Borg v Ahchow
[2011] VCC 700
•24 June 2011
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST - GENERAL DIVISION
Case No. CI-10-04879
| JEFFREY ANDREW BORG and | Plaintiffs |
| CEVRIYE BORG | |
| v | |
| PHILLIP BRUCE AHCHOW and | Defendants |
| HEATHER GAY AHCHOW |
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| JUDGE: | HIS HONOUR JUDGE ANDERSON |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 10, 14-17 June 2011 |
| DATE OF JUDGMENT: | 24 June 2011 |
| CASE MAY BE CITED AS: | Borg v Ahchow |
| MEDIUM NEUTRAL CITATION: | [2011] VCC 700 |
REASONS FOR JUDGMENT
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| Catchwords: | Contract – Property development agreement – Whether one party to be able to use the development property as security for their own personal borrowings – Breach of contractual and fiduciary obligations. |
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M. Stirling | Mills Oakley Lawyers |
| For the Defendants | Mr M.J. Campbell | Eales & Mackenzie |
| HIS HONOUR: |
4 mortgaged the property to the Bendigo Bank. Over time, Mr Ahchow used the
property as additional security for a line of credit facility which the Bendigo Bank had
first provided to Ahchow in 2003. Between July 2005, when the mortgage was
granted, and April 2008, when the line of credit was paid out by Westpac Bank,1 Jeffrey Borg and Bruce Ahchow had successful commercial cleaning businesses. In 2005, they decided to undertake a property development together. Mr Ahchow had found a property at 19 Maple Grove Toorak and, before signing a contract to purchase the property, he reached an agreement with Mr Borg for them to jointly bear the cost of purchase and redevelopment and to equally share the expected profits upon resale. Mr Borg and Mr Ahchow signed handwritten Heads of Agreement, and later executed a Property Funding Agreement dated 15 July 2005 prepared by a solicitor.
2 The property was bought in the names of Mr Ahchow and his wife. It was considered that if the property could be regarded as the principal place of residence of the Ahchows, capital gains upon resale would not be taxable. This was clearly untenable as it was always intended the property would be jointly developed as a commercial enterprise.
3 Both Mr Borg and Mr Ahchow had other business interests. It appears, however, that Mr Borg had more ready access to funds for his contributions towards the purchase price of the property and the development costs. On the other hand, Mr Ahchow needed to borrow money. This was, it seems, anticipated in the Property Funding Agreement. In the definition of ‘purchase costs’, the definition expressly excluded ‘the Ahchows’ costs of financing the Ahchow contribution’ [the costs relating to the purchase of the property].
At the time of the purchase of the Maple Road property, Mr and Mrs Ahchow facility, left a balance owing of $3,709,456.53. This sum included amounts drawn down for the purpose of the property development, but also included sums advanced for personal unrelated commercial interests of Mr Ahchow.
5 Mr Borg said that he did not know that Mr Ahchow was going to use the Maple Grove property as security for advances to the Ahchows, either for the Maple Grove development of for any other purpose. Mr Ahchow said that it had been discussed right from the start of the arrangement that he would need to use the property as security for his line of credit with the Bendigo Bank, as otherwise he would not have been able to fund his share of the purchase price and development costs of the Maple Grove development. Mr Ahchow said, however, that he told Mr Borg at the time that he would limit his borrowings, on the security of the Maple Grove property, to no more than one-half of the value of the property.
6 This is the central issue for determination in the case. Mr Borg said that he only became aware that the property had been used as security for Ahchow’s borrowings in about July 2007. By that stage, the Maple Grove development was nearing completion, and Mr Borg and Mr Ahchow were optimistic about the likely sale price and their profits from the redevelopment. They were looking ahead to a further project, although this time Mr Ahchow, Mr Borg and Borg’s brother-in-law Mr Huseyin Cobankara were to be equal shareholders in a development company. This was later established as Maple Properties Pty Ltd.
7 During 2007 and 2008, Mr Borg and Mr Ahchow were confident that the Maple Grove development would realise a significant profit for them, regardless of the borrowings by Mr Ahchow against the security of the Maple Grove property. A further development property was purchased through the company Maple Properties in early 2008 at 6 and 8 Mernda Road, Kooyong. This purchase had two consequences:
a.
To pay the deposit for the Mernda Road property, Mr Ahchow told Borg he would need to draw down his line of credit to in excess of 50 per cent of the value of the Maple Grove property.
b.
For Mr Ahchow to meet the purchase price and development costs of Mernda Road, it was necessary for him to refinance his borrowings. This was done through the Westpac Bank, which provided $4.575 million in April 2008. Of this sum, $3,709,456.53 was used to pay out Mr Ahchow’s line of credit to the Bank of Bendigo.
8 Mr Borg said he had “no option” than to follow this course because the parties were committed to the purchase of Mernda Road, and the Maple Grove property was securing substantial borrowings by Mr Ahchow. It was necessary to borrow sufficient money to pay off Mr Ahchow’s indebtedness to the Bendigo Bank. On the other hand, Mr Ahchow said that these dealings were simply putting into effect a new arrangement between himself and Borg whereby they had agreed to “roll over” their respective entitlements under the Maple Grove development into the Maple Properties Pty Ltd development of the Mernda Road property.
