Bendigo and Adelaide Bank Ltd v McKenzie

[2011] VCC 1238

IN THE COUNTY COURT OF VICTORIA Revised

(Not) Restricted

AT MELBOURNE
COMMERCIAL LIST

BANKING & FINANCE DIVISION

Case No. CI-11-01400

BENDIGO & ADELAIDE BANK LTD & ANOR	Plaintiffs
v.
MCKENZIE & ANOR	Defendants

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JUDGE:	His Honour Judge Anderson
WHERE HELD:	Melbourne
DATE OF HEARING:	16 September 2011
DATE OF JUDGMENT:	16 September 2011 (revised 19 September 2011)
CASE MAY BE CITED AS:	Bendigo & Adelaide Bank Ltd & Anor v. McKenzie & Anor
MEDIUM NEUTRAL CITATION:	[2011] VCC 1238

REASONS FOR JUDGMENT

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Catchwords:  Practice and procedure – Application by first defendant to set aside
default judgment – Whether defence on the merits – Tax minimisation
scheme involving investment in vinelots – Loan to first defendant to
fund his participation in the scheme – Representations by scheme
promoter as to financial strength of parent company and likely returns
from vinelots – Representations alleged to be made during 90 minute
presentation – Evidence of oral statements vague and without context –
Inconsistent with written statements about risks and speculative nature
of the investment in product disclosure statement – Application
dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr D.C. Gration	Turks Legal
For the Defendant	Mr D. Bongiorno	Hunts
HIS HONOUR:

proceeding” (s.63(2)(c)). It is accepted that the part of the Act relating to summary judgment has broadened the test for summary judgment. The Act provides that summary judgment should be given against a defendant if the defence “has no real prospect of success”.
5	by a defendant seeking to set aside a judgment regularly entered. In the present case, for the reasons I will set out, I am not satisfied that even on the test

1           The first defendant made application by summons, filed 26 July 2011, to set aside a judgment entered against him on 24 May 2011 in default of appearance. The summons was first before the Court on 12 August 2011. It was adjourned by consent to 26 August 2011. On that day, the parties appeared before Her Honour Judge Kennedy. She adjourned the summons until today and directed that, “On or before 9

September 2011, the first defendant is to file and serve any further affidavits he

wishes to rely upon and a proposed defence”.

2 2011 and 9 September 2011. In addition, the first defendant’s solicitor, Mr Hunt,
swore an affidavit on 26 August 2011 exhibiting “an amended proposed defence”.

The first defendant relies upon affidavits sworn by him on 17 June 2011, 26 August to Mr Hunt’s affidavit. Although a further affidavit from the first defendant has been filed following the hearing on 26 August 2011, a proposed defence has not been filed.

3           I was informed by counsel that Her Honour required the filing of a proposed defence in order for the defence of the first defendant to be appropriately articulated to determine whether a prima facie defence had been established sufficient for the judgment to be set aside. An explanation has been given by the first defendant as to the reason why judgment was entered in default of appearance and the application was not contested by the plaintiffs on the basis that no adequate explanation had been given.

4           The sole basis for the plaintiffs opposing the defendant’s application was that the first defendant had not shown a sufficient defence on the merits. On 1 January 2011, the Civil Procedure Act came into operation which introduced a new test for summary

judgment applications and provided that summary judgment, either for a plaintiff or a defendant, may be given upon application of a party or on the Court’s own motion, if the Court were “satisfied that it is desirable to summarily dispose of the civil

In my view, it is likely this provision affects the requirement for a defence to be shown prima facie defence sufficient for the judgment to be set aside.

6           The first defendant’s counsel, Mr Bongiorno, during the course of the hearing of the application, sought to further adjourn the hearing of the summons in order for the first defendant to file a proposed defence and counterclaim, in compliance with the order of Judge Kennedy and to file further affidavit material exhibiting documents not presently exhibited to the affidavits filed.

7           The hearing of the application proceeded over the luncheon adjournment today. I suggested to Mr Bongiorno, that in relation to his submission that the first defendant had failed to file a proposed defence due to the incompetence of his solicitors, the assertion should be supported by affidavit material or at least by a letter written by the solicitors. At 2.15pm, when the Court resumed, Mr Bongiorno produced a letter dated 16 September 2011 from his instructing solicitors. The letter purports to explain why it has not been possible for the first defendant to comply with the order of Judge Kennedy. In my view, the explanation given is unsatisfactory, particularly in view of the time that has elapsed since the entry of judgment.

