Brooker v Friend & Brooker Pty Ltd - [2006] NSWCA 385

NEW SOUTH WALES COURT OF APPEAL

CITATION: Brooker v Friend & Brooker & Anor [2006] NSWCA 385

FILE NUMBER(S):
40438 0f 2005

HEARING DATE(S): 13 March 2006

DECISION DATE: 20/12/2006

PARTIES:
Frederick Clarkson Brooker - Appellant
Friend & Brooker Pty Ltd – First Respondent
Nicholas Macarthur Friend – Second Respondent

JUDGMENT OF: Mason P McColl JA Basten JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 5181 of 2000

LOWER COURT JUDICIAL OFFICER: Nicholas J

COUNSEL:
R G Forster SC with M S White – Appellant
No appearance - First Respondent
Mr C R C Newlinds SC with H S Packer – Second Respondent

SOLICITORS:
Jonathan D’Arcy & Co – Appellant
No appearance - First Respondent
Bull, Son & Schmidt – Second Respondent

CATCHWORDS:
CORPORATIONS - effect of incorporation on liability of parties in quasi–partnership - company’s activities financed in part by funds raised by personal borrowings from family and friends by 2 directors and shareholders on-lent to company - whether agreement to bear burden of personal borrowings equally - nature of relationship between parties - whether evidence established fiduciary relationship.CONTRACT - ongoing relationship - necessary to look at whole relationship to determine whether contract in existence not only at what was said and done when relationship first formed.PARTNERSHIP - whether manifestation of mutual assent sufficient to prove a partnership agreement pursuant to which parties undertook to assume personal, and equal, responsibility for borrowings from family and friends - whether partnership displaced by incorporation of company.QUASI–PARTNERSHIP - mutual trust and confidence manifest from outset of business relationship - whether fiduciary relationship between parties exposing them to an obligation to account to each other in relation to personal borrowings on-lent to company - nature of the subject matter over which obligation extends EQUITY - fiduciary relationship - fiduciary relationship between parties arising from mutual trust and confidence reposed in each other from the outset of business relationship – determined by reference to course of parties’ conduct and inferences drawn from that conduct - can exist despite fact parties are in a corporate relationship - can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangements between them.CONTRIBUTION - right of contribution - rests on matters of substance not form - absence of contractual arrangement not controlling - common interest and common burden - shared decision-making touching administration of loan and application of loan proceeds - whether right of contribution where creditor not threatening to enforce debt - whether relief should be refused on discretionary grounds.DELAY – notwithstanding lapse of time possible to grant equitable relief on just terms - respondent on notice claim not abandoned. (D)

LEGISLATION CITED:
Partnership Act 1892

DECISION:
Appeal allowed; see para [58]

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40438/05
SC 5181/00
MASON P
McCOLL JA
BASTEN JA
Wednesday 20 December 2006