9 offers of $5.85 million at an auction in October 2007 and of $6.1 million in June 2008
had been rejected by Mr Ahchow and Mr Borg in the hope that the property would
realise more. As a consequence of the sale price and the drawings whichIn November 2009, Maple Grove was sold for a disappointing $4.55 million. Earlier facility and the refinancing with Westpac Bank, Mr Ahchow and Mr Borg did not receive anything from the sale of Maple Grove. Mr Ahchow said that, in any event, Mr Borg should not have expected to receive anything until after the completion of the development of the Mernda Road property and the sale of the two apartments to be erected on that property.
10 Mr Borg said that two meetings had taken place on 14 October 2008 and 22 June 2010 with his accountant Mr Sebastian Di Mauro and Ahchow, Borg, and Cobankara. At these meetings, Di Mauro had presented calculations of the amount Mr Ahchow owed to Borg as a result of the borrowings Ahchow had made using the Maple Grove property as security. It was said that in October 2008 Ahchow admitted at the meeting he owed Borg $1,708,343, and at the June 2010 meeting he admitted owing Borg $2,030,163. The parties had, on each occasion, discussed how the Ahchows might repay their indebtedness to the Borgs.
11 The issues for determination in the proceeding were:
a. Issues of credit and, particularly, whether Mr Ahchow or Mr Borg was to be believed about Borg’s knowledge and agreement that Ahchow would use the Maple Grove property for his own personal borrowings, including for purposes unrelated to the Maple Grove development. b. The nature of the arrangement between Mr Ahchow and Mr Borg and whether it gave rise to a partnership, joint venture or fiduciary relationship. c. Whether the property development arrangement, including the Property where the Maple Grove property was used as security.
d.
Whether the parties had agreed that the establishment of Maple Properties Pty Ltd, the purchase of the Mernda Road property and the re-financing with Westpac Bank affected any obligations by the Ahchows to account to the Borgs for their entitlements upon the sale of the Maple Grove property.
e.
Whether Mr Ahchow had acknowledged the Ahchows’ indebtedness to the Borgs in October 2008 and/or June 2010 and the effect of any acknowledgement or promise to pay.
f.
Whether the entitlement of the Borgs to recover in respect of both the Maple Grove development and the Mernda Road development could not be determined until after the Mernda Road apartments were sold, and whether any recovery would be limited to the Ahchows’ equity in the Mernda Road property.
g.
The calculation of any loss and damage, or other compensation, to which the Borgs were entitled to be paid by the Ahchows.
Establishment of the Maple Grove development project
12 The Borgs and the Ahchows met on 13 May 2005. Mr Borg and Mr Ahchow had previously discussed doing a property development together. Mr Ahchow had found an appropriate development property at 19 Maple Grove, Toorak. On 13 May, Ahchow and Borg signed a document headed “Heads of Agreement, PB and HG Ahchow and Borg Investment P/L”. The document contained the following bullet points:
• “Offer $1,580,000 in PB & HG Ahchow name •
Agree to meet all costs, including stamp duty, schematic design, legal costs, and incidental in equal parts.
• Prepare and agree to partnership agreement • Prepare and agree on construction plans and construction contracts. • Do all things in good faith to make things happen in a timely manner. •
Allow Borg Investments P/L to lodge a caveat on the title to protect their investment.
• Agree in principle to protect each other’s interests in the arrangements”.
13 purchase of 19 Maple Grove, Toorak, for $1,570,000. The purchasers’ solicitor was
stated to be “Tim Frampton” of Ashburton. On 15 July 2005, the Ahchows and the
Borgs executed a “Property Funding Agreement” prepared by Mr Frampton.On 17 May 2005, Mr and Mrs Ahchow (“&/or Nominee”) signed a contract for the after the parties had considered it. Mr Borg said he signed the document without reading it.
14 The parties agreed in the pleadings that, in or about July 2005, they entered into an agreement relating to “the purchase development and sale” of 19 Maple Grove. The parties agreed that the agreement was constituted by the Property Funding
Agreement, conversations between the parties “in and around July 2005” and by appropriate implications.
15 The Property Funding Agreement recites that the Ahchows had entered into a contract for the purchase of the Maple Grove property, that “the parties intend to redevelop the property”, that “Borg has agreed to contribute money towards the purchase and the development” and that “the parties have agreed to enter into this
agreement in order to formalise their roles, rights and obligations in relation to the
purchase and development”. The funding agreement stated in clause 9 that, “This
agreement represents the entire agreement between the parties in relation to its
subject matter”.
