Australian Securities and Investments Commission v Edwards - [2005] NSWSC 831

No judgment structure available for this case.

Reported Decision:
54 ACSR 583

New South Wales

Supreme Court

CITATION:
ASIC v EDWARDS [2005] NSWSC 831

HEARING DATE(S): 14/02/05, 15/02/05, 16/02/05, 17/02/05, 18/02/05, 22/02/05, 23/02/05, 24/02/05, 25/02/05, 28/02/05, 01/03/05, 02.03/05, 03/03/05, 21/03/05, 22/03/05, 23/03/05, 24/03/05.
Written submissions: 18/04/05, 13/05/05, 01/06/05

JUDGMENT DATE :

24 August 2005

JURISDICTION:
Equity Division
Corporations List

JUDGMENT OF:
Barrett J

DECISION:
Declarations of contravention under Corporations Act 2001 (Cth), s.1317E.

CATCHWORDS:
CORPORATIONS - insolvent trading - directors' liability - whether debts incurred - whether company insolvent - whether reasonable grounds for suspecting insolvency existed - whether defendant director aware of such grounds - whether defendant director failed to prevent incurring of debts - whether any defence available - CONTRACTS - general contractual principles - whether contract formed - whether case within any of first, second and fourth Masters v Cameron categories - RESTITUTION - restitution arising from incomplete contract - performance of work in expectation of reward - entitlement to quantum meruit - when quantum meruit debts incurred

LEGISLATION CITED:
Corporations Act 2001 (Cth), ss.95A, 588G, 588H, 1317E

CASES CITED:
ABB Engineering Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665
Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126
Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622
Brenner v First Artists' Management Pty Ltd [1993] 2 VR 221
British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504
Commissioner of State Taxation (WA) v Pollock (1993) 11 WAR 64
Credit Corporation Australia Pty Ltd v Atkins (1999) 30 ACSR 727
Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119
Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171
Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711
Flavel v Day (1984) 9 ACLR 502
Forge v Australian Securities and Investments Commission (2004) 52 ACSR 1
Hawkins v Bank of China (1992) 26 NSWLR 562
Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235
Kennedy v Australian Securities and Investments Commission (2005) 52 ACSR 301
Lewis v Doran (2004) 50 ACSR 175
Masters v Cameron (1954) 91 CLR 353
Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699
Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
Powell (as Liquidator of Noelex Yachts Australia Pty Ltd) v Fryer (2001) 37 ACSR 589
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266
R v Frawley (2005) 52 ACSR 461
Re Kerisbeck Pty Ltd (1992) 10 ACLC 619
Rema Industries and Services Pty Ltd v Coad (1992) 7 ACSR 251
Sandell v Porter (1966) 115 CLR 666
Shepherd v Australia and New Zealand Banking Group Ltd (1996) 20 ACSR 81
Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310
Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290
3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371
Way v Latilla [1937] 3 All ER 759

PARTIES:
Australian Securities and Investments Commission - Plaintiff
Malcolm Leslie Edwards - Defendant

FILE NUMBER(S):
SC 5254/03

COUNSEL:
Mr A.J. McInerney - Plaintiff
Mr T.D.F. Hughes - Defendant

SOLICITORS:
Australian Securities and Investments Commission Solicitor - Plaintiff
Phillip R. Loiterton - Defendant

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

WEDNESDAY, 24 AUGUST 2005

5254/03 - AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MALCOLM LESLIE EDWARDS

JUDGMENT

The proceedings and relevant persons

1 By originating process filed on 14 October 2003, the plaintiff (ASIC) sought declarations pursuant to s.1317E of the Corporations Act 2001 (Cth) to the effect that the defendants, Malcolm Leslie Edwards and Leonard George Jones, contravened s.588G(2) of that Act in that they failed to prevent Murray River Limited (“MRL”) from incurring debts in 1999. The proceedings against Mr Jones were compromised. The proceedings against Mr Edwards (who, for convenience, will be referred to simply as “the defendant”) were heard by me over 17 days: 14 to 18, 22 to 25 and 28 February and 1 to 3, 21 to 23 and 24 March 2005. Written submissions were filed on 18 April, 13 May and 1 June 2005. I reserved judgment on the last of those days.

2 It will be necessary to traverse a large quantity of evidence. It is appropriate, at the outset, to refer to and identify a number of relevant persons and companies, noting that the evidence is concerned wholly with activities of MRL in and about the partial construction of a resort complex and efforts to obtain finance for that project:

“ AFS ”: Australian Financial Solutions Pty Limited – a financial intermediary;

“ BDO ”: BDO Nelson Parkhill – a firm of chartered accountants retained by MRL for the purposes of a proposed prospectus;

“ Mr Beattie ”: Gregory Beattie, a partner of Eakin McCaffery Cox, solicitors for MRL;

“ Mr Branagan ”: Adrian Branagan – a consultant to DMF;

“ Mr Chamberlain ”: Christopher Chamberlain – a chartered accountant who became administrator and eventually liquidator of MRL;

“ CJC ”: Colin Joss & Co Pty Ltd, a building contractor based in Albury;

“Club” : Mulwala & District Services Club Ltd – the owner of the leasehold site intended to be the site of the resort development; party with Essington to the memorandum of understanding dated 4 May 1998 and the joint venture agreement of 22 December 1998;

“ Mr Curtis-Smith ”: James Curtis-Smith – solicitor for the Club;

“ DMF ”: Direct Mortgage Funding Pty Ltd – a financial intermediary;

“ Essington ”: Essington Asia Pacific Pty Limited, a company owned by the defendant and members of his family; party with the Club to the memorandum of understanding dated 4 May 1998 and the joint venture agreement of 22 December 1998;

“ Mr Fernandez ”: John Fernandez – a director of Urwin & Fernandez Pty Ltd, a venture capital firm;

“ Mr Gamble ”: Baxter Gamble – an officer of AFS;

“ Mr Haralambis ”: Constantine Haralambis – the solicitor for Leigh

“ Mr Hargreaves ”: Trevor Albert Hargreaves – a director of the Club and of MRL;

“ HGR ”: Herbert Geer Rundle, Melbourne solicitors representing potential providers of mortgage finance;

“ Mr Hickie ”: David Hickie – an employee of Mercator;

“Mr Jones” : Leonard Paul Jones – co-director with the defendant of MRL;

“ Mr Paul Joss ”: Paul Joss – son of Colin Joss and an officer of CJC;

“ Mr Joss ”: Colin Joss – the principal of CJC;

“ KCC ”: Knapman Clark & Co Pty Ltd – a firm of quantity surveyors;

“ KCMS ”: Knapman Clark Management Services Pty Ltd – a project manager;

“ Leigh ”: Leigh Superplan Pty Ltd – a lender;

“ Mr Male ”: A.W. Male – a registered valuer practising in Albury and the principal of A.W. Male & Associates Pty Limited;

“ Mr McKay ”: Peter McKay – an employee of DMF;

“Mr McNamara ”: Kenneth McNamara – a director of KCMS and the sole director of KCC.

“ Mercator ”: Mercator Funds Management Limited – a financial intermediary;

“ Mr Mullarvey ”: Michael Mullarvey – chief executive officer of the Club and secretary of MRL;

“ NAB ”: National Australia Bank Limited;

“ Mr Nieuwenhout ”: Anton Nieuwenhout – a director of the Club and of MRL;

“ Mr Radcliffe ”: Murray Radcliffe – an officer of WAMC;

“ Mr Reid ”: Martin Reid – a project manager employed by CJC;

“ Mr Robinson ”: Trevor Robinson – an officer of AFS;

“ Mr Sloan ”: James Sloan, the solicitor for CJC;

“ Mr Smith ”: Greg Smith – an officer of AFS;

“ Mr Tait ”: Robert Tait – a director of the Club and of MRL;

“ WAMC ”: Water Administration Ministerial Corporation – the lessor to the Club of the site of the proposed resort development;

WLB

ASIC’s case

3 ASIC’s case against the defendant is that he contravened s.588G by failing to prevent MRL from incurring each of several debts. ASIC thus relies on s.588G(2) which, referring to a person, a company, a debt, the incurring of the debt and the time of such incurring (some of which are elucidated by ss.588G(1) and 588G (1A)), states that the person contravenes s.588G by failing to prevent the company from incurring the debt if one of two conditions is satisfied: either the person is aware at the time of the incurring that there are grounds for suspecting that the company is insolvent or would become insolvent by the incurring of the debt (s.588G(2)(a)); or, alternatively, that a reasonable person in a like position in a company’s circumstances would be so aware (s.588G(2)(b)). A person is within the purview of this section if he or she is a director of the relevant company at the time that company incurs the relevant debt: s.588G(1)(a). The incurring of a particular debt is relevant for the purposes of the section if, first, the company is insolvent at the time of the incurring or becomes insolvent by incurring that debt (or debts including that debt) (s.588G(1)(b)); and, second, there exist at that time reasonable grounds for suspecting that the company is insolvent or would become so insolvent (s.588G(1)(c)).

4 Another condition of applicability of these provisions is that the time of the incurring of the debt is at or after the commencement of the Corporations Act 2001 (Cth). That commencement occurred on 15 July 2001, more than two years after most of the acts and events on which ASIC relies in this case. By virtue of s.1400, however, those acts and events may be so relied upon, where those acts and events gave rise to an equivalent liability under a provision of the Corporations Law as in force before 15 July 2001. It is submitted by ASIC and not denied by the defendant that this transitional provision applies in the present case. The correctness of that conclusion is, in any event, clearly indicated by both R v Frawley (2005) 52 ACSR 461 and Kennedy v Australian Securities and Investments Commission (2005) 52 ACSR 301.

5 If ASIC is to succeed in establishing a contravention of s.588G by the defendant by reason of the incurring of a particular debt by MRL, ASIC must show (in addition to the incurring of the debt):

(a) that the defendant was a director of MRL at the time of the incurring of the debt;

(i) was insolvent at the time of the incurring of the debt; or

(ii) became insolvent by incurring the debt (or debts including the debt);

(d) that the defendant failed to prevent MRL from incurring the debt; and

(e) that either

(i) the defendant was aware, at the time of the incurring of the debt, that there were grounds as referred to in (c) above; or

(ii) a reasonable person in a like position in a company in MRL’s circumstances would have been so aware.