8           Although Mr Bongiorno suggested that the letter referred to documents which had not presently been put before the Court as exhibits to the first defendant’s affidavits, that is not clear from the letter. On one reading of the letter, it appears that what the

solicitors are referring to is not the presentation of further material, but simply the
need for there to be a cross-referencing of that material in a proposed pleading. As a
consequence, I refused the first defendant’s application for an adjournment and
proceeded with the application.

9           The plaintiffs’ claim is essentially for the repayment of monies loaned to the first defendant. The monies were lent to the first defendant by the second defendant in order for the first defendant to enter into a tax minimisation scheme promoted by the parent company or an associated company of the second defendant. Subsequently, the plaintiffs have had assigned to them by the second defendant the rights of the second defendant under the loan agreement with the first defendant.

10         There is no dispute that the first defendant, in June 2008, ceased making the monthly loan repayments, at that stage due to the second defendant. The first defendant said in his affidavit that he ceased making the repayments because the dividend paid to

him in that year, as set out on a scheme distribution statement dated 25 September
2008, was less than he had expected.

11         Essentially, the defence of the first defendant is that at the time he entered into the scheme with the parent company or associated company of the second defendant, and entered into the loan agreement with the second defendant to fund his

scheme, which should entitle him to have the loan agreement with the second
defendant, now sought to be enforced by the plaintiffs, set aside. It is necessary
therefore to examine in some detail the representations alleged to have been made.

participation in that scheme, representations were made by the promoters of the sufficiently established on the affidavit material that representations were made to him which would be actionable pursuant to the Trade Practices legislation or that would otherwise entitle him to a declaration that the loan agreement with the second defendant is void or voidable and should not be enforced.

12         The issue has not been argued before me as to whether, in the circumstances of the assignment of the interests of the second defendant in the loan agreement to the plaintiffs, to the plaintiffs bear some responsibility in respect of those representations which would affect the obligation of the first defendant to make the loan repayments now due to the plaintiffs. I make no finding in relation to that issue.

13         The first defendant essentially relies upon two representations. He says that these representations were made orally during the course of a 90 minute presentation to him and other potential investors at the office of a financial adviser. The

representations are as follows:

a.	that the scheme’s parent company was financially strong;
b.	that the first defendant’s investment would be “income neutral for ten years”, as the annual dividend from the first defendant’s investment would at least be equal to the total annual loan instalments he was required to pay the second defendant and that, thereafter, he would be “left with an unencumbered long- term asset producing good annual cash-flows”.

14         It is not clear from the affidavit material what company is said to be the “scheme’s parent company”. There is reference in the scheme documents to Great Southern Securities Pty Ltd. There is reference in the affidavit material to Great Southern

Finance Pty Ltd. The only material in the first defendant’s affidavits referring to this alleged representation is in paragraph 6 of the affidavit sworn 9 September 2011, which states that during the presentation by the representative of “Great Southern” at the financial adviser’s office, the representative, Mr Tim Hess, State Sales Manager for Great Southern “repeatedly stressed the financial strength of the scheme’s parent company, Great Southern”.

15         In support of the second alleged representation, the first defendant says in the same affidavit that during Mr Hess’s presentation, amongst a number of “representations” that were “emphasised”, the following representations were made:

“e) My investment would be income neutral for 10 years, as the annual

dividend from the investment would be at least equal to my total annual loan

instalments of approximately $24,000.

f) Apart from loan instalments – to be paid monthly and recouped each year
via the annual dividend – I did not have to spend any of my own funds and my

loan would be repaid in 10 years and I would be left with an unencumbered

long term asset producing good annual cash flows”.

16         Mr Bongiorno, relied upon Exhibit RM3 to the first defendant’s recent affidavit, which was an “investment model prepared for my specific needs by Great Southern” and given to the first defendant by his financial adviser. On the third page of the document is set out a table with figures showing what appear to be the returns to the first defendant from the investment each year and the monthly repayments the first defendant needed to make, apparently to demonstrate that after ten years, the first defendant’s loan would be fully repaid and he would then continue to receive the proceeds of the investment, presumably in the form of dividends, into the future.

17         The scheme apparently involved a number of different agricultural pursuits, including plantations and vineyards. The particular investment taken up by the first defendant was described as vinelots. In his affidavit, the first defendant describes his occupation as Australian Senior Business Analyser. The investment model appears to be based upon the first defendant receiving a taxable income of $180,000 per annum. The investment he made was in the sum of $156,000, which he financed by the borrowing of that sum from the second defendant. This meant that he received a substantial tax benefit at the end of the financial year in which the investment was made. The investment model document indicates that, based on a taxable income of $180,000, the tax benefit in that year was $57,601.11.