16 The “Ahchows’ responsibilities” were set out in clause 3 and included settling the Maple Grove purchase contract, obtaining all relevant permits and plans for the development and depositing into a joint bank account upon request one half of the purchase costs. “Borg’s responsibilities” (in paragraph 4) were to similarly deposit into the joint bank account upon request one half of the purchase costs. “Purchase costs” were defined as “the Ahchows’ costs relating to the purchase” but were not to include “the Ahchows’ costs of financing the Ahchow contribution”.
17 Apart from standard clauses relating to “definitions and interpretation”, “severance”, “no waiver” and “governing law”, there were only two further clauses in the agreement:
a. Clause 2 was headed “No authority to bind” and read as follows:
“2.1 No party shall do any act, matter or thing under or in connection
with this agreement without the other party’s prior written consent;
and2.2 No party has authority to bind any other party under or in
connection with this agreement or in relation to the matters
contemplated by it”.
b. Clause 6 was headed “Relationship” and read: “Nothing in this agreement shall be construed as constituting any party a
partner or agent or representative of the other party or to create any
trust or partnership or joint venture between the parties”.
18 Clause 2.1 is relied upon by the Borgs in support of their claim arising from the use by the Ahchows of the Maple Grove property as security for their personal borrowings. Alternatively, the Borgs asserted that this conduct breached the Ahchows fiduciary obligations in respect of the property. Clause 6 is relied upon by the Ahchows as negating any characterisation of the relationship with the Borgs as a partnership or joint venture or otherwise giving rise to any obligation as trustees or fiduciaries.
Nature of the agreement between the parties
19 Both parties concede that their agreement relating to “the purchase development and sale” of the Maple Grove property goes beyond the Property Funding Agreement, notwithstanding the “entire agreement” clause in that document. The pleadings in the action define the agreement and the terms of the agreement from each party’s perspective. There is no dispute that the agreement involved the purchase of a property for redevelopment, the contribution by the parties of equal amounts for the purchase and development of the property, and the equal distribution of profits upon resale.
20 In these circumstances, defendants’ counsel, Mr Campbell, found it difficult in his final submissions to refute that the agreement seemed to be a joint venture arrangement. Further, as the arrangement involved the development of a property which was to be purchased in the names of the Ahchows only, and there were obligations by the parties to make contributions for the purchase and development of the property, it was likely that the parties would have fiduciary obligations to each other in relation to those contributions and generally in relation to the development property.
21 Accordingly, whilst nothing in the Property Funding Agreement might necessarily be construed as creating any particular relationship between the parties, it is clear that the parties’ arrangement for “the purchase development and sale” of the property
would be likely to create contractual and fiduciary obligations which were not
contemplated by clause 6.
Whether the Ahchows were entitled to borrow using the Maple Grove property as security
25
Ahchow told Borg that, “I had borrowed my half share in Maple Grove”.
Mr Cobankara gave evidence of having been present at Georgio’s restaurant when consent. Mr Cobankara thought the conversation occurred at a time when they were finishing Maple Grove and just before they purchased Mernda Road.
26 to each other at the wedding of Mr and Mrs Ahchow’s daughter on 28 July 2007.
22 In their defence, the Ahchows allege that it was a term of the agreement for the development of the Maple Grove property that, “Ahchow could borrow against Maple Grove up to the limit of one half of its value”. In support of this contention, there is reliance upon the evidence of Mr Ahchow of a conversation with Mr Borg at the time the arrangement was entered into in 2005, and evidence of Mr Abni Selimi of admissions Mr Borg was alleged to have made to him in a conversation in 2007. The conversation was denied by Mr Borg. It is necessary, therefore, to analyse the evidence and to reach conclusions about the credibility of the witnesses.
23 Mr Ahchow said that before the arrangement was entered into with the Borgs, he told Borg that he had a line of credit with the Bendigo Bank and that he needed to use the Maple Grove property as security to borrow the Ahchows’ contribution to fund the
heavily leveraged
not have otherwise done the development. Mr Ahchow said that he had explained topurchase and development of the property as he was “” and could according to the loan to value ratio (LVR). Additional security or value added to a property by redevelopment would enable Mr Ahchow to draw down further funds. Mr Ahchow said that he assured Borg that he would not, however, draw down more than half the value of the Maple Grove property.
24 Mr Borg denied that he had been informed of any of these matters by Mr Ahchow. been mortgaged by Mr Ahchow and used as security for his borrowings was in mid- 2007. Ahchow had told him, at a meeting at Georgio’s restaurant in Malvern, that he had borrowed half the equity of the property and had put some of the money into one of his companies, Service Central. Mr Borg said that he was surprised and upset by Mr Ahchow’s announcement and told him, “I hope you can pay it back”.
Mr Selimi said that he had a conversation with Mr Borg when they were seated next Mr Borg told him about the Maple Grove development, including his profit expectations. During the course of the conversation, Mr Borg told Mr Selimi that Ahchow had borrowed money for the development from the Bendigo Bank using the Maple Grove property as security; that Mr Ahchow’s bank manager at the Bendigo Bank was Mr John Dwyer, whom Mr Selimi had also dealt with; that Mr Ahchow had also borrowed on the security of the property for Service Central; and that as a result Ahchow was “soaking up the profit”.
