Bell v Mainbader Pty Ltd

[2002] NSWSC 890

CITATION:	Bell v Mainbader Pty Ltd [2002] NSWSC 890
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 5535 of 1991
HEARING DATE(S):	23 September 2002
JUDGMENT DATE:	27 September 2002
PARTIES :	Ronald James Bell and Elwyn Dorothy Park (Plaintiffs) Mainbader Pty Limited (First Defendant) Director Land Titltes Office (Second Defendant)
JUDGMENT OF:	Windeyer J at 1

COUNSEL :	Mr P Blackburn-Hart (Plaintiffs) Mr M Lee (First Defendant) No Appearance (Second Defendant)
SOLICITORS:	Patterson Byfield & Bryen (Plaintiffs) Corrs Chambers Westgarth (First Defendant) No Appearance (Second Defendant)
DECISION:	See paragraph 8

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IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

FRIDAY 27 SEPTEMBER 2002

5535/91 RONALD JAMES BELL & ANOR V MAINBADER PTY LTD & ANOR

JUDGMENT

1 I gave a judgment in this matter on 8 June 2001, answering a separate question referred for decision as follows - that interest earned on proceeds of sale and development of the land the subject of each agreement, should be brought to account in the determination of the residual balance required to be determined under clause 8. Other orders were made by consent and I noted terms of settlement agreed between the parties as to various matters. It was the view of each side that as the result of the agreed terms and the answer to the separate question all matters remaining in contention could be determined by accountants as provided for in the terms of settlement.

2 These proceedings have already been the subject of two considered judgments by trial judges in this Division and one judgment of the Court of Appeal. These judgments should be read with this judgment to avoid the trouble of having to set out all the facts again. In short under three separate agreements made between Mrs Park and her brother Mr Bell of the one part, and Mainbader Pty Ltd of the other part, Bell and Park agreed to sell to Mainbader certain land owned by them, Mainbader agreed to sub-divide, develop and market the land, paying all the expenses incurred in that work and thereafter it was agreed that what was called the residual balance, being the balance arrived at by deducting from the proceeds of sales of land in each development the costs of that development, would be shared as to twenty-five percent to each of Park and Bell and as to fifty percent to Mainbader. Mainbader subsequently settled any claim by Bell so that so far as these proceedings are concerned they are by Mrs Park to obtain the twenty-five percent interest to which she is entitled in the residual balance of each development. The three separate developments are best referred to as the Lot 31 development, the Lot 42 development and the Lot 32 development, all subject to different agreements, but all to the same intent and effect. Clauses 7 and 8 of the Lot 31 agreement are set out hereunder:

7. All funds required for the purchase by Mainbader referred to in the First Recital hereof, survey, planning, commitments to Dubbo City Council, Macquarie County Council, rates and charges, land tax, construction works, fencing, Project Management fees, including travelling and offices expenses, Accountancy, legal, agency, advertising and any other fees or costs directly or indirectly connected with the project, interest on borrowings involved in all activities by Mainbader under the provisions of this Agreement (at Bank Bill rate), establishment fees, bank fees, valuations, and all other holding charges shall be paid and borne by Mainbader, together with Project Management fees of G.K. Websdale & Sons Pty Ltd as set out in the Second Schedule.
8. The parties hereto shall be entitled in equal shares to such sum as may be determined by the parties hereto as being the residual balance held by the parties hereto under the provisions of this Agreement after a charging against all proceeds of all sales of Lots in the Subdivision of all costs to Mainbader on purchase of the said part Lot 3 in DP 245059 and of all works carried by Mainbader (and the fee paid to Project manager as hereinbefore provided). Not later than six months after the date of registration of the Plan of Subdivision of Stage 1 of Lot 31 hereinbefore referred to, an accounting shall be taken between the parties hereto of all operations under the provisions of this Agreement to the date so determined, and, according to the ongoing cash flow and other requirements of activities by Mainbader under the provisions of this Agreement, periodic distribution shall be made at the end of each month as soon as Mainbader is in a surplus cash flow situation after all costs and expenses as envisaged in Clause 7 have been recouped from the proceeds of sales.

