

On or about 11 June 2014, the Loan Agreement was executed by:
(a)Mr Moran, as Borrower;
(b)the Lenders; [36]
(c)AEP, as facility agent; and
(d)Argonaut Securities Pty Limited, as broker.[37]
[36] Carjay Investments Pty Ltd ABN 73 115 006 285, Hoperidge Enterprises Pty Ltd as trustee of Hoperidge Enterprises Pty Ltd Superannuation Fund ABN 94 872 136 320, Skye Alba Pty Ltd ACN 149 257 214, the plaintiff, Brent Stewart as trustee for the Stewart Trust, Jacinta Ann Laing and Bailey Group Holdings ABN 67 150 306 442.
[37] The Loan Agreement is at exhibit 1.788.
The Loan Agreement referred to Atrum as 'the Company'.
Material terms included:
(1)Each Lender agreed to provide a loan to the Borrower on the terms set out in the Loan Document.
(2)By clause 3.3:
The Borrower must use the proceeds of the Loan for the following purposes and in the following order of priority:
(a)First: to finance the conversion of the Borrower's partly paid ordinary shares in the Company to fully paid ordinary shares in the Company, up to the maximum amount that is permitted by law to be converted into fully paid ordinary shares at the applicable time;
(b)Second (at any particular time, after the maximum amount of the Borrower's partly paid ordinary shares in the Company have been converted into fully paid ordinary shares in the Company, to the extent permitted by law at that time):
(i)to finance the purchase by the Borrower of fully paid ordinary shares in Kuro Coal Limited;
(ii)to finance the purchase by the Borrower of fully paid ordinary shares in Ebony Coal Ltd; and
(iii)to finance any other purchasing shares in the Company; and
(c)Third: to pay any other transaction costs associated with the purposes described in paragraphs (a) and (b).
For the avoidance of any doubt, the proceeds of the Loan may not be used for personal, household or domestic purposes or for (or to refinance) any residential property investment.
The loan did not accrue interest, but the Termination Payment included a premium of $900,000. The Loan Agreement also provided for default interest at the default rate of 5% per month capitalised (if not paid) on the last day of each calendar month. The interest was payable on demand. The 'Default Rate' was also payable on any judgment from the date of judgment until paid in full.
Mr Moran agreed to pay AEP an arrangement and facility agent fee of $300,000 on the Drawdown Date.
The Termination Date was 31 July 2014, but could be extended under cl 6.2 to the later of 31 October 2014 and six months after the Drawdown Date. Mr Moran could extend the Termination Date by giving notice before 31 July 2014, if specified conditions had been fulfilled to the Facility Agent's satisfaction. A condition of extension of the Termination Date was the execution of documents granting to AEP, as Security Trustee, a first ranking Security Interest in respect of 20 million issued and fully paid ordinary shares in Atrum.
The Loan Agreement provided for the appointment of AEP as Facility Agent, and for the nature of the relationship between AEP and the Lenders and its relationship with the Borrower. Expressly, AEP was not an agent of or fiduciary for the Borrower.
On or about 11 June 2014, Mr Moran issued a drawdown notice and thereby borrowed $6,000,000 from the Lenders. It was an agreed fact that he only used $2,861,374 of the loan proceeds for an approved purpose under cl 3.3 of the Loan Agreement.

Further transaction documents

On or about 29 July 2014:
(a)Mr Moran and AEP, in its capacity as Security Trustee, entered into a Specific Security Deed;
(b)Mr Moran, the Lenders and AEP in its capacity as Security Trustee entered into a Security Trust Deed; and
(c)Mr Moran, AEP in its capacity as Security Trustee, and Argonaut Securities Pty Ltd entered into a Deed of Undertaking.

On 29 July 2014, Mr Moran authorised Bell Potter Securities Ltd (Broker) to pay the net proceeds on the sale or other disposal of his shares in Atrum, up to a maximum amount of $6,900,000, directly to AEP.
On or about 29 July 2014, Mr Moran exercised the option to extend the Termination Date until 11 December 2014.

The mandate for Argonaut to act as strategic adviser

In November 2014, Mr Moran made a further agreement with Argonaut, set out in a letter headed 'Mandate to Act as Strategic Advisor' (the Engagement).[38] Subject to the terms set out in the letter, Argonaut accepted the Engagement to act as Mr Moran's strategic advisor 'in relation to maximising the value of [Mr Moran's] shareholding in Atrum Coal NL.' The Engagement included a potential refinance or rollover of Mr Moran's borrowings 'and a process to sell all or part of the Atrum Stake (Sell Down) (collectively, the Transaction)'.
[38] Exhibit 1.207.
The Engagement was to continue for nine months, or until such other date as was agreed in writing. During the term of the Engagement, Mr Moran agreed not to retain any other party to perform similar services in respect of the Engagement without Argonaut's prior written approval, and to refer to Argonaut all enquiries in relation to the Engagement.
By cl 2, the parties agreed that the Engagement would be on an exclusive basis, with Mr Moran to pay damages if he entered into any transaction in breach of Argonaut's exclusivity.
Clause 3.1 set out the obligations of Argonaut including:
•advising and assisting Mr Moran in executing a strategy to achieve the Transaction on the best possible terms;
•managing a confidential and competitive process to achieve the AEP Loan Refinance;
•managing a confidential and competitive process for the sale of Mr Moran's shareholding in Atrum;
•developing a list of potential purchasers of the Atrum shares and targeting priority parties for participation in the Sell Down.
The Engagement specified an Argonaut Team comprising Mr Southee, Mr McDonough, Mr Selby and Mr Wu with additional assistance, including by Mr Rigg. Mr Southee and Mr Wu were located in Hong Kong.
Mr Moran was required to pay professional fees including an engagement fee, success fees, and reimbursement of Argonaut's expenses.
The Engagement could be terminated by Argonaut by seven days' notice in writing, and by Mr Moran, in his sole and absolute discretion. Mr Moran was required to pay the sum of $100,000 (less any Transaction Engagement Fee already paid), should he terminate the Engagement.
By cl 11, Argonaut formally disclosed that it and its related and associated companies may hold securities in Atrum, that it was the arranger of and a lender in the AEP loan syndicate, and that it acted as facility agent to the AEP loan syndicate and received fees. Argonaut further disclosed that it had previously acted as Atrum's financial and corporate advisor.
By cl 12, Mr Moran was free at all times to accept or reject the terms of any AEP Loan Refinance or Sell Down, and could terminate the Engagement at any time in his discretion.
Mr Moran acknowledged that Argonaut Capital and, potentially, Argonaut Securities[39] 'will be providing services in connection with the AEP Loan Refinance, AEP loan repayment and the Sell Down'. He acknowledged that AEP was a related party of the Argonaut Transaction Parties, and specifically acknowledged that there may be or was a conflict of interest between the obligations of each of the Argonaut Transaction Parties under the Engagement and the interests of their related bodies corporate, including AEP. Mr Moran acknowledged the obligations of each of the Argonaut Transaction Parties under the Engagement and their obligations to act for clients other than Mr Moran in ways which might conflict with his interests.[40]
[39] The 'Argonaut Transaction Parties': cl 13(a).
[40] Exhibit 1.207 cl 13(c).
By cl 13 Mr Moran further acknowledged and consented to the Argonaut Transaction Parties acting in respect of the Engagement despite the conflicts or any other potential conflicts of interest that may arise from time to time; acknowledged that the Argonaut Transaction Parties did not owe any duty to disclose to or use for his benefit any information acquired in the course of providing services to any other person or engaging in any other transaction; and expressly agreed and acknowledged
that in the event that the lenders to the AEP Loan (Lenders) seek an outcome which is inconsistent with that sought by [Mr Moran], the Argonaut Transaction Parties are not bound to take any action which is inconsistent with the outcomes sought by the Lenders.[41]
[41] Exhibit 1.207 cl 13(g).
Argonaut's standard terms and conditions of engagement were set out in an appendix to the Engagement and formed part of it. Relevantly, cl 12 of the standard terms included an acknowledgement and agreement by Mr Moran that Argonaut was engaged 'on an arm's length basis as an independent contractor and not in any other capacity, including as a fiduciary'.

The Amended and Restated Loan Agreement

On or about 11 December 2014, Mr Moran, the Lenders, AEP in its capacity as Facility Agent and Security Trustee, and Argonaut Securities (as Broker) entered into a Deed of Amendment and Transfer and an Amended and Restated Loan Agreement.[42]
[42] Exhibit 1.268.
The Deed of Amendment and Transfer was wholly in writing. Material amendments to the Loan Agreement were:
(a)The Termination Date was extended to 11 June 2015.
(b)Mr Moran was obliged to use the proceeds of the capital loan first to finance the conversion of 11,550,000 of his partly paid ordinary shares in Atrum to fully paid ordinary shares, otherwise the priorities for the use of funding were unchanged.
(c)Interest was to accrue on the loan from and including 11 December 2014 to the day the loan was repaid at the rate:
(i)25% per annum until 11 March 2015; and
(ii)30% per annum thereafter.
Interest accrued daily, but was not capitalised.
(d)Mr Moran agreed to pay interest on any amount not paid when due at the default rate of 5% per month, capitalised (if not paid) on the last day of each calendar month.
The Specific Security Deed was also amended so that AEP, as Security Trustee, had a fixed charge over 24 million ordinary shares in Atrum held by the defendant (the Secured Shares).
One of the Lenders (Brent Stewart as trustee for the Stewart Trust) transferred by novation all his rights and obligations under the Loan Agreement to another Lender, Carjay Investments Pty Ltd.
On or about 11 December 2014, the amount owed by Mr Moran under the Loan Agreement ($6,900,000) became the principal amount owing under the Amended Loan Agreement.