27 said Mr Selimi knew about the development and they had discussed it. He could not
recollect or dispute that he might have told Selimi he had “put cash in” for his share ofMr Borg, in his evidence, agreed that he had spoken to Selimi at the wedding. He “using the property as security for the Bendigo Bank” loan, Mr Borg said he “would have told him that Ahchow had borrowed 50 per cent of the equity”. He said he did not tell Selimi the name of Ahchow’s bank manager.
28 It is not possible to divorce this issue from the other evidence given at the trial and my general assessment of the witnesses’ credibility. It is appropriate, therefore, to look at the contemporaneous events and circumstances at the time Mr Ahchow
alleges he told Borg that he would be using the Maple Grove property as security. It is likely, in my view, that Mr Ahchow would have told Borg about how he had carried out previous property development projects, including a number of developments
with Mr Selimi. Mr Borg said that Ahchow had explained his “method” of developing properties which involved Ahchow saying that he lived in the property as his principal place of residence. Mr Ahchow may have also told Borg that he would borrow to
make his contributions to the project. Mr Borg said that each of them was to be
responsible for paying interest on any money they put into the project. That fact was
alluded to in the definition of “purchase costs” in the Property Funding Agreement.29 It is also possible, although less likely, that Ahchow told Borg that he had a line of credit from which he financed his contributions to other developments. It is possible Ahchow referred to the Bendigo Bank and might even have told Borg the name of his bank manager. However, the critical question is whether Ahchow told Borg that the Ahchows would use the Maple Grove property as collateral for advances to them by the Bendigo Bank. Mr Ahchow said that the capacity for him to borrow using the Maple Grove property was of critical importance; without that ability he would not have been able to proceed with the project. I note, however, that Mr Selimi said in evidence that it was always a rule in his previous development projects with Mr Ahchow that, “You don’t touch the property”.
30 Mr Ahchow alleges that, in relation to the Maple Grove development, it was a term of the agreement between the Ahchows and the Borgs that the Ahchows could borrow against the property. Notwithstanding this assertion, the proposed term is not
referred to, even obliquely, in the Heads of Agreement or the Property Funding with the alleged term. The Heads of Agreement contain a number of statements which appear to have been recorded to provide some protection for Borg in circumstances where the property was to be purchased in the names of the Ahchows. The Borg company could “lodge a caveat on the title to protect their interest”, the parties were to “agree on” construction plans and contracts, and they were to “do all things in good faith to make things happen”.
31 Mr Ahchow said that in fact Borg had agreed not to put in the Heads of Agreement any reference to the Ahchows borrowing up to half the value of the Maple Grove property. Mr Ahchow said that this was because of a “sensitive” issue. He said that he and Mr Borg felt that to include such a statement in the Heads of Agreement “may
affect the position in relation to the principal place of residence and the concession
may be compromised”. Mr Ahchow said he told his solicitor, Mr Frampton, that his half of the contributions was coming from borrowings secured by the property and that Borg’s contributions were coming from his own funds. He said he did not
discuss with Mr Frampton the principal place of residence issue. Mr Ahchow said
that he took the solicitor’s advice not to include a clause in the Property Funding
Agreement about not being able to borrow more than half the value of the property.
The solicitor advised that the agreement should be as simple as possible.32 I am not satisfied the Ahchows have established that the agreement for the purchase, development and sale of Maple Grove was subject to a term permitting the Ahchows to use the property as security for their borrowings. I reach that conclusion for the following reasons:
a. The proposed term is inconsistent with the Heads of Agreement and Property Funding Agreement. It is unlikely that if the parties had reached agreement on that issue, such an important matter would not have been expressly stated. b. The version of the events given by Mr Ahchow and the supporting evidence of asserted specificity of the conversations with Borg.
c.
The evidence of both Mr Ahchow and Mr Selimi was unsatisfactory and I would generally not accept their evidence on any disputed matter unless there was independent material confirming their version of events.
Unsatisfactory evidence of Mr Ahchow and Mr Selimi
33 Mr Selimi gave detailed evidence of what he asserted Mr Borg had told him. wedding in mid-2007. By the end of his evidence he said he had had “discussions on many occasions” with Borg during which it was made clear that Borg was “aware that Ahchow had borrowed against the property” and Borg “knows that he [Ahchow] was allowed” to borrow on the security of the property. It is possible that Mr Borg had such discussions with Mr Selimi after (as Borg said) he was told by Mr Ahchow in mid-2007 that he had borrowed up to 50 per cent of the value of Maple Grove. However, Mr Selimi gave his evidence as though this was a matter of agreement between Ahchow and Borg from the start of the project. Mr Selimi’s evidence was given in a series of confused, confident and unrestrained statements based on what Selimi said was an inexact recollection of conversations with Borg and what he knew from unstated discussions with Mr Ahchow over many years. It is impossible to disentangle any credible evidence from Mr Selimi.
