Beagle Holdings Pty Ltd v Equus Financial Services Ltd
[2000] WASC 27
•16 FEBRUARY 2000
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: BEAGLE HOLDINGS PTY LTD & ANOR -v- EQUUS FINANCIAL SERVICES LTD [2000] WASC 27
CORAM: TEMPLEMAN J
HEARD: 23-27, 30-31 AUGUST, 30 NOVEMBER & 1 DECEMBER 1999
DELIVERED : 16 FEBRUARY 2000
FILE NO/S: CIV 2427 of 1992
CIV 1363 of 1994
BETWEEN: BEAGLE HOLDINGS PTY LTD
First Plaintiff
BEAGLE MANAGEMENT PTY LTD
Second PlaintiffAND
EQUUS FINANCIAL SERVICES LTD
Defendant(BY ORIGINAL ACTION)
EQUUS FINANCE SERVICES LTD
PlaintiffAND
BEAGLE HOLDINGS PTY LTD
First DefendantGREAT SOUTHERN PLANTATIONS LTD
Second DefendantJOHN CARLTON YOUNG
Third DefendantHELEN MARGARET SEWELL
Fourth DefendantBEAGLE MANAGEMENT LTD
Fifth DefendantREGISTRAR GENERAL OF THE STATE OF NEW SOUTH WALES
Sixth Defendant(BY COUNTERCLAIM)
Catchwords:
Contracts - Construction and interpretation of Finance Provision Agreement and a Variation Agreement - Whether agreement varied by informal agreements - Whether agreement repudiated - Whether plaintiff estopped from relying on breaches - Whether plaintiff entitled to account - Turns on own facts
Legislation:
Nil
Result:
Parties directed to produce minute of order to give effect to findings of fact and thereby strike a balance between them
Representation:
Original Action
Counsel:
First Plaintiff : Mr D M Stone
Second Plaintiff : Mr D M Stone
Defendant: Mr J A Chaney
Solicitors:
First Plaintiff : Williams & Hughes
Second Plaintiff : Williams & Hughes
Defendant: Stables Scott
Counterclaim
Counsel:
Plaintiff: Mr J A Chaney
First Defendant : Mr D M Stone
Second Defendant : Mr D M Stone
Third Defendant : Mr D M Stone
Fourth Defendant : Mr D M Stone
Fifth Defendant : Mr D M Stone
Sixth Defendant : No appearance
Solicitors:
Plaintiff: Stables Scott
First Defendant : Williams & Hughes
Second Defendant : Williams & Hughes
Third Defendant : Williams & Hughes
Fourth Defendant : Williams & Hughes
Fifth Defendant : Williams & Hughes
Sixth Defendant : No appearance
Case(s) referred to in judgment(s):
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] NSWR 1504
Jowitt v Callaghan (1938) 38 SR NSW 512
Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267
Secured Income Real Estate Australia Ltd v St Martin's Investments Pty Ltd (1979) 144 CLR 596
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245
Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd(1968) 118 CLR 429
Williams v Frayne (1937) 58 CLR 710
Case(s) also cited:
Alliance Multimedia Corporation Pte Ltd v Pugh, unreported; FCt SCt of WA; Library No 970568; 21 October 1997
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549
Australian Competition & Consumer Commission v Golden Sphere International Inc (1998) FCR 424
Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679
Avco Financial Services v White [1977] VR 261
Bendix Mintex Pty Ltd v Barnes (1997) 42 NSWLR 307
Boranga v Flintoff (1997) 19 WAR 1
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20
Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1983-1984) 153 CLR 491
Carter v White (1883) 25 Ch D 666
Chan v Cresdon (1989) 168 CLR 242
Cohen & Co v Ockerby & Co Limited (1917) 24 CLR 288
Hide 'n Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Horwath Junior v Commonwealth Bank Ltd (1998) VSCA 51
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Jones v Schiffmann (1971) 124 CLR 303
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 476
Re Conley; ex parte Trustee v Barclays Bank Limited (1938) 2 All ER 127
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Schenker & Co v Maplas Equipment & Services Pty Ltd [1990] VR 834
Sellars v Adelaide Petroleum NL & Ors (1992) 179 CLR 332
Shevill v Builders' Licensing Board (1982) 149 CLR 620
The Commonwealth v Verwayen (1990) 170 CLR 394
Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (In Liq) (1936) 54 CLR 361
TEMPLEMAN J: On 28 June 1988, the plaintiffs, which were then known respectively as Templegate Holdings Pty Ltd and Templegate Funds Management Ltd, entered into a Finance Provision Agreement ("the FPA") with Equus Financial Services Ltd, the defendant.
The plaintiffs' names have been changed subsequently to Beagle Holdings Pty Ltd and Beagle Management Pty Ltd. It will be convenient to refer to them jointly, by whichever name is appropriate in the context.
Templegate owns pine forests in New South Wales. It promoted tax effective investments in these plantations by offering leases and management agreements. A number of investors financed their investments by borrowing from Equus, which was, and is, a finance company. These "approved investors" charged their prospective interests to Equus to secure the loans.
Disputes have arisen between Beagle and Equus about their respective rights and obligations under the FPA and under a Deed of Variation which they executed in May 1992 ("the Variation Agreement"). The disputes are complex and wide‑ranging. The trial was of nine days duration, and there is a considerable volume of largely non‑contentious documentary evidence, the significance of which is in dispute.
At my direction, counsel have co‑operated in the preparation of a list of the issues arising for determination. It will therefore be convenient to give my reasons by reference to the issues so identified: or groups of issues where that approach is more appropriate.
Issue 1: The applicable principles of construction
Although identified as an issue, this is largely uncontentious. It is common ground that the relevant agreements are commercial in nature and are therefore to be construed on that basis. In seeking the parties' contractual intention "no narrow or pedantic approach is warranted": Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd(1968) 118 CLR 429, 437.
Any agreement must be construed against the background of the factual matrix in which it came into existence. The court is entitled to have regard to the aim or, objectively, the genesis of the transaction. But it must disregard evidence of the parties as to their actual intentions and expectations: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352.
Issue 2: Which agreement governed the parties' rights and obligations at material times?
Although, as I have noted, the parties entered into the Variation Agreement in May 1992, Equus contends that the FPA was varied earlier, by an agreement reached in correspondence.
Beagle contends that if there was any such antecedent agreement, it was not acted on: and that it was merged in, or was superseded by, the Variation Agreement. In any event, it is submitted, there is no material difference in the construction of the Variation Agreement and the agreement in correspondence for which Equus contends.
In order to understand this issue, it is necessary to explain cl 5 of the FPA which sets out the consequences of default by an approved investor.
Clause 5.1 provided that if an approved investor defaulted under the provisions of his loan agreement with Equus, such that Equus was entitled to require immediate repayment of all monies owing thereunder, then certain rights and obligations would arise as between Equus and Templegate. Clause 5.1(a) then provided that for a period expiring 90 days after the date of default, Equus would follow its "normal collection procedures". There is no definition of this term. However, Templegate was entitled to require Equus to provide it with proof of the collection procedures followed in any particular case.
By cl 5.1(b), no later than 45 days after the default, Equus was required to notify Templegate of that fact.
If the default continued for a period of 90 days (during which time Equus was required to pursue collection of the debt) Equus was entitled, after giving 21 days notice to Templegate, to debit a Reserve Fund with an amount equal to the investor's indebtedness.
The Reserve Fund was established by cl 6 of the FPA. Templegate was to deposit into the fund an amount equal to 5 per cent of the principal of each loan advanced by Equus to an approved investor. By cl 6.3, Templegate was required to maintain the Reserve Fund, but, apparently to a slightly different level, being 5 per cent of the principal and "amount agreed to be lent components" outstanding under Aggregate Loans Outstanding as defined.
When a defaulting investor's indebtedness was discharged (either by debiting the Reserve Fund or, if the fund was insufficient for that purpose, by payment of the shortfall by Templegate) then Templegate was entitled to an assignment of all Equus' rights in the relevant loan agreement for a consideration equal to the relevant indebtedness.
Clause 5.1(e) provided that if the amount debited to the Reserve Fund was insufficient to satisfy the balance of monies owed to Equus by an approved investor, Equus was not (subject to certain other provisions) to have any right to recover the shortfall from Templegate, but would be entitled and obliged to pursue the remedies available to it pursuant to the relevant loan agreements.
Clause 5.2 provided that if Equus proposed to exercise a power of sale under a loan agreement, or proposed to surrender or terminate a lease and management agreement in the exercise of a power contained in a loan agreement, Templegate would, on request, do one of two things at its election. It would either take an assignment of the lease and management agreement for a consideration equal to its current value, less 15 per cent (representing the agreed costs of on‑selling, stamp duty and registration costs); or it would agree to the surrender and/or termination of the lease and management agreement and pay to Equus by way of consideration, an amount equal to the current value of the lease and management agreement, again, less 15 per cent.
If Equus exercised a power of sale or a power to surrender or terminate a lease and management agreement, and the amount realised was less than "the Floor Amount" for that contract, cl 5.3 provided that Templegate would pay Equus, within seven days of a demand, an amount equal to the difference between the Floor Amount and the amount realised upon sale or termination or surrender. The Floor Amount was defined as 60 per cent of the relevant investor's indebtedness under his loan agreement with Equus.
Clause 5.4 provided that the obligations imposed on Templegate pursuant to cl 5 should continue to bind it until the total of the indebtedness under all loan agreements no longer exceeded $100,000.
It is thus clear that if there were sufficient numbers of defaults by investors, with consequential demands on the Reserve Fund, and Equus was unable to recover the amount of indebtedness from the investors concerned, it would be likely to enforce its securities and either sell lease and management agreements or assign them to Templegate.
Debits to the Reserve Fund
From a statement of the Reserve Fund produced by Equus, which I accept as being accurate, I find that between 19 July 1988 and 28 February 1989, Templegate deposited a net amount of $316,317.67 into the Reserve Fund (Ex 4, p 534).
During 1990 an investor known as Tysule No 3 Pty Ltd defaulted under its loan agreement with Equus. I find that on 14 September 1990, Equus debited the Reserve Fund in an amount of $50,395.78: and on 26 September, Templegate deposited that amount into the Reserve Fund. (Ex 4, p 535).
I find that on 28 September 1990, Equus debited the Reserve Fund in the amounts of the indebtedness of two further defaulting investors, a Mr and Mrs Stewart. The total amount debited was $103,380.73. On 18 December 1990, Templegate deposited $97,188.00 into the Reserve Fund: an amount some $6,192.73 less than the amount of the relevant indebtedness.
Between November 1988 and December 1991, a further 11 investors defaulted, including a company known as Mortco Pty Ltd. And, between 29 July 1989 and 11 December 1991, Equus entered into a series of interest rate variations with nine investors (Scott Schedule No 1).
It is clear that the level of defaults had the potential to result in a substantial cash outflow for Templegate, which it would have preferred to avoid (Ts, p 169-171 and 193‑194).
The Mortco Debt
In relation to Mortco, the following procedure was adopted which enabled Templegate to re‑sell the relevant interests and thereby obtain third party funds with which to replenish the Reserve Fund:
1.on 28 March 1991 Equus debited the Reserve Fund in an amount of $22,604.16 in respect of the interest due on the Mortco debt which amounted to some $354,000;
2.on 28 June 1991, Equus transferred Mortco's lease and management agreement, its loan agreement and all its securities to Templegate without payment (Ex 10A and 10B);
3.on 12 August 1991, Equus debited the Reserve Fund in an amount of $280,776.82 as it was entitled to do pursuant to cl 5.1(c) of the FPA;
4.on 2 September 1991 Templegate deposited the sum of $287,754.00 into the Reserve Fund and made a payment of $12,246.00 in part settlement of the Mortco debt (Ex 4 p 130);
5.on 4 December 1991 Templegate paid a further amount of $28,446.31 direct to Equus which on the same day debited the Reserve Fund in an amount of $13,522.00, thereby discharging the Mortco debt.