6 The matters to which I have referred emerge from ss.588G(1) and 588G(2):

7 Even if ASIC succeeds in establishing the elements contemplated by s.588G the defendant will not be held to have contravened s.588G if he establishes one of the defences made available by s.588H:

“(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).

(2) It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.

other person

(4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.

(5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.

MRL and the project in brief

8 MRL came into being on 16 June 1998. It became a public company and adopted its present name on 21 August 1999. Its original name was Murray River Pty Limited. The time at which it was converted to a public company and adopted the name “Murray River Limited” is of no consequence. I shall refer to it as “MRL” whether or not its name had been changed at the relevant time.

9 ASIC records show that the defendant became a director of MRL on 19 July 1998 and remained in office until 31 March 2000. It was not suggested in the course of the proceedings that this is incorrect or that the defendant was not a director during any part of that period. At the times material to the proceedings, the issued share capital of MRL consisted of two fully paid shares, one held by Essington Asia Pacific Pty Ltd (“Essington”) and the other by Mulwala & District Services Club Ltd (“the Club”). There were five directors: Mr Hargreaves, Mr Tait and Mr Nieuwenhout from the Club and the defendant and Mr Jones from Essington.

10 The Club and Essington entities were the parties to a memorandum of understanding dated 4 May 1998. That memorandum set out a framework within which Essington and the Club would pursue a plan to develop an apartment hotel on land on the shores of the lake on the Murray River at Mulwala/Yarrawonga. The arrangements foreshadowed by the memorandum of understanding were in due course embodied in a joint venture agreement made on 22 December 1998 among MRL, the Club and Essington. Those parties agreed that MRL would undertake the conduct and management of a project involving the development of the relevant land. That land (Lot 29 in Strata Plan 37724) was held by the Club as lessee under a lease from the Water Administration Ministerial Corporation (“WAMC”). The lease was for a term ending on 31 October 2036. The joint venture agreement made provision with respect to this leasehold interest (which it designated “the Property”) as follows:

3.3 Transfer of Property

Either party may by notice in writing to the other require the Property to be transferred to the Company for the Purchase Price conditional on the following:-

(a) the Company paying all stamp duty and other fees or charges associated with the transfer of the Property;

(b) the extension of the current strata leasehold estate held by Mulwala in the Property so as to increase the term of the strata leasehold estate to a term not less than 99 years or such other term acceptable to the Company or such term as negotiated between the Company and Water Administration;

(c) the notification of the Development Consent by the relevant authority in respect of the Property in a form acceptable to the Company;

(d) the approval of the proposed strata plan of subdivision of the Property by Owners Corporation SP 37724.

3.4 Mulwala Finance

The Purchase Price will be notionally paid by the Company to Mulwala by the Company at the time of Transfer of the Lease simultaneously handing to Mulwala a registrable first Mortgage secured over the Property for the full amount of the Purchase Price. Mulwala will execute a deed of priority to postpone its mortgage in favour of a mortgagee financing the Project and otherwise as resolved by the Company and with the consent of Mulwala first had and obtained in writing to postpone its priority, the Mortgage shall remain a first charge and encumbrance on the Property until discharged in full.

the ‘Purchase Price’)

the ‘Repayment Date’

11 The joint venture agreement also made provision in relation to the capital structure of MRL (the Club and Essington were to have one share each) and management of, decision-making within and funding of MRL. The last-mentioned matter was dealt with as follows:

5.1 Sources of Funding

EAP must ensure that the Company has sufficient working capital to conduct the Project from:-

(a) loans by the Parties to the Company or;

(b) borrowings by the Company.

5.2 Loans from Parties

(a) EAP and Mulwala upon the signing of this Agreement shall be entitled to present to the Company, accounts relating to expenditure incurred by both parties collectively and individually in connection with the formation of this Agreement and as set out in Schedule 3 hereto, and that such accounts shall thereafter be treated as loans to the Company by EAP and Mulwala respectively. Such loan shall not attract interest but otherwise be repaid in the manner set out in sub-clause 5.2(b).

(b) Any loan by a Party to the Company shall be repaid on reasonable notice and the Company must pay interest at the interest Rate to the Party at the end of each month from the date of receipt of the loan until the date of repayment.

5.3 Guarantee Payments

If a Party has to make payments under a guarantee of the Company’s borrowings then, the Company must treat those payments as a loan by that Party to the Company governed by clause 5.2 above.

5.4 Other Sources of Funding

A decision of the Company to meet funding requirements by means other than referred to in this clause will be by unanimous resolution of all the Parties entitled under the Articles to vote.”

12 Although the joint venture agreement was made on 22 December 1998, the parties had before that date taken tangible steps to pursue the plan of action encompassed by it. In July 1998, there had been prepared a project co-ordination manual. The author was Knapman Clark Management Services Pty Ltd and (“KCMS”). The manual said that EAP had retained Wolski Lycenko & Brednock (“WLB”) to provide architectural and consultancy services to MRL for a new resort at Mulwala. Also involved was a firm of quantity surveyors, Knapman Clark & Co Pty Ltd (“KCC”). The defendant and Mr Jones had been business associates in the property development field for some time. The defendant had been active in property development for many years. Mr Jones was an architect by profession. They were both located in Essington’s office premises at North Sydney and saw one another virtually every working day. It was their habit to have coffee together on a daily basis. They often lunched together and had drinks after work. Their offices were almost adjoining. Each would regularly call unannounced at the other’s office when the need arose.

13 KCMS was located in the same building as Essington. Mr McNamara had an ongoing relationship with Essington and had worked on other projects with the defendant and Mr Jones.

14 The Club was a registered club with premises at Mulwala. Its activities included the operation of a motel (or modest resort) on Lot 29. Demolition of those premises formed part of the project with which these proceedings are concerned.

The contraventions alleged by ASIC

15 ASIC’s case is that the defendant contravened s.588G on six occasions, in that six separate and distinct debts were incurred by MRL in circumstances attracting the operation of the section vis-à-vis the defendant. The creditor, in respect of each such debt, was Colin Joss & Co Pty Ltd (“CJC”), a building contractor. ASIC maintains that each of the six debts became owing, due and payable by MRL to CJC either pursuant to a building contract between MRL and CJC or upon a quantum meruit, in either case for work done by CJC. There is no dispute that CJC carried out work on and in relation to Lot 29. Nor is there any dispute that Lot 29 was, at all material times, a leasehold property of which the Club was the registered proprietor.

16 The six debts alleged, and the dates on which ASIC says they were contracted by MRL were:

1. $ 390,000 - 27 April 1999

2. 635,000 - 10 May 1999

3. 1,340,000 - 20 May 1999

4. 859,370 - 18 June 1999

5. 183,889 - 22 July 1999
6. 181,772 - 24 September 1999

17 ASIC says that the first two debts were paid in full, that the third was paid as to $365,000 and that the other three were not paid.

The defendant’s contentions

18 I should, at this point, refer to the matters raised by the defendant in his points of defence filed on 24 February 2004. Those matters go to both the elements that ASIC must prove and matters arising from s.588H. The defendant says that

(a) at all material times, MRL was objectively solvent;

(b) the alleged debts were not due and payable in that

(i) CJC, by its conduct, was estopped from enforcing any debt owing by MRL;

(ii) CJC assumed a risk in continuing to work on the project; and

(iii) any breach of contract did not give rise to a debt incurred by MRL

(c) even if a debt was incurred, MRL has a right of indemnity from another entity for the debt or is the beneficiary of a constructive trust or resulting trust and the right of indemnity or beneficial interest is an asset of MRL;

(d) at all material times, the defendant had no reasonable belief that MRL was insolvent or would become insolvent;

(e) the defendant had reasonable grounds to expect and did expect that MRL was solvent and would remain so even if it incurred debts as alleged by ASIC;

(f) the defendant had reasonable grounds to believe that MRL would be able to rely on resources outside its balance sheet to meet its debts and liabilities;

(g) the obtaining of finance by MRL was continually frustrated by the Club which acted in breach of the joint venture agreement;

(h) at all material times the defendant had reasonable grounds to believe and did believe

(i) that competent and reliable persons were responsible for providing him with adequate evidence about MRL’s solvency;

(ii) each of those persons was fulfilling that responsibility; and

(iii) on the basis of information provided to him by those persons, that MRL was and would remain solvent even if the alleged debts were incurred;

(i) at all material times, the defendant was only one of six directors of MRL which he did not control and which was not his alter ego;

(j) no moneys came out of MRL to the defendant’s personal favour, nor did he prefer his own interests or those of associates or attempt to enrich himself at the expense of MRL or its shareholders or creditors;

Corporations Act

19 Finally, the defendant prays in aid the dispensing powers of the court under ss.1317S and 1318.

20 As stated in written submissions filed after the hearing, the defendant’s contentions are:

(i) that ASIC has failed to prove any contravention of s.588G(2) by the defendant;

(ii) that at all material times relied upon by ASIC, MRL was objectively solvent and was not proved otherwise to the requisite standard;

(iii) that the defendant is entitled to the defences provided by ss.588H(2) and (3);

(iii) that, at all material times, the defendant had no reasonable belief that MRL was insolvent or would become insolvent;

(v) that the defendant had reasonable grounds to expect and did expect that MRL was solvent and would remain solvent even if MRL incurred the debts as alleged by ASIC and any other debts incurred by MRL at that time;

(vi) that the defendant had reasonable grounds to believe and did believe that MRL would further be able to rely upon resources and assets outside MRL’s balance sheet to meet its debts and liabilities as and when they were incurred;

(vii) that the obtaining of finance, transfer of the relevant land and giving of the security for MRL were continually frustrated by one of the joint venture partners, being the Club;

(viii) that the Club’s actions at all material times were such as to permit a finding by the court that it was a shadow director of the Company, which by those actions was squarely responsible for the predicament in which MRL found itself in 1999;

(ix) that it was the egregious breach of its contractual and fiduciary obligations by the Club as a joint venturer under the joint venture agreement of 22 December 1998 that demands the closes analysis in order that the total context of this matter be properly understood to enable the defendant to be exonerated as he should be; and

(x) that the approach adopted by ASIC in both the running of the case and its written submissions is and was “altogether too simplistic, blinkered, selective and characterised throughout by a failure to grapple with important concepts such as the law relating to the content of fiduciary and contractual obligations in the context of a joint venture relationship such as that which came into effect in this case on 22 December 1998.”