34 Mr Ahchow was a witness who made grudging concessions only when it was apparent that there was strong independent evidence which made continued denial or obfuscation untenable. Because of the requirements of the parties in calling other witnesses, Mr Ahchow’s evidence was interrupted by the evidence of Mr Di Mauro (via videolink from Thailand) and the evidence of Mr Selimi. It was noticeable that Mr Ahchow appeared to adjust his evidence after Mr Di Mauro had given evidence about the meetings on 14 October 2008 and 22 June 2010, when it was alleged that Ahchow made admissions about the monies owing to the Borgs and how they proposed to repay those monies.
35 In his evidence-in-chief, Mr Ahchow was vague about the documents he had to determine what the parties’ entitlements would be after the sales of all the properties. He said that he did not agree to anything at the meetings. He did not offer to make any payment to the Borgs and he said, specifically in relation to the meeting on 22 June 2010, that he did not say anything about being bankrupt or in debt to the ATO, or having acknowledged owing money to the Borgs.
36 During Mr Di Mauro’s interposed evidence, Di Mauro identified the documents he produced at the meetings, the email correspondence with Ahchow (both before and after the meetings), and the minutes he had prepared following the meetings. The minutes of the meeting on 14 October 2008 recorded as the “total consolidated debt owed by BA”, the sum of $1,708,343 and noted under the heading, “Where to from here?”, that “BA will get back to JB with a plan of repayment of debt”. The minutes were sent by Mr Di Mauro to the attendees, including Mr Ahchow, by email on 15 October 2008.
37 The typewritten minutes of the meeting on 22 June 2010, prepared by Mr Di Mauro, recorded that $2,030,163 was owed to the Borgs from the Maple Grove development. The minutes then recorded, “JB asked questions: How is this now going to be
repaid? BA made the following comments: ‘I am now bankrupt; I can only afford to
make payment of $5,000 per month; these have been funded from Gateway
[Mr Ahchow’s cleaning company] which only due to not paying the Tax Office so Ican't even keep that up’”. Later the minutes recorded, “JB advised he will have to go
down legal avenue. BA advised as soon as that happens then you must understand
that any moral obligation to repay the debt is removed”.
38 Mr Di Mauro was cross-examined about his procedure in preparing minutes for the meeting in June 2010. He said that he took handwritten notes at the meeting and within three days he typed them up. Although Mr Di Mauro was in Thailand, he was
requested to arrange for his office in Melbourne to produce his handwritten notes. are faithfully reproduced in the typed minutes.
39 During his later cross-examination, Mr Ahchow agreed that at the meeting on relation to Gateway. He also conceded that he had said that, “If I don’t deal with this [the issue of the Borgs’ entitlement] I could be headed for personal bankruptcy’. He said that the $5,000 per month referred to Gateway’s cash flow.
40 Other examples of Mr Ahchow’s unsatisfactory evidence related to the valuations obtained by the Bendigo Bank during the Maple Grove development and the draw- downs made by Mr Ahchow from the Bendigo Bank line of credit.
41 Mr Ahchow gave evidence about three valuations of Maple Grove obtained by the Bendigo Bank and dated 15 November 2006, 5 March 2007 and 23 July 2007, all during the redevelopment of the Maple Grove property. In his evidence, Mr Ahchow
said that at about the time of the first valuation he told Borg that he had asked the
bank to get a valuation. Mr Ahchow related the valuation to what he said was his
original undertaking to Borg that his drawings on the line of credit were not to exceed
50 per cent of the valuation.42 In relation to the second valuation, Mr Ahchow said the purpose was to increase the available funds from the line of credit facility because he was continuing to put money into the construction of Maple Grove. Mr Ahchow said the agreement limiting his drawings on the line of credit to his half of the value required the revaluation of the property in order to keep his agreement with the Borgs in place.
43 meeting with Borg and Cobankara about extending their property developing
activities through a company. Mr Ahchow said he was requested to get a valuationMr Ahchow said in relation to the final valuation, that it was obtained following a extending the loan for the purposes of the company. Mr Ahchow also said the “main purpose” of the valuation was so that the company could fund the acquisition of land if a suitable property became available.
44 This evidence was, in my view, misleading. The valuations were a requirement of the bank in order for further funds to be made available to the Ahchows. Mr Ahchow had in his evidence sought to relate the valuations to his version of what he asserted was the agreement with the Borgs. The use Mr Ahchow made of the line of credit also
demonstrated that this evidence was highly improbable.
45 The Ahchow’s line of credit with the Bendigo Bank was paid out by a refinancing arrangement with Westpac on 9 April 2008. The balance owing at that date was $3,709,456. This included the deposit for Mernda Road of $312,500 which the parties
agreed Ahchow should pay from the line of credit. Therefore, as at 9 April 2008, the
portion of the line of credit attributable to the Ahchows was $3,396,956. The last
valuation of the Maple Grove property obtained by the Bendigo Bank on 23 July 2007
valued the property at $5.5M. As at 9 April 2008, this was the only property securing
the line of credit. Mr Ahchow was asked in cross-examination why he had drawn
down the line of credit by about $650,000 more than 50 per cent of the valuation of
$5.5M.