These arrangements were put in place because of Templegate's expectation that it would resell the Mortco interest to a new purchaser, thereby raising funds which could be used in part‑payment of the original debt.
A permanent solution is proposed
On 3 September 1991, the day after Templegate deposited $287,754.00 into the Reserve Fund, Mr Peter Hopps, who was then Templegate's Financial Director, wrote to Mr Chris Bunce of Equus to say that Templegate had established a secondary market for the resale of forestry lots and had in place "the necessary legal procedures and documentation". He continued:
"To assist our cashflow we seek a situation where we pay out Equus' loans (ie the Reserve Fund) in conjunction with the settlement of the resale of these lots on the secondary market (ie similar to the Mortco deal)." (Ex 4 p 132)
At that time Equus' Managing Director was, as he still is, Mr Nicola Russo. Following a discussion between Mr Russo and Mr Hopps on 10 September, Mr Russo sent a letter dated 23 September to Mr Hopps in which he set out his understanding of the discussions "with regard to your Buyback and Loss Reserve calls under the Finance Provisions Agreement". (Ex 4 p 136‑7) The letter went on to set out a proposal. In cross‑examination, Mr Russo said that the proposal was "a fair characterisation" of a rather more sophisticated way of implementing Mortco-type arrangements in relation to defaulting loans.
Mr Russo concluded his letter of 23 September by requesting Templegate to signify its acceptance by appending the signatures of Mr John Young and Ms Helen Sewell. That is a reference to Mr John Carlton Young and Ms Helen Margaret Sewell, who at all material times have been directors of the plaintiff companies.
Mr Young and Ms Sewell did not countersign the letter. But on 7 October 1991 Ms Sewell wrote to Mr Russo confirming acceptance of the 23 September letter, subject to four specific matters. She concluded her letter:
"I trust you will agree with the above amendments. If so, please have your solicitor give us an estimate of their costs for the preparation of the Variation Agreement. If these costs are acceptable we will advise you accordingly so that the draft agreement can be prepared." (Ex 4, p 138‑9)
It seems that Equus' solicitors were too expensive for Templegate, which itself appointed solicitors: Parker & Parker. On 5 November they wrote to Templegate for Mr Hopps' attention, referring to his instructions received on 4 November. (Ex 4 p 141‑2).
The letter referred to the proposal to enter into a Deed of Variation to the FPA:
"… which will evidence the arrangements with Equus as set out in the letter from Equus to Templegate dated 23 September and the reply from Templegate to Equus dated 7 October."
The letter went on to refer to the Templegate's instructions to draft the necessary Deed of Variation.
On 13 November 1991, Mr Bunce wrote to Mr Hopps providing "a complete update on the situation with buybacks etc". He set out the accounts to be "boughtback". These included Mortco (which had not then been completed) and a number of accounts "requiring 20 per cent No 2 loss reserve funds."
That was clearly a reference to the letter of 23 September 1991 in which it had been proposed that when a notice was served on a defaulting investor pursuant to s 57(2)(b) of the Real Property Act 1990 (NSW), Templegate would lodge with Equus an amount equal to 20 per cent of the principal balance of the defaulting account. These funds were to be deposited in an interest bearing security deposit to be known as the No 2 Loss Reserve Account.
On that basis, Mr Bunce calculated that Templegate should deposit $101,384.13. He asked for a cheque in that amount.
According to a file note made by Mr Bunce on 29 November 1991, he spoke with Mr Hopps on that day. The note recorded that the "20 per cent No 2 money" would be paid when the variation documents had been agreed. (Ex 4 p 150).
On 22 January 1992, Mr Ian McLennan of Equus wrote to the directors of Templegate. He referred to the FPA and noted that several investors were in substantial default. The current balance on those accounts was said to be $283,530. In addition, Mr McLennan said, there were several accounts which were in excess of 45 days in arrear. The balance on those accounts was given as $518,353. Mr McLennan concluded his letter by saying:
"Could you please send us your cheque by return mail if you wish to 'buyback' the accounts. Alternatively if we have not heard back from you within 14 days we shall debit the Loss Reserve Fund."
The reference to 45 days was, I think, a reference to cl 5.1(b) of the FPA which provided that Equus was to notify Templegate no later than 45 days after the date of a default by an investor.
In my view, the effect of the letter of 22 January 1992 was to give Templegate the option of implementing the informal agreement which had been reached in September-October 1991, subject to preparation of a Deed of Variation. The letter did not acknowledge the existence of a Variation Agreement: indeed, it recognised the continuing effectiveness of cl 5 of the FPA.
The parties continued to negotiate on the form of the Variation Agreement until May 1992. (See Ex 4, p 170, 175, 180, 183, 189 ‑ 190, 193, 198, 200).
Execution of the Variation Agreement
On 18 May 1992, Mr Hopps sent to Mr McLennan copies of the Deed of Variation which had been executed by Templegate. He enclosed a cheque in the sum of $123,935.91 to be credited to the No 2 Reserve Fund in accordance with the Variation Agreement. Mr Hopps requested Equus to return the Deed of Variation to Templegate for stamping after it had been executed. He concluded: "I am pleased that the matter is finally completed."
I find that the Variation Agreement was executed by Equus by 25 May 1992 at the latest. On that date, it opened the No 2 Loss Reserve Account by depositing the cheque referred to above.
In these circumstance, I am satisfied, and find as a fact, that although in September and October 1991 the parties came close to an agreement about varying the FPA, and may have agreed in principle, their agreement was always subject to the execution of a formal instrument which was not executed until late May 1992.
Equus points out in its closing submissions that until Templegate amended its pleadings on 20 August 1999, it was common ground that an agreement had been reached between the parties in the September-October 1991 correspondence. It is submitted that the evidence of Mr Young and Mrs Sewell is also to that effect.
That evidence is somewhat equivocal, however. Both Mr Young and Ms Sewell said that from late 1991, Templegate was "aware of the terms of the variation to the FPA and began to regulate its affairs in accordance with those terms". However, as I have found, the contemporaneous documents support the conclusion that although an informal agreement had been reached, it became effective only when the Variation Agreement had been executed. It is not clear what is meant by Templegate regulating its affairs. I find it to be the fact that Templegate did not act pursuant to the Variation Agreement until it was executed.
Issue 3: The factual matrix to the relevant agreements
As I have already noted, the aim or objective of the FPA was to provide a source of funds which could be advanced to investors who wished to participate in the scheme promoted by Templegate. It was recognised by the parties that Equus would adopt a liberal acceptance policy and thereby conduct business as speedily as possible and with a minimum amount of formality. Typically, an investor would be a person with a high net worth who had sufficient cashflow to service the debt, but who did not wish to encumber any asset other than the forestry lease and management agreement by way of security. That was accepted by Ms Sewell and Mr Young in cross‑examination. (Ts 107-8, 156‑8).
I have already set out the circumstances in which the Variation Agreement came into existence. Its objective was to alleviate Templegate's cashflow problems arising from an unexpected level of defaults by enabling Templegate to resell forestry interests on the secondary market and thereby generate funds with which to discharge outstanding indebtedness. The Variation Agreement therefore introduced an element of flexibility into the relationship between Templegate and Equus which had not existed under the FPA.
Issue 4: Construction Issues
4.1: Was the Variation Agreement a Guarantee?
Although the question is directed to the Variation Agreement, that document cannot be considered in isolation from the FPA.
It is well settled that a contract of guarantee
"… is a contract between two persons which is intended by them to secure the performance of the obligation of a third person to one of them. The existence, present or future, of the obligation of a third person, and an intention in the parties to the contract to secure the performance of that obligation, are essential features of a contract of guarantee. If these elements are present, the contract is one of guarantee whether the promise be collateral to the promise of a principal obligator and in the nature of a distinct and separate promise to perform the principal obligation if he does not…."
Jowitt v Callaghan (1938) 38 SR NSW 512 at 516 ‑ 517 per Jordan CJ.
More recently, Mason CJ held that:
"A contract of guarantee is, subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default or miscarriage of another who is, or is contemplated to be or to become liable to the person to whom the guarantee is given ….": Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254.
In the present case therefore, the question is whether the Variation Agreement imposed on Templegate an obligation to "answer for" a defaulting investor's indebtedness.
The principal effect of the Variation Agreement was to substitute new provisions for cl 5 and cl 6 of the FPA. Consequently, the defined term "Reserve Fund" was deleted. That fund was replaced by two funds: the Templegate Forestry Trust Reserve Fund ("the Reserve Fund") and the Templegate No 2 Loss Reserve Account ("the No 2 Account").
By cl 6A.1, Templegate agreed to deposit in the Reserve Fund an amount equal to 5 per cent of the principal sum advanced to each approved investor. Subject to one matter, which is not relevant, the Reserve Fund was not to be held on trust for Templegate.
Clause 5 of the Variation Agreement contained a scheme which applied if an approved investor defaulted on his loan agreement with Equus such that Equus became entitled to require "immediate repayment" of all monies due. The elements of the scheme were as follows. I will paraphrase where convenient:
cl 5.1(a)
As soon as Equus became aware of a default, it was to serve on the investor any default notice required "at law or in equity". It is common ground that this included a notice pursuant to the mortgage of the investor's forestry interest which resulted in Equus ' power of sale becoming exercisable.
Clause 5.1(b)
If the default continued for more than 45 days, Equus was to serve a Notice of Default on Templegate to inform it of the default and to provide details of the indebtedness.
Clause 5.1(c)(i)
If the default continued for a further 15 days after service of the Notice of Default, Templegate was to deposit with Equus an amount equal to 30 per cent of the relevant investor's indebtedness. This was to be placed in the No 2 Account.
Clause 5.1(d)(i)
If the default continued for not less than 90 days (ie 45 days after service of the Notice of Default under cl 5.1(b)), Equus was entitled to serve a Payout Notice on Templegate to the effect that Equus required it to pay the defaulting investor's indebtedness no later than 60 days after service.
Clause 5.1(d)(ii)
If Templegate gave notice to Equus that it would comply with the payout notice, Equus was entitled to give Templegate a notice setting out the amount to be paid to satisfy the defaulting investor's indebtedness, after deducting the amount of the default deposit and accrued interest, which would be drawn from the No 2 Account.
Clause 5.1(d)(iii)
At the end of the 60 day period, Equus would debit the No 2 Account with the default deposit and accrued interest; and Templegate would be required to pay the balance of the indebtedness.
Clause 5.1(d)(iv)
If Templegate did not comply with the Payout Notice, Equus would be entitled to credit the defaulting investor's account with the amount of the default deposit and accrued interest and pay any outstanding balance from the Reserve Fund.
Clause 5.1(d)(v)
Until the defaulting investor's indebtedness was paid, whether by Templegate or otherwise, interest would continue to accrue as provided by the investor's loan agreement with Equus; and Equus was required to follow "its normal collection procedures" in order to recover the debt.
Clause 5.1(e)(i)
Where a defaulting investor's indebtedness was discharged, either by Templegate directly, or from a combination of the default deposit and the Reserve Fund, Templegate was entitled to an assignment of all the securities held by Equus in relation to the debt.
Clause 5.1(h)
If the amount standing to the credit of the Reserve Fund was insufficient to satisfy the balance owing by a defaulting investor, Equus had no right (except as provided in other provisions of the Variation Agreement) to recover the shortfall from Templegate but was entitled to pursue its remedies against the defaulting investor.