First Extension Letter

From November 2014, Argonaut approached potential lenders or investors for the purpose of refinancing the loan or selling down some of Mr Moran's shares. None of those approaches succeeded.
In late May and June 2015, Mr Selby had several exchanges with Mr Simon Lyons of FIIG Securities. On 5 June 2015, Mr Lyons wrote to Mr Selby, 'we are very confident that we would be able to provide an alternative finance solution to replace the existing lenders for the loan facility being provided to Mr Russell Moran and Mr Gino D'Anna secured over all of the ATU shares that they hold as you outlined to me by email'.[43]
[43] Exhibit 1.492.
On 7 June 2015, Mr Selby advised Mr Moran that FIIG could provide a term sheet by the end of the next week and that he had provided Mr Lyons with the key loan documents for his review.[44]
[44] Exhibit 1.499.
On 8 June 2015, Mr Selby wrote again, by email, advising Mr Moran that he had spoken with Mr Lyons and informed him that Atrum 'may or may not enter suspension tomorrow'. He advised Mr Moran that the prospect of refinancing was 'promising although not without risk'.[45]
[45] Exhibit 1.500.
On 8 June 2015, Mr Moran and Mr D'Anna brought an urgent ex parte application in the Supreme Court of Western Australia to restrain Atrum from disclosing specified personal information which they had provided to Atrum in circumstances which were said to attract an obligation of confidence. Mr Moran was represented in the Supreme Court proceedings by his solicitors in this trial, Bennett + Co. An injunction was ordered.
On 9 June 2015, Atrum shares were suspended from official quotation, pending the release of an announcement.[46]
[46] Exhibit 1.501.
On 9 June 2015, the injunction was extended by consent until 12 June 2015, and on 12 June 2015 Mitchell J again extended the restraint.[47]
[47] Moran v Atrum Coal NL [No 3] [2015] WASC 219; Moran v Atrum Coal NL [No 2] [2015] WASC 218.
Argonaut responded to these developments. On 9 June 2015, Mr Rigg emailed Mr Selby:
As discussed, you are not to be involved with sorting out this mess unless requested to assist Nick [McDonough].
Given what Russell has done today and effectively eliminated our ability to dispose of the shares held as security, you must finally realise that Russell is someone we need out of our lives as soon as possible.
This means that Nick will pursue the FIIG opportunity.[48]
[48] Exhibit 1.504.
The negotiations with FIIG had continued during the period of the suspension. On 9 June 2015, Mr Lyons advised that the loan was about $10,295,000, and FIIG required security over 44,169,977 shares across the two borrowers (that is, Mr Moran and Mr D'Anna).[49]
[49] Exhibit 1.507.
Mr Selby forwarded this email to Mr Moran. Mr Moran responded that he was not prepared to increase the current security of 24 million shares. He continued:
For FIIG to be a real option, they need to come up with an interest rate that they would be prepared to accept to step into the existing lender arrangement. Otherwise I may as well continue negotiating with the existing lenders and litigate if the shares are not dealt with in a fair manner. Or try to bookbuild.
Can you go back to FIIG and ask them to price up the original loan document?[50]
[50] Exhitib 1.507.
On 10 June 2015, Mr Moran's solicitors, Bennet + Co, wrote to Argonaut on behalf of Mr Moran in these terms:
We are instructed that our client has had discussions with you on a number of occasions including as recently as today in relation to the refinancing of the monies owed to the syndicate which fall due tomorrow, 11 June 2015. As you are aware in this regard our client expects to receive a Term Sheet in relation to a 12 month refinance of the loan within the next 5 business days.
In the circumstances we are requesting on behalf of our client a seven‑day extension of the loan 'termination date' to 18 June 2015 to enable our client to progress the proposed refinancing without being in a position where the current loan becomes overdue…
If for any reason you believe you will be unable to agree to this request we would also be grateful if you could advise us as soon as possible so that we can discuss with you alternative arrangements to ensure that the proposed refinance is able to be progressed without disruption that would be detrimental both to our client and to the lending syndicate.[51]
[51] Exhibit 1.512.
On 11 June 2015, AEP wrote to Mr Moran, care of his solicitors. AEP agreed to extend the date for satisfaction of the Payment Obligation from 11 June 2015 to 18 June 2015, subject to the conditions and terms of the letter.[52]
[52] Exhibit 1.555.
The conditions of extension included an acknowledgement by Mr Moran that the Payment Obligation was a debt owed to the Finance Parties,[53] which, but for the extension, would be due and payable on 11 June 2015. Mr Moran was required to satisfy the Payment Obligation in full on the extended date.[54] Failure to satisfy the Payment Obligation in full would be an immediate event of default entitling the Finance Parties to enforce the security and any other rights under the Transaction Documents arising on an event of default without notice.[55]
[53] By exhibit 1.788 cl 1, Finance Parties means each of the Facility Agent, the Security Trustee (if applicable) and each Lender.
[54] In exhibit 1.555 [1(a)], the Payment Obligation was specified as the obligation on 11 June 2015 to pay the Principal Outstanding ($6,900,000) and any accrued but unpaid interest (assuming payment on the Termination Date, being $947,095.38).
[55] Exhibit 1.555 [3.1(d)].
By [3.2] of the letter:
The Borrower agrees that the Borrower will be liable for interest at the Default Rate on the Payment Obligation (to the extent it remains unpaid) from and including 11 June 2015 to the date it is paid (and otherwise in accordance with clause 4.2 of the Loan Agreement). This paragraph applies despite the extension under paragraph 2, or any other term of a Finance Document to the contrary.
Mr Moran agreed to provide the Finance Parties with regular updates on the proposed refinancing with FIIG, and agreed that any Finance Party may discuss the refinancing with FIIG.
The First Extension Letter was executed as a deed.
In early June 2015, before the First Extension Letter, Argonaut had become aware of Mr Moran's breach of the Loan Agreement by using funds other than for the purposes specified and permitted by that agreement.

Second Extension Letter

Negotiations with FIIG continued after 11 June 2015, through Argonaut.
Argonaut was advised by FIIG on either 17 or 18 June 2015 that FIIG would not proceed.
On 17 June 2015, Mr Moran's solicitors wrote to Argonaut to request a further extension of the loan Termination Date to 30 June 2015 to enable Mr Moran to finalise the proposed refinancing without being in a position where the current loan became overdue.[56]
[56] Exhibit 1.574.
On 18 June 2015, AEP replied, offering a further extension to 17 July 2015.[57] The letter referred specifically to the interest that had accrued on the Payment Obligation at the Default Rate under the First Extension Letter, and stated the amount of that interest as $88,596.
[57] Exhibit 1.579.
The letter continued:
The Borrower has informed us that:
(i)the Borrower is proposing to sell sufficient of its Shares to pay all amounts owing under the Transaction Documents on or before the Extended Date (Sell Down);
(ii)at or about the same time as the Sell Down, [Atrum] proposes to undertake a capital raising (Capital Raising);
(iii)the ordinary shares of [Atrum] were placed in a trading halt on 4 June 2015 and were suspended from trading on ASX on 9 June 2015, and it is proposed that they remain suspended while the Capital Raising is proceeding,
and the Borrower has requested a waiver of the Event of Default that would arise under clause 10.1(h) of the Loan Agreement,[58] in respect of the period until and including the Extended Date.
[58] That is, a suspension of trading for more than 10 consecutive days.
By [3.2] of the letter:
The Borrower agrees that the Borrower will be liable for interest at the Default Rate on the Payment Obligation (to the extent it remains unpaid) from and including 11 June 2015 to the date it is paid (and otherwise in accordance with clause 4.2 of the Loan Agreement). This paragraph applies despite the extension under paragraph 2, or any other term of a Finance Document to the contrary.
On 18 June 2015, Mr Moran executed the Second Extension Letter, as a deed.

Correspondence with ASX and events at Atrum

On 21 June 2015, Mr Sanders of Bennett + Co, on behalf of Mr Moran, wrote to James Rowe, Manager Listings (Perth), ASX Compliance Pty Ltd. He referred to a memorandum of understanding, arising out of a meeting of the Atrum Board, which detailed 'proposed capital raising by [Atrum] in conjunction with the repayment or refinance of Mr Moran and Mr D'Anna's loans as well as an agreement not to seek to have the current [Atrum] suspension lifted until completion of these matters'.[59] Mr Sanders wrote:
Mr Moran intends to call an urgent Board meeting to discuss these matters but in the meantime it would not be appropriate for ASX to lift the suspension of [Atrum] shares, and if it were to do so Mr Moran is concerned that the market would not be fully informed as to the company's financial position including information that may be material to the price or value of the company's shares.[60]
[59] Exhibit 16; ts 611 ‑ 614.
[60] Exhibit 16.
On 22 June 2015, apparently unaware of the email from Mr Sanders the previous day, Mr Rigg also wrote to Mr Rowe regarding the trading halt and subsequent suspension for Atrum. Mr Rigg said:
Argonaut is the security trustee, facility agent and co-lender to Atrum directors Russell Moran and Gino D'Anna (Director Loans).
The reason given for Atrum's request for trading halt and subsequent suspension related to the Director Loans.
Argonaut and I personally as a Responsible Executive (under the ASX Market Integrity Rules) have serious concerns about Atrum and in particular believe the market is unlikely to have full disclosure should Atrum seek to have the suspension from trading lifted anytime soon.[61]
[61] Exhibit 1.587.
Mr Rigg wrote that Argonaut believed that the Board of Directors of Atrum was completely dysfunctional, and there was a clear power war between Mr Chisholm and Mr Moran, the two largest shareholders. He further wrote that, in his opinion, Atrum was surviving on loans from Mr Chisholm and tax rebates, and did not have sufficient funds to meet its obligations and do its assets justice without raising at least $10 million. Mr Rigg requested that Argonaut be heard should there be a request to lift the suspension due to his concern that the market would not be fully informed.[62]
[62] Exhibit 1.587.
On 23 June 2015, Mr Moran received a letter, signed by Mr Chisholm as Executive Chairman of Atrum, immediately revoking 'any authority, power of attorney or other rights granted to you by Atrum Coal NL or any of its related entities pursuant to which you may bind Atrum Coal NL or any of its related entities'.[63] Mr Moran forwarded the notice to Argonaut and suggested discussing a potential strategy.[64]
[63] Exhibit 1.592.
[64] Exhibit 1.591.
Mr Rigg emailed Mr Rowe again on 23 June 2015, repeating his request that the suspension not be lifted without Argonaut having an opportunity to be heard.[65]
[65] Exhibit 1.594.
On 26 June 2015, Mr Moran resigned as a director of Atrum. Atrum made an ASX announcement regarding the resignation.[66]

Default

[66] Chronology, agreed event [33].