49
Service Central. He said that he “believed” he told Mr Borg that he was investing
money in Service Central. Initially, he said he could not recall when he told Borg. He
then said that he had a telephone conversation with Borg saying that they wereMr Ahchow admitted that large sums had been transferred from the line of credit to the Westin Hotel in May 2007, that he would be using funds for this purpose.
46 Mr Ahchow’s response was that, whilst the Maple Grove redevelopment was under construction, the bank lending limit related to a formal valuation of the property. However, once construction was completed, the property was “under market conditions”. Mr Ahchow said he was working on the understanding of the agreement with Mr Borg that, after completion of the redevelopment, the 50 per cent moved from a bank valuation to a market valuation which was to be determined by what he and Borg discussed and the market appraisals obtained from real estate agents.
47 Mr Ahchow was cross-examined about his use of the line of credit following the final valuation requested by the Bendigo Bank and dated 23 July 2007. Mr Ahchow was asked to explain large withdrawals from the account in the form of transfers to other bank accounts. Mr Ahchow generally responded that he was unable to state the
purposes of the drawings because he could not identify the particular accounts to
which the money had been transferred. Upon analysis, it became clear that the
transfers could have had little to do with the development of Maple Grove as
construction was completed in about September 2007.48 In any event, the contribution made by each of the Ahchows and the Borgs to the purchase and redevelopment of the Maple Grove property totalled the sum of $1,564,981. It was apparent, therefore, that after deducting the Ahchow’s contribution of $1,564,981 and the deposit of $312,500 for Mernda Road from the payout figure for the line of credit on 9 April 2008 of $3,709,456, substantial drawings had been made from the line of credit for purposes quite unrelated to the Maple Grove development, quite apart from accrued interest and bank charges.
50 In his final submissions, plaintiffs’ counsel, Mr Stirling, submitted that Mr Ahchow had an “unconvincing demeanour”, he “tried to advance his case at every opportunity”, he “avoided admitting matters”, he was “willing to reconstruct events” and made “non-
responsive answers” in order to pursue his “themes” and to avoid issues
unfavourable to his case. There is force in the submissions Mr Stirling made about
the credibility of Mr Ahchow’s and Mr Selimi’s evidence. What is obvious, however,
is that the defendants had not established a term of sufficient certainty, as they had
alleged, in relation to the borrowings by the Ahchows upon the security of the Maple
Grove property.
Establishment of Maple Properties Pty Ltd and the purchase of Mernda Road
51 Both parties agree that the arrangement between them for the purchase, development and sale of the Maple Grove property contained a term that “after the
sale of Maple Grove the profits would be distributed equally between the plaintiffs
and defendants”. The Maple Grove property was not sold until November 2009. The
sale price of $4.55M would have been sufficient, after payment of the expenses
associated with the sale and each party’s contribution to the purchase and
development costs of the project had been met, to return a profit to each of the
Ahchows and the Borgs of $599,779.52 This did not happen as the whole of the net proceeds of sale went to the Westpac Bank to meet the amount of $4,575,000 obtained upon the refinance with Westpac in April 2008 when the Ahchow’s Bendigo Bank line of credit facility was paid out. By that time, the parties were committed to the establishment of Maple Properties Pty Ltd as a vehicle for the purchase and development of the property at Mernda Road.
53 The Ahchows allege in their amended defence that in 2007 the parties and Mr Cobankara entered into an agreement to “form a company to attend to another
property development opportunity and to roll the Maple Grove development into the
new company”. It was alleged that there were terms of the new agreement that:
“(a) the parties would form a company specifically for property
development;(b) all of the assets and liabilities of the plaintiffs, defendants and Huseyin in the Maple Grove development would be rolled into the development opportunity with the new company; and (c) the plaintiffs, defendants and Huseyin would be paid out any of their entitlements from the Maple Grove development and from the new development from the proceeds of the sale of the new development to be undertaken by the new company”.
54 Further, it was alleged that, if “the defendants are indebted to the plaintiffs in any sum
(which is denied) then –
(a) no such indebtedness arises until after the sale of 8 Mernda Road, Kooyong; and (b) any indebtedness of the defendants to the plaintiffs is limited to the equity of the defendants in 8 Mernda Road, Kooyong”.