Clause 5.1(j)
If the total amount of all loans outstanding from defaulting investors was greater than the total amounts standing to the credit of the No 2 Account and the Reserve Fund, then Equus was entitled to require Templegate to deposit into the No 2 Account an amount equal to the shortfall. If Templegate did not comply with that demand, Equus was entitled to declare the Variation Agreement void in its entirety and require Templegate to meet its obligations under the FPA.
In my view, the terms of the Variation Agreement which I have summarised above disclose an intention that Templegate was to answer for the debt or default of an investor. The procedure by which the indebtedness was to be discharged was, I think, optional. Templegate could choose to respond to a payout notice served pursuant to cl 5.1(d)(i). If it did not, Equus was entitled to debit the No 2 Account and the Reserve Fund and recoup the indebtedness in that way. And by cl 5.1(j), Templegate could then be required to deposit further funds into the No 2 Account to ensure that all outstanding indebtedness was secured.
It is submitted by Equus that Templegate was not required to answer for a defaulting investor's indebtedness as a guarantor: rather, its obligation was to deposit monies into the No 2 Account and the Reserve Fund, on which Equus could then draw.
While this is true, it does not, I think, detract from Templegate's obligation to discharge the defaulting investor's indebtedness by one of the means to which I have referred above.
Then it is submitted that once Templegate became liable to answer for the debt of a defaulting investor by the service of a payout notice pursuant to cl 5.1(d)(ii), interest on that debt would accrue at 20 per cent per annum pursuant to cl 10.1 of the FPA. This, it is said, resulted in Templegate becoming liable to pay a different amount from that owed by the investor whose liability to interest was governed by the terms of his own agreement with Equus.
I do not accept that submission. It appears to take no account of the proviso to cl 10.1 which is to the effect that the clause should not apply to any liability of Templegate to Equus to meet the obligations of an investor under a loan agreement where interest or other credit charges were accumulating in respect of the unpaid amount by virtue of the loan agreement itself.
I therefore construe cl 10 to impose an obligation on Templegate to pay interest at 20 per cent per annum only on a debt which was not already accruing interest. That is, on a debt other than that incurred by a defaulting investor. In short, Equus was not entitled to recover interest twice over.
Even if I am wrong in that construction, the reference in cl 10.1 to Templegate meeting the obligations of an investor under a loan agreement supports the view that Templegate was intended to be a guarantor.
Equus then submits that if the Reserve Fund was insufficient to discharge the defaulting investor's indebtedness "…the arrangements in relation to buy-back and floor amount come into play".
This is a reference to cl 5.2 and cl 5.3 of the Variation Agreement which are in the same terms as those clauses in the FPA. I have summarised their effect above.
It is submitted that those arrangements differ from any normal notions of subrogation and "give the contract the flavour of a separate commercial transaction between the parties".
While the provisions may be unusual (as to which I express no view) I do not think they detract from the obligations imposed on Templegate pursuant to cl 5.1. The purpose of those provisions was to ensure that by one means or another, Templegate discharged the indebtedness of a defaulting investor. Clause 5.2 and cl 5.3 applied only if Equus proposed to exercise a power of sale or to surrender or terminate a lease and management agreement. That was an alternative means by which Equus was entitled to recover the indebtedness. But it did not detract from the effect of cl 5.1.
Equus relies on Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] NSWR 1504 in which the Full Court of the Supreme Court of New South Wales considered whether certain provisions of a hire purchase agreement constituted a guarantee. The agreement contained a clause which provided that where the account of any customer should, in the opinion of the hirer, be unsatisfactory, the hirer might give notice to the dealer to that effect: and the dealer would then be required to pay to the hirer the total amount due on the contract, less any amount paid by the customer.
Walsh J, with whom the other members of the Full Court agreed, held that the clause could not be regarded as a contract of guarantee and nothing else. This was because the clause could operate in a situation in which there had been no default at all. Further, if a customer did default, the amount which the hirer could require the dealer to pay was not the amount of the default: it included the whole of the further amounts which the hirer would have received if the agreement had run its full term and all hire purchase instalments had been paid. (Page 1508 ‑ 1509).
In my view, these are significant distinguishing features. In the present case, Templegate became liable to Equus only on the default of an investor: and it was required to answer for that debt if called upon by Equus to do so. I am therefore persuaded that the FPA, as varied by the Variation Agreement, was a contract of guarantee.
Issue 4.2: Did the service of a payout notice by Equus create a debt payable by Templegate in the sum demanded or any sum?
As I have noted above, cl 5.1(d)(i) of the Variation Agreement entitled Equus to serve on Templegate a payout notice requiring it to pay the defaulting investor's indebtedness. A power to require Templegate to make a payment seems to me to impose on Templegate a corresponding obligation to make that payment. Prima facie, therefore, the payout notice created a debt.
Templegate contends that no debt could be created because a payout notice does not specify the amount of the indebtedness. It is submitted that Templegate would become aware of the relevant amount only if it notified Equus pursuant to cl 5.1(d)(ii) that it would comply with a payout notice. If it did so, Equus would be entitled to respond by notifying Templegate of the amount to be paid.
I do not accept that submission. It ignores the fact that cl 5.1(d)(iii) refers to "the amount stated on the Payout Notice".
In my view, the provision in cl 5.1(d)(ii) about Equus notifying Templegate "of the amount to be paid" was not intended to inform Templegate of the amount of the debt, but of the amount which it would be required to pay after deduction of the amount to be drawn from the No 2 Account. That would depend on the amount standing to the credit of the account and the accrued interest.
In my view, a payout notice served pursuant to cl 5.1(d)(i) creates the debt: but subsequent provisions provide Templegate with alternative means of payment. Clauses 5.1(d)(ii) and (iii) apply if Templegate responds to the payout notice by saying that it will comply. Clause 5.1(d)(iv) applies if Templegate does not comply with the payout notice. I do not think that provision was included simply to protect Equus' position if failure to comply with a payout notice constituted a default by Templegate. It is to be noted that cl 5.1(d)(ii) does not impose on Templegate an obligation to comply with a payout notice: it provides that if Templegate notifies Equus that it will comply with a payout notice, then certain steps may be taken.
Templegate contends that if the service of a payout notice creates a debt, the result is an absurdity. This is because, it is submitted, Templegate would then have an obligation to discharge the debt created by the payout notice while at the same time being obliged, if called upon to do so, to top up the Reserve Fund and the No 2 Account so that their aggregate was not less than the aggregate indebtedness due from defaulting investors.
That would, I accept, be an absurd result, bearing in mind that the object of the Variation Agreement was to alleviate Templegate's cashflow problems, not to aggravate them. However, the absurdity is avoided by the conclusion that although the payout notice creates a debt, Templegate has an option as to the way in which it may be discharged. It may either make a direct payment of the balance due after taking into account the default deposit drawn from the No 2 Account; or it may permit Equus to draw on the Reserve Fund.
During the course of closing addresses I informed counsel that my tentative view about the construction of cl 5 of the Variation Agreement was as I have set it out above. After a short adjournment during which counsel considered the implications of that conclusion, they agreed that some of the issues would fall away. I therefore deal only with those remaining.
Issue 4.3.2: What on the true construction of the Variation Agreement was the effect of the entry of an approved investor into a Part X Bankruptcy Act arrangement?
This issue arises from the opening words of cl 5.1 to which I have referred above. The machinery of cl 5.1 is triggered when an investor defaults such that Equus "is entitled to require immediate repayment of all monies owing" under the relevant loan agreement.
It is submitted by Templegate that a Part X arrangement might either take the form of an assignment of the investor's divisible assets or a Deed of Arrangement. If the former, it is submitted, all the investor's provable debts would be released: if the latter, the investor might be released and discharged from all relevant provable debts. As a result, it is submitted, Equus would not be entitled to require "immediate repayment" of all monies due under the loan agreement.
I do not accept that submission. In my view, the question is not whether Equus is entitled to require immediate repayment under the general law, but under the provisions of a loan agreement. That term is defined in the FPA to mean:
"An instrument containing loan terms and collateral documentation (if any) entered into between an Approved Investor and [Equus]…."
It is therefore necessary to consider the terms of the loan agreements which were all in a standard form. Exhibit 20 p 1-8 is an example.
Clause 7 of each loan agreement contains a list of events constituting default. These include the investor committing an act of bankruptcy or becoming subject to bankruptcy proceedings or entering into any arrangement or composition with his creditors. If any of those events occurs, then cl 9 provides for secured monies and accrued interest to become due and payable immediately. That, I think, is the answer to Templegate's submissions.
That is not, however, the end of the matter. Templegate contends that if (as I have held) the FPA as varied includes a guarantee, Templegate would be discharged by reason of a Part X arrangement or bankruptcy which resulted in the loss or surrender of any security given by the defaulting investor. It is submitted that in those events, Equus would not be able to assign the relevant loan agreement or security pursuant to cl 5.1(e)(i) of the Variation Agreement, as it is obliged to do when Templegate discharges the corresponding debt.
Templegate relies on a passage from the judgment of Dixon J in Williams v Frayne (1937) 58 CLR 710, 738, that:
"If the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained, completed, protected, maintained or preserved, any failure in the performance of the condition operates to discharge the surety and the discharge is complete."
Applying that principle, the question which arises here, is whether there is an express or implied condition that a specific security shall be assigned.
In my view, there is not. Clause 5.1(e)(i) applies where monies owing by a defaulting investor are satisfied either by a payment by Templegate pursuant to cl 5.1(d)(ii) or under the cl 5.1(d)(iv) procedure. If the latter, Equus is entitled, pursuant to cl 5.1(d)(v), to follow its normal collection procedures. Although, as I have noted above, those procedures are not defined, they undoubtedly include the enforcement of security.
That being so, the reference in cl 5.1(e)(i) to the assignment of "any securities" held by Equus must, I think, be taken to refer to such securities as Equus may hold after following its normal collection procedures. There may be none.
Issue 4.3.4: What was the effect of the giving of time by Equus to an approved investor
Templegate submits that if the Variation Agreement included a guarantee, it was discharged if a defaulting investor was given time to pay. I do not accept that submission. I do not think Templegate could complain if, in following its normal collection procedures and exercising its judgment, Equus allowed an investor time to pay. In my view, the giving of time in those circumstances would not result in the guarantee being discharged. The position would be different, I think, if Equus merely allowed time to elapse without attempting to pursue the debt.
Issue 4.3.6 and 4.3.7: What is the effect of Equus' failure to serve a default notice at 45 days from an investor's default or a payout notice within a reasonable time after 90 days from that default?
Clause 5.1(b) imposed on Equus the obligation to serve a notice of default "as soon as practical" after the expiration of 45 days from an investor's default.
Service of the notice triggered Templegate's obligation to deposit an amount equal to 30 per cent of the defaulting investor's indebtedness. That indebtedness would include interest, which would continue to accrue from the date of the investor's default.
That being so, it was clearly important to Templegate that the default notice be served promptly.
Clause 5.1(d)(i) did not impose on Equus an obligation to serve a payout notice promptly after 90 days from the relevant default: it provided Equus with an entitlement to serve such a notice if the default continued for not less than 90 days.
Equus submits that because Templegate could always pay out the debt if it wished to do so, Equus could serve a payout notice at any time after 90 days. The result would be that the right to serve a payout notice would be interminable, subject perhaps to a six year limitation period.
I do not accept that submission. It is well settled that as a general rule, where no time is expressly limited for a particular action to be taken, it must be taken within a reasonable time unless there are indications to the contrary: Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1, 13 per Dixon J.
It follows, in my view, that if action is not taken within a reasonable time, it cannot be taken at all. I see no indications to the contrary. That is because delay reduces the value of Templegate's right to subrogation: and Templegate could not take any steps itself to pursue the debt until it had taken an assignment of the relevant securities.