On 29 June 2015, Atrum requested that it remain suspended from Official Quotation until 13 July 2015, pending an announcement relating to a capital raising.[67]
[67] Chronology, agreed event [35].
On 13 July 2015, Atrum announced to the market that it remained suspended from Official Quotation pending an announcement relating to a capital raising.[68]
[68] Chronology, agreed event [38].
On or about 18 July 2015, Mr Moran committed an event of default by failing to pay the Payment Obligation due and payable by 17 July 2015.
On or about 18 July 2015, AEP sent a notice of default.[69]
[69] Admitted on the pleadings, see statement of claim [16] ‑ [17] and defence and counterclaim [16] ‑ [17].
On 20 July 2015, Atrum again advised the market that it remained suspended from Official Quotation.[70]
[70] Chronology, agreed event [42].
On 27 July 2015, Atrum was reinstated to Official Quotation on the ASX.[71] Atrum announced a '1 for 17' fully underwritten, non‑renounceable entitlement offer of new shares at $0.50 per new share with one new free option for every two new shares subscribed (each new option was exercisable for one share at $0.80).[72]

The termination of the Engagement

[71] Chronology, agreed event [43].

[72] Chronology, admitted event [44].

The Engagement was for a period of nine months, although it could be extended in writing. There is no evidence that it was extended, and so it expired in August 2015. If the Engagement had not already expired, it would have come to an end on 21 October 2015, as a result of notice of termination from Argonaut to Mr Moran on 14 October 2015.[73]

Payments made by the defendant

[73] Admitted on the pleadings, see defence and counterclaim [28] and reply to defence and counterclaim [7C].

Between 5 November 2015 and 9 March 2016, Mr Moran paid AEP 13 amounts which reduced the amount owing:
(a)$160,317 paid on or about 5 November 2015;
(b)$120,809 paid on or about 10 November 2015;
(c)$49,894 paid on or about 12 November 2015;
(d)$94,199 paid on or about 27 November 2015;
(e)$44,108 paid on or about 1 February 2016;
(f)$11,123 paid on or about 2 February 2016;
(g)$7,162 paid on or about 3 February 2016;
(h)$6,948 paid on or about 4 February 2016;
(i)$17,604 paid on or about 5 February 2016;
(j)$7,022 paid on or about 8 February 2016;
(k)$71,903 paid on or about 3 March 2016;
(l)$21,430 paid on or about 7 March 2016; and
(m)$15,577 paid on or about 9 March 2016.[74]
[74] Admitted on the pleadings, see statement of claim [20] and defence and counterclaim [26].
Pursuant to cl 13 of the Loan Agreement, Mr Moran was obliged to indemnify each Finance Party against the costs of any actual or attempted enforcement of its rights under the Transaction Documents, including legal expenses on a full indemnity basis. AEP applied $48,377 from the payments received towards legal expenses.[75]

Continuing default

[75] Admitted on the pleadings, see statement of claim [20].

On 6 May 2016, AEP sent a notice of ongoing default to Mr Moran and demanded that he provide additional security to ensure that the Loan to Value Ratio was 58% or less.[76]
[76] Exhibit 1.719; chronology, agreed event [56].
Mr Moran responded, by email, that additional security would not be forthcoming.[77]
[77] Exhibit 1.720.
On 14 September 2016, AEP sent to Mr Moran a notice of ongoing default for the non-payment of the Payment Obligation and accrued interest, and gave notice that the Finance Parties were and remained immediately entitled to enforce the security and any other rights under the Transaction Documents.[78]
[78] Exhibit 1.730; exhibit 1.731; chronology, agreed event [57].
On 19 September 2016, Bennett + Co responded on behalf of Mr Moran and wrote, relevantly:
Currently Atrum is in the process of securing development capital and as a consequence there would not appear to be any liquidity for a sale of a material number of shares. Mr Moran expects to be able to progress the sale of a significant quantity of Atrum shares after Atrum has secured its next round of development funding and would welcome the opportunity to discuss this further with you and the lending syndicate in terms of both timing and execution.[79]
[79] Exhibit 1.734; chronology, agreed event [58].
On 2 November 2016, AEP sent a further notice of ongoing default to Mr Moran, dated 31 October 2016.[80]
[80] Chronology, agreed event [59]; exhibit 1.741.
On 8 December 2016, Bennett + Co responded to the notices sent by Argonaut. The letter was not conciliatory in tone. It concluded:
Mr Moran remains committed to meeting his legal obligations to repay what is rightfully due under the Loan as soon as possible. Having said that, should precipitous action be taken by you Mr Moran will take steps to preserve his rights, including seeking urgent injunctive relief to prevent the sale of the Secured Shares without his consent.[81]
[81] Exhibit 1.756.
On 9 December 2016, the Majority Lenders gave instructions to enforce the security over Mr Moran's shares.[82] On the same day, Argonaut Capital sent a notice of enforcement to Mr Moran and AEP 'took possession' of the 24 million Secured Shares.[83]

Enforcement of security interest

[82] Chronology, agreed event [61].

[83] Chronology, agreed event [62] ‑ [63].

On 12 December 2016, at its request, Atrum was put into a trading halt.[84]
[84] Chronology, agreed event [64].
On 16 December 2016, Atrum announced that it would conduct a $13.5 million equity raising by issuing 27 million new fully paid ordinary Atrum shares at a placement price of $0.50 per share. The Lenders purchased a majority of those shares.[85]
[85] Chronology, agreed event [65].
Atrum further announced that Argonaut would be selling 24 million fully paid ordinary Atrum shares in a block trade.[86]
[86] Chronology, agreed event [65].
On or about 16 December 2016, AEP enforced its security interest by selling 24,000,000 shares through a block sell down executed on the ASX.[87]
[87] Chronology, agreed event [66]
AEP applied $11,881,561.05 of the proceeds to reduce the principal and interest; $118,438.95 was used to pay enforcement costs.[88]
[88] Admitted on the pleadings, see statement of claim [22] and defence and counterclaim [22.1].

The claim

AEP claimed that the proceeds of sale of the Secured Shares was not sufficient to satisfy the amount then owing, and, on or about 16 December 2016, AEP issued a notice of demand to Mr Moran demanding payment of the amount of $6,089,924. Mr Moran did not comply with the Notice of Demand.[89]
[89] Admitted on the pleadings, see statement of claim [24] ‑ [25] and defence and counterclaim [24.1], [25.1].
On 20 December 2016, AEP issued the writ in this action, claiming the Principal Outstanding and accrued but unpaid interest plus costs incurred up to and including 15 December 2016. AEP also claimed interest on the Principal Outstanding at the rate provided in the Extension Letters, alternatively pursuant to s 31(2) of the Supreme Court Act 1935 (WA) and costs.
On 1 May 2017, AEP filed an amended writ of summons adding a claim for the legal costs of enforcement.
On 29 July 2019, without objection, AEP filed a further amended writ of summons correcting the amounts claimed.
On AEP's case, the amount outstanding at the date of issue of the writ has continued to accrue interest at the rate of 5% per month, capitalised monthly.

Matters in contention

The claim

Many of the matters pleaded in the statement of claim were not in dispute. The matters in contention on the statement of claim and defence were:
•The authority of AEP to bring the proceedings.
•Whether the provision for interest at the Default Rate in each of the Loan Agreement, Amended Loan Agreement, First Extension Letter and Second Extension Letter was void and unenforceable as a penalty.
•Whether the content of the notice of default and the notices of ongoing default were correct.
•Whether AEP was entitled to apply the amount of $48,377 to its legal fees.
•Whether AEP was entitled to apply the proceeds of sale of securities in the way detailed in the statement of claim.
•The amount of principal and interest outstanding at 16 December 2016.
•Whether AEP failed to mitigate any loss suffered by the Lenders, by not selling the Secured Shares within a reasonable period of time after 18 July 2015, in circumstances where it knew the market value of the Secured Shares was falling.
•The legal expenses incurred by AEP in connection with the attempted enforcement of its rights.
Some of these issues were dependent upon whether the provision for interest was unenforceable. If interest was payable at the Default Rate, the content of the notices of default and ongoing default, and the amount of principal and interest outstanding at 16 December 2016, followed from that finding.
Whether AEP was entitled to apply amounts to its legal fees, and to apply the proceeds of sale in the manner pleaded, are governed by express terms of the agreements between Mr Moran and Argonaut.
Mr Moran also raised further matters in his defence and counterclaim, particularly by the pleas added in the Re-Amended Defence and Counterclaim, filed in June 2018. I deal with those below.