21 In its submission in reply, ASIC contended that the defendant had made no submission in support of the aspects of the points of defence summarised at items (b), (c), (h), (i), (j) and (k) above. That point is well taken and I approach the matter on the footing that the defendant’s defence is based wholly on items (a), (d), (e), (f) and (g) as explained and supplemented in items (i) to (x). The defendant does, however, submit that ASIC has failed to discharge its onus of proving a central element, namely, the incurring of the relevant debts by MRL. That matter is squarely in issue, together with the elements going to solvency of MRL at the relevant times, reasonable grounds for suspecting insolvency at those times and the state of the defendant’s awareness of such grounds (or the hypothetical awareness of a reasonable person in a like position) – in other words, the several matters emerging from ss.588G(1)(b) and (c) and 588G(2)(a) and (b).

Evidence relevant to contract formation and progress claims

22 The alleged debts in question (see paragraph [16] above) were, as I have said, debts said by ASIC to be owing, due and payable by MRL to CJC either under a contract or upon a quantum meruit. Since the two are mutually exclusive (in that there can be no quantum meruit claim if a contract requires payment), the first step must be to determine whether a contract for the provision of building services by CJC to MRL for reward came into being. That makes it necessary to review a body of evidence.

23 ASIC contends that a contract for the design and construction of 142 units on Lot 29 came into existence between MRL and CJC on or some time after 4 February 1999. Relevant actors on behalf of MRL, in ASIC’s submission, were Mr McNamara (of KCMS) and Mr Jones. ASIC says that, although no formal building contract was executed by both MRL and CJC, a contract came into existence under the first or second category in Masters v Cameron (1954) 91 CLR 353 or the so-called fourth class identified in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 as derived from Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310, the existence of which has recently been confirmed by the Court of Appeal in Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235.

24 CJC received, through KCMS an invitation to tender to which it responded. A draft building contract was submitted by KCMS to CJC on or about 19 November 1998. It was expressed to relate to a “new 142 room resort development at Mulwala for Murray River Pty Ltd” and contained the invitation to tender. The draft nominated a commencement date of 3 February 1999. CJC submitted a tender on or about 16 December 1998. It referred to a tender price of $15,975,760. There was subsequent discussion between Mr Joss and Mr McNamara about reducing the price. As a result, Mr Reid of CJC informed Mr McNamara on or about 22 December 1998 that savings of $1,701,168 could be achieved. (There was a subsequent addition of $80,000.) On 20 January 1999, Mr McNamara informed Mr Reid of CJC that CJC was the successful tenderer and gave him a list of things needed for the preparation of the contract. On or about 8 February 1999, CJC confirmed in writing to KCMS that the final contract price was $14,483,447. The items identified by KCMS as required from CJC included “completed bond form in the amount of $1,000,000”. Letters of particular importance were brought into existence on 1, 2, 3 and 4 February 1999.

25 On 1 February 1999, Mr Reid of CJC wrote to Mr McNamara as follows:

“Demolition is programmed to commence on Thursday 4th February, 1999.

Prior to Thursday could your [sic] please organise a formal letter of intent, subject to finalising Contract Sum and the Contract as documented in our correspondence dated 7th December, 1998.”

26 The letter of 2 February 1999 is a letter from Mr Jones to Mr Joss saying:

“The issue of contract for the construction of project The Lake Resort by Colin Joss & Co has been delayed due to paperwork required by the Club’s bankers giving clear title to the land.

The Club have been assured by the bank this is purely a procedural matter, however, we cannot conclude our documentation until the matter is finalised.”

27 The letter of 3 February 1999 is a letter from Mr McNamara to Mr Jones:

“Mr Martin Reid, of Colin Joss, rang at 455pm today stating that the letter of intent has not yet been received and they cannot give the Demolition subcontractor the OK to proceed for tomorrow until they have this letter.

Your urgent attention would be appreciated.”

28 This prompted a response by Mr Jones, in the form of a handwritten endorsement, as follows:

“To: Ken McNamara

29 The letter of 4 February 1999 is also from Mr Jones to Mr Joss. It reads as follows:

“We confirm that it is the intention of Murray River Pty Limited to enter a contract with Colin Joss & Co to construct a new resort on site known as Lake Resort, Melbourne Street, Mulwala.

We understand there are some contractual matters to be soughted [sic] out with Knapman Clark Management Services before contract documents can be finalised.

We also have some procedural matters to finalise with the Club regarding the transfer of the lease on the site as mentioned.”

30 This letter of 4 February 1999 followed on from a letter of 14 January 1999 from Mr Jones to Mr Joss in which Mr Jones confirmed that it was in order for CJC’s engineers to prepare engineering drawings for the foundation and said:

“We have few formalities to complete before we are able to send you a letter of appointment …

31 The position at about the time of the sending of that letter is reflected in the minutes of the eleventh meeting of the Project Control Group held on 18 January 1999. That meeting was attended by representatives of the Club, Mr Jones and Mr McNamara. The minutes record:

Building Program

Colin Joss & Co were recommended as the builder although negotiations were proceeding to reduce the construction price further.

Attention was drawn to on completion maintenance and service charges from Sub-Contractors.

Construction figure approved as a Maximum Fixed Price $14,430,597.00.

Construction to commence with site hand over 4th February 1999.”

32 It is thus clear that Mr Jones’ letter of 4 February 1999 was intended to convey concurrence in the commencement of work by CJC on that date. It is also clear that the letter of 4 February 1999 was intended to confirm the existence of the relevant intention to contract despite the message in Mr Jones’ letter of 2 February 1999 regarding delay in the issue of a contract because of a “purely procedural matter” raised by the Club’s bank, which matter was referred to again in the final paragraph of the letter of 4 February 1999. The letter of 4 February 1999 was expressly sought by CJC. Mr Reid made it clear in his letter of 1 February 1999 that he wished to have such a letter before allowing the demolition subcontractor to begin work on Lot 29 on 4 February 1999.

33 After sending Mr Joss the letter of 4 February 1999, Mr Jones wrote to Mr Mullarvey on the same day saying:

“We have advised Colin Joss & Co that it is the intention of Murray River Pty Limited to enter a contract with Colin Joss & Co to construct the new resort.

We have also advised that there are some procedural matters regarding the transfer of the lease which have to be completed before the funding is finalised and the contracts signed.

He seems relaxed that these matter will be soughted [sic] out in the near future.”

34 On 23 February 1999, Mr Reid wrote to Mr McNamara. The letter, headed “Mulwala Resort”, began:

“Significant contractual issues still remain outstanding mainly …”

35 On 1 March 1999, however, CJC submitted to KCMS “Progress Claim No 1” in the sum of $581,723.92 referring to a “Contract total” of $14,483,447 and “Variations” of $100,000 making up a “Revised contract total” of $14,583,447. KCMS wrote to CJC on 2 March 1999 acknowledging receipt of the progress claim and referring to a KCMS letter of 8 February 1999 “which confirmed the requirements of the Contract that require to be conformed with before we can process your claim”. CJC sent a long letter dated 5 March 1999 in reply to a letter of 3 March 1999 which, from the terms of the CJC letter, was distinct from the KCMS letter of 2 March 1999. I mention the letter of 5 March 1999 only because of the reply dated 8 March 1999 from KCMS beginning:

“We are in receipt our [sic] your letter of 5th March and whilst appreciative of the efforts to date by your company advise that we are merely servants of the Contract Documents which we must adhere to being the agreement between your Company and Murray River Pty Ltd.”

36 On 19 March 1999, KCMS prepared a document designated “Volume Three – Fifth (5th) Schedule – Sundry Information for inclusion in Building Contract”. It included a list of “sundry information for inclusion in building contract”, including seven items referable to a letter from CJC dated 16 March 1999. That letter is a letter from CJC to KCMS referring to “Mulwala Resort” and commencing

“As requested in your facsimile dated the 16th March 1999, please find enclosed two copies of the following documentation required for the preparation of a contract on the above project.”

37 On 26 March 1999, Mr Jones (signing as executive director of Essington) wrote to Mr Joss enclosing a letter from KCMS, addressed to MRL, which Mr Jones described as a letter which “indicates we can accommodate your request to waive the necessity of a performance bond”.

38 CJC’s second payment claim (“Progress Claim No 2”) was submitted on or about 31 March 1999, the date it bears. Like the first, it was addressed to KCMS. The sum claimed was $847,437.13. The claim referred to a revised contract total of $14,583,447.00 and to a total of $1,429,161.05 referable to various heads of activity, less the prior claim of $581,723.92.

39 On 9 April 1999, Mr Jones wrote to Mr Joss saying:

“The signed contract documents will be couriered back to you today.”

40 On 12 April 1999, Mr McNamara of KCMS wrote to Mr Reid of CJC as follows:

“I have been advised by Mr Jones that the contract has now been executed by Murray River P/L.

I am currently preparing the payment certificate for progress claim No. 1 and this will be faxed to you tomorrow.

Mr Jones has advised me that notwithstanding the contract processing time he is doing his utmost to expedite payment a.s.a.p. (ie. this week).”

41 The next day, however, there was a meeting of the directors of MRL (attended by the defendant, Messrs Hargreaves, Tait, Jones and Mullarvey) at which Mr Jones is reported to have said that the contract had been signed by CJC “and advice was being sought from Knapman Clark Management Services that all compliance items had been completed by the Builder before Murray River signed”. The meeting resolved that Mr Jones “be authorised to sign these documents once KCMS approval had been received”. On the same day, Mr McNamara (for KCC) issued a certificate addressed to MRL stating that “a drawdown of $390,000.00 (excluding Capitalised Interest) is in order for payment to Colin Joss & Co Pty Ltd”. The certificate referred to “Value of Contract” and said that the development was on target “to achieve the contractural [sic] practical completion date”. Attached was a reconciliation of the $390,000 certified with the $581,723.92 in Progress Claim No 1”.

42 On 14 April 1999 Mr Reid of CJC wrote to Mr McNamara of KCMS complaining about delay in payment of the first payment claim. The next day, Mr McNamara sent to Mr Joss a copy of a letter from Mr Jones referring to arrangements for payment.

43 On 26 April 1999, KCC issued a second certificate addressed to MRL. The certificate stated that a drawdown of $635,000.00 was in order for payment to CJC. This related to Progress Claim No 2.