It was accepted by both Mr Young and Ms Sewell in the course of cross‑examination, that they would not have expected Equus to serve a payout notice immediately after 90 days from the relevant default: but rather, to take steps to pursue the investor. (Ts 203 and 127‑ 128). Indeed, Ms Sewell said that Templegate would not have expected the Reserve Fund to be debited "unless there was absolutely no chance of getting it out of the client".
As to that, Mr Russo accepted in cross‑examination that as a general proposition, if a default had been outstanding for six or seven months without payment, there was a significant risk that the relevant amount could not be collected. Mr Russo qualified his answer by saying that it would depend on the circumstances. While I accept that to be so, I consider that a reasonable time for the service of a payout notice would be within a period of seven months from the date of the default, provided it was reasonable for Equus to pursue the defaulter during that time. If it became apparent shortly after a default that there were no prospects of recovery, then, I think, it would be incumbent on Equus to serve a payout notice much sooner.
Issues relating to collection procedures
Clause 5.1(d)(v) required Equus to follow "its normal collection procedures" until a defaulting investor's indebtedness had been paid, whether by Templegate or otherwise.
There is nothing in the Variation Agreement which defines or identifies Equus' normal collection procedures. However Templegate knew, well before entering into the Variation Agreement, that Equus' procedures were somewhat lax. Both Mr Young and Ms Sewell said in the statements which became their evidence‑in‑chief, that in late 1990, during discussions with Mr D'Allessandro of Equus, they were told "there was a lack of follow‑up procedures adopted by Equus in its loan recovery division."
Some illustrations of the steps taken by Equus are contained in copies of notes given to Templegate during 1991: see Ex 4 p 110‑111 and 120 6.
It is submitted by Templegate that, as a matter of construction, the obligation imposed on Equus was to pursue reasonable collection procedures. It is submitted that the concept of normal collection procedures carries the implication that such procedures should be reasonable. I do not accept that submission. This case is not concerned with what might be normal in the debt collection industry generally: it is concerned with procedures which were normal for Equus.
Equus submits that there must be implied in the FPA and the Variation Agreement, a term that Equus would do all such things as were necessary on its part to enable Templegate to have the benefit of the contract. I accept that Secured Income Real Estate Australia Ltd v St Martin's Investments Pty Ltd (1979) 144 CLR 596 is authority for that proposition. However, I do not think it advances Templegate's case. That is because the contract of which Templegate was to have the benefit, involved the pursuit by Equus of its normal collection procedures, whatever they may have been.
For the same reasons, I do not accept Templegate's submission that Equus was subject to an implied obligation to take reasonable steps not to expose Templegate to avoidable economic loss. That, I think, would impose on Equus an obligation approaching strict liability.
It is contended by Templegate that Equus' normal collection procedures included, after an investor had been in default for 30 days, the registration of a caveat against the property identified in the charge clause contained in the investor's finance contract: and the institution of legal proceedings after 60 days.
However, the evidence does not establish that Equus "normally" registered caveats or instituted legal proceedings. Caveats could not be lodged in any event in respect loans subject to the Victorian Credit Act. And further, s 91(4) of the Transfer of Land Act 1958 (Vic) provided that a caveat which had lapsed or had been removed could not be renewed by or on behalf of the same person in respect of the same interest. In short, a caveat could only have been registered once: and the registration therefore called for a particularly careful exercise of judgment. In many cases, there was no point in lodging a caveat because the investor's property was already subject to a first mortgage which would account for all the available equity.
Templegate contends that Equus' failure to follow normal (reasonable) collection procedures constituted a repudiation of the FPA, as varied. At least, it is submitted, Equus was not entitled in the period February ‑ August 1994 to serve payout notices and debit the Reserve Fund. I shall deal with those issues in due course.
Issue 6: Was there a separate (or collateral) agreement made between Mr Russo and Mr Hopps on 11 May 1992 relating to the assignment of forestry interests by Equus to Templegate?
The issue arises from the allegation in par 25.1 of Equus' counterclaim, that in about May 1992, Templegate was unwilling or unable to pay certain monies due from it to Equus pursuant to the FPA, as varied. It is alleged that Equus then agreed to assign certain specified securities to Templegate to enable it to market them by way of a registered prospectus and to utilise the proceeds of sale to discharge the indebtedness of the relevant defaulting investors.
Templegate contends that there was no such agreement: that the arrangements were made pursuant to the Variation Agreement.
On 4 May 1991, Mr Hopps sent a fax to Mr McLennan, Equus' Credit and Risk Manager (Ts 294) in which he referred to cl 5.1(j) of the then proposed Variation Agreement. He went on to say it was "imperative" that s 57(2)(b) notices be sent immediately to ten defaulting investors whom Mr McLennan had identified in a letter of 23 April and who owed a total of $413,119.69. (These became known as the Group A investors.) Mr Hopps concluded by seeking confirmation that the amount payable to the No 2 Account would be 30 per cent of the above figure: $123,935.31. (Ex 4 p 193).
At that time, the Deed of Variation was close to being finalised. In my view, Mr Hopps took the steps outlined above in anticipation that it would be implemented.
On 11 May, Mr McLennan replied. He confirmed that the amount payable to the No 2 Account was $123,935.31: and he asked for a cheque to be sent "ASAP". (Ex 4 p 200).
It was Mr Russo's evidence‑in‑chief that on or about 11 May 1992, Mr Hopps telephoned him and Mr McLennan. Mr Hopps said that the number of accounts in arrears was quite high and that payment of the 30 per cent deposit would put a severe strain on Templegate's cashflow. Mr Hopps said that Templegate would not be able to pay the other 70 per cent in the agreed time‑frame.
According to Mr Russo, Mr Hopps proposed that Templegate's then solicitors, Baker and McKenzie, should prepare the necessary paperwork to enable Equus to effect surrenders of the leases, termination of the Management Agreements and assignment of the loans, so that all the forestry interests could be ready for resale in a special prospectus which Templegate would have ready by the end of June. Mr Hopps is said to have told Mr Russo and Mr McLennan that as soon as Templegate sold the interests, the proceeds of sale would be paid to Templegate to make up the outstanding 70 per cent.
Mr Russo said he was prepared to agree to the request as a "once off" to assist Templegate to clear up all the problem loans. Mr Russo repeated his evidence in cross‑examination. (Ts 31‑32).
On 14 May 1992 Mr Hopps wrote to Baker and McKenzie. He set out the details of "Equus defaulters whose lots we are buying back and will subsequently resell". These were the Group A investors, whose debts totalled $413,119.69. (Ex 4 p 205 ‑ 6).
On the same day, Mr Hopps sent a facsimile to Mr McLennan. After referring to the Variation Agreement, Mr Hopps said he had asked Baker and McKenzie to commence preparation of the documentation concerning the transfer of loans to Templegate. (Ex 4 p 208).
On 18 May 1992, Mr Hopps wrote again to Mr McLennan. He enclosed copies of the executed Deed of Variation and a cheque in the sum of $123,935.91 to be credited to the No 2 Account in accordance with the agreement (Ex 4 p 269).
On 27 May, Baker and McKenzie wrote to Mr McLennan about the preparation of documents to transfer Equus' rights against defaulting debtors to Templegate. The letter contained the following passage:
"Assuming that there will be no payments made to Equus as a result of the Section 57(2)(b) Notices forwarded and that the mortgagee sales will take place on June 18 1992, please let me know the amount which each of the defaulting debtors will owe to Equus on that date (ie the amount which Equus proposes to debit from the Reserve Fund)."
The letter went on to refer to the fact that pursuant to cl 5.1(c) and cl 5.1(d)(iii) of the FPA, Equus was obliged to deliver to Templegate the original loan agreements and any security documents it held in connection with each loan "as a condition of its rights to debit the Reserve Fund".
The reference to the FPA is clearly intended as a reference to the Variation Agreement.
Equus replied to Baker and McKenzie's letter on 10 June, 1992, enclosing documents which they had requested (Ex 4 p 283 ‑ 285).
Thus far, the arrangements appear to reflect the provisions of the Variation Agreement: Templegate had paid the 30 per cent default deposit and was to pay the remaining 70 per cent by way of a debit from the Reserve Fund. The transfer of Equus' interests in the loan agreement and securities would therefore be assigned to Templegate pursuant to cl 5.1(e)(i) of the Variation Agreement.
There was, however, no debit from the Reserve Account on 30 June 1992 when, it seems, the various assignments were effected. (Ex 4 p 536). This is consistent with Mr Russo's evidence that the balancing 70 per cent of the relevant indebtedness (being $289,183.78) was to be derived from the proceeds of sale of the forestry interests which had been assigned to Templegate. Indeed, as at 30 June 1992, the amount standing to the credit of the Reserve Account was $274,232.00, which would have been insufficient to discharge the indebtedness in any event.
The arrangements are referred to in a letter dated 6 November 1992 from Mr Alan Herskope, Equus' solicitor, to Templegate's present solicitors. Mr Herskope wrote:
"In early June 1992 [Templegate] instructed Messrs Baker and McKenzie to prepare certain assignment documents which were then forwarded to [Equus]. It was represented to [Equus] that the securities the subject of these assignment documents were being sold under a registered prospectus and that in order to comply with the prospectus requirements, it was necessary to effect these assignments and pass the legal title in the securities to [Templegate].
It was further represented to [Equus] that [Templegate] did not have the funds required to pay the consideration expressed in the assignment documents but that this "was merely a formality" as the documentation to effect sales to third parties would occur towards the end of June 1992 and funds would flow to [Equus] to payout the remaining 70 per cent of the amount due under each defaulting loan." (Ex 2 p 450).
I accept the evidence of Mr Russo, to which I have referred above, that he agreed to the assignment of the forestry interests of the Group A investors to Templegate, in advance of payment. This agreement took effect outside the Variation Agreement, which made no provision for this procedure.
Mr Russo agreed, I think, because he had no realistic alternative. He accepted that Templegate had a cash flow problem due to the unexpectedly high number of substantial defaults. He knew that pursuit of the investors would be unlikely to solve the problem. Although caveats could be lodged over their respective properties, these were commonly the subject of first mortgages to banks or other financial institutions. And the forestry interests were worth very little, as tax effective investments, unless they could be surrendered and re‑sold by way of a new prospectus. Further, I think it likely that Templegate encouraged Mr Russo to believe that there was a secondary market for the forestry interests, and that they would be sold in the reasonably near future. Whether that encouragement was given by Mr Hopps or Mr Young is immaterial for present purposes. I accept Templegate's submission that there are inconsistencies in the evidence, and in Mr Herskope's letter of 6 November 1992. However, despite these inconsistencies, as I have said, I accept Mr Russo's evidence about this side agreement, as I shall refer to it.
Issue 6.1: What were the terms of the side agreement?
I find the terms of the side agreement were:
1.that in respect of the Group A investors, Equus would not debit the Reserve Fund in the amount equal to 70 per cent of their indebtedness;
2.Templegate would pay the 70 per cent out of the proceeds of sale of the Group A investors' forestry interests on the secondary market; but
3.if payment was not made within a reasonable time, Templegate would remain liable to discharge the debt.
4.In those circumstances, Equus would be entitled to have recourse to the default deposits.
The terms 1 and 2 above were agreed expressly. I think it necessary to imply the terms in 3 and 4, to give business efficacy to the agreement. Obviously, it cannot have been the parties' intention that if Templegate's optimism about re‑selling proved to be unjustified, Equus would simply release it and write off the debts. And since the side agreement took effect partially outside the Variation Agreement, there would be no machinery by which the default deposits standing to the credit of the No 2 Account could be accessed by Equus.