FREDERICK CLARKSON BROOKER v FRIEND & BROOKER PTY LTD & ANOR

Judgment

MASON P: I have had the benefit of reading in draft the judgments of McColl JA and Basten JA. I gratefully adopt McColl JA’s summary of the facts.
The claim ultimately pressed on behalf of the appellant was for contribution by Mr Friend (the respondent) with respect to all or part of the outstanding balance of the SMK loan still owing by the appellant. Friend & Brooker Pty Ltd (the company) is unable to assist the appellant to repay the balance of this debt which he incurred on its behalf.
The appellant incurred this debt in 1986 when he borrowed $350,000 from SMK Investments Pty Ltd, securing repayment by granting mortgages over two properties, one owned by himself and his wife, the other owned by himself and his mother. $250,000 was paid to SMK on account of outstanding interest in July 1993 when the company, at the joint direction of the appellant and the respondent, forwarded this sum directly to SMK out of the funds recently received from Eurobodalla Shire Council. The appellant appears (without reimbursement from the company) to have paid some additional money out of his own funds to SMK. But a large and growing sum remains outstanding to SMK. With the accrual of interest, the balance of the appellant’s indebtedness to SMK stood at approximately $1.3 million in November 2004.
It is not suggested by the respondent that the SMK mortgage debt is statute-barred or otherwise unenforceable. It is secured by mortgages. I interpret the trial judge’s finding that SMK is not “presently proposing to claim against [the appellant] for repayment of the SMK loan” as a statement that the creditor is not pressing, not as a statement that the creditor has released the debt. The passage from Mr Peterson’s evidence set out by Basten JA includes the statement: “I’m not planning to execute against him at the moment….”. The lender would appear to have a right to immediate payment from the appellant (cf Mahoney v McManus (1981) 180 CLR 370 at 376).
The SMK loan had been incurred by the appellant for the purpose of the ongoing business venture that was being conducted by the two men primarily through the company. The appellant borrowed the money from SMK with the prior concurrence of the respondent. The money was on-lent by the appellant to the company and, under the direction of the two men, applied by the company in discharging certain pressing debts. This happened at a time when the ANZ Bank had frozen the company’s account and when other creditors were pressing. If the company had been put into liquidation at that time then both “partners” would have been considerably worse off than eventuated. Neither wanted this to happen. The company’s obligation to reimburse the appellant was formally acknowledged in its balance sheet for the year ended 30 June 1987 which treated the on-lent SMK loan money as part of the appellant’s director’s loan account.
The trial judge correctly held that the respondent was not jointly liable at law to SMK to repay the SMK loan. The appellant was the only borrower (leaving aside the situation of his wife and mother). But this is not the end of the appellant’s contribution claim which is based on much more than the simple borrowing.
The appellant relies on the conversations that preceded incorporation in 1977 (“the para 8 conversations”). They are set out by McColl JA. He also points to the structure and operation of the company which, over many years, was conducted by the two men on the basis of shared ownership and control, mutual cooperation and close friendship. The company was only one of several corporate and trust entities used as the business expanded, but the pattern was maintained. There were frequent affirmations of equality, sharing and mutual reliance over the years, subject to particular projects being expressly stipulated as the concern of one only of the parties. All decisions of consequence were taken jointly by the two men who were friends as well as co-venturers in a business that expanded and contracted as opportunities presented themselves (Blue 19-27, 33). The respondent referred to the appellant as his “partner” in a 1987 letter (Blue 70).
Reliance is also placed upon the pattern of similarly structured borrowings involving the directors each from time to time borrowing externally (thereby pledging his own credit) for the purpose of on-lending to the company to meet its primary needs. The SMK borrowing was a very substantial one, but was otherwise typical in the manner in which finance was often acquired to keep the company afloat during the long years when Eurobodalla Council withheld payment of moneys that were due to the company.
The 1986 borrowing was preceded by a conversation between the two men that provided yet further evidence of the fact that the appellant acted with the concurrence of the respondent and for the purposes of the wider venture in which they were engaged. It included the following exchange:
Brooker: Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council.
Friend: What do you think?
Brooker: We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan.
Friend: Well then, we should do it.
By 1990 the company had ceased to trade. Thereafter, it concerned itself exclusively in the pursuit of the bitterly contested claim for moneys owing by Eurobodalla Council. During the 1990s, discussions between the two men focussed upon the arbitration proceedings and decision-making as to the order in which company debts should be discharged. Some of the creditors paid off in the early stages were members of the respondent’s family (Blue 36). Costs incurred in the litigation were also given priority (Blue 37).