44 On 27 April 1999, Mr Jones wrote to Mr Mullarvey a comprehensive letter about the status and affairs of MRL. Under a heading “Funding”, Mr Jones said:

“The builder has submitted two claims:

Payment No. 1

Payment No. 2

Claim No. 3 is expected on 4th May 1999 amounting to $1.35m, payment is due by 24th May 1999.

Amount: Date:

Draw-downs 1 and 2 are from lawyers funds to be repaid out of draw-down No. 3 from a bank (traditional funding).

Essington has been negotiating an underwriter for the prospectus and end purchaser for the whole development.”

45 Progress claim No 3 was issued by CJC on 30 April 1999. Like the earlier claims, it was addressed to KCMS. The sum claimed was $1,090,194.15. On 7 May 1999, KCC certified that a drawdown of $1,340,000 was in order for payment to CJC. The revised contract total was shown as $12,594,475.00. Items totalling $2,519,355.20 were claimed, with credit given for the prior claims of $1,429,161.05.

46 On 13 May 1999, KCMS replied to a letter of the same date from Mr Reid of CJC headed “Payment of Progress Claim Nos. 1, 2, & 3/Breach of Contract”. Mr Reid’s letter of 13 May 1999 set out in detail the steps in relation to the proposed contract and payments for work from 19 November 1998 to 13 May 1999. Mr Reid also said that KCMS and others had “breached the Contract and Colin Joss & Company Pty Ltd reserve the right to seek damages and pursue the relevant default procedures”. KCMS said in its reply that payment No 1 had been made, that payment No 2 was two days late and that payment No 3 was not yet due. It then went on to quote the “Conditions of Contract, Clause 19.4” and to refer to remedies available under the “Contract”.

47 Mr Joss and the defendant met in Canberra on 16 May 1999. It will be necessary to say more about the meeting in due course. I mention it now because, on 21 May 1999, Mr Joss wrote a letter to the defendant referring to the meeting and to an understanding he had gained from it that the second and third payments would be made on 25 May 1999, an understanding that he had thought the defendant was going to confirm. The letter complained about delay in payment and requested confirmation of the payment date by 24 May 1999. The letter sought to implicate Essington as well as MRL. The defendant did not reply at once to this letter. But there was a reply dated 21 May 1999 from Mr Marriott, company secretary of Essington:

“We refer to the meeting between Mr Colin Joss (for Joss & Co) and Malcolm Edwards (for Murray River Pty Limited) at Canberra on 16th May 1999.

We do not proposed [sic] to comment on your letter 21st May 1999 or your purported chronology of 13th May 1999 in detail, other than to draw to your attention the following salient facts:

1. At all times and at all stages, it had been made quite clear to your Company that Essington Asia Pacific Pty Limited’s (EAP) involvement is a shareholder of Murray River Pty Limited and has a contract from it for certain project works. You seem to be under the mistaken belief that EAP has some contractual building contract with you. This is incorrect. It is evidenced by the fact that any contract is with Murray River Pty Limited not Essington Asia Pacific Pty Limited.

2. Essington rejects that any fundamental breach of contract has taken place. As we understand it, you have been kept fully advised as to the funding situation and timing of any progress payments.

3. You commenced construction work on this site without the executed building contract with Murray River Pty Limited. You were fully aware of this commercial risk. We trust co-operation between Murray River Pty Limited and your firm will continue to allow commercial issues between them to be resolved.”

48 The defendant wrote to Mr Joss two days later, on 23 May 1999:

“Dear Colin

I refer to our meeting in Canberra on 16th May. The principal concern from your position being the delayed payment for the project and my concern was the order of works that had been carried out prior to execution of the building contract.

Following our range of discussion including bond issues I indicated that payments on advice then available would be between 3 and 4 weeks late. I also informed you that the representatives of the lender to Murray River Pty Limited expected that a payment could be made on or about 24/25th May. I suggested that should a delay be experienced it would be appropriate that you meet with Ken McNamara and Len Jones to work out an alternative work program and cashflow while they were at Mulwala on 17th May. I realise that was not possible as you planned to remain in Canberra. As at 21st May I had not received the expected further advice despite many attempts to clarify the arrangements. I have been assured by Mr Baxter Gamble of AFS, Sydney that he and your Mr Martin Reid had spoken at least twice up to Thursday and when challenged Mr Gamble made the comment that because of other commitments and his belief that Mr Reid would be informing you he had not as you are aware returned numerous of my calls. Contrary to your suggestion it seems it was me they chose to ignore.

As advised on Friday night, I am meeting with Mr Gamble on Monday and will contact you thereafter. Thank you for your cooperation.”

49 There was another exchange of letters on 24 May 1999 between Mr Joss and the defendant regarding payment. Mr Joss’s letter of that date read as follows:

“Received your letter this morning where you noted several points of our conversation that took place in Canberra on 16th May, 1999.

· You were right in your recollection that I was concerned by late payments by Murray River Pty Ltd.

· You were correct as my recollection was also that we could expect payments on 24/25th May, 1999.

· Discussion regarding bond issues as you noted was vaguely discussed in part at our meeting. This was your problem how you sought finance – not mine, although we are very interested.

· I am puzzled as in your letter you say you indicated to me that payments on advice then would be available between three and four weeks late. I do not recall this discussion – please elaborate.

· Regarding Site Meeting held at Mulwala 17th May, 1999.

My recollection of financial matters regarding late payments was that this topic would be best left out of discussion during this meeting as Directors of the Mulwala Club would be in attendance.

Note: At the meeting of the 17th May when it became apparent that there were no Directors of the club in attendance, it would have been appropriate that Ken or Len could have raised the issue of an alternative work program and cash flow with Martin Reid.

· I would not be able to be in attendance as I had continued business in Canberra on the 17th May, 1999.

We note that as from today payment of Progress Claim No. 3 is due. Therefore we would expect that the full amount of both claims for March and April will be forwarded as one payment for a total sum of $1,975,000.00.

We await your response.”

50 Progress Claim No 4 was issued by CJC to KCMS on 31 May 1999. The sum claimed was $935,017.91. It referred to items totalling $3,454,373.11 against which credit was allowed for the prior claims totalling $2,519,355.20. The next day, 1 June 1999, MRL (Mr Jones) wrote to Mr Reid of CJC saying among other things:

PAYMENT

We are informed that Mr Gamble has advised you that they are finalising payment details as discussed and will keep you advised.”

51 On 4 June 1999, KCC issued Drawdown Certificate No 4 addressed to MRL. It certified that $859,370.00 was “in order for payment to Colin Joss & Co Pty Ltd”.

52 On 7 June 1999, Mr Sloan, a solicitor instructed by CJC, wrote to MRL, the defendant and others stating that MRL was trading while insolvent and threatening proceedings. On 10 June 1999, Mr Sloan wrote to MRL giving notice, on behalf of CJC, that the works had been suspended and would not recommence until all moneys due had been paid.

53 The defendant wrote to Mr Sloan on 11 June 1999 as follows:

“Dear Mr Sloan

I have your letter dated 7th June 1999.

I deny that Murray River Pty Limited is ‘attempting to use your client to finance the project’. I also deny emphatically any purported insolvent trading, breach of contract or breach of the Corporations Law.

It seems to me unhelpful to embark on expensive time consuming and public litigation which at the end of the day will not provide any more satisfactory resolution than commercial arrangement for any of the parties involved in this case. You will appreciate that as a result of your communications, I have asked the solicitors of Murray River Pty Limited to examine the contractual position between the Company and your client.

On 16th May 1999 I met with your client in Canberra, it was accepted at that time that any payments scheduled during the next two months from 16 May 1999 were likely to be delayed for three to four weeks on the assumption of current advice from financiers and that Mr Joss acknowledged that position. In fact Mr Joss indicated that he was not in favour of my suggestion of slowing the work and revising the cash programme as that might have other consequences for Joss & Co. I am surprised that he has chosen to engage you to write to me and other directors of Murray River Pty Limited but understand his concerns which we have discussed in detail.

I am informed that Murray River Pty Limited will respond to your client shortly with a proposal to resolve all our outstanding disputes. If you have any further need to write to me please write to my lawyer Mr Andrew Sutherland at Eakin McCaffery Cox, St Martins Tower, Market Street, Sydney, phone: 9265 3000, fax: 9261 5918.”

54 The cessation of work caused alarm at the Club. A meeting took place at CJC’s office in Albury on 16 June 1999 to discuss the matter. A detailed account of who said what at the meeting is in evidence. Among those present were the defendant, Mr Joss, Mr Reid, Mr McNamara, Mr Mullarvey and solicitors for MRL, the Club and CJC. The account of the meeting records Mr Reid as asking when CJC was to be paid, the CJC solicitor adding that CJC is owed $3 million. The defendant is recorded as saying that he was aware of the matter “which is regrettable” but that a payment schedule would be given to CJC on 21 June. In response to a question what guarantee CJC had that they would be paid, the defendant reportedly said, “None, only my word”.

55 Mr Mullarvey wrote to the defendant on 24 June 1999 expressing the ongoing concern of the Club about the position that had been reached and asking for information and reassurance. This made it clear that a “schedule” (presumably the payment schedule foreshadowed for 21 June 19999 at the meeting on 16 June) had been submitted to CJC but had been rejected. The letter reads in part as follows:

“You will recall my comment yesterday that even with Colin Joss & Co paid, we will not want to let him back to site until we are satisfied with the ongoing arrangements. You have a copy of the schedule put to Colin Joss & Co Pty Limited, which was rejected as, was the suggestion that the builder and the project manger [sic] discuss a compromise. A letter suggesting the alternative has been sent to Mr Joss following my discussions with financiers yesterday. A copy is attached.”

56 Progress Claim No 5 was issued by CJC to KCMS on 30 June 1999. It was in the sum of $815,619.40, representing work items totalling $4,039,989.40 less previously certified claims of $3,224,370.00. KCC issued its fifth certificate on 8 July 1999. It certified that a drawdown of $183,889.00 was in order for payment to CJC. On 28 July 1999, CJC wrote to MRL saying that it required payment of $3,447,657.85 before recommencing on the site. This represented the aggregate of the first five KCC certificates plus interest calculated by CJC.