55 It is important to note a number of key dates:
Date Event 17 June 2005 19 Maple Grove purchased Later in 2005 Redevelopment work commenced on Maple Grove. Around May 2007 Ahchow alleged that at a meeting at the Westin Hotel
between Ahchow, Borg and Cobankara, they discussed
forming a company to do further developments with the three
of them as equal shareholders. The Maple Grove
development would be rolled into the company and loan
accounts would be used to adjust the entitlements of each of
the parties.Mid 2007 Borg alleged Ahchow told him that he had borrowed half the
equity of Maple Grove through his line of credit facility with
Bendigo Bank.September 2007 Maple Grove redevelopment completed. 20 October 2007 First auction of Maple Grove. Highest genuine bid $5.85M. Late January 2008 Parties agreed to purchase Mernda Road property. Borg
agreed to the deposit for the purchase being paid by Ahchow
from his line of credit. Ahchow alleged that everything from
Maple Grove was to be rolled into the new company.3 March 2008 Maple Properties Pty Ltd established with Ahchow, Borg and
Cobankara as directors and, through their respective trust
companies, equal shareholders.17 March 2008 Contract of sale for the purchase of Mernda Road. 9 April 2008 Settlement of the purchase of Mernda Road by a refinancing
with Westpac and the payout of the Bendigo Bank line of
credit.21 June 2008 Second auction of Maple Grove. Property passed in but
subsequent offer of $6.1M.4 August 2008 Meeting between Ahchow, Borg, Cobankara and Mr Di
Mauro.2008/2009 Contacts with Ristos for the purchase of Maple Grove for
$5.4M, and later $6.4M. Contracts rescinded.April 2009 The Ahchows paid $160,000 to the Borgs. 27 November 2009 Settlement of the sale of Maple Grove for $4.55M. 22 June 2010 Second meeting between Ahchow, Borg and Cobankara with
Di Mauro.18 September Sale of Lot 6 Mernda Road for $3.3M. 2010
27 October 2010 Writ issued. 56 The critical facts which emerge are:
a.
During 2007 and 2008, Ahchow and Borg were hopeful of selling the Maple Grove property for a substantial sum close to $6.5M which would have resulted in a significant profit to them.
b.
In the second half of 2007, Ahchow and Borg were looking forward to further development projects and, together with Huseyin Cobankara, agreed to put their operation on a more structured footing by forming a company.
c.
In March 2008, Ahchow, Borg and Cobankara agreed to purchase the Mernda Road property and incorporated Maple Properties Pty Ltd for that purpose.
d.
In May 2008, the Ahchow’s debt to the Bendigo Bank under the line of credit facility was paid out when Westpac refinanced at the time the purchase of the Mernda Road property was settled.
e.
In October 2008, the parties met to calculate the Ahchows’ indebtedness arising from their use of the Maple Grove property as security for their personal borrowings.
f.
In November 2009, when the Maple Grove property was sold, there was no distribution to the Borgs because the whole of the net proceeds of sale were required to be paid to the Westpac Bank.
57 The Ahchow’s case was that the requirement of the Maple Grove property development agreement, that after the sale of that property the profits would be distributed, was displaced by a further agreement that the Maple Grove development would be “rolled into” the new company and any entitlements of Ahchow, Borg or Cobankara from the Maple Grove or Mernda Road developments would be paid from the proceeds of the sale of the new development and any indebtedness of the Ahchows to the Borgs would be limited to the Ahchow’s equity in the Mernda Road property. This revised agreement was said to arise from conversations “in or about May/June or early July 2007” between Ahchow, Borg and Cobankara and implications from “the conduct of the parties in developing and selling Maple Grove and Mernda Road”.
58 Mr Ahchow gave evidence that he met with Borg and Cobankara at the Westin Hotel around May 2007. They discussed setting up a company with equal shareholdings as a vehicle for further property development. There was discussion about how the operations of the new company would be funded. Mr Ahchow’s evidence was that Borg said that they would further draw on the equity in Maple Grove. Ahchow asked how that was going to work because of the imbalance of the borrowings and entitlements of the three shareholders. Borg said that loan accounts would be set up as, “That’s how we do it at Borg”. They agreed to refinance the Maple Grove development and Ahchow asked if they would roll it into the new structure. Borg replied, “That sounds fine”.
59 In early 2008, when the Mernda Road property had been identified as an appropriate development, there was a further discussion which Mr Ahchow said occurred at a café in Brighton. Ahchow said that they discussed using the line of credit for Maple Grove until they had put in place new funding with Westpac. Ahchow said that he could give a Bendigo Bank cheque for the deposit for Mernda Road, although if he paid that cheque, it would put his borrowings above 50 per cent. He asked Borg if that was “okay”. Ahchow said that Borg replied, “Yes, that is what we’ve agreed, roll everything in from Maple Grove”.
60 Mr Borg said that in mid-2007, Ahchow told him that he had borrowed half the equity of the Maple Grove property and Borg said to Ahchow, “I hope you can pay it back”. Later in 2007, Ahchow, Borg and Cobankara had discussed doing further
developments and agreed on the purchase of the Mernda Road property. Borg
agreed to Ahchow paying the deposit for Mernda Road from the Bendigo Bank line of
credit and joined in the application for finance from Westpac in March 2008, from
which the balance of the Bendigo Bank facility of $3,709,456 was paid out and further
funds were made available to complete the purchase of Mernda Road.61 Mr Borg said, however, that there was no discussion with Ahchow that they would no discussion about varying the original arrangement that he would be paid his equity contribution and profit for the Maple Grove development upon the sale of that property. There were further discussions at the meeting on 18 October 2008. Ahchow agreed that he owed the Borgs $1.7M. There was no suggestion by Ahchow at the meeting, or in later correspondence, that the Borgs’ entitlements from the Maple Grove development was to be deferred to an indefinite time when the Mernda Road developments were completed or that the Borgs’ capacity to recover those entitlements would depend upon the extent of the Ahchows’ equity in Maple Properties Pty Ltd.