On 8 December 1993, the directors resolved that the company would pay themselves interest on the loan accounts at Supreme Court rates, backdated to 1984 (presumably on the basis that interest would run from the time of individual borrowings that remained undischarged). This was done so that “it will look better… to the Bank” (Blue 19).
The two directors eventually discharged all external company debts with the proceeds of the Eurobodalla claim. These included debts owed to the directors for on-lending transactions, except for the SMK loan involving the appellant.
As indicated, in July 1993 $250,000 was paid by the company directly to SMK in partial discharge of the appellant’s indebtedness to that entity. Both men knew that the payment (which was appropriated towards outstanding interest) left a substantial sum still owing by the appellant to SMK and by the company to the appellant.
In September 1994 there was a conversation deposed to by the appellant as follows:
He said:I would like to draw $12,500 from the money now in the account. I suggest we draw equal amounts.
I said:We must be careful as to how the money is disbursed. I don’t think there is enough to pay all our outstanding debts.
He said:I need the money urgently.
Mr Friend’s response was delivered in a forceful and what I perceived to be an angry tone.
I said:Okay. I’ll go along with that provided we treat this as payment “on account” pending a full analysis of our position.
The two men met at the appellant’s home in about October 1994 where the following conversation took place:
Brooker: There is not enough to pay all the debts. We have about $80,000 and other creditors, some smaller amounts and the debt to the Petersons is nearly a million dollars. We should pay out what we’ve got and then work out between us what we need to do to cover the shortfall.
Friend:I don’t accept that. I don’t accept liability for the debt to the Petersons. I saw how much it had grown with interest when I was doing the calculations for the arbitration.
Brooker:But that’s not right. That money went to pay debts of our business.
Friend:You really should have serviced it and if you couldn’t, you should have sold your property.
Brooker:That’s no good to me. I will have to think about where we go from here.
This belated denial by the respondent was pregnant with a concession that the SMK/Petersons loan represented a cost initially incurred by the appellant for the purpose of the venture as well as a qualified admission of the respondent’s obligation to contribute towards exonerating the appellant of this debt. The admission was qualified in that a spurious excuse was advanced by the respondent to justify his refusal to assist his colleague further. The excuse raised a point that was irrelevant, not pleaded, never established in the evidence and not relied upon in submissions in this Court. The excuse was irrelevant because there was nothing to indicate that the terms of the SMK borrowing (originally sanctioned by the respondent) were improvident or that the appellant had undertaken to discharge it within any time frame. Nor was it established that the appellant had ever disabled himself from paying off the balance of the loan. He simply lacked the cash resources to do so, having regard to various commitments. The respondent was not kept in the dark on this matter.
The picture that emerges is that the two men and their business were cash-strapped at the relevant time.
Between 1993 and 1998 the company disbursed effectively all of its funds. The details are set out in paras 20-24 of the judgment at first instance (see McColl JA’s reasons at [63]). The disbursements were effected pursuant to instructions from the appellant and the respondent jointly. Nothing in the terms of those discussions and instructions involved the appellant relinquishing his claim, repeated from time to time, that he anticipated a final adjustment as between the two men of the burden of discharging the outstanding SMK loan. The effect of these transactions was that the company effectively exhausted its assets in discharging all external obligations and making a series of agreed payments to the two men (in equal amounts) totalling $345,000 paid to each man.
The payments to the men during this period were expressed as “interest free loans” by the company repayable on notice (Blue 349ff). The reasoning behind this appellation is obscure. Perhaps the men realised that there might ultimately be a need for the company to recall the funds for some purpose. (If this was the case the respondent has never offered to join in the company demanding that he should repay his “interest free loans”.)
What is slightly clearer is that the terms of the loans left the directors free to spend the “borrowed” sums as they chose. In several instances it was the respondent who proposed a particular set of paired disbursements because he had a particular need for the money that was to be advanced to him. It is not suggested that the moneys were disbursed earmarked to be applied in a particular manner. I therefore agree with Basten JA (at [198]) that the fact that the appellant did not use the funds to repay this particular SMK debt is beside the point. (In fact he spent a portion of his payments in meeting other SMK borrowings that had been on-lent by him to the company in similar fashion to the major one still in question.)