57 Under cover of a letter dated 23 August 1999, the defendant sent Mr Mullarvey a copy of the balance sheet of MRL at 30 June 1999 with a copy of the profit and loss account for the year to that date. He asked that Mr Mullarvey circulate it to the directors of MRL, noting that it would be necessary for the directors, at their next meeting, to authorise signing of the accounts. The balance sheet recorded as a current asset cash at bank of $1,358.46 and as a non-current asset “Buildings – Mulwala Resort” of $4,848,600.66, making up total assets of $4,849,959.12. Two liabilities were recorded, both being non-current liabilities. One ($470,000) reflected a loan obtained from Leigh Superplan Pty Ltd. The other ($4,225,972.16) was designated “Creditors Control”. Accompanying or attached to the accounts was a schedule headed “Aged Payables” reflecting a total of $4,495,089.17 and a handwritten adjustment (by way of deduction) of $269,117.01 referring to five marked items dated July 1999 and therefore not relevant to the position at 30 June 1999. The adjusted total of $4,225,972.16 corresponds with the “Creditors Control” item in the balance sheet. The “Aged Payables” schedule includes seven items (disregarding eliminated items of July) referable to CJC. These total $2,872,013.46, of which $635,000.00 is recorded as 90 days plus, $1,340,000.00 is recorded as 31 to 60 days and the balance is recorded as current. As will be seen presently, subsequent reconciliation of this balance sheet with the accompanying trial balance suggests that the sum owing to CJC should have been recorded at $2,834,370: see paragraph [93] below.

58 On 31 August 1999, CJC issued to KCMS Progress Claim No 6 for $1,383,761, being work items of $4,792,020.61 less $3,408,259.00 previously certified. KCC issued to MRL on 10 September 1999 certificate No 6 certifying that a drawdown of $181,772.00 was “in order for payment to Colin Joss & Co Pty Ltd”.

Decision on contract formation

59 It is not clear that a formal building contract was ever executed by both MRL and CJC and dealt with in such a way as to be binding on them. It is more likely than not, in my view, that it was not. There is in evidence a copy of a form of tender dated 16 March 1999 bearing an impression of the common seal of CJC and the signatures of Mr Paul Joss and Mr Reid. The date 26 March 1999 appears in the attestation clause. On the following page appears an impression of the common seal of MRL and the signatures of Mr Jones and a Mr Burke who does not purport to be an officer of MRL but merely, it seems, a witness to Mr Jones’ signature. The date 3 May 1999 appears under Mr Burke’s signature. But it is not clear that this is in reality a single document executed by both parties. It may be something that was put together after the event. Nor is there anything to show to the requisite standard that parts executed by the respective parties were ever exchanged.

60 Indeed, Mr Jones said in evidence that he never delivered to CJC the part of the contract he had signed ostensibly on 3 May 1999 and that this was at the defendant’s suggestion or direction.

61 The impression I have just stated is strengthened by Mr Reid’s letter of 13 May 1999 to Mr Jones setting out steps in relation to the proposed contract and payments from 19 November 1998 to 13 May 1999. The last entry (for 13 May 1999) is, “11.27 am. Signed (TBC) contract documents picked up”. This suggests that contract documents supposedly signed by MRL were to be picked up by CJC on 13 May 1999 (the date of the letter) but that it was not confirmed that they were in fact signed. (“TBC” means, I assume, “to be confirmed”).

62 It is nevertheless clear, in my view, that from 4 February 1999 or thereabouts, there was a consensus that CJC should perform work for MRL and that MRL should receive the benefit of that work. Certain basic facts are clear: KCMS was, at all material times, acting for and in the interests of MRL; the contractual negotiations were between CJC and MRL; Mr Jones acted for MRL when, on 4 February 1999, he confirmed in writing to Mr Joss that “it is the intention of Murray River Pty Limited to enter a contract with Colin Joss & Co to construct a new resort on site known as Lake Resort, Melbourne Street, Mulwala”; CJC began work on the site on or about 4 February 1999 and progress claims were thereafter submitted by CJC to KCMS for work done and materials provided, which progress claims were received by KCMS, discussed by it with MRL and, in due course, assessed and processed as if the proposed contractual terms had been in force between CJC and MRL. It is significant that, in the letter of 8 March 1999 to CJC, KCMS described themselves as “merely servants of the Contract Documents which we must adhere to being the agreement between your Company and Murray River Pty Limited”.

63 CJC did work. MRL, through KCMS, received and acknowledged payment claims. KCC issued drawdown certificates. These certificates were addressed to MRL. The sums in the first two certificates were paid by MRL, as was part of the sum in the third certificate. MRL never disputed its liability for any of the certified sums. The balance sheet of MRL as at 30 June 1999 forwarded by the defendant to Mr Mullarvey for circulation among the directors of MRL was accompanied by the “Aged Payables” list clearly acknowledging a liability of $2,872,013.46 to CJC.

64 At all material times on and after 4 February 1999, CJC obviously considered itself entitled to perform and charge for work and MRL, in turn, obviously considered itself entitled to the benefit of such work and bound to pay for it. There had been, in fact, a consensus on price before 4 February 1999, although with some peripheral matters still to be concluded. Work began under the supervision of KCMS who were acting for and with the authority of MRL. KCMS proceeded as if the contract documents governed the relationship. CJC submitted payment claims as provided for in the contract documents. KCMS treated them as received under the contract documents. KCC performed an evaluating function as if the contract documents applied. And MRL, by both payment and acknowledgment of liability, acted on the footing that payment certificates issued by KCC required payment by it.

65 Even though certain aspects contemplated by the contract documents were never settled, MRL and CJC obviously embraced and acted in accordance with at least so much of the documents’ intent as envisaged the performance of work by CJC and the mechanisms for payment claims, assessment of work completed and payment against progress certificates issued by quantity surveyors. All this shows that the parties were content to abide by, at the least, the provisions of clause 19 of the contract documents which contained typical provisions with respect to submitting of monthly claims by the builder, checking and assessment by the employer’s representative and the issue by that representative of certificates. Clause 19 says that “the amount so certified shall forthwith become a debt due from the Employer to the Contractor and shall be paid within ten days after the date of issue of the certificate …”. These provisions, viewed in the light of the several certificates issued by KCC, would, if applicable, have given rise to debts due by MRL to CJC in the amounts and on the days stated in paragraph [16] above.

66 ASIC contends that a contract came into existence within the first, second or fourth category associated with Masters v Cameron and Baulkham Hills Private Hospital. The first and second classes were described by Dixon CJ, McTiernan and Kitto JJ in Masters v Cameron as follows:

“[The case] may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.”

Sinclair Scott & Co v Naughton

67 In assessing the present case, it is, I think, important to recognise that while, on 8 March 1999, Mr McNamara described KCMS as “merely servants of the Contract Documents which we must adhere to being the agreement between your Company [ie CHC] and Murray River Pty Ltd”, Mr Reid of CJC had, on 23 February 1999, written to Mr McNamara: “Significant contractual issues still remain outstanding mainly …”. There followed reference to two matters, “Confirmation of Contract Sum” and “Security from Murray River Pty Ltd”. There was not, thereafter, explicit agreement on either of the matters explicitly mentioned, although the parties’ conduct showed some form of acceptance of (or, more precisely, non-rejection of) the contract sum that formed the basis of the CJC payment claims, the KCC certificates and such payments in response to such certificates as were actually made by MRL. But even so, the fact that certain terms were recognised as in need of agreement but were never agreed militates against a conclusion that the case is within the first or second of the Masters v Cameron classes. The first class covers cases in which “the parties have reached finality in arranging all the terms of their bargain” [emphasis added]. The second covers cases where “the parties have completely agreed upon all the terms of their bargain”. Such a situation cannot exist where any aspect of the bargain is recognised as not agreed, even though there may be a core of agreed terms.

68 The fourth class, by contrast, relates to cases where “the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms”. An essential element here is recognition by the parties that the existing terms are to be binding “immediately and exclusively”, the matter of additional terms lying merely in the realms of expectation. In the present case, I do not think that the parties committed “immediately and exclusively” to part only of the envisaged totality of terms. There was, in my view, an ongoing recognition that not all terms were settled. What the parties did was to act in accordance with part of the envisaged totality of terms, their expectation being that there would in due course be a contract including the core terms to which they gave a form of advance effect.

The quantum meruit alternative

69 Although, for these reasons, I do not consider it possible to bring this case within any of the classes of contract for which ASIC contends, it by no means follows that MRL did not become indebted to CJC in the way ASIC argues. If there was no contract, the case is one in which MRL asked CJC to undertake work and CJC agreed to do so, with both of them expecting, at that point, that a contract would be entered into between them. MRL’s intention, at inception, was made explicit in Mr Jones’ letter of 4 February 1999. The letter was, in terms, a true “letter of intent”.

70 As was observed by Allsop J in Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 (a case concerning a tender for the construction and supply of seats for railway rolling stock), the “letter of intent” is a known instrument in tender cases, one function of it being “to assist the recovery of money expended in the interim by the tenderer or supplier if contractual arrangements cannot be reached”. His Honour referred to the decision of Robert Goff J in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504 where a claim upon a quantum meruit by supplier of cast iron nodes was upheld. Claims in contract failed because no contract had been formed, although negotiations had taken place, a quantity and price had been agreed and the defendant (buyer) had issued a letter of intent confirming the price and identifying the form of contract that was to be used. Discussion about the terms of contract and perceived uncertainties in the specification followed but, despite these matters being outstanding, it was agreed that the plaintiff (supplier) should go ahead with the manufacture of the first cast. Further correspondence followed and difficulties experienced by the plaintiff in producing satisfactory items were overcome. Although contractual negotiations were still in progress, the plaintiff went ahead with the casting and delivery of nodes in stages. After six months or so of discussions and difficulties, all but one of the nodes had been delivered, with a contract still not signed. The last node was delivered after a further four months. The plaintiff claimed for the price of the goods. The defendant claimed damages for late delivery.

71 To the extent that the plaintiff’s claim was contract-based, it failed. The court found that no contract had been made. But a quantum meruit claim succeeded. I quote from the judgment of Robert Goff J:

William Lacey

Hounslow

Ltd v Davis

Lacey v Davis

Sanders & Forster Ltd v A Monk & Co Ltd

OTM Ltd v Hydranautics

72 The present case is, on my analysis, one of a contract that failed to materialise. The principles applicable to such a case were discussed by Einstein J in ABB Engineering Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665. His Honour said (at [159] to [162]):

“The particular principles which require to be applied in the present case concern contracts which do not materialise. The matter is dealt with in Mason & Carter, Restitution Law in Australia, Butterworths 1995 at [1033] et seq.