3 It is accepted that the same clauses or ones to exactly the same effect apply to the Lot 42 and the Lot 32 development agreements, although in the Lot 32 agreement there was a staged development which made some difference to the time at which Mrs Park would be entitled to receive her first payment.

4 For the purpose of deciding the present question the following provisions of the terms of settlement are relevant:

5. Mr Haywood of PricewaterhouseCoopers and Mr Done of KPMG ("the accountants") will meet to determine the amount, if any, payable to Mrs Park by Mainbader, or alternatively payable to Mainbader by Mrs Park, under each of the three agreements, separately, on the following bases:-

…

(c) The date or dates, if any, on which Mrs Park became entitled to periodic distributions under cl 8 of the agreements in relation to Lots 31 and 42 are to be ascertained, separately, by:-

(i) tallying the received proceeds of sales of developed lots,

(ii) tallying all expended funds falling within the categories described in cl 7 of those agreements interpreted to include within those categories the whole of the purchase prices payable (in light of (a) and (b) above) by Mainbader,

(iii) thereby fixing the date or dates, if any, when Mainbader was in a surplus cash-flow situation by reference to:-


A those proceeds,

B those funds,

C the ongoing cash-flow and other requirements of activities by Mainbader to purchase and develop Lot 31 with respect to the first of these agreements and Lot 42 with respect to the second of these agreements, meaning in this regard the expected unexpended costs of purchase and development under each of those agreements respectively.

(d) Borrowings by Mainbader from FNL Investments Pty Ltd are to be treated as borrowings upon which interest, establishment fees and line and acceptance fees charged are to be included within the categories of expended funds within the meaning of cl 7 in the agreements, if and to the extent that, with respect to each separate agreement, those borrowings were involved in any activities by Mainbader under the provisions of that agreement. For the avoidance of doubt, the use of money (including interest) derived from net proceeds of sales under any of the three agreements cannot be counted as a cost towards the development of the land under the other agreements.

…

(j) The amount payable by one party to the other will include interest compounded six-monthly at the average of 30 day bank-bill rates during that period, on all component sums determined to have fallen due and payable but which were not paid on time, treating the time for payment as falling 28 days after the accounting by Mainbader should have revealed as an entitlement one way or the other.

(k) The accounting by Mainbader is to be reconstructed as if it were required only once every six months.

5 The accountants have reported and have stated that there are some areas of disagreement which they require to have answered before they can determine the moneys due by Mainbader to Mrs Park. While the terms of settlement provided that such matters of disagreement would be determined by an umpire, the parties agreed that the matter should not be determined in that way, but should be determined by the court. They therefore sought an order that the questions in the joint statement prepared by the accountants be determined as separate questions, and I made that order. Those questions as set out by the two accountants, Messrs Done and Hayward are as follows:

Mainbader Pty Ltd and Mrs E Park

Questions that need to be answered in order for Messrs Done and Hayward to agree on the monies due by Mainbader Pty Ltd to Mrs E Park

These questions are designed to ensure the effect of the Windeyer Judgement handed down on 8 June 2001 ("the Judgement") on the agreements and the Short Minutes of Order and Terms of Settlement dated 8 June 2001 ("the Terms of Settlement") are applied appropriately within the following accounting framework in order to determine whether there is any further amount payable to Mrs Park under each of the three agreements as required by the Terms of Settlement.

Accounting framework

The accounting framework for determining the amount due to Mrs Park in accordance with the Terms of Settlement is as follows:

1 A separate calculation must be made for each of the three agreements (Lot 31, 42 and 32) and in the case of Lot 32 a separate calculation on a Stage by Stage basis.

2 The amounts of and dates on which Mrs Park is to receive period distributions from Mainbader Pty Ltd in relation to Lots 31 and 42 are to be ascertained as follows (Clause (Sc) of the Terms of Settlement):
$
Proceeds from sale of development land xx
Less
Development costs (which include related costs)
paid to the date that calculation is made (as per
Clause 7 of the original agreement) xx
xx
Less
The sum of unexpended development and other
costs as per clause 7 under each agreement (ie the
costs still to be paid to complete the development
of a particular Stage or Lot) "unexpended monies" xx

Residual balance - surplus xx

The calculation is to be done each six months (Clause 5(k) of the Terms of Settlement). If a surplus results from the above calculation, then Mrs Park is entitled to receive 25% of that surplus.