Such terms would therefore be reasonable and equitable, in all the circumstances: and would not contradict an express term of the side agreement.
I do not accept Mr Russo's evidence that there was an express oral agreement between him and Mr Hopps that Templegate would hold the proceeds of sale of the forestry interests in trust for Equus. (Ex 7 par 6.2.2).
Nor do I accept Mr Young's evidence that in relation to the Group A investors Equus "had the right under the loss reserve fund to debit the loss reserve fund and ask for a top up…." (Ts 202). This is inconsistent with a memorandum dated 21 July 1992 from Mr McLennan to Mr Russo, in which it is said that:
"Templegate have verbally asked to debit the Loss Reserve with the Buyback amount, credit the funds generated by the resales to the Loss Reserve, and that will see the gradual rebuilding of the reserve to the required level." (Ex 4 p 371).
This request was said to be coupled with a proposal by "Templegate" to provide "collateral Real Estate security", which would be released, once the Reserve Fund had been increased to the required level.
Mr Young said he did not recall any discussions with Mr McLennan about security. (Ts 2011). However, these negotiations seem to have been conducted principally with Mr Hopps. Although he was the person substantially charged with the day to day management of Templegate's relationship with Equus, until his departure in August 1992, Mr Hopps was not called to give evidence. Ms Sewell said he was in Perth, but "in ill health". (Ts 119).
Issue 6.2: What was the effect on that agreement of the execution of the Variation Agreement?
In my view, the side agreement was not affected by the Variation Agreement. That is to say, it was not the intention of the parties that the loans which were the subject of the side agreement would be subject to the regime provided by the Variation Agreement.
Issues 6.3 and 6.4: What was the effect on the side agreement of the execution of transfers and assignments on 30 June 1992?
I do not regard the execution of these documents as having any effect on the side agreement: they were the means by which the agreement was performed.
Issue 6.5: What was the effect on the side agreement of the matters relating to Muscat, Kingston Craft and Stancic; and Equus' letter of 20 August 1992?
6.5.1: Muscat
Mr John Muscat was a Group A investor who on 14 May 1992, owed some $55,849 to Equus (Ex 4 p 201).
As Baker and McKenzie pointed out in their letter dated 23 June 1992 to Equus, it had financed only part of Mr Muscat's lease and management agreement. The balance was financed by GIO. Both Equus and GIO took mortgages of the whole of lease and management agreement. (Ex 4 p 287‑ 288).
GIO had registered its mortgage. It executed a transfer of the lease and assignment of the management agreement to Templegate. Baker and McKenzie pointed out in a note to their letter that:
"As Muscat no longer 'owns' the leasehold interest, his indebtedness to Equus cannot be reduced by a sale of his lease and the whole of his indebtedness will be assigned to Templegate." (Ex 4 p 292).
I do not think the fact that Templegate obtained Mr Muscat's interests from GIO affects its agreement with Equus. Templegate was placed in a position in which it could resell the interest formerly owned by Mr Muscat. It remained liable to discharge his debt to Equus. However, Templegate was not entitled to set off the value of Mr Muscat's lease against his indebtedness because the lease was not transferred by Equus.
6.5.2: Kingston Craft
Kingston Craft Pty Ltd was another Group A investor. On 4 August 1992 Mr Laurence Ryton Williams, Equus' General and Operations Manager, wrote to Mr Young in relation to Kingston Craft. He said that the account is "overdue to be repurchased". In other words, Templegate had not paid the consideration it should have done for taking an assignment.
Mr Williams went on to say that Equus had taken legal action in relation to the debt; and that Kingston Craft had offered to settle the matter by making a payment of $50,000 on the basis that it would retain security. Mr Williams asked Mr Young to indicate his willingness to accept the offer by counter‑signing the letter. Mr Young did not counter‑sign the letter. Instead, he endorsed on it the following:
"1.Equus to accept the offer of $50,000 on behalf of Templegate.
2.Equus to debit the Templegate No 2 Reserve Fund with the sum of $61,895.55 in settlement of the Kingston Craft debt to Equus.
3.Equus to endorse the cheque from Kingston Craft in favour of Templegate Holdings Pty Ltd and forward it to Templegate."
In cross‑examination, Mr Russo said he thought Mr Young's response was "absolutely outrageous". (Ts 383‑ 4).
I have some sympathy for Mr Russo, arising from the fact that Equus had not been paid anything other than the 30 per cent default deposits in respect of the Group A investors. What Mr Young proposed would have resulted in Equus being paid out in full in relation to Kingston Craft, but apparently, out of the default deposits rather than the Reserve Fund. In those circumstances, I can see no commercial justification for Templegate to retain the sum of $50,000.
It is, of course true that Equus had assigned the Kingston Craft interests to Templegate. However, Equus had not been paid and had managed to achieve what appeared to be a reasonable settlement. It was clearly in the interests of both Equus and Templegate that it should do so. I do not think that either took account of the strict legal position. For example, Mr Young's endorsement (at par 2 above) referred to the Kingston Craft debt to Equus when the debt was then due to Templegate.
On 20 August 1992, Mr Russo wrote to Mr Young and Ms Sewell. He said:
"In recent months you have been forwarded various documents in relation to the Lease and Management Agreements. We understand that you have sold 14 of these units for net proceeds of approximately $115,000. We put you on notice that you hold these funds in trust for us and we note that despite your assurances that these funds would be deposited into our bank account on the 18 August 1992 this has not occurred. We hereby demand that these funds be remitted to us without further delay.
We also demand that the remainder of the unsold units … be immediately returned to us". (Ex 4 p 396).
I do not think Mr Russo was justified in saying that the proceeds of sale of the various interests should have been held on trust. As I have held, there was no express agreement to that effect: rather, the side agreement resulted in Templegate owing 70 per cent of the value of the defaulting investor's loans to Equus.
However, Templegate did not make any payments to Equus pursuant to the side agreement. In my view, its failure to do so amounted to a repudiation of that agreement. But that did not entitle Equus to regard the agreement as void ab initio. It resulted in Templegate being under an obligation to pay damages.
The issue I am asked to resolve is what was the effect on the side agreement of the decision by Equus and Templegate to regard the assignment of Kingston Craft's forestry interests as being of no effect. However, I do not think that Equus and Templegate did make that decision.
Templegate did not accept Mr Russo's proposal in his letter of 4 August. Mr Russo then decided, unilaterally, to settle with Kingston Craft, which, it must be assumed, did not know that Equus had no title.
The settlement did not deprive Templegate of the relevant forestry interests: and it is not suggested that Templegate could have achieved any better result by itself pursuing the debtor.
In those circumstances, I consider that the effect of the settlement was to reduce Templegate's indebtedness to Equus pursuant to the side agreement by $50,000.00.
6.5.3: Stancic
It is common ground that some time after the assignment to Templegate of its lease and management agreements with Mr and Mrs Stancic, Templegate re‑assigned these interests to Equus which entered into a new agreement with Mr and Mrs Stancic, thereby re‑financing the debt.
In my view, the effect of those arrangements was to remove the Stancic debt from the side agreement. Templegate's indebtedness to Equus was therefore reduced by the amount of the Stancic debt.
6.5.4: What was the effect of Equus' decision made on 20 August 1992 to treat the assignments of leases and management agreements as being of no effect ab initio
I have referred above (under issue 6.5.2) to Equus' letter dated 20 August 1992, in which Mr Russo asserted that Templegate held the proceeds of sale of the Group A investors' forestry units on trust for Equus, and that it should return the unsold units. This was on the basis which Equus asserted in letters to the Group A investors, that "the alleged assignment never took place". (Ex 4 p 500 is an example).
As I have already held, the consequence of Equus accepting a repudiatory breach of the side agreement was not to avoid it. Thus, Equus' assertion was misconceived. However, I do not think Equus' conduct in making that assertion had any relevant effect.
6.5.5: What was the effect of Equus' subsequent conduct in enforcing the loan agreements?
In my view, the effect of that conduct was to mitigate Equus' loss, resulting from Templegate's breach of the side agreement. Templegate's liability to pay damages is reduced by the amounts which Equus recovered, or refinanced, as in Stancic's case.
Issue 7: Was a collateral agreement made on 14 August 1992?
It is common ground that a meeting took place on 14 August 1992 in Equus' offices in Melbourne between Mr Russo, Mr Tony Nixon, Equus' Account Manager, Mr Young and Ms Sewell. It is also common ground that the meeting was, in effect, the continuation of a meeting between the same persons on 10 August. There is, however, a sharp conflict in the evidence. Mr Young and Ms Sewell gave identical accounts of the two meetings in the statements which became their evidence‑in‑chief. These accounts were based on notes said to have been made by Ms Sewell at, or shortly after the relevant meeting. Neither Mr Young nor Ms Sewell was cross‑examined on their evidence. Mr Russo gave his evidence from recollection. He was cross‑examined. Mr Nixon was not called to give evidence.
Having reviewed all the evidence, I make the following findings of fact on the material issues.
At the meeting on 10 August, Mr Young told Mr Russo that Templegate had derived a net sum of $105,000 from the sale of forestry interests on the secondary market. Mr Russo then produced a copy of a letter which Equus had sent to Templegate in April 1992. Mr Young said it was either the letter of 7 April or that of 23 April. He said the name of "Bailey" had been added in handwriting. On the balance of probabilities, I find that it was the letter of 23 April. That is because the letter set out the names of the Group A investors. That, I think, explains Mr Russo's interest in the letter of 23 April.
I find that Mr Russo then produced a calculation of the Reserve Fund. Mr Young or Ms Sewell then told Mr Russo that the figures were not correct.
Mr Young and Ms Sewell then brought the meeting to a close because they had another engagement. Mr Russo said he would recalculate the balance outstanding on the Reserve Fund and provide that information to Templegate in readiness for a further meeting on 14 August.
On 10 August Mr Nixon wrote to Templegate. He referred to the meeting with Mr Young and Ms Sewell. He said Equus had calculated the "top up" requirement for the Reserve Fund and the No 2 Account as $176,166. (Ex 4 p 396‑7). He said that was based on Equus receiving the amount of $105,000 from the sale of forestry interests (referred to above) and on the Kingston Craft debt being settled for $50,000. He requested a cheque by return mail.
The letter of 10 August 1992 was addressed to Templegate's post office box in Perth. However, Mr Young and Ms Sewell were staying in Melbourne during the week 10‑14 August. Mr Russo, I find, said he would ask Mr Nixon to fax the figures to the apartment where they were staying.
On 13 August, Mr Russo telephoned Mr Young and Ms Sewell in Melbourne. I find that Mr Russo asked Mr Young if Templegate was intending to make the payment which had been sought. Mr Young said Templegate was not prepared to pay. He said he needed to check Mr Russo's calculations which he thought were incorrect.
Ms Sewell then joined the conversation by means of an extension telephone. She asked Mr Russo whether he had allowed for the floor amount in the calculations of debits to the Reserve Fund. Mr Russo said that under the Variation Agreement, the floor amount did not apply to any payout figure. Ms Sewell said she was not sure that was correct. She said the floor amount was not allowed for in the calculation of the sums debited to the loss Reserve Fund in relation to Mortco.
Mr Russo said there had to be "give and take". He said that when the FPA was varied, Equus had permitted Templegate to pay 30 per cent but had removed the floor amount. There was then a discussion of the floor amount, but the matter was unresolved.
At the meeting of 14 August, Mr Young again informed Mr Russo that he and Ms Sewell did not agree with the calculations in relation to the Reserve Fund. Mr Young said that on the advice he had received from Mr Frank D'Allessandro, the intention of the Variation Agreement was that Equus would only debit the Reserve Fund to the extent of 60 per cent of the defaulting investors' indebtedness: and that the Reserve Fund should contain an amount equal to 5 per cent of the principal amount outstanding.