In January 1995 the appellant presented the respondent with a list of calculations showing that his contribution exceeded the respondent’s by approximately $900,000. He proposed payment of the ANZ Bank and other small creditors with the balance of the money held in trust by the parties’ solicitor going to Mr and Mrs Peterson (SMK). The respondent refused point blank to accept any such proposal. Subsequently the parties met from time to time. They arranged to pay out the external creditors and endeavoured (ultimately without success) to reach agreement on the matter presently at issue.
The pattern of drawing smallish sums in equal amounts commenced after the third payment from the Council in the sum of $900,000 in about September 1994. It appears that this was done on the initiative of the respondent and the basis of his need for money urgently (Blue 38, 39). The appellant acquiesced, while making it clear that these payments were “on account” pending a full examination of the situation as between the two men (Blue 39). The consequence of these arrangements was that out of the final payment from the Council the parties received $345,000 each by various instalments paid over a three year period between 1995 – 1998.
The company has not been wound up, but its only remaining asset is approximately $6000 in the bank.
Had the parties cooperated in jointly recalling the “loans” made one or both of to them out of the proceeds of the Eurobodalla claim or in putting the company into liquidation so that preferential payments might be investigated and recovered, then an alternative solution to the present impasse might have presented itself. But this is neither here nor there because neither party seeks such a remedy.
The basis of the appellant’s right to contribution
Undoubtedly the parties contemplated that the company would be the primary source for repaying all company debts, including moneys owing to the directors themselves. But the present issue presents itself because the company’s coffers are bare. The respondent says in effect that this is the appellant’s bad luck and he points to the absence of any contract or conversation addressing the personal claim now made.
I do not think that the analysis is greatly assisted by invoking the “fiduciary relationship” label. In Blythe v Northwood (2005) 63 NSWLR 531, I drew attention to authorities emphasising the need to delineate the subject matter over which any fiduciary obligation extends and I cautioned against discovering fiduciary obligations that are prescriptive rather than proscriptive in nature. The fiduciary label is often invoked in a conclusory sense and it frequently disguises as much as it reveals.
The facts need to be examined in detail to see if they disclose a broader arrangement that, consistently with the formal structures and contracts, generated an obligation in conscience requiring the respondent to contribute towards exonerating the appellant from the plight he finds himself in at the end of the venture.
The discussions and transactions summarised above were redolent of a broad and evolving joint venture in which two “partners” participated on terms of equality and mutual trust. Absence of an express or extant contract of partnership is not conclusive. In Bartels v Behm (1990) 19 NSWLR 257 one member of a partnership borrowed money at interest to enable partnership debts to be discharged. This occurred after termination of the partnership but before winding up was completed. The borrowing partner acted because he was being pressed by a bank that held a mortgage over his home to secure the repayment of the partnership overdraft. He was held entitled to contribution with respect to the interest incurred on the borrowing. The entitlement to contribution was not denied by the fact that the partnership was dissolved by the time the borrowing was made.
In Cummings v Lewis (1993) 41 FCR 559, Cooper J said (at 593), citations omitted):
The circumstance which gives rise to an equity to compel contribution where there is a common liability or a common risk is that satisfaction of the liability or the loss occasioned by the risk has been borne by one of a number. Once the equity has arisen it is then that “the duty of contribution extends to all persons who are within the scope of the equitable obligation”. It is the equity which has arisen which the courts enforce. The principle of equity which operates to create the equity is: he who enjoys the benefit ought also to bear the burden.
I agree with McColl JA and Basten JA that “the para 8 conversations” that took place during 1976 and 1977 were not in themselves sufficient to generate the right now invoked by the appellant. But they are not irrelevant to its proper analysis, unless (by circular reasoning) one assumes that the creation of the corporate structure to which the conversations were primarily directed exhausted their materiality.
The appellant’s claim for contribution also bases itself upon the events surrounding the taking out of the SMK loan. Indeed, even later events are also relevant, because the claim depends to some degree upon the very fact that the primary obligee (i.e. the company) became unable to repay the appellant’s loan account, swollen as it was due to the on-lending of the SMK money, due to the parties’ decisions to pay all other external debts first and to the respondent having persuaded the appellant to make the series of “loans” to the directors in the context in which that happened.