3 The calculation of the amount due by Mainbader Pty Limited to Mrs Park in respect of Lot 32 is to be done on a similar basis to Lot 31 and 42 except that it is on a individual Stage by Stage basis with no monies becoming due to Mrs Park until 85% of lots in number in a particular Stage have been settled.

Areas of Disagreement

We now set out the two basic areas where we cannot agree.

A Interest charged by Mainbader Pty Ltd against Lots 31 and 42 or Stages in respect of Lot 32

1 Mr Done

a For Lots 31, 32 and 42 Mr Done believes that interest is chargeable against each Lot or Stage as a development cost whenever the development and other costs for the said Lot or Stage exceed sales proceeds (a" cash deficit").
b Mr Done also notes that at the commencement of the development of Lot 31, Mainbader had $100 in issued capital. This is and has always been the issued capital. As a result Mainbader borrowed funds from Westpac Bank or from FNL Investments Pty Ltd, a related corporation of Mainbader. Whenever a development or other cost was incurred in relation to a Lot or Stage, interest was charged by Mainbader Pty Ltd at the agreed interest rate from the date of presentation of the cheque. As a result the interest so charged was based on the development and other costs incurred at any point of time and not on any loan balance from FNL Investments Pty Ltd or Westpac Bank.
c He also interprets each agreement to say that if one Lot (say Lot 31) has reached the position where proceeds from sale of development land are greater than development and other costs paid to that point (a "cash credit") BUT no monies are due for distribution as unexpended monies are still in excess of the cash credit WHILST at the same time another Lot (say Lot 42) is in a position where the development costs incurred are in excess of sales proceeds THAT there is no requirement to offset the cash credit in Lot 31 against the cash deficit in Lot 42 before calculating the interest charge made by Mainbader Pty Ltd on the Lot 42 cash deficit.
d In relation to Lot 32 where the accounting is on a stage by stage basis, Mr Done's view is that if one stage is in cash credit whilst another Stage or Lot is in a cash deficit there is no requirement to offset the "cash credit" that exists on the one Stage against the cash deficit in another Stage before calculating the interest charge made by Mainbader Pty Ltd on the cash deficit in the later mentioned Stage.


The above views are held on the basis that each of the three agreements is to be treated separately (refer to the first paragraph of clause S of the Terms of Settlement).

2. Mr Hayward

a Mr Hayward's view is that by virtue of Clause 5(d) of the Terms of Settlement only interest on borrowings by Mainbader Pty Ltd from FNL Investments Pty Ltd to the extent used in carrying out the activities under an agreement qualify to be included as development costs under Clause 7 of the original agreements. To the extent that interest cannot be attributed to a borrowing from FNL Investments Pty Ltd it should be disallowed as a development cost.
b Mr Hayward is also of the view that Clause 5(d) of the Terms of Settlement directs that the "cash credit" mentioned in 1(c) and 1(d) should be offset against the "cash deficit" before any interest charge by Mainbader Pty Ltd is calculated in respect of any Lot or Stage whenever a "cash credit" was used to finance a "cash deficit".
c Mr Hayward agrees with Mr Done that at the commencement Mainbader Pty Ltd had $100 in issued capital, however reported annual operating profits increased shareholders funds to $1,046,094 by 30 June 1996.


Questions

(i) Is Mr Done's interpretation as set out in Al (a) and A1(b) correct or is Mr Hayward's interpretation correct as set out in A2(a)?

(ii) Is Mr Done's interpretation as set out in A1(c) and A1(d) correct or is Mr Hayward's interpretation correct as set out in A2(b)?

B Interest calculation on "cash credits" in Lots 31 and 42 and Stages in Lot 32


1 Mr Done

Mrs Park is entitled to receive 25% of any residual balance available for distribution in accordance with the "accounting framework" for each agreement as set out earlier. In accordance with Clause S(k) of the Terms of Settlement the residual balance is calculated each six months. In accordance with Clause 5(j) of the Terms of Settlement interest is payable to Mrs Park commencing from a day 28 days after the amount due to her was calculated in relation to the six month period (ie if the calculation date was 31 S` December 1994 and such calculation was completed on 15 February 1995 then interest on Mrs Park's share of the distributable amount commences to accrue 28 days after 15 February 1995). It is Mr Done's view that under the Judgement and the Terms of Settlement this is the only interest payable to Mrs Park.