There was then a discussion about the floor amount and the way it was dealt with in the FPA and the Variation Agreement.
Mr Russo then said the matter had been going on for nine months: that he had an unsecured loan (from Templegate) outstanding on Equus' books and that he had to report to the board of Equus on the following Tuesday. Mr Russo said he wanted Templegate to provide some security for the unpaid debt.
Ms Sewell said words to the effect that Templegate was not required to give any security: that Templegate would continue to sell the units and reimburse Equus as they were sold.
The meeting then adjourned to Mr Russo's office where Mr Russo and Mr Nixon calculated the defaulting loans and put the figures on a whiteboard. Mr Russo said that Templegate owed Equus $176,000.
Mr Young then recalculated the figures applying the 60 per cent floor amount. Mr Russo said words to the effect that he would never have done a deal in which he could suffer a loss: and that no financier would do such a deal. Mr Young told Mr Russo that Equus had the right to recover the shortfall using normal industry collections procedures. He said that no further security was required by Equus: nor would Templegate provide any. He said that if previous payments made in respect of defaulters such as Mortco were taken into account, it might be that Equus owed money to Templegate. He requested Mr Russo to recalculate his figures based on the true loans outstanding figure and a 60 per cent floor amount.
Mr Young went on to say that Templegate had collected approximately $105,000 from sales of lease and management agreements on the secondary market. He said Templegate was prepared to pay that sum immediately if it was held in trust until the figures had been sorted out.
Mr Russo then asked how many units were available for resale. Mr Young said that there were about 36. Mr Russo said that if Templegate could sell 12 units per month over the next three months he would be happy. Ms Sewell said that Templegate could not guarantee that level of sales because the sale levels were inconsistent.
Having regard to these findings, I am not persuaded that the parties entered into an agreement on 14 August 1992, as pleaded. I have no doubt that Mr Russo sought to have Templegate pay $105,000, being the proceeds of sale of certain of the forestry interests; and to provide security. Nor do I doubt that Mr Russo would have been content if Templegate had agreed to pay the balance by three consecutive monthly instalments. However, I am satisfied, on the balance of probabilities, that Mr Young did not commit Templegate to making any payment until the question of construction of the FPA and Variation Agreement had been resolved. That being so, issues 7.1, 7.2 and 7.3 do not arise.
Issue 8: What was the parties' conduct, and what were the material events, in the period between August 1992 and August 1994?
In dealing with this issue, it will be convenient to consider Equus' entitlement to serve the various default and payout notices referred to under issue 9.
Mr Russo wrote to Mr Young on 18 August 1992, setting out the terms of an agreement he said he believed they had reached at the meeting of 14 August. He asked Mr Young to countersign the letter. (Ex 4 p 389‑390).
Mr Young did not do so. He replied on 20 August, saying that solicitors had been instructed to provide an opinion about the effect of cl 5.3 and the Floor Amount. He said that no further action could be taken until the opinion was received. (Ex 4 p 395).
Mr Russo responded immediately to Mr Young's letter of 20 August. On the same day, he sent Mr Young the letter to which I have referred above, with which he enclosed a copy of a standard demand letter dealing with defaulting loans. He said the notice would be completed and sent to Templegate within the next 24 hours if a resolution had not been reached.
Templegate then placed the matter in the hands of it present solicitors, Messrs Williams & Hughes. On 2 September 1992, the solicitors wrote to Equus' solicitors and raised a number of issues in relation to the true construction of the FPA and the Variation Agreement. I note that some of the contentions set out in the letter have not been pursued by Templegate. The letter contained a request for a substantial amount of information including:
• an account of the Reserve Fund and the calculation of the amounts by which it had been debited;
•details of collections procedures which had been followed in relation to certain investors;
•details of loan agreements of defaulting investors;
•details of the lodgment of caveats.
Equus did not respond to the letter. I accept Mr Russo's evidence that this was on the advice of Mr Herskope, with which Mr Russo agreed, that it was a further attempt by Templegate to procrastinate.
On 17 September Mr Herskope wrote to Templegate. He referred to what I have described as the side agreement. He contended that it was "the clear and express intention of the parties" that Templegate would pay the full consideration to Equus on receipt of the lease and management contracts and loan securities which had been assigned to Templegate on about 30 June.
As I have held above, that was not the agreement. The purpose of the side agreement was to facilitate Templegate's sale of the relevant interests so that the indebtedness could be discharged from the proceeds of sale.
Mr Herskope went on to point out (correctly) that Templegate had failed to discharge its obligations under the side agreement. He said in those circumstances Equus had instructed him to inform Templegate that it considered the various documents to be of no effect. Mr Herskope put Templegate on notice that should it take any steps to deal with the securities in a manner inconsistent with Equus' claimed interest, it would immediately take injunctive proceedings to preserve its position. He said that injunctive relief would be sought unless Templegate gave an undertaking to place $105,000 in its solicitor's trust account and instruct Baker and McKenzie to hold the security documents in escrow pending resolution by the court.
Messrs Williams & Hughes responded by facsimile on 24 September. They asserted that the effect of the side agreement was that only when the forestry interest previously owned by a defaulting investor had been sold to a third party was Equus to debit the Reserve Fund: and that Templegate's liability to top up the Reserve Fund would be regulated by the provisions of the FPA.
As I have held, that was not the agreement. However, Williams & Hughes went on to say (correctly, as I have held) that there was no basis for Mr Herskope's contention that the 30 June assignments had been ineffective or that Equus was entitled to rescind them ab initio. The solicitors repeated Templegate's request for "a full accounting".
There was a further exchange of letters between the solicitors on 6 November 1992 (when Mr Herskope wrote to Williams & Hughes) and on 12 November 1992 (when Williams & Hughes replied). By then, Templegate had commenced these proceedings.
Throughout 1993, Equus submitted monthly reports to Templegate. These were computer print‑outs showing details of the accounts relating to investors introduced by Templegate. The reports were accompanied by what appears to have been a standard form letter signed by Mr Williams. Templegate was invited to contact another of Equus' employees if a copy of collection notes for any of the accounts was required.
On 17 May 1993, Equus served a notice of default on Templegate. The notice related to the following investors and amounts of indebtedness:
Bull MJ$98,526.06
Bull JL$77,710.77
Leeds JL$102,835.35
Leeds CM$112,261.22
$391,333.40
The notice required Templegate to deposit with Equus an amount equal to 30 per cent of the defaulting investors' indebtedness on or before 15 days from the date of the notice. This demand was obviously made pursuant to cl 5.1(c)(i) of the Variation Agreement.
Mr and Mrs Bull and Mr and Mrs Leeds were apparently practising in partnership as accountants. Their regular monthly payments to Equus ceased in July 1992. In December 1992, apparently in response to a request from the firm Leeds Bull & Co, Equus considered granting the investors a moratorium until June or July 1993.
In those circumstances, I do not think it could be said that the notice of default was served "as soon as practical" after the default, as required by cl 5.1(b) of the Variation Agreement. I therefore conclude that by 17 May 1993, Equus' right to serve the notice had been lost.
On 24 February 1994, Equus served a payout notice on Beagle (which was then operating under its new name).
The payout notice referred to eight defaulting investors. They included Mr and Mrs Bull and Mr and Mrs Leeds who had been the subject of the default notice referred to above. The other defaulters were Bailey PG, Puratic L, Thomson RJ and Rosenberg RS.
On the following day, 25 February, Equus served a notice of default on Beagle. This related to five investors whose total indebtedness was said to be $147,851.55. (Ex 4 p 497).
On 15 April, Mr Young wrote to Mr Williams referring to the notice of default dated 25 February and the payout notice dated 24 February. He informed Equus that Beagle denied any liability. He requested that Equus provide information about the basis on which the claims were made, full details of collection procedures and full particulars of withdrawals from the Reserve Fund since 30 June 1992.
There appears to have been no reply to that letter. Mr Williams said in cross‑examination that he thought the letter had been passed on to Equus' solicitor to reply. However, Mr Williams could not recall seeing a reply (Ts 502).
The history of the investors referred to in the payout notice of 24 February (other than Mr and Mrs Bull and Mr and Mrs Leeds) was as follows:
Mr P G Bailey
A default notice had been served in relation to Mr Bailey on 17 June 1992. A meeting of Mr Bailey's creditors was held on 28 May 1993. On 7 June 1993 he entered into a Deed of Arrangement with a Trustee in Bankruptcy. On 23 June 1993, Mr Michael Paolucci, one of Equus' account executives, wrote to the firm of accountants of which Mr Bailey's trustee was a partner. Mr Paolucci took issue with the amount of indebtedness claimed by Mr Bailey. He said Equus was owed $38,422.59. He went on to say that Equus had not received notification of the creditors' meeting because the relevant documents had been sent to its previous address, which it had not occupied since November 1992.
On 7 January 1994, Equus accepted $15,000 in satisfaction of Mr Bailey's outstanding obligations under his loan agreement.
According to Equus' statement of Mr Bailey's account, the balance due after payment of $15,000 was $30,625.47. That was on 7 January 1994. The payout notice stated that Mr Bailey's indebtedness on 24 February 1994 was $24,504.93. The discrepancy has not been explained.
The interval between the notice of default and the payout notice was a little over 20 months. As I have noted above, I would consider a delay of up to seven months to be reasonable in the absence of any extenuating circumstances. There are none in this case. The collection history shows that Mr Herskope was instructed to take legal action against Mr Bailey on 3 July 1992, but that very little was done thereafter until Equus became aware of the creditors' meeting in the circumstances to which I have referred above. I therefore find that Equus was not entitled to serve a payout notice in relation to Mr PG Bailey.
Mr L Puratic
Equus' notice of default was served on Beagle on 17 August 1993. Equus' obligation pursuant to cl 5.1(b) of the Variation Agreement was to serve a default notice as soon as practicable after the expiration of 45 days from the occurrence of the default. However, as Mr Puratic's file discloses, Mr Puratic defaulted in July 1992. Equus lodged a caveat in respect of Mr Puratic's property on 26 August 1992 and subsequently took action in the County Court in respect of the outstanding indebtedness. The proceedings appear to have been settled in June 1993.
In these circumstances, I do not consider that Equus was entitled to serve the default notice. In any event, the delay of a little over six months in service of the payout notice was, I think, unreasonable, given the long history of unsatisfactory performance by Mr Puratic and his apparent financial difficulties, as disclosed by Equus' collection notes.
I therefore find that Equus was not entitled to serve a payout notice in relation to Mr Puratic.
Ultimately, in about November 1998, Equus settled with Mr Puratic, apparently with Beagle's consent. However, as appears from a letter dated 10 November 1998 from Mr Young to Mr Williams, Beagle's consent was given without prejudice to its position in relation to the current litigation.
Mr R J Thomson
Equus served a notice of default on Templegate on 25 September 1992. There was therefore a delay of 17 months before the payout notice was served. I find the delay was unreasonable in the circumstances with the result that Equus was not entitled to serve the payout notice.
Mr R S Rosenberg
Mr Rosenberg defaulted on 11 September 1992. However, by 17 August 1992, at the latest, Equus was aware of a potential problem when Mr Rosenberg telephoned to give notice of an informal meeting of his creditors. He entered into a Part X arrangement with his creditors on 13 November 1992. Equus' notice of default to Templegate was dated 17 November.
The payout notice was therefore served some 15 months later, in respect of a debt which was clearly irrecoverable.
Although Mr Rosenberg had charged real property to Equus to secure the loan, it had become apparent by at least June 1993 that a prior charge to the Westpac Banking Corporation would absorb all available equity in the property.