Unlike the learned trial judge, I do not regard the appellant’s claim for contribution as contradicting any aspect of the corporate structure adopted by the two men as the vehicle for conducting the relevant part of their business activities. The appellant is not seeking to disturb the statutory scheme of distribution of assets for an insolvent company. Indeed the company’s inability to repay any more of its indebtedness to the appellant referable to the SMK loan is the critical starting point, though by no means the finishing point, of the appellant’s claim for contribution. The question at issue is whether the arrangements between the two men referable to their affairs generally and the SMK loan in particular were such as to generate a right of contribution in the circumstances that have come about.
The principles of contribution and recoupment are discussed authoritatively by Kitto J in Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342. After tracing the historical origins, Kitto J drew attention to the underlying doctrine of equality as the basis of the common law and equitable rules. He said (at 350-1):
The right arises at law when one of several persons has paid more than his proper share towards discharging a common obligation … and it arises in equity when a liability of one of several to pay more than his share has been ascertained’ but for present purposes this difference is immaterial: what is important is the reason, namely that payment by the one discharges not only himself but each of the others, and qui sentit commodum sentire debet et onus.
There are well known categories (co-sureties, joint contractors, partners, trustees, insurers etc) to which this general principle has detailed application. I have endeavoured to summarise my understanding of the principles in Mason and Carter, Restitution Law in Australia chapter 6. There must be a common obligation (Burke v FLOT Pty Ltd (2002) 209 CLR 282), but an equitable principle such as contribution is not confined by legal structures. In Ramsay v Lowther (1912) 16 CLR 1, Isaacs J said (at 23-4):
Marshalling regulates the order of different classes of assets, and does not operate between assets of the same class. As between the latter the question is, properly speaking, one of contribution, and if that be borne in mind it supplies the answer to the problem we are considering.
A few words of Knight Bruce VC, in Tombs v Roch [(1846) 2 Coll 490 at 499, 500; 63 ER 828 at 832] are instructive: “Contribution, … if it differs from marshalling, does so in species rather than generically, in form rather than in nature.
“Marshalling and contribution are, each of them, the adjustment between several persons of their rights respectively, inter se, in respect of a charge or claim, which, affecting all of them, or properties belonging to all of them respectively, has been or may be enforced in a manner not unjust, as far as the person is concerned by whom it was or may be enforced, but not just as between the persons or properties liable.”
Of particular relevance to the present case is the principle that the right of contribution rests upon matters of substance, not form. Thus, it was established in the basal case of Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184 that a right of contribution between sureties could arise whether they were jointly bound, jointly and severally bound, or severally bound by the same or different instruments. The parties did not have to know of each other’s existence at the time they incurred their primary liabilities. What was critical was that the sureties had “a common interest and a common burthen” (at 273; 1278 per Lord Eyre CB). See also James Hardie & Coy v Wyong Shire Council (2000) 48 NSWLR 679; Belan v Casey (2003) 57 NSWLR 670.
The focus on substance over form is illustrated by the cases involving co-sureties where extrinsic evidence is permissible to show that the true arrangement was that one debtor was principally liable and the other liable as surety only (Tate v Crewdson [1938] 1 Ch 869) or that two persons were in substance each sureties for another’s debt (Sherwin v McWilliams (1921) 17 Tas LR 9).
In the present case, the whole venture was grounded on equality as between the two men who became the joint controllers of the company and who, until the falling out, reposed trust in each other, sharing all major decision-making. The general discussions in 1976 and 1977 and the particular discussions referable to the SMK transaction illustrate this mutuality, interdependence and basic equality. Undoubtedly, the men chose the company as the corporate vehicle for their “partnership”. It enabled them to function in particular ways as regards third parties and, to a large degree at least, it provided the juridical structure within which the rights of the two “partners” were to be worked out. The appellant’s willingness to trust the respondent continued during the 1993-1998 period when the appellant acquiesced in the respondent’s request to empty the corporate cupboard by disbursing all of the company’s assets in legitimate though apparently more pressing claims.
But the men were prepared to be flexible when it suited them and to move beyond the corporate structure when it was necessary or appropriate to do so. The SMK loan is an illustration of this, and it was not the only external borrowing that was procured by one of the men before being on-lent to the company common purposes being pursued through the company structure (see Blue 502ff).
None of these arrangements departed from the basic and enduring principle of equality that was spelt out in the “para 8 conversations” and reflected in the way that the company was administered over many years.
The respondent argues, in effect, that there was no right of contribution because the parties never squarely addressed the possibility that eventuated. But the absence of a contractual arrangement as between the parties to the contribution claim is never controlling (Dering).