2 Mr Hayward

Mr Hayward's view is that not only is Mrs Park entitled to interest in the above situation but she is also entitled to have interest calculated on a separate accounting basis included in the calculation of residual balance at times when a Lot (Lots 31 and 42) or Stage (Lot 32) was in cash credit.

Mr Hayward's view is that whenever there is a cash credit in a Lot (Lot 31 and 42) or a Stage (Lot 32) that interest should be calculated on such cash credit as an addition to the proceeds of sale from development land. Mr Hayward understands that the words in paragraph 8 of the Judgement " that monies earned from this development not required as outgoings " when read in the context of paragraphs 9 and 11 which both state " interest earned on the proceeds of sales on development of the land, the subject of each agreement, should be brought to account in determination of the residual balance " mean that Mainbader was entitled to use the proceeds of sale to settle development costs as they arose and to the extent there was a cash credit then interest was to be calculated and brought to account as further proceeds from the sale of development land.

Questions

(i) Is Mr Done's interpretation as set out in B1 correct or is Mr Hayward's interpretation correct as set out in B2.

(ii) If Mr Hayward's interpretation is correct what interest rate should be applied? Should the interest rate be:

(a) the bank bill rate from time to time on funds borrowed? or
(b) the rate payable on a bank cash management account from time to time? or


(c) some other rate?

C Clarification Requests

1 Mr Hayward is asking that A2(a) apply on the basis that the FNL Investments Pty Ltd loan at various points in time was less than the sum of the amounts of the cash deficit on which interest was being charged. However, if Justice Windeyer rules that both A2(a) and A2(b) should be applied then at all times (except in 1989 and 1990 when Mainbader Pty Ltd borrowed directly from Westpac as well as FNL Investments Pty Ltd) the loan from FNL Investments Pty Ltd will always be greater than the amount bearing interest as calculated by Mr Hayward in his A2(b). As a result in Mr Done's view if Justice Windeyer rules that A2(b) is to be applied then he should rule that A2(a) has no applicability.

Question

Is Mr Done's interpretation as set out above correct?

2 Under A2(b) the "cash credit" is utilised by Mr Hayward to reduce the interest charge made by Mainbader Pty Ltd whilst under B2 Mr Hayward claims that interest be paid on the "cash credit". If both these interpretations were applied to calculate the residual balance , Mrs Park would receive the benefit of a reduction in interest payable and an increase in interest receivable on the same monies.

In the event that Justice Windeyer agrees with Mr Hayward's interpretations both in relation to:

A2(b) - Interest charged; and
B2 - Interest on cash credits

Mr Done believes that the calculation of the amount due to Mrs Park will be excessive. Mr Done believes Justice Windeyer should indicate which of the two interpretations should be first applied in calculating the final amount due to Mrs Park. If A2(b) is to be first applied then the dollar value used as the amount on which interest is calculated under B2 would be reduced to the extent that such amounts (ie the cash credits) have been applied in the calculation under A2(b). Alternatively if B2 is to be first applied then it will not be necessary to make any calculation under A2(b).
Mr Hayward believes that the use of a "cash credit" to fund a "cash deficit" was not authorised by the agreements (the Judgement Clause 8) the consequence of which may well be that Mainbader Pty Ltd is:
(a) prevented from claiming interest as a development cost on a " cash deficit" funded by a "cash credit" (Terms of Settlement Clause 5(d)); and
(b) is required to bring to account interest that should have been earned on a "cash credit" as if the proceeds of sale from development land had been applied for the intended purpose of paying authorised expenses under that agreement and for the payment of distributions to participants.


Question

We request that if the above situation applies Justice Windeyer indicate to us whether or not the adjustment proposed by Mr Done should be made when determining a residual balance and if so which alternative (A2(b) or 132) should be selected to make the adjustment.