I therefore find that the delay in serving the payout notice was unreasonable, with the result that Equus was not entitled to serve that notice.
For reasons which I shall set out under issue 10, I am not persuaded that Templegate either waived, or is estopped from relying on, its rights to require compliance with the time stipulations in the Variation Agreement in relation to the service of the payout notice of 24 February 1994.
On 20 May 1994, Equus debited the No 2 Account with the sum of $160,760.16, the entire balance of that account (Ex 4 p 538).
On the same day, this amount was credited to the Reserve Fund, from which four amounts totalling $420,984.46 were then withdrawn. (Ex 4 p 537) Those amounts were used by Equus to discharge debts owed by:
R J Thomson
R S Rosenberg
J L Leeds
C M Leeds.
It will be recalled that they were four of the investors the subject of the payout notice dated 24 February 1994. However, the amounts withdrawn from the Reserve Fund do not correspond with the indebtedness specified in that notice, (Ex 4 p 496) which is $63,624.07 less. No evidence has been adduced by Equus to explain this discrepancy.
Also on 20 May 1994, Mr Williams of Equus wrote to the directors of Beagle to inform them that Equus had that day withdrawn the sum of $160,780.16 "which would otherwise be payable to Beagle". It was said that the cheque represented the default deposits amounting to $123,935.91. This related to the Group A investors: see Ex 4 p 205‑206 and 269. The letter went on to say that as Beagle was in default of its obligations pursuant to the Variation Agreement, Equus had "set off the above monies against the monies due by [Beagle] to [Equus]". Beagle was not told, however, that Equus had debited the Reserve Fund.
Although I am not required to deal with subsequent events. (See Ts 759-760) I will, for completeness, set out my findings.
On 16 August 1994, Equus served on Beagle a payout notice relating to the Group A investors other than Stancic and Kingston Craft, whose debts had been settled. The notice required Beagle to pay the entire indebtedness of those investors.
In my view, that notice was not required, in the sense that Beagle was under an existing obligation to pay damages arising from its repudiation of the side agreement.
Equus served a further notice of default on 16 August 1994, in relation to M Dargan (Ex 4 p 526). Equus' records disclose that her account had been classified as "delinquent" on 15 March 1989. Equus then attempted to pursue the guarantor, but was unsuccessful. Only then did it serve the notice of default.
In those circumstances, I am satisfied that the notice of default was far too late to be of any effect. For that reason, a payout notice served in relation to M Dargan on 7 September 1994 was equally ineffective (Ex 4 p 544).
Issue 9
As I have noted above, I have dealt with most of the matters arising under issue 9 in the course of my reasons relating to issue 8. Two questions remain, however, being issues 9.3 and 9.4. I deal with them together.
Issues 9.3 and 9.4: Was Equus entitled to withdraw default deposits relating to the Group A investors from the No 2 Account on 20 May 1994, and credit the deposits to the Reserve Fund, and then to debit the Reserve Fund
As I have noted above, Equus deposited $160,760.16 which it withdrew from the No 2 account on 20 May 1994, into the Reserve Fund. On the same day Equus withdrew $420,984.46 from the Reserve Fund to discharge the debts owed by:
R J Thomson
R S Rosenberg
J L Leeds
C M Leeds
These investors were not included in Group A. Their debts were therefore subject to the Variation Agreement. That being so, Equus was only entitled to debit the Reserve Fund if appropriate default and payout notices were served without undue delay. But as I have already held, that was not done.
It follows that Equus was not entitled to withdraw the whole of the $420,984.46. Its entitlement was limited to $160,760,16 in respect of the Group A investors. That entitlement arose pursuant to an implied term in the side agreement: see issue 6 above. The fact that those monies passed through the Reserve Fund seems to me to be irrelevant.
Issue 10: Did Templegate waive (or is it estopped from relying on) any essential time stipulation in the FPA relating to the service of default notices by the conduct referred to in the particulars to paragraph 6 of the reply to the defence to counterclaim
The issue arises in this way: Templegate pleaded in par 26.2 of its defence to counterclaim that cl 5.1(b) of the Variation Agreement "is an essential time stipulation".
In its reply, Equus denied this was so. It then raised the issue of waiver and/or estoppel, upon which, it was alleged, Equus had relied by not ensuring that it complied strictly "with the time stipulation for giving Notice of Default". (Papers p 63‑64).
The particulars, on which waiver and estoppel are based, include a number of matters. I deal with each in turn.
First, reliance is placed on the conversation between Mr Hopps and Mr Russo on 10 September 1991, to which I have referred above. The essence of the conversation, as pleaded, is that Mr Hopps told Mr Russo that Templegate needed time to fix the problems arising from an increasing number of defaulting investors, when it had insufficient cash‑flow to top up the Reserve Fund. Mr Hopps is alleged to have said that if Equus followed time limits strictly, and served default notices "it would send [Templegate] broke".
Mr Russo is alleged to have said, in response, that neither party had been concerned to adhere strictly to the time provisions of the FPA, especially where there were prospects of a defaulting account being brought under control. Mr Russo said he would instruct his staff to be "more selective" about the issue of default notices.
Mr Russo's evidence is to the same effect as the pleading: and I accept it. However, as pleaded, and as I find to be the fact, Mr Hopps' request for a sympathetic approach was made in the context of a search by Templegate for an arrangement which would facilitate the earlier resale of defaulting investors' forestry interests than was possible under the FPA.
As I have noted above, under issue 2, the conversation of 10 September 1991 was the precursor to Mr Russo's letter of 23 September. It led ultimately to the Variation Agreement.
Mr Hopps' request may have resulted in a somewhat relaxed approach by Equus. As an example, Equus relies on its letter dated 7 August 1991 to Templegate: the letter contains information about two defaulting investors, but is not the formal notice of default which might have been served (Ex 4 p 126).
Equus relies also on Templegate's letter dated 3 September 1991, in which Mr Hopps proposed a regime of the kind which came to be incorporated in the Variation Agreement: and in which he proposed that Templegate should make regular payments on behalf of defaulting investors to "avoid the need for Equus to debit the Reserve Fund" (Ex 4 p 132). This was put on a more formal basis in June 1992: see Ex 4 p 365‑366.
I accept that Equus may have been encouraged to permit some relaxation in the service of default notices - although the letter of 3 September 1991 appears to contemplate that default notices would have been served. However, while this spirit of cooperation no doubt existed during the negotiations which preceded the Variation Agreement, the parties were at arms' length at least from September 1992, when solicitors became involved on both sides.
Equus relies also on its letter dated 22 January 1992, in which, as I have noted above, it gave Templegate the option of "buying back" defaulting loans or suffering a debit to the Reserve Fund (Ex 4 p 168‑169). The letter identified investors whose accounts were over 45 days in arrears. Of those, Seery and Pantera Nominees Pty Ltd were Group A investors. The only other relevant investor was Bailey, who was included in the payout notice of 24 February 1994. There is nothing to suggest that the two year delay was attributable to any request or conduct on the part of Templegate.
Equus relies, finally, on "the assignment agreements pleaded in par 25 of the Defence and Counterclaim". But these assignments, which related to the Group A investors, were in a special category by reason of the side agreement.
The explanation for the delay was given by Mr Russo in cross‑examination (Ts 438‑440). He said that once the parties were engaged in litigation "it didn't seem to serve any great purpose" to serve notices. This was because he took the view that Templegate "had made it clear they weren't going to meet their obligations". He did not cause Equus to serve the notices because he did not believe Templegate would make payment. Mr Russo said he tried to have the notices served earlier (although not a great deal earlier, I think) but the relevant employees of Equus did not attend to it.
I accept Mr Russo's evidence. But in my view his explanation does not justify the delay. It is true that Templegate had repudiated the side agreement by failing to pay for the interests which had been assigned to it in June 1992. However, as I have held, the side agreement took effect outside the FPA and the Variation Agreement. There was still a substantial amount standing to the credit of the Reserve Fund: some $269,000 as at January 1993. But there had been no repudiation of the FPA or Variation Agreement by Templegate. That being so, there was no valid reason for Equus not to serve the appropriate notices once it became apparent that the attempts to resolve the dispute, in August 1992, had been unsuccessful.
In its letter of 20 August 1992, Equus had foreshadowed the service of notices pursuant to the Variation Agreement. This, despite the fact, as Mr Russo said in cross‑examination, that the parties had not run their affairs by sending notices for four years (Ts 351).
It was Equus' letter of 20 August 1992 which prompted Templegate to instruct its solicitors. They then wrote the letter of 2 September which contained a substantial request for information. It was that letter, it will be recalled, which Mr Herskope and Mr Russo regarded as an attempt by Templegate to procrastinate. However, the requests for information were justified, in my view: and Equus made no attempt to answer any of them. In any event, Equus seems not to have regarded Templegate's conduct as repudiatory: it served default and payout notices in 1994 (albeit too late to be of any effect) thereby acknowledging the continued existence of the agreements.
In all the circumstances, I am not persuaded that Templegate waived its rights to require timely service of default notices (or payout notices). Nor is it estopped from relying on the relevant provisions of the Variation Agreement.
Issue 11: Did Equus repudiate the Variation Agreement?
Beagle relies on a number of matters which, it contends, either individually or collectively constitute a repudiation of the Variation Agreement by Equus.
First, it is said, Equus failed to follow "normal collection procedures" against defaulting investors. However, as I have noted above, Equus' obligation was to follow its normal collection procedures: cl 5.1(d)(v)b. However inadequate those procedures may have been, that was the standard on which the parties agreed. And as I have said, Templegate was aware of the way in which Equus dealt with these matters before it entered into the Variation Agreement. Having reviewed the steps taken by Equus after the execution of the Variation Agreement, it seems to me that it continued to act as it had done previously with the result that it did follow its normal collection procedures.
I have already held that Equus was under no obligation to follow "reasonable" collection procedures - whatever that concept might involve. For this reason, there can be no question of repudiation arising from any such failure.
It is then submitted that Equus' failure to account constitutes a repudiation.
It was accepted by counsel for Beagle that a consideration of this issue should commence from 2 September 1992 when its solicitors asked for an accounting. I have referred to that letter above, in relation to issue 8. As I there noted, Equus did not reply to the letter. However, I am not persuaded that its failure resulted from an intention not to be bound by the Variation Agreement, which imposes no express obligation to account in any event. Rather, Equus accepted Mr Herskope's advice that the letter should be regarded as a further attempt by Templegate to procrastinate. Accepting that explanation as I do, I am not persuaded that the failure to account constitutes a repudiation.
Reliance is then placed on subsequent failures to account: particularly in response to a letter dated 24 September 1992 from Templegate's solicitors (ex 4 p 419-420) and a request from Mr Young on 25 August 1994 for a list of debits to the Reserve Fund since 12 December 1991 and a short explanation of the reason for the debit in each case. (Ex 4 p 531).
An obligation to account involves only the provision of information about the movement of funds. It does not require explanations to be given. By 2 September 1992, Templegate had been given information about all movements on the Reserve Fund. Equus provided a reconciliation on 3 February 1989. (Ex 4 p 32). On 11 July 1989, Equus provided information about the balance standing to the credit of the Reserve Fund, being $280,777.00. (Ex 4 p 118).
Then on 12 August 1991, Equus informed Templegate that it had debited the Reserve Fund in an amount of $280,777.00. This clearly reduced the balance to zero. Templegate was requested to replenish the Reserve Fund in an amount of $287,754.00. (Ex 4 p 127). Templegate paid this amount which was credited to the Reserve Fund on 2 August 1991. (Ex 4 p 535).