The primary issues

The authority of AEP to bring the action

Following amendment to the writ of summons on 1 May 2017, AEP pleaded that it was the facility agent for the Lenders pursuant to the Loan Agreement, Amended Loan Agreement, First Extension Letter and Second Extension Letter and authorised by each Lender to bring these proceedings on their behalf in its capacity as facility agent.
Mr Moran did not admit that AEP was authorised to bring the proceedings on behalf of the Lenders. He submitted that the Lenders had not given authority to AEP in writing. One lender had given authority only after the action commenced.
Under cl 14 of the Loan Agreement, AEP was not generally obliged to consult with any Lender before exercising any power under a Transaction Document. There were, however, prescribed exceptions including cl 14.3(j) which provided that it was not authorised to act on behalf of a Lender (without first obtaining that Lender's consent) in any legal or arbitration proceedings relating to any Transaction Document.
Mr Moran relied upon cl 14.3(j), and further submitted that, pursuant to cl 19 of the Loan Agreement, a consent was only effective if it was in writing, signed by or on behalf of the person giving it.
I do not accept the challenge to the actual authority of AEP to bring these proceedings.
First, as Mr Moran submitted, the action proceeded as a representative action where each of the Lenders had the same interest.[90] AEP was a Lender. There was no challenge to the proceedings continuing as representative proceedings brought by AEP.
[90] ts 630.
Second, AEP led evidence of actual authority from each of the Lenders. Mr Rigg sought and received authority from Mr Biesse for Hoperidge Capital and Carjay Investments, Mr Burton for Skye Alba and Mr Bailey for the Bailey Group.[91] It was not in dispute that Carjay Investments had acquired the interest of another of the Lenders, Brent Stewart. The last of the Lenders gave authority shortly before trial.
[91] ts 191.
Third, the requirement of writing in cl 19 of the Loan Agreement is for the benefit of either AEP or the Lenders. None of the Lenders has questioned the authority of AEP to bring the proceedings on their behalf.
As between Mr Moran and the Lenders, any action taken by AEP, as the Facility Agent, concerning any Transaction Document was taken to be authorised by the appropriate Lenders.[92]
[92] Exhibit 1.788 cl 3.2.
Had I considered it necessary, I would have added each of the Lenders as a party to the action.

Was the default rate of interest a penalty

The plaintiff's submissions

The primary submission on behalf of AEP was that it was entitled to recover interest at the rate specified in the Extension Letters. AEP submitted that although it was described as the Default Rate, interest at 5% per month was not payable upon failure of to meet the primary obligation, but was part of the primary obligation. It does not come within the penalties doctrine.

The defendant's submissions

The defence focused on the rate of interest being described as the 'Default Rate' and calculating as an annualised interest rate of 79.58%. The defence submitted that it is not a genuine pre-estimate of the loss from default on the loan, or of the cost to the Lenders of being kept out of the money loaned. The defence further submitted that there was no evidence as to how the rate was calculated and, the rate being prima facie a penalty, there was an evidential onus on AEP (on behalf of the Lenders) to prove it was a genuine pre-estimate of their loss.
The defence further submitted that the First Extension Letter and Second Extension Letter were not new agreements, but extensions of the Loan Agreement, so that the 'default' interest rate was not in fact a primary obligation.

Determination

The essence of a penalty is that it is a collateral stipulation, a detriment imposed on a contracting party in the event that it does not observe the principal stipulation.[93]
[93] Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28; (2016) 258 CLR 525 [158] (Gageler J).
In Andrews v ANZ Banking Group Ltd the Court said:
Mason and Deane JJ observed in Legione v Hateley that, as the term suggests, a penalty is in the nature of a punishment for non-observance of a contractual stipulation and consists, upon breach, of the imposition of an additional or different liability.
In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for an in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation. [94]
[94] Andrews v ANZ Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205 [9] ‑ [10] (citations omitted). See also Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406, 445.
Whether a sum or rate stipulated is a penalty is a question of construction 'to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach'.[95]
[95] See Dunlop Pneumatic Tyre Company v New Garage and Motor Company Limited(1914) AC 79, 86 ‑ 87.
I have earlier set out the material terms of the Extension Letters. In substance, the obligation on Mr Moran to pay the principal sum and accrued interest was extended to the Extended Date. In consideration of that extension he acknowledged and agreed that the Payment Obligation and accrued interest to date was a debt owed and, but for the extension, would be due and payable; and he agreed to satisfy that debt on the Extended Date. Interest was payable at the 'Default Rate' from the date of the first Extension Letter to the date the Payment Obligation was paid, despite the extension.[96]
[96] Exhibit 1.555 [3.2]; exhibit 1.580 [3.2]. The Second Extension Letter also provided for interest from 11 June 2015, the date of the first extension.
Each Extension Letter was a new and separate agreement. As a matter of construction, the payment of interest at the rate of 5% per month was a primary stipulation in the agreement, payable independently of the obligation to observe any other contractual obligation.
Had the agreements in each Extension Letter not been made, interest at that rate would have been payable in default under the Loan Agreement. That does not, however, alter the character of the interest obligation in each of the fresh agreements made by each Extension Letter.
For that reason, the question of a penalty does not arise.

The defence and counterclaim

In his pleaded defence, Mr Moran raised several matters which were not pressed at trial, following the refusal of an application to amend the defence on the second day of the trial. To enable the trial to proceed without interruption, I said that I would give my reasons as part of the final reasons for decision.
Before setting out my reasons for refusing the amendment, I will set out essential elements of the defence pleaded.
Mr Moran pleaded that AEP failed to mitigate the loss suffered by the Lenders by failing to sell the Atrum shares held as security within a reasonable period of time after 18 July 2015, in circumstances where (as AEP knew) the market value of the Secured Shares was falling.[97]
[97] Defence and counterclaim [22.4].
Mr Moran did not admit the legal and enforcement expenses claimed by AEP and particularised in [23] of the statement of claim.[98] Mr Moran also did not admit the accuracy of the terms of the notices of demand served on him.[99]
[98] Defence and counterclaim [23].
[99] Defence and counterclaim [24] ‑ [25].
Otherwise, the defence was based primarily on the Engagement. Those contentions were repeated in the counterclaim.
Mr Moran pleaded that it was an implied term of the Engagement that Argonaut would exercise reasonable skill and care in the provision of corporate advice.[100] He further alleged that Argonaut represented that they possessed the skill and expertise necessary to provide advice for the purposes of the Engagement and knew or ought to have known that Mr Moran would rely on Argonaut's skill and expertise. On that basis, Mr Moran alleged a duty to exercise reasonable skill and care.[101]
[100] Defence and counterclaim [29].
[101] Defence and counterclaim [30] ‑ [31].
Mr Moran pleaded that in about April 2015, Argonaut breached the Engagement by Mr Rigg discussing with Mr Chisholm a refinance strategy for the refinance of the Loan Agreement, without Mr Moran's consent.[102]
[102] Defence and counterclaim [32].
Mr Moran also pleaded that, in providing corporate advice pursuant to the Engagement, Argonaut breached an implied contractual term of the Engagement to exercise reasonable skill and care, and its duty to exercise reasonable skill and care. The particulars pleaded of the breach were quite specific and limited, and referred primarily to the period between 24 May and 24 June 2015.
Mr Moran further alleged misleading and deceptive conduct, by representations in relation to a financial service in contravention of s 1041H(1) of the Corporations Act 2001 (Cth) and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth).[103]
[103] Defence and counterclaim [37].
The representations were pleaded to have been made prior to and in entering into the Engagement. Mr Moran pleaded that Argonaut represented to him that if he appointed Argonaut as his strategic adviser, Argonaut would:
34.1Be best placed to convince the lenders to extend the loan pursuant to the Loan Agreement.
34.2Be able to find another party to refinance the loan pursuant to the Loan Agreement.
34.3Be in a position to facilitate a strategic sell down of the defendant's shares in Atrum to assist with the refinancing or repayment of the loan.[104]
[104] Defence and counterclaim [34].
The 'particulars' of the representations were that
(a)In around October 2014 Mr Selby suggested to the defendant that the defendant appoint the Argonaut Group as his strategic adviser.
(b)In around October 2014 Mr Selby told the defendant he was confident that the Argonaut Group would be best placed to convince the existing lenders to extend the loan.
(c)On 12 November 2014 Mr Selby sent the defendant an email outlining a discussion that he had had with Mr Biesse, a representative of the largest members of the lending syndicate, in relation to the rollover of the loan with the existing lenders as well as the potential strategic sell down of the defendant's shareholding in Atrum.[105]
[105] Defence and counterclaim [34].
Mr Moran also pleaded that in entering the Engagement, Argonaut represented that it intended to act as his independent strategic adviser in relation to maximising the value of his shareholding in Atrum, including a potential refinance or rollover of the Loan Agreement and a process to sell all or part of his shareholding in Atrum.[106]
[106] Defence and counterclaim [35].
Mr Moran pleaded that the representations pleaded were misleading and deceptive in that:
The intention of [Argonaut] in entering into the Engagement was to build upon the goodwill that the [Argonaut] had been building with Atrum and use it is a bargaining tool to get a new mandate with Atrum.[107]
…
[Argonaut] were not in a position to act as an independent strategic adviser to the defendant nor did they have the intention or desire to do so.[108]
[107] Defence and counterclaim [36.1].
[108] Defence and counterclaim [36.2].
Mr Moran also pleaded that Argonaut engaged in conduct in connection with the supply or possible supply to him of financial services or to the acquisition or possible acquisition by him of financial services that was, in all of the circumstances, unconscionable.[109]
[109] Defence and counterclaim [38] ‑ [40].