It is plain enough as the learned authors point out [1033] that " in all cases in order to rely on restitution, a plaintiff must establish both enrichment and injustice [it being] insufficient merely for a plaintiff to assert that a request to do work was relied upon, or that there was a legitimate expectation that contract would be agreed ". The authors go on to add "[t]herefore, work done in preparing to perform a contract, such as in preparing a tender, generally cannot be made the subject of a claim for reasonable remuneration. Such expenditure is an overhead expense to be recouped, if at all, from payments under the contract" .

Abigroup particularly relies upon this last passage but, as will be seen from the discussion which follows, the matter must always be governed by the particular facts, matters and circumstances.

73 The case before Einstein J was, as here, what Mason and Carter, in the work cited, called “the more difficult case where there is not only a failure to conclude an agreement, but the work done does not amount to full execution of what was contemplated as being done under the contract”. Einstein J then referred to the approach taken by Mason and Carter to such a case:

Sabemo Pty Ltd v North Sydney Municipal Council

in failing to advise Sabemo that it had no intention of paying, it accepted the benefit of the work and came under an obligation, imposed by the law of restitution, to pay for the work done

74 Einstein J then quoted from the judgment of Byrne J in Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221 (at p.259):

Pavey's Case

Sabemo's Case

where the work done falls outside that normally expected of tenderers

British Steel Corp v Cleveland Bridge and Engineering Co Ltd

75 The present case cannot possibly be regarded as one in which CJC intended to act gratuitously or MRL expected (or had any reason to expect) that CJC was acting gratuitously. The work CJC began on 3 February 1999 was not work related to the preparation of the contract or work preliminary to that envisaged by the building contract the parties had in contemplation. It was work which, if a contract of the description contemplated by them were in force, would be work clearly and directly referable to the contract, in the sense of being required by the contract to be performed in return for the contracted monetary reward.

76 Nor can the situation be viewed as one in which there was a mutual expectation that there would be no payment unless and until the entire task was completed. The parties showed this by embracing and implementing at an early stage and on a continuing basis, the regime under the contemplated contract for progress claims, assessment of them, the issue of certificates by KCC and payment against those certificates.

77 I am therefore of the opinion that CJC was (and was recognised by MRL to be) entitled to reasonable reward for work actually done. The foundation is a right which is the obverse of “an obligation to pay a reasonable remuneration or compensation for a benefit actually or constructively accepted”: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at p.157 per Deane J. CJC performed work at the request of MRL in advance of the formation of a contract between them, although in circumstances where both of them envisaged and actually followed certain procedures for ascertaining reasonable remuneration on an ongoing basis. The restitutionary claims of CJC may therefore be seen as appropriately quantified by that process. The process was not itself a product of any contractual term. It was merely part of the surrounding circumstances in which both acceptance of benefit is to be recognised and reasonable remuneration for that benefit is to be given.

Incurring of the quantum meruit debts

78 The relevant concept of “incurring”, as applied to debts, was considered in the context of s.588G in Powell (as Liquidator of Noelex Yachts Australia Pty Ltd) v Fryer (2001) 37 ACSR 589. Olsson J (with whom Duggan and Williams JJ concurred) referred to the decision of the Court of Appeal of this court in Hawkins v Bank of China (1992) 26 NSWLR 562, a case arising under an analogous provision of earlier legislation. Olsson J said:

Hawkins

79 Olsson J next referred to the decision of the Full Court of the Supreme Court of Western Australia in Commissioner of State Taxation (WA) v Pollock (1993) 11 WAR 64 where Ipp J observed that the normal meaning of the word “incur” is to become liable to, or subject to, through one’s own action or by omission. Olsson J also referred to the judgment of Hodgson J in Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 in which the relevant concept was elucidated in a way described thus by Olsson J:

by its choice

• whether the company has a choice whether to do (or omit) the act or not;

• whether it is the act or omission, or something else, which renders the company liable for the debt; and

• whether the company would otherwise (in any event) have been liable for the debt.”

80 In Shepherd v Australia and New Zealand Banking Group Ltd (1996) 20 ACSR 81, however, Bryson J expressed the opinion that the element of choice referred to by Hodgson J does not form part of the “incur” concept. The South Australian court resolved this matter by preferring the approach taken by other intermediate appeal courts in Hawkins and Pollock.

81 Case law indicates, in my view, that “incurring” is the act, omission or other circumstance which causes the company to owe the debt. In the present case, where CJC, at the request of MRL, commenced building work in the absence of a contract (but in the context of a mutual expectation that a contract would be made) and the parties, by their conduct, showed an intention of proceeding in accordance with the system of progress claims and certificates envisaged by the form of contract before them, the situation was one in which MRL subjected itself to a liability for quantum meruit payments when, in response to its request, CJC began work. From that point, MRL was party to a regime under which the performance of work CJC progressively generated rights for CJC to be paid for that work.

82 The parties envisaged from the outset that progress claims would be made. That aspect of the regime contemplated by them gives shape to the form of the reasonable remuneration available by way of quantum meruit. The circumstances were not such as to engender any expectation that payment would only be made when the totality of the work had been completed. As J.B. Dorter and J.J.B. Sharkey say at p.5011 of “Building and Construction Contracts in Australia” (looseleaf 2nd ed):

“In contracts like building contracts, the presumption is that if they be of any substantial duration, the price will be paid progressively.”

83 That presumption is, by statute, extended to any arrangement (not necessarily a contract) under which one person undertakes to carry out construction work for another: see the Building and Construction Industry Security of Payment Act 1999 which creates a statutory scheme for the quantification and recovery of progress claims. Those provisions were not in force at the times relevant to these proceedings.

84 The parties shared intentions and the remuneration basis they contemplate are a clear indicator of what, as between them, is reasonable remuneration. This is so not only in cases where a contract is silent and there is implied a promise that reasonable remuneration will be paid but also in a quantum meruit case where reasonable remuneration is the essence of the restitutionary right. Relevant, therefore, is the observation of Lord Wright in Way v Latilla [1937] 3 All ER 759 (at p.766), a case of the former kind:

“… the amount to which the appellant is entitled is left at large, and the court must do the best it can to arrive at a figure which seems to it fair and reasonable to both parties, on all the facts of the case. One aspect of the facts to be considered is found in the communings of the parties while the business was going on. Evidence of this nature is admissible to show what the parties had in mind, however indeterminately, with regard to the basis of remuneration. On those facts, the court may be able to infer, or attribute to the parties, an intention that a certain basis of payment should apply.”

237 The defendant sought to say that, while he was aware that continuation of work by CJC entailed an increasing debt obligation, he did not see that obligation as an obligation of MRL, at least before action was taken by Mr Jones on 3 May 1999 to execute a copy of the building contract for MRL. He says that he regarded any obligation in respect of earlier work as an obligation of the Club because the work was being done on the Club’s land and MRL had not become party to any contract with CJC. He further said that he was torn between two courses of action: first, stepping in and putting a stop to the work being done by CJC; and, second, arranging for MRL to obtain the funds it eventually borrowed from Leigh and to apply those MRL funds in satisfaction of the first progress payment, thus “keeping faith” with the Club and the joint venture.

238 I do not accept this version. The minutes of two meetings of directors of MRL on 13 April 1999 show that the directors determined that the building contract should be executed (subject to “KCMS approval” of certain matters) and concerned themselves with the obtaining of finance in two tranches, one of $444,000 and the other of $1,400,000. The next day, 14 April 1999, the defendant received a letter of offer from AFS in relation to the advance of $444,000 the purpose of which was stated to be:

“To make progress payment to Colin Joss & Co Pty Ltd in the amount of $390,000.00 and associated fees with the advance.”

239 There is no record of the defendant having said at the board meeting that MRL was not obliged to make the first progress payment. He was, at the time, party to efforts to raise funds to enable MRL to make the payment. Had he been of the opinion that MRL was under no obligation but that it might (or would) be in MRL’s interests to meet the payment in any event, he would, as a responsible director, have raised those matters with his co-directors and sought approval of the strategy to outlay MRL funds in the absence of any liability and for the purpose of “keeping faith” with the Club and the joint venture. He raised no such matter with the board. I am satisfied that his failure to do so supports a finding that he did not, at the time, hold the views he described in his evidence. As at 13 April 1999, he accepted that MRL was obliged to meet the first progress payment and was engaged in efforts to raise the necessary funds. And that remained his state of mind into the future.

The Canberra meeting and surrounding events

240 As already mentioned, Mr Joss and the defendant met on 16 May 1999. Mr Joss was in Canberra for a conference. The defendant went there by arrangement for a discussion with him. The meeting was instigated by the defendant.

241 The defendant says that he asked Mr Joss to slow the project down. Mr Joss accepts that such a request or suggestion was made. Mr Joss said in cross-examination:

“Q. So does all of the evidence you have just given in that last answer or two constrain you to agree with what I am putting to you which is that as at 16 May 1999, you were of the view that this project was moving forward and had such a head of steam up, it had to keep going?
A. Yes. Unless we were told otherwise.

Q. Do you say Mr Edwards said something about slowing the job down?
A. Correct.

Q. What did you understand when he said something to you about slowing the job down, if that is what he said?
A. Well, if he wanted us to stop the job, he could have stopped the job, but you can't slow it down. I mean, we had - there was no way you could slow it down. I guess you could stop it but that's - I mean what do you slow down? How do you slow a job down? You either stop it or you keep it going.

Q. Well, I suppose, Mr Joss, that you could do things at a rather more leisurely pace?
A. Yes, and then be late on delivery.

Q. Was that the performance bond issue?
A. No, the liquidated damage issue.

Q. Well, did you say anything to him about that in that conversation, ‘No, Mr Edwards we can't possibly slow the job down because that would put us in the gun for a late issue’?
A. Well, Malcolm Edwards has been around. He would know that.

Q. He has been around. You had only met him for the very first time this day?
A. By this time we had a fair clue on what they were - on who we were dealing with.