18         It appears, from the table on page 3 of the investment model document that this tax benefit was included as the opening balance in calculating the time it would take for the benefits of the scheme to equal the payout of the loan which funded the first

defendant’s participation in the scheme. The copy of page 3 of the document that I
am endeavouring to interpret is a very poor photocopy. It appears that the tax benefit
obtained immediately following the investment was taken into account because the
loan repayments were approximately $25,000 per annum and the anticipated return
to the first defendant from his investment would not, at least during the first ten years
of the scheme, exceed more than about $17,000.

19         It is not clear how the first defendant anticipated the scheme would work. In his most recent affidavit, he said that in June 2008 he stopped the monthly loan repayments because he had not received the expected return that year from the scheme of $17,075. It is clear that this sum would have been insufficient to meet the loan repayments, without taking account of the tax benefit initially received.

20         In considering whether the defendant has established a sufficiently arguable defence, it is necessary for me to refer to other documents that were available to the first defendant at the time he entered into the loan agreement. These are documents the first defendant has exhibited to his recent affidavit and, in some respects, are documents that he relies upon. The first document is what appears to be a sales brochure. The second document is a more formal document, headed “Product Disclosure Statement”. The product disclosure statement is required by the relevant legislative framework for such investments and on the first page includes a statement that neither Great Southern Managers Australia Ltd as the issuer of the product disclosure statement “or its related companies guarantee the success of the Projects

nor the repayment of capital or income return. Participation in the Projects is
considered speculative and prospective Growers should read this PDS in its entirety
and seek professional advice that an investment of this type is appropriate for their
particular circumstances. The investment is for a long term, likely to be approximately

twenty years”.

21         The product disclosure statement included, from page 35, an extensive section headed “Risks and Risk Management”. That portion of the document commences “Participation in the projects is intended to be of a long term nature in commercial

viticulture and is therefore subject to attendant risks and should be considered as
speculative. The risks associated with viticulture are similar to those associated with

any large scale farming or agricultural venture”. On the following pages are set out what are described as “Environmental/Growing risks”, “Market/Commercial Risks” and “Other Risks”. Then follows a section headed, “Returns, Factors affecting return”.

Reference is made to a table on page 41 of the document setting out extensive discussion of a number of “factors affecting returns”. The general brochure, which I have referred to, specifically notes in a footnote that potential investors should have regard to the product disclosure statement.

22         If the first defendant had filed a draft defence and counterclaim, the pleading of the representations and the particulars of those representations would have been clearly set out. From the first defendant’s affidavits, I have attempted to distil the relevant alleged facts from which the pleading would be derived. It seems to me that what the first defendant essentially relies upon in support of this application are very general statements alleged to have been made as part of a 90 minute oral presentation.

23         In relation to the first alleged representation concerning the financial strength of the parent company, no attempt is made to set out the specific statements made by Mr Hess in the presentation which supports the alleged conclusion that he “repeatedly stressed the financial strength of the scheme’s parent company”.

24         In relation to the second proposed representation that it would be essentially “an income neutral” investment for ten years, again, the statements relied upon are general statements of conclusion without any attempt to set out the context in which particular statements may have been made or whether the representative of the promoter of the scheme qualified the statements or expressly disavowed the qualifications in relation to the likely success of the scheme that were set out in the product disclosure statement. In the absence of such material in the first defendant’s affidavits, it is very difficult to see how he might have pleaded these matters satisfactorily in a defence and counterclaim.

25         Either this particular scheme or similar schemes have been the subject of extensive litigation both in this Court and in the Supreme Courts of Victoria and New South Wales. In Clarke v Great Southern Finance Pty Ltd [2010] VSC 473, Croft J struck out a statement of claim by investors seeking to avoid liability for obligations they had entered into, although he gave the plaintiffs leave to re-plead.

26         In Bendigo & Adelaide Bank Ltd v Cairncross [2011] NSWSC 610, Einstein J, in the Supreme Court of New South Wales, summarily dismissed cross-claims in that proceeding by defendants seeking to avoid their loan obligations to banks as assignees. The factual basis of the claims and cross-claims made in each of those proceedings are not extensively set out in those judgments and I do not rely upon those judgments to support the conclusions I have reached in this matter.

27 has a defence on the merits in relation to the plaintiffs’ claim against him, sufficient for

Essentially, my conclusion is that the first defendant has failed to establish that he 18 July 2011 is dismissed. The first defendant must pay the plaintiffs’ costs to be taxed on Scale D.

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Certificate

I certify that these 7 pages are a true copy of the reasons for decision of His Honour Judge

Anderson delivered on 16 September 2011 (and revised on 19 September 2011).

Dated: 19 September 2011

Caroline Dawes

Associate to His Honour Judge Anderson