The only debits of any consequence thereafter were $13,522.00 on 5 December 1991, being the balance of the payout on the Mortco account; and $8,995.26 on 17 September 1992, relating to Kingston Craft. The Mortco payment was the subject of agreement between Mr Bunce and Mr Hopps in November‑December 1991: see ex 4 p 147‑149 and p 154. The debit relating to Kingston Craft was notified to Templegate's solicitors in the enclosure to a letter dated 14 September 1992 from Mr Herskope: see ex 4 p 412‑414.
So far as the No 2 Account was concerned, it had been opened in May 1992 with a deposit of Templegate's cheque in the sum of $123,935.91. There were no subsequent movements on the account until the debit of $160,760.16 on 20 May 1994, about which Equus informed Beagle in its letter of that date. (Ex 4 p 502).
In the light of that evidence, and subject to one matter, I am not persuaded that there has been a failure to account. That matter is the 20 May 1994 withdrawal from the Reserve Fund, about which, as I have noted above, Beagle was not informed until some time later. However, given that there was no express obligation to account in the Variation Agreement, I do not think that failure (if it was a failure) could reasonably be regarded as a repudiation. Nor, indeed, could the debits themselves. That is because, even if Equus was wrong to debit the Reserve Fund to the extent it did, I am satisfied that it genuinely believed it was entitled to do so and that it was therefore performing the agreement.
It is not in issue in these proceedings that Equus has an obligation to account to Beagle. That was conceded by Equus' counsel. It is not therefore necessary for me to explore the basis on which the liability to account arises: nor the extent of the obligation. It is not an issue, it seems, to which the parties turned their mind until shortly before the litigation commenced. Those are matters which in my view, tend to lead away from a conclusion that any shortcomings in the discharge of Equus' obligation to account constitute a repudiation.
The final matter relied on by Equus is an alleged failure to inform Templegate of the details of the pursuit of its collection procedures.
Equus' obligation to provide information about collection procedures is contained in cl 5.1(d)(v)b. It was required to provide information to Templegate on request.
A request was made by Mr Hopps in his letter dated 19 August 1991 to Mr Bunce. (Ex 4 p 128‑129). That request was answered by Mr Bunce in a letter dated 13 November 1991 to which a series of collection notes were said to have been attached. (Ex 4 p 147‑149). The collection notes are not attached to the copy of the letter which is contained in the trial bundle. However, there appears to have been no complaint by Mr Hopps, or anyone else at Templegate, that the material had not been included. On the balance of probabilities, I find that the collection notes were included.
In their letter dated 2 September 1992, Williams & Hughes requested detailed information about the collection procedures followed in relation to the Tysule, Mortco and Stuart loans (ex 4 p 403). These were investors whose interests had been resold some two years earlier. Their debts were no longer collectable. The provision of the collection information would therefore have been of little practical value to Templegate as at September 1992.
It may have been considerations of this kind which caused Mr Herskope to take the view that the very detailed request for information contained in Williams & Hughes' letter was an example of procrastination by Templegate. Whether or not that was so, I am not persuaded that the failure to provide the information, in the circumstances, constituted repudiatory conduct on the part of Equus.
From December 1992 onwards, Equus provided Templegate with a monthly report which listed all accounts currently in the portfolio, including all those in arrears. Each report was accompanied by a covering letter containing an offer to provide collection notes for any of the accounts. However, Templegate made no further request for information of this kind. For this reason, I do not accept Beagle's submission that after May‑June 1992 Equus was unwilling to provide details of its pursuit of collection procedures. I am not persuaded, therefore, that Equus' conduct after September 1992 was repudiatory. For this reason issue 12 does not require to be considered.
Issue 13: Did the grant of a floating charge breach the terms of the FPA?
It is common ground that on 8 October 1992 Templegate created a floating charge over all of its assets and undertakings. Equus contends that in so doing, Templegate breached cl 4.1(j) of the FPA which required it:
"…not to assign, transfer, encumber, mortgage, charge, dispose of or part with possession of the whole or any part of the land in relation to which a Lease and Management Agreement has been entered into with an Approved Investor …."
It is submitted by Equus that if the floating charge amounts to an equitable charge, then it falls within the proscription set out above. However, in my view no equitable charge was created. I accept the submission of counsel for Beagle that the law in Australia is as summarised by Nicholson J in Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267, 273, to the effect that a floating charge creates no equity in the relevant assets until crystallisation "… so that there is no conferral of an equitable interest or a proprietary interest by the creating of a floating charge".
I am not persuaded, therefore, that the creation by Templegate of the floating charge constituted a breach of the FPA.
Issue 14: What is the effect of Equus' inability (if found) to account properly and accurately for the extent of defaulting investors' indebtedness and debits to the Reserve Fund and the No 2 Account
As I have noted, it is common ground that Equus is obliged to account to Beagle for monies received and disbursed.
As I have also noted, there are various discrepancies in the financial information which has been provided by Equus from time to time. These matters were explored in the evidence of Mr Williams, who as Equus' Operations Manager since 1988, was the person best qualified to deal with them.
Mr Williams explained that Equus' financier had been Beneficial Finance, which was a subsidiary of the State Bank of South Australia. Equus used its computer system. But as Mr Williams said, Equus "was only a very small cog in the wheel". (Ts 480). For that reason, the system created problems for Equus. For example, the system did not continue to calculate interest accruing in the account of a debtor whose account had "matured". It was therefore necessary to calculate interest manually.
In 1995, Equus moved from this system, which was known as FRS, to a "real time" system. However, that system did not always produce correct calculations of interest. Mr Williams went on to explain the steps which had been taken in an attempt to produce accurate figures.
In cross‑examination, Mr Williams conceded that the calculated accounts relating to various investors were incorrect. These included R J Thompson (Ts 497, Ex 12(3)). Nor was Mr Williams able to say whether or not accounts relating to some 35 other investors were correct. These accounts were included in Ex 12(2). Mr Williams said that the figures had been produced by three or four account managers who had been employed by Equus over the years. None of them remained in Equus' employ. He was not aware of any enquiry as to their whereabouts: but knew one was in the USA.
At the conclusion of his evidence, I asked Mr Williams whether it would be possible to recalculate the indebtedness of defaulting investors. Mr Williams said he thought it could be done by revisiting the original computer print‑outs generated by the FRS system and then undertaking further manual calculations (Ts 575 ‑ 7).
Fortuitously, the hearing was adjourned for some three months after the close of evidence. During that interval and following discussions between the parties, Mr Williams did carry out the re‑calculation exercise in relation to defaulting investors. He produced a further statement, supported by computer print‑outs which filled a lever‑arch file. When the hearing resumed, I admitted this evidence, (Ex 18) on the basis that, having regard to the circumstances in which it was prepared, counsel for Beagle did not wish to cross‑examine on it.
I accept Mr Williams' evidence that inaccurate figures were produced by employees of Equus who have since departed. Mr Williams gave me the impression that he had the experience and competence necessary to produce replacement figures which would be accurate and comprehensive as possible in the circumstances as I have summarised them above. I therefore accept the figures contained in Exhibit 18 as reflecting the true state of the accounts from time to time of the investors to whom they relate.
The effect of Equus' previous failure to provide accurate information is that Templegate may have over or underpaid. To the extent that is so, adjustments may be made, as required.
Issue 15: To what relief are the parties entitled?
1.The Claim
In its prayer for relief, Beagle seeks a number of orders, not all of which have been pursued. They include the following:
(i)An order that Equus provide Beagle with proof of its normal collection procedures in respect of defaulting investors
This order has not been pursued, but I would not make it in any event. The information has all been provided, albeit largely on discovery.
(ii)An account of all sums which Equus has demanded Templegate pay to the Reserve Fund
It is not necessary to make an order in these terms. There is no dispute about the amounts which were paid by Templegate to be credited to the Reserve Fund.
(iii)An account of all sums drawn by Equus from the Reserve Fund
It is not necessary to make an order in these terms. The position is now clear: although some accounting may need to be carried out in order to provide a basis for the calculation of damages or restitution, to which I shall refer below.
(iv)Damages for breach of contract
This claim has two limbs. The first is an order for the restoration to the Reserve Fund of monies which should not have been withdrawn from it on 20 May 1994, together with interest.
Beagle is entitled to have principal restored, but not interest. That is because of cl 6A of the Variation Agreement, which provides for Equus to have the interest on funds standing to the credit of the Reserve Fund.
The second limb is for damages for the alleged breach by Equus of its obligation to follow normal or adequate collection procedures. For the reasons given above under issue 11, I am not persuaded that there was any such breach.
(v)An order that Equus deposit the monies constituting the Reserve Fund with the National Australia Bank
This has not been pursued.
(vi)A declaration that Beagle "is under no liability whatsoever" pursuant to the guarantee
As I have held, Beagle is a guarantor of the approved investors' obligations. However, in substance, the guarantee is, I think, a series of guarantees, relating to each investor. Thus, if Equus acted in such a way as to discharge Beagle from liability in respect of one investor, it would not be discharged entirely.
In my view, this issue is academic, in the sense that a departure by Equus from the terms of the Variation Agreement (for example, by reason of undue delay in the serve of notice) would disentitle Equus from claiming on Beagle in any event.
I therefore decline to make any such declaration as sought.
2.The Counterclaim
Equus seeks various orders arising from its contention that Templegate was in breach of contract when it granted the floating charge referred to in issue 13. Having found that was not the case, it is not necessary to consider this matter further.
The principal relief sought by Equus is the payment of money pursuant to the payout notices served in February, August and September 1994: and damages arising from Templegate's failure to perform the side agreement.
I have held that Equus was not entitled to serve the payout notices, but that it is entitled to damages for breach of the side agreement.
Equus also seeks a declaration that the assignments pursuant to the side agreement were never effected: and an order for the return of the relevant documents.
For the reasons given in relation to issue 6, Equus is not entitled to any such relief.
Conclusion
Ultimately, the issue is one of money, it being necessary to decide where the balance lies between the parties.
I set out the following calculation which is intended to give effect to the findings I have made above:
Due from Beagle
Total indebtedness of Group A investors: $413,119.69
(Although Mr Williams has re‑calculated
the amounts due from each of the Group A
investors, that is, I think, irrelevant. The sideagreement required the payment of this amount)
Less: 30 per cent default deposits on 18 May 1992 $123,935.91
$289,183.78
Less : amount received in
Kingston Craft settlement $50,000.00
: amount of Stancic debt $80,374.61 $130,374.61
$158,809.17
Interest should be paid on this amount from (say) August 1992 to 20 May 1994 on the basis that Equus then became entitled to the default deposits. However, credit must be given for the interest of $36,824.25, which Equus actually earned on the default deposits down to 20 May 1994. (Ex 4 p 538). There may be an issue as to the way in which this interest should be brought to account. Interest should not accrue after 20 May 1994, because Equus then had the use of the Reserve Fund. If the parties are unable to agree, I will hear further argument.
In my view, Beagle is prima facie entitled to recover from Equus, or be credited with, the amounts which were deposited with the original Reserve Fund to represent 5 per cent of the principal sums (however calculated) borrowed by approved investors in respect of whom, Beagle no longer has any liability. These are the investors named in the default and payout notices served on 17 May 1993, 24 and 25 February and 16 August 1994. The payout notice of 16 August 1994 related to the Group A investors, and may therefore be left out of account.
The course which I have charted through the factual morass of this litigation is somewhere between those plotted by the parties. That being so, I recognise that the calculation of damages and restitution as outlined above may well need to be revised.
I therefore propose to deliver these reasons on an interim basis with a direction to the parties to confer in an attempt to produce a minute of order which gives effect to my findings of fact.
If agreement cannot be reached, because of differences in principle, or because additional findings of fact need to be made or construction issues resolved, I will hear further argument.
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