Q. You never said to him, ‘Look, we can't slow this job down, Mr Edwards’, because of any reasons that you wanted to advance, did you, because you were fully committed to this moving forward to meet what you understood to be everyone's required deadline, December 1999?
A. Contracted deadline.

Q. Mmm?
A. Our contracted deadline.

Q. No contract - you were fully committed to move this project forward, there was nothing to stop you saying to Mr Edwards, ‘Look, Mr Edwards, there is a problem slowing this down for me and the problem is this’; you didn't say that, did you? You assumed he had been around a long time?
A. No, it was discussed to slow the job down and I explained to him we didn't - we weren't able to slow it down. We could stop it, but we can't slow it down.

Q. And it was apparent--
A. So am I going to send half the concreters away and half the bricklayers away and half the electricians away? I mean, you are either - you either stop it or you keep it going.

Q. It is a very compelling argument as you make it now but you didn't seek to make it in front of Mr Edwards at the time, did you?
A. We would - we did discuss for a short period of time slowing the project down.

Q. And the reason - and it was he who raised it, so you say in your affidavit?
A. Correct.

Q. Wasn't it? And the reason, and you well understood it--
A. Well, if he was so concerned--

Q. Would you let me finish, please, my question? The reason that he was raising it, and you well understood it at the time, was that he was concerned about debts of the company being further racked up?
A. Well, why didn't he say, ‘Stop the job. I can't pay you’? Why didn't he say that and give it to us in writing so that then we have got something to stop the job.

Q. You understood when he was asking you to slow it down that there must have been a reason for that, didn't you?
A. You bet.

Q. And it was pretty obvious what the reason was, wasn't it?
A. I - I would have to say it was financial.

242 It is clear from this that the defendant canvassed with Mr Joss the possibility of slowing the pace of work but never asked that work cease. Mr Joss made it clear in his evidence that, if he had been asked to stop work, he would have done so. The defendant had obviously come to realise, some time before 16 May 1999 that his hopes of raising finance were misplaced.

243 From Mr Joss’s viewpoint, the most important topic discussed at the meeting was when overdue payments would be made. The defendant said that he expected a payment could be made on or about 24 or 25 May 1999. That was confirmed in the defendant’s letter of 23 May 1999 to Mr Joss. That letter identified as the defendant’s “concern”, from the perspective of the Canberra meeting, “the order of works that had been carried out prior to the execution of the building contract”. The same line was taken by the defendant in a memorandum of 26 May 1999 to Mr Jones which reads in part as follows:

“You will readily understand how I have stewed since the revaluation [sic] in the meeting with you and Ken on 15th May (in preparation for my meeting with Joss where I believed there was no contract until the lender enforced execution) that with or on your authority KCMS had accepted the builders quote before Joss entered the site, prior to title passing from the club to Murray River. I accepted for weeks the comment that, as you informed Mullarvey, he is working for practice. I could not understand the stupidity of Joss or the Club allow work to commence without a contract. Len, I can’t believe my own stupidity to have relied on non-specific comment.”

244 Mr Jones gave evidence that, in sending this memorandum, the defendant was actuated by a decision that “it was time he moved to protect himself”. I am satisfied that that was the defendant’s purpose in writing the memorandum. I have already found that the defendant was aware from late January 1999 that work was to start on 3 February 1999. I have also found that, at least from 13 April 1999, he was aware that work had in fact begun as planned without any contract having been executed. That being so, there is no objective reason why he should have chosen to write a memorandum to Mr Jones on the matter more than a month later. Taken as a whole, the memorandum does not show itself to have any substantial purpose apart from communication of the quoted extract. Given the close proximity in which the defendant and Mr Jones worked and the fact that they saw one another several times a day, the memorandum must be accepted as having been brought into existence for a purpose other than communication of its content by the defendant to Mr Jones. I accept that the defendant created it in an attempt to protect himself in case of later scrutiny of his actions.

245 It is relevant to mention, in this context, two events that had happened earlier in May 1999. On 3 May, Mr Joss telephoned the defendant and asked, “Where is my money?” The defendant replied that the money would be in CJC’s bank account “tomorrow” and that AFS was being “very pedantic with the documentation”. On 13 May, Mr Reid of CJC sent to KCMS a letter which has already been noticed (see paragraph [46] above). That letter set out a full catalogue of events from 19 November 1998 to 13 May 1999 concerning the proposed contract and payment obligations in respect of work done, as CJC saw them. A handwritten note placed by Mr Reid on the original put through the fax machine shows that he confirmed with “Pat from Essingtons” at 12.40pm that “ME, LJ and KMc” (obviously the defendant, Mr Jones and Mr McNamara) had received copies of the letter.

246 Neither in the 3 May telephone conversation with Mr Joss nor in response to the copy of the 13 May version of events as seen by CJC did the defendant seek to say that CJC should not have started work on 3 February 1999 or that CJC could not or should not look to MRL for payment for work done. This is added confirmation that his complaint to Mr Jones in the memorandum of 26 May 1999 was written for the self-protecting purpose to which Mr Jones referred in his evidence.

The s.588G(1) elements

247 I pause at this point to consider the position that has been reached in relation to the elements referred to in s.588G(1).

248 I have found that debts were incurred by MRL in the amounts and at the times for which ASIC contends: see paragraph [16] above. It is not disputed that the defendant was a director of MRL at each of those times: see paragraph [9]. I have also found that MRL was insolvent at each of those times: see paragraph [211] above. The apparently constructive attitude of CJC from 16 May 1999 to seeking a solution to MRL’s financial problems did not affect matters relevant to the second and third of these findings. The requirement that the time of incurring of the debt be after the commencement of the Corporations Act is met by the effect of transitional provisions: see paragraph [4] above. These findings combine to supply all the elements contemplated by paragraphs (a), (b) and (d) of s.588G(1). It remains to consider the question posed by paragraph (c), that is, whether, at the time of the incurring of the debt (or, as here, each debt), there were “reasonable grounds for suspecting” that the company was insolvent or would become insolvent by incurring the debt.

249 The inquiry relevant to s.588G(1)(c) is not an inquiry concerning the particular director whose conduct is under scrutiny. It is an inquiry into the objectively formed state of mind of a person of ordinary competence. These propositions are supported by cases such as 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 and Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699. As Einfeld J observed in the latter case (at p.703) questions of the particular director’s knowledge of and participation in the incurring of the debt play no part in this aspect of the s.588G inquiry.

250 The central word in s.588G(1)(c) is “suspecting”. The criterion is one of suspicion, which is something less developed and less well formulated than expectation. The matter was explained by Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 (at p.303) in this way:

“In the first place, the precise force of the word "suspect" needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’, as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which ‘reason to suspect’ expresses in sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes--a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.”

251 I am of the opinion that the “reasonable grounds for suspecting” element, with respect to the insolvency of MRL, existed in the circumstances of this case. A director of ordinary competence, viewing objectively the whole of the circumstances of MRL at the time of the incurring of each of the quantum meruit debts, would have had no real idea at all where the necessary money would be found. There would have been, at the least, a suspicion that MRL was unable to pay its debts. The suspicion would have been so strong as to represent near certainty. Section 588G(1)(c) is therefore satisfied.

252 I accordingly record my finding that all of the elements that s.588G(1) makes necessary in order to cause s.588G to apply exist in this case.

The s.588G(2) elements

253 The thing which, in terms of s.588G(2), constitutes contravention is a default rather than an act. A person contravenes by “failing to prevent the company from incurring the debt”. This form of words does not imply that contravention can occur only if the particular director possesses a capacity, acting alone, to deflect the company from the particular course of action. I quote from the judgment of Ormiston J in Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423 (at p.439):

“If a director were entitled to rest supinely and protest that he could not act without the concurrence of one or more of his colleagues when he knew that the company was in fact insolvent, then the section would have little practical purpose. It would be wrong if the word ‘authority’ were so narrowly construed and the director was not in those circumstances obliged to take all steps practicable to prevent the company from trading while insolvent. The fact that often a single director may be unable to prevent the authorised person contracting a debt is irrelevant. If he is unable to persuade his fellow directors to withdraw that authority when the company is insolvent, he should seek to have the company wound up or resign. If each director took account of his obligations the company would soon cease trading.”

254 The same approach was taken by Mandie J in Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126 (at p.221):

attempt

255 Mandie J went on to support that conclusion by reference to other parts of s.588G (at p.221):

“This analysis is in my view supported by the existence of the particular defences expressly provided for by s 588H(4) and (5). Section 588H(4) provides that it is a defence if it is proved that ‘because of illness or for some other good reason’, the director did not take part at the relevant time in the management of the company. Section 588H(5) provides that it is a defence, if it is proved that the director ‘took all reasonable steps to prevent the company from incurring the debt’. In that regard I note that s 588H(6) provides that the matters to which regard is to be had in determining whether the director took all reasonable steps are to include any action a director took with a view to appointing an administrator of the company, when that action was taken and the results of that action. This latter provision suggests what the legislature had in mind in relation to the kind of steps which an individual director might take in any attempt to prevent a company from incurring a debt or debts. The constructional effect of providing for these defences is, it seems to me, that the legislation, read as a whole, treats a director, or at least an inactive or acquiescent director, as having failed to prevent the incurring of a debt unless the director satisfies the onus of proving one or more of the matters referred to in those sections. Put another way, the language in which these defences is couched depicts the obverse of a failure to prevent the company from incurring a debt.”

256 In the present case, the defendant did not, as a practical matter, work as part of a board of directors in the matter of raising finance. Not only the Club and those of its directors who were members of the MRL board (plus Mr Mullarvey), but also Mr Jones, deferred to the defendant in that area. In fact, all of them deferred to the defendant more generally. The Club personnel did not profess any particular commercial skills. They were certainly not skilled or experienced in matters of property development. In their minds, Essington brought those skills to the joint venture. And within Essington, it is clear that the defendant was, in a practical sense, superior to Mr Jones who in many ways did the bidding of the defendant or carried through plans he had developed. Mr Jones gave evidence that the defendant preferred to appear to be in the background even though he was active. While allowing Mr Jones to appear to be the active party, the defendant was busy behind the scenes, even to the extent of correcting and re-writing Mr Jones’ letters.