62 For the reasons I have given earlier, I would not accept Mr Ahchow’s evidence upon any disputed issue unless it were supported by independent evidence. It makes no sense that Borg would agree to forego of defer his entitlements from the Maple Grove
property development. The inability of the Borgs to recover their entitlements upon
the sale of Maple Grove was solely due to Mr Ahchow having used the property
without Borg’s agreement as security for his own personal borrowings.63 Mr Borg said he was surprised and upset when he was told by Ahchow in mid-2007 that Ahchow had used Maple Grove as security for his personal line of credit. From that time until Mr Ahchow sought Borg’s permission in February 2008 to exceed 50 per cent of the value of the property to pay the Mernda Road deposit, it appeared that
the borrowings using Maple Grove were limited to less than half the value of the
property. Borg had earlier agreed to pursue a further development through a
corporate structure. Later, Borg had no option but to agree to the refinancing with
Westpac and the payment out of the Bendigo Bank facility.64 Ahchow and Borg believed, through 2007 and 2008, that the Maple Grove property would realise a substantial profit for both of them and that there would be available funds to meet the Borgs’ entitlements. However, there is no credible evidence that at
development should be “rolled into” Maple Properties Pty Ltd developments. Mr
Borg, through his accountant, Mr Di Mauro, investigated the consequences of the
Ahchows having burdened the Maple Grove property with their own personal debt. Inany time Mr Borg agreed that the Borg entitlements from the Maple Grove agreed to get back to Mr Borg “with a plan of repayment of debt”.
65 When Ahchow failed to do that and the actual sale of Maple Grove did not realise sufficient funds to do more than discharge part of the debt to Westpac, Borg again met with Ahchow, Cobankara and Di Mauro in June 2010 and further admissions of
indebtedness and promises to pay were made by Ahchow. In about April 2009, the view, the reference to “loan accounts” by Mr Ahchow was reconstruction and there was no credible evidence that at any relevant time loan accounts were established within Maple Properties Pty Ltd in respect of the entitlements or liability of the Ahchows or the Borgs. The only calculations of this sort were those presented by Mr Di Mauro at the meetings in October 2008 and June 2010.
70 66 In the circumstances, I reject the assertions by the Ahchows that their original agreement, that the profits of the Maple Grove development would be distributed upon the sale of that property, was displaced by a later agreement to roll over the Maple Grove development into the new company.
Ahchows’ breach of the property funding agreement and of their fiduciary obligations
67 The Ahchows should not have mortgaged the Maple Grove property in July 2005. They should not have borrowed money from the Bendigo Bank, either for the purchase and development costs of Maple Grove or for their other personal investments and purposes, using Maple Grove as security. The Ahchows also borrowed substantially in excess of half the value of the property.
68 All of this conduct breached the obligations upon the Ahchows pursuant to clause 2.1 of the Property Funding Agreement not to “do any act, matter or thing, under or in
connection with this agreement [for the purchase and redevelopment of the Maple
Grove property] without the other party’s prior written consent”. The conduct was also a breach of the fiduciary obligations owed by the Ahchows to the Borgs, primarily because the Maple Grove property was retained in the Ahchows’ legal ownership. The Ahchows were obliged not to do anything which might prejudice the other parties to the joint venture for the purchase, development and sale of that property, whether as joint contributors or beneficiaries.
69 But for these breaches, the Borgs would have received their entitlements to a distribution of their contributions to, and the profits from, the Maple Grove development upon the sale of that property in November 2009. The measure of the damages or compensation to which the Borgs are entitled, by reason of either the contractual breach or breach of fiduciary relationship, is essentially the same; that the Borgs be put in the position that they would have been in but for the breaches by the Ahchows.
It is agreed that the Ahchows and the Borgs each contributed $1,564,981 towards the profits upon resale was the sum of $599,779. Of the Borgs’ total entitlement of $2,164,760, the Ahchows have only paid $160,000. The balance of $2,004,760 should have been paid to the Borgs at the time of the sale of Maple Grove. The Borgs are entitled to interest on that sum from the settlement date of 16 November 2009. They seek a lesser rate of interest than the rate prescribed by statute. A rate of nine per cent was agreed between the parties at the meeting on 18 October 2008.
Orders 71 There will be judgment for the plaintiffs against the defendants for $2,004,760 16 November 2009 until today (585 days), of $289,179.76; total judgment $2,293,939.76.
72 I will hear the parties further on the question of costs.
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Certificate
I certify that these 23 pages are a true copy of the reasons for decision of His Honour Judge
Anderson delivered on 24 June 2011.
Dated: 24 June 2011
Caroline Dawes
Associate to His Honour Judge Anderson
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