Declaration

We, Peter Done of KPMG and Kenneth Hayward of PricewaterhouseCoopers agree that on receipt of the answers to the foregoing questions we will be able to finalise our determination of the amount payable to Mrs Park by Mainbader Pty Limited under Clause 5 of the Terms of Settlement. Since these matters are legal issues we consider the use of an umpire pursuant to Clause 8 of the Terms of Settlement inappropriate and require the Court's direction.

Signed as a correct record this 28th day of August 2002.

Kenneth Hayward Peter Done

6 As I think happened on the last occasion, insufficient attention seemed to have been given to what was really in issue prior to the hearing being commenced before me; and it may well be that the matters in contention could have been expressed in a more simple way. In any event, it is necessary to state at the beginning that the contention of Mr Hayward as appears in paragraph A(2)(a) of the joint report is no longer pressed.

7 In my opinion the questions in dispute can be determined after setting out the following determinations or conclusions.

1. Each agreement is to be treated as entirely separate from each other agreement.

2. Under clause 7 of the agreements interest on funds borrowed for project purposes and used for project purposes is a proper cost payable by Mainbader to be taken into account in determining the residual balance.

3. Under clause 5(j) of the terms of settlement Mrs Park is entitled to interest on sums which have fallen due to her, but which were not paid within twenty-eight days after an accounting carried out pursuant to Clause 5(c) would have revealed an entitlement to periodic distribution.

4. So far as Mainbader has used moneys from one project to fund another project those moneys are not a cost of development of that other project because the terms of settlement so provide.

5. Interest can only be charged by Mainbader if interest has been paid or is payable by Mainbader. Interest is not chargeable by Mainbader against a development just because development costs exceed sales proceeds. Interest is payable on borrowings. It is not payable upon contributions. Interest earned (if any) is brought to account in accordance with my earlier judgment. Counsel for Mrs Park, in written submissions, seem to be placing reliance on the fact that the projects were each joint ventures, thereby perhaps giving rise to some fiduciary obligation. Such matters are quite unsuited to be determined in the way sought by the parties where the decision needs to be based on contract terms. Nevertheless my answer to the separate question decided on 8 June 2001 needs to be given reasonably wide meaning. If project funds not required at present are not invested at interest but rather in purchasing a block of land in Western Australia as was suggested, that block of land would be a project asset. But if project funds are used for a subsequent project they do not earn interest and should reduce interest which would otherwise be paid on funds which would otherwise be required for the next project. The overall result will be fair to both parties. The terms of the agreement do not require Mainbader to pay Mrs Park interest on twenty five percent of any cash surplus. It follows from this that the questions will probably need to be reformulated so as to give a helpful answer. However, by way of answering the questions presently posed:

A. Interest charged

1(a). Mr Done is not correct. Interest is chargeable if paid on moneys borrowed for and used in a particular project. Mr Hayward is not correct.
1(b) This basis of charging is correct insofar as it complies with the answer to 1(a) and the payments were made from borrowed funds.
1(c) Mr Done is correct in his answer to 1(c). Mainbader is not required to pay interest on moneys which have not earned interest. Interest paid on moneys borrowed for a subsequent project, say Lot 42, will be a project expense. Moneys available to Mainbader in its bank account being moneys from the proceeds of sale of land in Lot 31, not distributed and not required at the present time for development of Lot 31, but held for the future and used for Lot 42 are not a project cost for Lot 42, but no interest is payable to Mrs Park on them.
It follows from this that Mr Hayward’s interpretation in clause A2b is not correct and Mr Done’s contention in A1c is not necessarily correct. As I determined earlier if Mainbader earned interest on the proceeds of sales that interest is to be brought into account in establishing the residual balance. If it paid interest on moneys borrowed and used for the purposes of a particular project then that interest is to be brought to account in establishing the residual balance. If it left moneys idle in its bank account – which seems highly unlikely – then that is not to be taken into account one way or the other.
B. Mr Done’s interpretation in B1 is correct and Mr Hayward’s interpretation in B2 is incorrect.

C. 1 does not arise. 2 does not arise.

8 It is my understanding that these reasons answer the matters in contention. Appropriate orders will need to be made to answer the questions or for reformulation of the questions if that is required. The parties also need to make submissions on costs and I will fix a time for the making of orders and submissions on costs.

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Last Modified: 11/22/2002