The plea of unconscionable conduct was specific. Mr Moran alleged that Mr Selby suggested that Mr Moran appoint Argonaut as his strategic adviser and sent emails to him in relation to such an appointment in October and November 2014, when the termination date of the Loan Agreement was 11 December 2014, and in those circumstances 'asserted significant commercial pressure on [Mr Moran] to enter into both the Engagement and enter into the Deed of Amendment and Transfer'.[110]
[110] Defence and counterclaim [38].
Mr Moran further pleaded that AEP asserted significant commercial pressure on him to enter into the First Extension Letter and the Second Extension Letter in circumstances where, in the period 5 June 2015 to 11 June 2015, Mr Selby represented to Mr Moran that FIIG Securities was willing to refinance his loan, and the termination date provided by the Deed of Amendment and Transfer was 11 June 2015.[111]
[111] Defence and counterclaim [39].
Mr Moran pleaded that Argonaut caused him to suffer loss and damage in that he:
… entered into the Deed of Amendment and Transfer, the First Extension Letter and the Second Extension Letter which included terms that have resulted in [him] being indebted to [AEP] for a significantly greater sum than he otherwise would have been.
… was unable to refinance the loan made pursuant to the Loan Agreement during the term of the Engagement on more favourable terms than the terms provided in the Deed of Amendment and Transfer, the First Extension Letter and the Second Extension Letter.
… was unable to effect a strategic sell down of [his] shares in Atrum during the term of the Engagement to enable [him] to either refinance or repay the loan.[112]
[112] Defence and counterclaim [41.1] ‑ [41.3].
By his defence, Mr Moran sought to set off the liability of Argonaut against his liability to AEP (that is, to the Lenders).[113]
[113] Defence and counterclaim [43].
By counterclaim, Mr Moran also alleged loss and damage from the failure by AEP to pay to him the surplus it received on the sale of the Secured Shares.[114] The plea relied, essentially, on the allegation that the default interest charged was unenforceable as a penalty.
[114] Defence and counterclaim [44] - [46].
Mr Moran further alleged breach of AEP's duty in relation to the sale of the Secured Shares to act in good faith and not to sacrifice his interests.[115] The plea referred back to [22.4] of the defence in which Mr Moran alleged that AEP did not sell the Secured Shares within a reasonable period of time after 18 July 2015, in circumstances where (as AEP knew) the market value of the shares was falling. Mr Moran alleged that the failure to sell the shares until on or about 16 December 2016, despite knowing that the market value of the shares was falling and that the Second Extension Letter required him to pay interest at the Default Interest Rate, breached the duty and caused him loss.[116]

The defence to counterclaim

[115] Defence and counterclaim [47].

[116] Defence and counterclaim [48.1] ‑ [48.2].

Argonaut admitted the duty, contractual or otherwise, to exercise reasonable care and skill, but denied the breach.
Argonaut pleaded that, by the terms of the Engagement, Mr Moran acknowledged that there was or may be a conflict of interest in the Argonaut Transaction Parties acting for him in respect of the Engagement; acknowledged their obligations to act in the Lender's interest; and consented to and acknowledged that they were not bound to take any action inconsistent with the outcomes sought by the Lenders.[117]
[117] Reply and defence to counterclaim [7B(d)].
Argonaut further pleaded that, on or about 17 June 2015, FIIG resolved not to proceed further and no other potential investor offered to refinance Mr Moran's loan.[118]
[118] Reply and defence to counterclaim [7E].
Argonaut admitted that it owed Mr Moran a duty, in relation to the sale of the Secured Shares, to act in good faith and not to wilfully or recklessly sacrifice his interests, but denied breach of the duty.[119]
[119] Reply and defence to counterclaim [9].
Argonaut also relied on its plea in [7] of the reply and defence to counterclaim to the effect that:
(1)it had no obligation under the various loan agreements, the Specific Security Deed, or at law or in equity to sell the shares at a particular time or for a particular price or to sell them at all;
(2)under the Specific Security Deed, Mr Moran agreed that AEP, as a secured party, was not liable for any delay in exercising any power or remedy under the Specific Security Deed, including the power to sell the Secured Shares, except to the extent 'that it is a direct and foreseeable result of fraud, gross negligence or wilful misconduct'; AEP relied upon clauses 6.4, 9.3 and 10.1 of the Specific Security Deed;
(3)Mr Moran had the ability to sell the Secured Shares himself to reduce the amounts owing under the Amended Loan Agreement at all material times;
(4)the market value of the Secured Shares varied in the period 18 July 2015 to 16 December 2016;
(5)on 8 December 2016, Mr Moran threatened to seek injunctive relief to prevent AEP from selling the shares without his consent.[120]

The proposed amendment

[120] Reply and defence to counterclaim [7].

In both written opening submissions (filed the week before trial), and oral submissions on the first day of trial, Mr Moran's case departed substantially from that pleaded. On the second morning of trial, the defence handed up a minute of proposed amendment.
Before considering the proposed changes, it is relevant to have regard to the history of the action.
The writ was filed on 20 December 2016, and the statement of claim filed on 13 February 2017.
The defence and counterclaim was filed on 5 April 2017.
This action was admitted to the Commercial and Managed Cases List on 7 April 2017.
The defence and counterclaim was amended on 23 June 2017.
The parties attended mediation in February 2018.
On 14 March 2018, I made orders for the exchange of witness statements by 20 June 2018.
On 21 June 2018, I made orders, by consent, for the filing of a re‑amended defence and counterclaim, and extended the time for the filing of witness statements to 14 August 2018.
A re-amended defence and counterclaim was filed on 30 July 2018. It introduced the pleas regarding the Engagement, breaches of the Engagement and duty of care, misleading and deceptive conduct, and unconscionable conduct. It also introduced the claim for relief pursuant to s 1325(2) of the Corporations Act for an order that the Deed of Amendment and Transfer, the First Extension Letter and the Second Extension Letter were void ab initio. By these amendments, Argonaut Capital Limited and Argonaut Securities Pty Limited were added as defendants to the counterclaim.
On 17 August 2018, the time for filing amended pleadings was extended, and further directions were made with regard to the filing of expert evidence.
On 1 October 2018, the matter was provisionally listed for a trial of five days, commencing on 6 May 2019.
On 29 November 2018, the time for the service of witness statements was extended to 15 February 2019, and the time for compliance with orders regarding expert evidence was also extended. The action was listed for trial commencing 29 July 2019.
On 6 March 2019, the time for Mr Moran to file and serve his witness statement was extended to 8 March 2019.
On 20 March 2019, I made orders including detailed directions regarding the expert evidence to be led.
On 4 April 2019, the time for Mr Moran to comply with the order to provide a copy of the export report or substance of his expert evidence was extended to 6 May 2019, and the time for Argonaut to provide their expert evidence was extended to 6 June 2019. The time for conferral between experts was extended to 20 June 2019.
The proposed amendments:
(1)specifically pleaded that the terms of the Engagement gave rise to a fiduciary obligation on the part of AEP and the others in Argonaut 'not to act in a manner adverse to the interests of the defendant'.[121]
(2)alleged breach of all of the terms of the Engagement referred to in [27] of the defence, and not only the term pleaded in [27.6]. The particulars, however, remained confined to [27.6].
(3)expanded the plea of unconscionable conduct to include all allegations of breach of the Engagement, or the duty to exercise due care and skill, which were now to be pleaded as unconscionable conduct by a fiduciary.
(4)added further paragraphs to the prayer for relief, giving greater particularity to the claim for damages, and adding a claim for orders varying the terms of the Loan Agreement pursuant to s 12GM of the Australian Securities and Investments Commission Act.
[121] Minute of further re-amended defence and counterclaim [27.7].
Counsel for Mr Moran submitted that the proposed further amendments raised no new factual matters and remained 'within the four corners and factual metes and bounds'[122] of the amended defence and counterclaim filed in June 2017. That submission greatly understated the effect of the proposed amendment.
[122] ts 99.
The scope of the changes was apparent in Mr Moran's written opening where, for example, he submitted that '[Argonaut] found its loyalties irreconcilably divided' and, 'Given the significant conflicts of interests, it would be unconscionable for [Argonaut] to profit at the expense of Mr Moran'.[123] Mr Moran submitted that Argonaut was 'actively working against Mr Moran' in favour of AEP and the lending Syndicate.[124] None of that had been pleaded.
[123] Defendant's written opening submissions, dated 23 July 2019 [7], [9].
[124] Defendant's written opening submissions [142.2].
Mr Moran had pleaded that AEP failed to mitigate any loss suffered by the Lenders - the plea to which AEP had responded,[125] and which could not be sustained on the claim for a liquidated amount owing under contract. He now submitted, not a failure to mitigate, but that where '[Argonaut] was burdened with significant conflicts of interest, and the fiduciary nature of the relationship between [Argonaut] and Mr Moran, it was not only reasonable, but necessary for [Argonaut] to protect Mr Moran's interests'.[126]
[125] Defence and counterclaim [224]; reply and defence to counterclaim [7].
[126] ts 56.
Similarly, the plea of breach of the implied term to exercise reasonable skill and care became a claim that Argonaut had behaved unconscionably. Mr Moran now would allege that Argonaut breached the implied terms of the Engagement set out in [29] of the defence, 'and/or the duty to exercise reasonable skill and care, and/or its fiduciary obligation not to act in a manner adverse to the interests of the defendant'.[127] Where the allegation of unconscionable conduct pleaded in the amended defence and counterclaim was a specific allegation that Argonaut exerted significant commercial pressure on two particular occasions or during two particular periods, Mr Moran now proposed an allegation of unconscionable conduct 'which extends generally to all matters which are pleaded as being breaches of the implied term of the Engagement'.[128]
[127] ts 102.
[128] ts 103.
The submissions filed on behalf of Mr Moran identified the extent of the departure from his pleaded case. They were, however, filed only the week before trial. Argonaut's submissions had been filed on 15 July 2019; they did not address the case that Mr Moran sought to advance in the proposed amendments.