257 In the particular factual circumstances, the defendant could, at any time, have stepped in and required that building work cease. He could also have stepped in to ensure that it did not commence in the first place. Had he taken such a step (citing lack of financial capacity as the reason), it is virtually certain that the other directors of MRL would have accepted his intervention and even welcomed it. He, as they saw him, was the commercial and financial expert and his view on matters of financial prudence would have been accepted virtually as a matter of course. Had he said that the desired timetable dependent upon work starting on 3 February 1998 was not commercially feasible and would have to be revised because funding was not yet in place, his view would have prevailed. If, after work had started, he had said that it should stop because MRL could not afford it, again his view would have prevailed.

258 The defendant never warned his co-directors of the reality that MRL did not have the funds with which to undertake the project. The message he communicated, both directly and through Mr Jones, was always that the various elements necessary to secure the necessary funding were within grasp. It was always just a matter of a short time until all would be well.

259 The defendant had, at all material times, ample ability to cause MRL to avoid incurring the relevant debts by ensuring that building work was not undertaken. He did not exercise that ability. He therefore failed to prevent MRL from incurring the quantum meruit debts generated by the performance of the building work.

260 The remaining issue under s.588G(2) is whether paragraph (a) or paragraph (b) is satisfied – in other words, was the defendant aware, at the time of the incurring of each debt, that there were reasonable grounds for suspecting that MRL was insolvent; or would a reasonable person in a like position in a company have been so aware?

261 Each of these questions must be answered in the affirmative. As to the defendant’s own awareness, the findings already made leave no doubt that he knew all the facts contributing inexorably to an objectively based mistrust, at each material time, as to the ability of MRL to pay all its debts as they fell due. As to the view of a reasonable person in a like position, there is no reason to think that such a person would not have shared the objectively based mistrust that was in fact in the mind of the defendant.

Conclusion on s.588G

262 All the elements which, in combination, must exist in order to justify, by reference to ss.588G(1) and 588G(2), a conclusion of contravention of s.588G have been shown to exist in relation to the incurring of each of the debts upon which ASIC relies. I therefore conclude that the defendant contravened s.588G by failing to prevent MRL incurring each of those debts, subject to any defence that may be made available by s.588H.

Matters by way of defence

263 In referring as I have to the availability of any defence under s.588H, I intend to refer to only some of the matters raised by the defendant as set out in paragraph [18] above. I have already said that the defendant’s case did not seek to make good several of those matters, with the result that the only items in the list relied upon were (a), (d), (e), (f) and (g), as explained and supplemented by items (i) to (x) set out in paragraph [20] above.

264 In relation to insolvency of the company at the time of the incurring of the relevant debt, the necessary ingredients of contravention are, first, a finding that the company was insolvent when the debt was incurred (or would become insolvent by incurring it); second, that there were, at that time, reasonable grounds for suspecting that the company was insolvent (or would become so); and, third, that the person alleged to have contravened was, at that time, aware that there were reasonable grounds for suspecting insolvency. I have made positive findings adverse to the defendant on all those matters.

265 The only aspect of s.588H that the defendant makes any real attempt to advance by way of defence is s.588H(2). There is reference in the materials to reliance upon s.588H(3) but the evidence provides no basis for this. The only person upon whom the defendant could conceivably seek to say that he relied, in the s.588H(3) sense, is Mr Jones. But any such argument would fail at the threshold. It was the defendant, not Mr Jones, who was principally involved in developing plans to raise finance for MRL. The defendant could not possibly have believed, or had any grounds to believe, that Mr Jones was in any way “responsible” for providing to him adequate information about MRL’s financial position. Under the joint venture, it was Essington that had the task of arranging finance for the project being pursued through MRL. And within Essington, it was the defendant, not Mr Jones, who played the leading role in relation to financing and MRL’s financial needs.

266 In relation to s.588H(2), it is the task of the defendant to prove that, at the time of the incurring of each relevant debt, he had reasonable grounds to expect, and did expect, that MRL was solvent at that time and would remain so even if it incurred the debt. The defendant has attempted to discharge that onus by pointing to the observations in Lewis v Doran (above) that the company “own moneys” do not mark the limits of the resources to which regard may be had in determining solvency, coupled with what he chose to regard as the right of MRL to obtain financial support from the Club under clauses 5.2 and 5.3 and clauses 3.3 and 3.4 of the joint venture agreement. For reasons I have already expressed (see paragraphs [202] to [206] above), those clauses could not have been the source of any well-based objective view as to the existence of any financing obligation of the Club. To the extent that the defendant may in fact have held any such view (and I am not satisfied that he did), it was not of such a quality as to represent any reasonable ground of expectation of the kind with which s.588H(2) is concerned.

267 Before leaving matters of defence, I must refer to submissions advanced on behalf of the defendant which put much store by the proposition that the Club was, at all material times, a “shadow director” of MRL – that the Club “called a tune” that was “danced to” by Messrs Hargreaves, Tait and Nieuwenhout who were directors of both the Club and MRL and made up of a majority on the MRL board. It follows, on this thesis, that it was the unseen hand of the Club in the affairs of MRL that was the real force in everything that MRL did. The thesis is supported by various references in the documentary evidence to decisions of the Club’s board as to how the three persons should act as directors of MRL.

268 The first thing to be said about this is that, on the evidence, Messrs Hargreaves, Tait and Nieuwenhout were rarely active as directors of MRL except in purely formal ways. To the extent that they were parties to substantive decisions, the relevant resolutions were apparently unanimous. There is accordingly no evidence that they, as a group, imposed the will of some external party in the person of the Club.

269 Second, the “shadow director” submission is made in support of the proposition that the Club wrongfully denied to MRL financial resources (in the form of a guarantee by the Club and transfer of Lot 29) that it was bound by the joint venture agreement to provide. For reasons I have already stated, the Club was not under any such contractual duty. The “shadow director” argument therefore leads nowhere at that level.

270 Third and fundamentally, however, how would the defendant’s position have been different if the Club had been a “shadow director” and (to take up another item in the defendant’s submissions) had acted in a way that was contrary to the interests of MRL? Those circumstances, if they had existed, would not have relaxed or modified the defendant’s duties in the matter of insolvent trading. If the reality had been that the Club was deliberately and wrongfully starving MRL of funds that it should have been providing, that would have been something that the defendant was bound to take into account in determining his own conduct. It would have sharpened his duty to take such action as he properly could to prevent the incurring of the debts in question. At a substantive level, therefore, the “shadow director” allegation, even if made out, would not avail the defendant.

271 The defendant has not made good any defence available under s.588H. Nor has he made good the sweeping assertion quoted at subparagraph (x) of paragraph [20] above.

Conclusion

272 In the result, therefore, I am satisfied that the defendant contravened s.588G(2) in that he did not prevent the incurring by MRL of each of the several debts referred to at paragraph [16] above. The court is therefore required by s.1317E(1) to make a declaration of contravention in respect of each contravention. I direct that, within 21 days, appropriate forms of declaration complying with s.1317E(2) be drawn up by ASIC, submitted to the defendant for comment and delivered to my Associate together with such comments as the defendant may have made. I shall then make the declarations in chambers, unless either party wishes to be heard on any matter going to their form.

273 For reasons given by the Court of Appeal in Forge v Australian Securities and Investments Commission (2004) 52 ACSR 1, there must be a separate hearing on penalty. That hearing will be appointed in due course. ASIC has already indicated that it will seek a disqualification order under s.206C(1) but will not seek the imposition of any pecuniary penalty under s.1317G(1). The separate hearing will be the appropriate occasion for any submissions there may be as to the exercise of the dispensing powers of the court under ss.1317S and 1318, assuming that the defendant wishes to press those matters.

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Citations

Australian Securities and Investments Commission v Edwards [2005] NSWSC 831

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CITATION:	ASIC v EDWARDS [2005] NSWSC 831
HEARING DATE(S):	14/02/05, 15/02/05, 16/02/05, 17/02/05, 18/02/05, 22/02/05, 23/02/05, 24/02/05, 25/02/05, 28/02/05, 01/03/05, 02.03/05, 03/03/05, 21/03/05, 22/03/05, 23/03/05, 24/03/05. Written submissions: 18/04/05, 13/05/05, 01/06/05
JUDGMENT DATE :	24 August 2005
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Declarations of contravention under Corporations Act 2001 (Cth), s.1317E.

CATCHWORDS:	CORPORATIONS - insolvent trading - directors' liability - whether debts incurred - whether company insolvent - whether reasonable grounds for suspecting insolvency existed - whether defendant director aware of such grounds - whether defendant director failed to prevent incurring of debts - whether any defence available - CONTRACTS - general contractual principles - whether contract formed - whether case within any of first, second and fourth Masters v Cameron categories - RESTITUTION - restitution arising from incomplete contract - performance of work in expectation of reward - entitlement to quantum meruit - when quantum meruit debts incurred
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss.95A, 588G, 588H, 1317E
CASES CITED:	ABB Engineering Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 Brenner v First Artists' Management Pty Ltd [1993] 2 VR 221 British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504 Commissioner of State Taxation (WA) v Pollock (1993) 11 WAR 64 Credit Corporation Australia Pty Ltd v Atkins (1999) 30 ACSR 727 Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119 Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Flavel v Day (1984) 9 ACLR 502 Forge v Australian Securities and Investments Commission (2004) 52 ACSR 1 Hawkins v Bank of China (1992) 26 NSWLR 562 Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 Kennedy v Australian Securities and Investments Commission (2005) 52 ACSR 301 Lewis v Doran (2004) 50 ACSR 175 Masters v Cameron (1954) 91 CLR 353 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Powell (as Liquidator of Noelex Yachts Australia Pty Ltd) v Fryer (2001) 37 ACSR 589 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 R v Frawley (2005) 52 ACSR 461 Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 Rema Industries and Services Pty Ltd v Coad (1992) 7 ACSR 251 Sandell v Porter (1966) 115 CLR 666 Shepherd v Australia and New Zealand Banking Group Ltd (1996) 20 ACSR 81 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 Way v Latilla [1937] 3 All ER 759
PARTIES:	Australian Securities and Investments Commission - Plaintiff Malcolm Leslie Edwards - Defendant
FILE NUMBER(S):	SC 5254/03
COUNSEL:	Mr A.J. McInerney - Plaintiff Mr T.D.F. Hughes - Defendant
SOLICITORS:	Australian Securities and Investments Commission Solicitor - Plaintiff Phillip R. Loiterton - Defendant