Reasons for disallowing the amendment

The considerations to which the court should have regard in determining an application for amendment, are those set out in Aon Risk Services Australia Ltd v Australian National University.[129]
[129] Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 [89] - [103]; [111] - [112].
Relevantly, justice requires that the parties have a proper opportunity to plead their case, but limits may be placed on re-pleading when delay and cost are taken into account. A party will not always be permitted to raise an arguable case at any point in the proceedings.
The pleas regarding the Engagement and the allegations of breach, misleading or deceptive conduct, and unconscionable conduct, were introduced by amendment in June 2018. Those pleas could have been re-amended, without leave, pursuant to O 21 of the Supreme Court Rules 1971 (WA), up to six weeks before trial. It is apparent from the instructions to Mr Bald, the defence expert, that no later than April 2019 the lawyers for Mr Moran were considering the question of conflict of interest, and the effect of such conflict on the services provided to Mr Moran. The defence was not amended, however, and no application to amend was made until I asked counsel for Mr Moran, in the course of his opening submissions, about the extent to which his submissions departed from the pleaded case.
The pleadings must define with clarity and precision the issues or questions which are in dispute between the parties and fall to be determined by the court.[130] To ensure a basic requirement of procedural fairness, a pleading must state the case sufficiently clearly to allow the other party a fair opportunity to meet it.[131]
[130] Nyoni v Patterson [2012] WASCA 171 [36] - [38].
[131] Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279, 286 - 287; Gould v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490, 517; Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 [24] - [26].
The proposed amendments radically recast both the defence and the counterclaim. Argonaut had not addressed that case in its reply and defence to counterclaim. None of the Argonaut parties' witness statements had been prepared on the basis of the proposed amended case.
There is no doubt that refusing the amendment prejudiced Mr Moran's case. There were elements of the defence which, without amendment, were simply not arguable. For example, the plea of failure to mitigate ‑ absent a plea of unconscionable conduct ‑ could not succeed. But no adequate explanation was given for why such significant amendments were only advanced at the time of trial, particularly when the question of a conflict of interest had obviously been considered in April 2019, if not earlier.
If the trial was to proceed, it was too late in the proceedings to recast the defence and counterclaim in such a radical way. Having regard to the history of the action, it was not appropriate to adjourn the trial.
For those reasons, I refused the amendment.

Defence and counterclaim - consideration

Counsel for Mr Moran accepted that, following the decision to disallow the proposed amendments, he was unable to advance submissions in relation to unconscionable conduct or misleading and deceptive conduct.[132] For the same reason, counsel accepted that the particulars of breach in [33(c)] ‑ [33(f)] of the defence could not be pressed.[133] The plea of failure to mitigate also fell away.
[132] ts 731.
[133] ts 728, 740.
In effect, the matters remaining on the defence and counterclaim were:
(1)breach of the Engagement by Mr Rigg discussing matters with Mr Chisholm in or about April 2015;[134]
(2)breach of the duty to exercise reasonable skill and care (contractual or tortious) by Mr Rigg sending an email to Mr Selby stating that 'the Argonaut Group's first and only obligation in relation to the loans was to protect the lending syndicate';[135]
(3)breach of the duty to exercise reasonable skill and care by not advising Mr Moran, before 5 June 2015, of any offers it had received from any party to undertake the Transaction;[136]
(4)breach of the duty to exercise reasonable skill and care by Mr Rigg's emails to Mr Rowe in June 2015;[137]
(5)breach of the duty to exercise reasonable skill and care by Mr Selby's email of 24 June 2015, advising Mr Moran that a refinancing of the Loan Agreement was probably unlikely;[138]
(6)breach of the duty to exercise reasonable skill and care by Mr Rigg sending an email to Mr Bailey on 6 October 2015, stating that Argonaut was not communicating with Mr Moran;[139]
(7)failure to act in good faith and not sacrifice Mr Moran's interests by failing to sell the shares held as security until on or about 16 December 2016, despite knowing that the market value of the shares was falling and that the Second Extension Letter required the defendant to pay interest at the Default Interest Rate.[140]

Confidential information

[134] Defence and counterclaim [32].

[135] Defence and counterclaim [33(a)].

[136] Defence and counterclaim [33(b)].

[137] Defence and counterclaim [33(g)].

[138] Defence and counterclaim [33(h)].

[139] Defence and counterclaim [33(i)].

[140] Defence and counterclaim [47].

Mr Moran pleaded a contractual obligation to not disclose any confidential information he supplied without his prior written consent. He alleged that Mr Rigg discussed with Mr Chisholm 'a refinance strategy for the refinance of the Loan Agreement'.[141] The plea did not identify information which would be Confidential Information as defined.
[141] Defence and counterclaim [32(c)].
Argonaut relied on the specific terms of cl 7(d) of its Standard Terms and Conditions of Engagement:[142]
… in connection with the Engagement, it is contemplated that [Mr Moran] may supply to Argonaut certain non-public or proprietary information concerning [Mr Moran] and his group (Confidential Information). Argonaut will not, without [Mr Moran's] prior written consent (in each and every instance), disclose any Confidential Information to any person, other than its affiliate's and its affiliates' respective officers, directors, employees, representatives, auditors and advisers, who agree to keep such Confidential Information confidential to at least the same extent as Argonaut, but solely for the purpose of Argonaut complying with the Agreement provided, however, that the foregoing shall not apply to any information that becomes publicly available other than as a result of the breach of Argonaut's undertakings under the Agreement, or to any information Argonaut is requested or required to disclose by law, to any regulatory authority in connection with any judicial or administrative process.
[142] Exhibit 1.207.
By cl 7(e), publicly available information included information obtained from a source other than Mr Moran, his affiliates or advisers or other representatives, provided that the source had not entered into a confidentiality agreement concerning that information.
The obligation in cl 7(d) must also be read with cl 3.1 of the Engagement by which Argonaut was obliged to '[discuss] the Transaction with Atrum in order to secure its support and assistance with negotiating for enhanced shareholder rights where appropriate, including anti-dilution and other strategic shareholder rights'.
It was not in dispute that Mr Rigg spoke to Mr Chisholm. Mr Rigg gave evidence in his witness statement about conversations either in meetings or by telephone with Mr Chisholm, in early 2015, including in about March 2015.[143] Mr Rigg said that Mr Chisholm asked him what he was going to do about the fact that Mr Moran's loan had expired, and that Mr Chisholm told him that Atrum's lawyers had reviewed the Loan Agreement. In about March 2015, Mr Rigg wanted to speak to investors and Mr Chisholm about Atrum raising capital. Mr Rigg was concerned that the only way Argonaut could enforce the security and dispose of Mr Moran shares at a reasonable price was if Atrum did not require capital.[144] Mr Rigg believed, however, that the loans to Mr Moran and Mr D'Anna had not been publicly disclosed to the ASX. He believed that Atrum could not raise money and have those shares listed for quotation without disclosing the existence of the loans.[145]
[143] Exhibit 3 [91] - [100A].
[144] Exhibit 3 [93] ‑ [94].
[145] Exhibit 3 [100A].

Loss and damage

Although the matters in [32] and [33] of the defence were pleaded as a defence to the claim, they are not in themselves a defence to a claim for repayment of a debt.
Mr Moran pleaded in [41]:
As a consequence of the matters set out in paragraphs 32 to 41 the plaintiff and the defendants by counterclaim have caused the defendants by counterclaim to suffer loss and damage in that:
41.1The defendant entered into the Deed of Amendment and Transfer, the First Extension Letter and the Second Extension Letter which included terms that have resulted in the defendant being indebted to the plaintiff for a significantly greater sum than he otherwise would have been.
41.2The defendant was unable to refinance the loan made pursuant to the Loan Agreement during the term of the Engagement on more favourable terms than the terms provided in the Deed of Amendment and Transfer, the First Extension Letter and the Second Extension Letter.
41.3The defendant was unable to effect a strategic sell down of the defendant's shares in Atrum during the term of the Engagement to enable the defendant to either refinance or repay the loan.
Subparagraph 41.1 could only relate to the pleas in misleading and deceptive conduct and unconscionable conduct, which were not pressed following my ruling on the proposed amendment.
The claims in [41.2] and [41.3] were not pleaded as a loss of opportunity to refinance on more favourable terms or sell down and refinance the loan. But that appears to be the substance of the allegation. To establish that case, Mr Moran had to demonstrate, on the balance of probabilities, that the conduct of Argonaut in breach of its duty to exercise reasonable skill and care caused him to lose that opportunity. The question then would be the value of that opportunity.
I am not satisfied, for the reasons set out above, that Mr Moran has proved that any conduct by Argonaut, in breach of the Engagement or its duty of care, caused any relevant loss of opportunity.
Alternatively, Mr Moran pleaded an entitlement to set off amounts for which the defendants to the counterclaim might be liable against the claim brought by AEP as facility agent for the Lenders (of which AEP was one).[179] Mr Moran was unable to articulate a case for a set off in law or in equity. The parties were different. The transactions under which each party was sued were different.
[179] Defence and counterclaim [43].

The counterclaim

Mr Moran re-pleaded the claims in his defence in the counterclaim.
In addition, he pleaded a claim based on there being a surplus, following the sale of the shares held as security.[180] That plea depended on the court finding that the interest rate on the loan was unenforceable as a penalty, and cannot succeed.
[180] Defence and counterclaim [46].
Mr Moran also pleaded a breach by Argonaut of its obligation to act in good faith and not sacrifice his interests in the sale of the shares held as security. He pleaded breach of that duty:
by failing to sell the [Secured] Shares until a date on or about 16 December 2016, despite knowing that the market value of the Subject Shares was falling and that the Second Extension Letter required the defendant to pay interest at the Default Interest Rate as pleaded in paragraph 15(c) of the Statement of Claim ...[181]
[181] Defence and counterclaim [48.2].
Argonaut admitted that it owed Mr Moran a duty in relation to the sale of the Secured Shares, to act in good faith and not to wilfully or recklessly sacrifice his interests.[182]
[182] Reply and defence to counterclaim [9].
Argonaut further pleaded that AEP, as the Secured Party, was not liable for any delay in exercising any power or remedy under the Specific Security Deed, including the power to sell the Secured Shares, except to the extent that it was a direct and foreseeable result of fraud, gross negligence or wilful misconduct.[183]
[183] Reply and defence by counterclaim [7(b)(ii)] in particulars Argonaut relied on the Specific Security Deed cl 6.4, 9.3 and 10.1.
Subject to the terms of the Specific Security Deed, Argonaut was subject to a duty analogous to that of a mortgagee exercising a power of sale. It is a duty to exercise the power of sale in good faith and for the purpose for which it was conferred, such that a receiver or mortgagee could not recklessly or wilfully sacrifice the interests of the chargor or mortgagor.[184]
[184] Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676, 680 (Griffith CJ), 695 (Barton J), 701-702 (Isaacs J); Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350 [9] ‑ [10]. In Western Australia there is no statutory duty to take reasonable care to ensure that the property is sold at the market value.
In Ultimate Property Group Pty Ltd v Lord, Young CJ in Eq described the duty as one in equity:
… to act conscionably towards the mortgagor and persons under the mortgagor. The duty is not to be considered in some mechanical way, but the whole of the mortgagee's conduct with respect to the sale is to be considered. The mortgagee may, up to a point, act solely in its own interests, but it must also act conscionably towards the mortgagor and those claiming under the mortgagor.^.[185]
[185] Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 [38].
The onus is on the mortgagor to plead and prove such a breach of duty.[186] Mr Moran has not shown when, or how, the security should have been realised consistently with the duty pleaded, and consistently with Argonaut's duties to the Lenders.
[186] Rowe v National Australia Bank Limited [2019] WASCA 140 [135].
In considering the whole of Argonaut's conduct in relation to the sale the following matters should be taken into account.
First, Mr Moran's pleaded case is that Argonaut breached the duty by failing to sell the Secured Shares until on or about 16 December 2016, despite knowing that the market value of the shares was falling and that the Second Extension Letter required Mr Moran to pay interest at the Default Interest Rate. That is, Mr Moran relies not only on the obligation to obtain a proper price, but on an obligation to mitigate his continuing liability for interest. Those two factors may pull in different directions.
Second, that formulation of the duty must be considered in the light of the clauses of the Specific Security Deed pleaded by Argonaut. In particular, by cl 10.1:
None of the Secured Party, any of its authorised representatives or agents, any Attorney or any Receiver is liable for any omission or delay in exercising any power, right, discretion or remedy under this document or for any involuntary loss or irregularity that may occur in relation to the exercise or non-exercise of any of them except to the extent that it is a direct and foreseeable result of its own fraud, gross negligence or wilful misconduct.
Similarly, cl 10.3 excluded liability for loss from any exercise, attempted exercise or failure to exercise any rights in the Specific Security Deed except to the extent the loss was a direct and foreseeable result of fraud, gross negligence or wilful misconduct, none of which was pleaded.
Third, the allegation that the share price, to Argonaut's knowledge, was falling, is not sustained on the evidence. In the period from when the suspension on trading in Atrum on the ASX was lifted, the price varied from a low of $0.35 in February 2016 to a high of $1.021 in August 2016.[187] Mr Moran has not shown that Argonaut knew the price was falling, or would fall, throughout the period after the service of the notice of default.
[187] Exhibit 1.783.
Fourth, I am not satisfied that sufficient shares could have been sold earlier or at a higher price to satisfy the debt at any particular time. It has not been proved that, at any time or price, there was a buyer for that volume of shares by a private placement, or that there was a real opportunity to sell sufficient shares into an open market.
Finally, the only evidence about the considerations that led Argonaut to not enforce the security earlier, and the process by which the sale was effected, was given by Mr Rigg. The first notice of default was sent to Mr Moran on or about 18 July 2015. Mr Rigg said that, in his view, to enforce the security at that stage would be a disclosable event to the market and he considered 'the impact on Atrum Coal would be bad and the share price would be adversely affected'.[188] Similarly, in March 2016, when the Atrum share price fell, Mr Rigg was concerned that a forced sale of 24 million shares disclosed to the market would have significantly affected the share price.[189]
[188] Exhibit 3 [146].
[189] Exhibit 3 [164].
It is also relevant that, on 19 September 2016, Bennett + Co, on behalf of Mr Moran, wrote to Mr Rigg, advising that:
… Atrum is in the process of securing development capital and as a consequence there would not appear to be any liquidity for a sale of a material number of shares. Mr Moran expects to be able to progress the sale of a significant quantity of Atrum shares after Atrum has secured its next round of development funding and would welcome the opportunity to discuss this further with you and the lending syndicate in terms of both timing and execution.[190]
[190] Exhibit 1.734.
On 31 October 2016, Argonaut gave notice of ongoing default as a final warning before enforcing the security.[191]
[191] Exhibit 1.849.
The Argonaut Investment Committee considered whether Argonaut should be involved in any investment in Atrum. On 1 December 2016, Argonaut settled with Mr D'Anna, leaving only Mr Moran's loan to be repaid.
On 8 December 2016, Mr Moran's lawyers again wrote to Mr Rigg saying, among other things, that his ability to repay the loan 'is obviously influenced by the liquidity of the Secured Shares…[and] there would not appear to be any liquidity for a sale of a material number of the Secured Shares'.[192]
[192] Exhibit 1.756.
On 9 December 2016 Mr Rigg received instructions from the Lenders to enforce security over the 24 million Secured Shares and a notice of enforcement was sent to Mr Moran.[193] Brokers were engaged. I have set out earlier the steps taken to maintain the share price while effecting the sale.
[193] Exhibit 1.758; exhibit 1.759; exhibit 1.760.
In final submissions on behalf of Mr Moran, counsel submitted that there was no evidence as to how and why the shares were to be traded at $0.50, being a discount to market of slightly over 10%.[194] The difficulty with this submission is that the onus is on Mr Moran to show a failure to act in good faith. The agreed expert evidence was that an investor that was capable and willing to take a large block of shares in the Secured Shares would seek a discount of between 5 and 20% from the current traded price, depending on the security being considered in the depth of public tradable market.[195] The alternative of a sale on market faced the problem of the liquidity of the Secured Shares and the risk of downward pressure on price. Mr Moran has not shown the discount to market was unreasonable.
[194] Defendant's written submissions [20] ‑ [23]. The agreed expert evidence was that the shares were traded at a discount of 5.66% on the trading price, and the discount was not unreasonable: exhibit 8 [60]; exhibit 9, 2.
[195] Exhibit 10 [88] ‑ [89]; exhibit 9, 8.
Mr Moran has not proved that Argonaut recklessly or wilfully sacrificed his interests, and has not established the allegation that Argonaut breached its duty to him.

Conclusion

On the findings I have made, it is unnecessary to determine Argonaut's allegations that Mr Moran should be denied relief because of his own improper conduct.
AEP, on behalf of the Lenders, is entitled to the principal outstanding and accrued but unpaid interest incurred up to and including 15 December 2016, and interest from that date at the agreed rate of 5% per month.
Pursuant to cl 13 of the Loan Agreement, Mr Moran must indemnify each Finance Party against the costs of any actual or attempted enforcement of its rights under the Transaction Documents, including legal expenses on a full indemnity basis. AEP, on behalf of the Lenders, is entitled to $15,279.05 for legal costs incurred between 16 December and 22 December 2016 in connection with the attempted enforcement of its rights. Interest on that amount is payable at the rate of 6% per annum pursuant to s 32(1) of the Supreme Court Act 1935 (WA).
There will be judgment for AEP on that basis and the plaintiff is to bring in orders to give effect to this decision.
The counterclaim is dismissed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

CG
Associate to the Honourable Justice Allanson

5 FEBRUARY 2020

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: ARGONAUT EQUITY PARTNERS PTY LTD -v- MORAN [2020] WASC 24 (S)
CORAM:   ALLANSON J
HEARD:   5 FEBRUARY 2020
DELIVERED          :   26 FEBRUARY 2020
FILE NO/S:   CIV 3185 of 2016
BETWEEN:   ARGONAUT EQUITY PARTNERS PTY LTD
Plaintiff
AND
RUSSELL HAROLD MORAN
Defendant
(BY ORIGINAL ACTION)
RUSSELL HAROLD MORAN
Plaintiff by Counterclaim
AND
ARGONAUT EQUITY PARTNERS PTY LTD
First Defendant by Counterclaim
ARGONAUT CAPITAL LTD
Second Defendant by Counterclaim
ARGONAUT SECURITIES PTY LTD
Third Defendant by Counterclaim
(BY COUNTERCLAIM)

Catchwords:

Costs - Where loan agreement provided for plaintiff's costs of enforcing its rights - Where counterclaim repeated claims in defence - Whether costs of defence of counterclaim plaintiff's costs of enforcing its rights

Costs - Indemnity costs - Where defendant/plaintiff by counterclaim rejected Calderbank offer made before trial - Whether rejection unreasonable

Costs - Special costs orders - Whether amount allowed under determination inadequate

Legislation:

Legal Profession Act 2008 (WA), s 280

Result:

Final orders made

Category: B

Representation:

Original Action

Counsel:

Plaintiff	:	G R Donaldson SC & R Young
Defendant	:	M L Bennett

Solicitors:

Plaintiff	:	Ashurst Australia
Defendant	:	Bennett + Co

Counterclaim

Counsel:

Plaintiff by Counterclaim	:	M L Bennett
First Defendant by Counterclaim	:	G R Donaldson SC & R Young
Second Defendant by Counterclaim	:	G R Donaldson SC & R Young
Third Defendant by Counterclaim	:	G R Donaldson SC & R Young

Solicitors:

Plaintiff by Counterclaim	:	Bennett + Co
First Defendant by Counterclaim	:	Ashurst Australia
Second Defendant by Counterclaim	:	Ashurst Australia
Third Defendant by Counterclaim	:	Ashurst Australia

Case(s) referred to in decision(s):

Ford Motor Co of Australia Ltd v Lo Presti (2009) 41 WAR 1
Sino Iron Pty Ltd v Mineralogy Pty Ltd [No 2] [2017] WASCA 76 (S)

ALLANSON J:

Title

On 5 February 2020, I gave judgment in this matter upholding AEP's claim and dismissing Mr Moran's counterclaim against AEP and two other Argonaut entities. The orders for the amount of the judgment was reserved to allow for a recalculation of interest. The costs orders were also reserved.
The judgment sum has now been calculated.
The Argonaut parties applied for a comprehensive suite of costs orders. A judgment will now be entered for more than $37 million against an individual, who is unlikely to be able to satisfy the primary judgment. The current exercise in determining the basis on which Mr Moran is to pay costs is, patently, futile.
The application has been made, however, and I must deal with it. In these reasons I will not repeat any of the facts and assume a knowledge of the primary judgment.
The first orders sought are the costs of AEP in the enforcement of its rights under the Transaction Documents. They are governed by the agreements between the plaintiff and Mr Moran. Pursuant to cl 13 of the Loan Agreement, Mr Moran is obliged to indemnify AEP.
In relation to the counterclaim against AEP, with one exception, the matters pleaded were all pleaded as matters of defence, and then repeated in the counterclaim. The exception is the allegation that AEP and the other Argonaut parties owed Mr Moran a duty of good faith in relation to the sale of his shares. And that plea was based on factual allegations made also in the defence. In effect, the costs of AEP in responding to the amended defence and counterclaim are not distinguishable from the costs of the enforcement of its rights under the Transaction Documents. In my opinion, AEP should have its costs of the claim and the counterclaim on the same basis.
The Argonaut parties other than AEP - the second and third defendants by counterclaim - apply for indemnity costs after 17 July 2019 on the basis of an offer made to Mr Moran by a letter of that date. The letter was expressed to be a Calderbank offer. The offer was open for acceptance until 23 July 2019 - that is for four working days. The first day of trial was 29 July 2019.
There can be no doubt that the offer was reasonable, with the Argonaut parties agreeing to accept $2 million inclusive of costs, interest and GST to effectively settle both the claim and the counterclaim.
At the time of the offer, all witness statements had then been filed, and relevant documents had been exchanged. The joint expert report had been completed. And the plaintiff had filed its submissions and chronology.
The letter of offer clearly stated the Argonaut parties' position, including the argument (which was accepted at trial) that the doctrine of penalty did not apply to the interest Mr Moran was liable to pay under two Extension Letters.
A Calderbank offer will not justify an award of indemnity costs unless its rejection was unreasonable.[196] In deciding whether the rejection of a Calderbank offer was unreasonable regard should ordinarily be had to at least the following:
(a)the stage of the proceeding at which the offer was received;
(b)the time allowed to the defendants to consider the offer;
(c)the extent of the compromise offered;
(d)the defendants' prospects of success, assessed at the date of the offer;
(e)the clarity with which the terms of the offer were expressed; and
(f)whether the offer foreshadowed an application for indemnity costs in the event of the defendant rejecting it.[197]
[196] Ford Motor Co of Australia Ltd v Lo Presti (2009) 41 WAR 1.
[197] Ford Motor Co of Australia Ltd v Lo Presti.
The offer was made not long before trial. At that stage of the proceedings, with preparation for trial at an advanced stage, Mr Moran and his legal advisers were in a good position to consider the offer, the extent of the compromise offered, and their prospects of success, notwithstanding the comparatively short time given to them to respond.
It was, in my opinion, unreasonable to reject the offer. My only reservation in that conclusion was whether it was reasonable to expect Mr Moran to pay $2 million within a comparatively short time. He has, however, not chosen to adduce any evidence as to whether he had the capacity to meet the proposed settlement.
It is appropriate to order that Mr Moran pay the cost of the second and third defendants by counterclaim on an indemnity basis from 17 July 2019 (the costs of AEP are separately dealt with). That is, Mr Moran is to pay on a party-party basis the second and third defendants' costs of the counterclaim incurred up to 17 July 2019; and to pay the costs incurred after 17 July 2019, except in so far as they are of an unreasonable amount or have been unreasonably incurred, so that, subject to those exceptions, the second and third defendants by counterclaim will be completely indemnified for their costs.
To the extent that it is still relevant, having regard to the indemnity costs orders which are being made, the Argonaut parties sought an order pursuant to s 280 of the Legal Profession Act 2008 (WA) that any party-party costs (that is, the costs before 17 July 2019 for the second and third defendants by counterclaim) be taxed without regards to the limits on maximum hourly and daily rates, or the limits set out in relevant items in the Legal Profession (Supreme Court) (Contentious Business) Determination 2016 (WA) and the Legal Profession (Supreme Court) (Contentious Business) Determination 2018 (WA).

By s 280 (2), the court may make orders of the kind sought if it is of the opinion that the amount of costs allowable under a costs determination are inadequate because of the unusual difficulty, complexity or importance of the matter.
The principles concerning special costs orders under s 280(2) are well settled, and were recently set out in Sino Iron Pty Ltd v Mineralogy Pty Ltd [No 2].[198] Relevantly, s 280(2) operates to give the successful party the opportunity to recover those costs which have been reasonably and properly incurred where, in the court's opinion, the scale is inadequate because of the 'unusual difficulty, complexity or importance of the matter'.
[198] Sino Iron Pty Ltd v Mineralogy Pty Ltd [No 2] [2017] WASCA 76 (S) [11] ‑ [16].
Before exercising the power in s 280(2), the court must form the opinion that the amount allowed under a costs determination is inadequate because of the 'unusual difficulty, complexity or importance of the matter'.
The Argonaut parties filed no evidence regarding the hourly and daily rates charged by the practitioners working on this action, and not even an estimate of the hours spent compared with those allowed for in the determination. Evidence is not always required. The trial judge, especially where they have also been the case manager, should normally have an understanding of whether the matter meets the criteria of unusual difficulty, complexity or importance under s 280. But the court must also consider whether the amounts under the determination are inadequate. Here the same solicitors and counsel acted for all parties; the matters raised on the counterclaim repeated the defence; the costs of AEP are to be paid on an indemnity basis; and the costs of the other Argonaut parties are to be paid on an indemnity basis from 17 July 2019. I have no evidence or other material on which to form an opinion as to whether the amounts allowed under the determination for those remaining party‑party costs are inadequate.
Including the remaining orders on the outcome of the action, I will make orders in these terms:
1.The defendant pay the plaintiff:
(a)the amount of $37,166,082, being the principal outstanding and accrued but unpaid interest incurred up to and including 15 December 2016 under the Amended Loan Agreement (being Annexure A to the Deed of Amendment and Transfer dated on or around 11 December 2014) (Amended Loan Agreement) and the letter agreements dated 11 June 2015 (First Extension Letter) and 18 June 2015 (Second Extension Letter), and interest from 15 December 2016 at the rate of 5% per month capitalised on the last day of each calendar month until the date of these orders; and
(b)interest on that amount at the rate of 5% per month capitalised on the last day of each calendar month until payment.
2.Pursuant to clause 13 of the Amended Loan Agreement as varied by the First Extension Letter and Second Extension Letter:
(a)the defendant pay to the plaintiff $15,279.05 in respect of legal costs incurred by the plaintiff between 16 December 2016 and 22 December 2016 together with interest on that amount at the rate of 6% per annum pursuant to s 32(1) of the Supreme Court Act 1935 (WA) until payment; and
(b)the defendant pay the plaintiff's costs in respect of the plaintiff’s claim against the defendant; to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred so that, subject to those exceptions, the plaintiff will be completely indemnified by the defendant for its costs; and
(c)the plaintiff by counterclaim pay the first defendant by counterclaim's costs in respect of the counterclaim, to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred so that, subject to those exceptions, the first defendant by counterclaim will be completely indemnified by the defendant for its costs.
3.The plaintiff by counterclaim pay the second and third defendants by counterclaim's costs of the proceedings on a party-party basis for costs incurred up to and including 17 July 2019.
4.The plaintiff by counterclaim pay the second and third defendants by counterclaim's costs of the proceedings after 17 July 2019, to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred so that, subject to those exceptions, the second and third defendants by counterclaim will be completely indemnified by the plaintiff by counterclaim for their costs.
5.The costs in orders 2, 3, and 4, above, to be taxed if not agreed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

CG
Associate to the Honourable Justice Allanson

26 FEBRUARY 2020