Persons who embark upon a joint venture on terms of equality may be thinking more of division of profits rather than sharing of losses. Be that as it may, the principles of equitable contribution which come to the fore when a venture sours are designed to maintain the spirit of equality in the bad times as well as the good. The sky was already cloudy in 1986 when the SMK transaction was negotiated and put into place. The appellant assumed the primary risk of the borrowing, but with the prior approval of the respondent and for the mutual benefit of the two men who were concerned to keep the company afloat.
This was always a risk (burden) assumed by one venturer for the benefit of both. The two men must have contemplated the possibility that the company might prove unable to repay the money on-lent or otherwise reimburse the appellant for his costs of the borrowing. It is to me inconceivable that the appellant would have stuck his neck out to the extent that he did were it not on the basis that the two men were continuing to conduct their affairs generally upon the basis of equality. It is equally inconceivable that, if the possibility of ultimate company failure had been raised in 1986, the respondent would have said: “You alone bear that risk”. On the contrary, the parties proceeded to repose trust and confidence in each other to deal equitably with each other in all matters touching the business venture. It would have been unconscientious then, just as it is unconscientious now, for the respondent to have said: “You alone bear that risk if the unthinkable happens”.
The shared decision-making touching the administration of this loan and the application of the loan proceeds shows that the parties were still conducting the business on the basis of mutuality and equality.
There is no injustice in requiring the respondent to contribute towards exonerating the appellant as to half of the true cost of the borrowing. Interest-free loans outside family arrangements are rarities. The conversation between the two men that preceded the relevant SMK transaction gave notice, if notice were required, that the borrowing was going to be made. I infer that SMK required the appellant to pledge his credit and to provide the security of two mortgages because it was unwilling to advance money directly to the near-insolvent company. I also infer that the respondent always knew that the SMK borrowing involved interest obligations.
The subsequent arrangement whereby it was agreed that the company would pay interest at Supreme Court rates on the directors’ loan accounts was a further recognition that borrowing has a cost that is usually reflected in an obligation to pay interest. But this arrangement did not, in my view, alter or cap the underlying obligation now belatedly called upon (in the circumstances of the company’s insolvency) to share in the exoneration of his “partner” as regards the one remaining external debt arising out of the venture. A fortiori, in circumstances where the arrangements entered into by the respondent in the mid 1990s helped bring about the company’s repudiation of liability to pay the directors’ loan accounts.
Basten JA agrees with McColl JA that the relationship between the parties required an equality of contributions in relation to the financial accommodation provided to the company. So do I, for the reasons I have endeavoured to express. Basten JA nevertheless would withhold relief on the grounds set out towards the end of his reasons.
The first ground is that the appellant has not established that the proceeds of the SMK loan have not been repaid to him by the company. I disagree with Basten JA’s characterisation of the “interest free loans” to the directors in the mid 1990s as entailing repayment of moneys owing to the appellant and therefore effectively appropriated to the SMK transaction. The “loans” were not treated in this manner by the company, nor was there any discussion between the two men that imposed on the appellant any obligation to use the “loan” to pay off SMK. The very fact that identical, equally unappropriated “loans” were made to the respondent suggests that each man chose to receive the money on terms that left him free to spend the money as he wished, also bearing in mind that the “loan” label put each at risk of the funds being recalled by the company if the two men jointly resolved to require their return. Identical “loans” made in these circumstances in no way involved the adjustment of the appellant’s disproportionate burden stemming from the SMK transaction.
The second “problem” discerned by Basten JA is that the appellant has not established any factual basis for inferring that it is unconscionable of Mr Friend not to pay half the interest on the loan obtained by Mr Brooker from SMK. I disagree with this conclusion and with the reasoning upon which it rests. The conclusion proceeds, implicitly, from the starting point that the appellant’s claim is grounded on the basis of the “fiduciary relationship” discussed by McColl JA. I prefer the somewhat sharper equitable principles of contribution as the basis of analysing the rights of the parties. If those principles are established, there is in my opinion, no additional requirement for the plaintiff to establish unconscionable behaviour (cf Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 423 [20]-[26). But I do not shrink from labelling the respondent’s conduct as unconscientious in the circumstances.
Basten JA then moves to more detailed considerations. He instances the August 1984 decision to consolidate all loans sourced to third parties who were family members or friends of one or other of the directors, into the directors’ loan accounts, coupled with the 8 December 1993 decision to pay interest at Supreme Court rates on the directors’ loan accounts.
I would first point out that the 1984 decision preceded the SMK transaction. I acknowledge that the SMK loan was subsequently treated as a director’s loan account transaction as regards the appellant. But this matter of internal company accounting did not, in my view, impact upon the justice of the appellant’s claim to a just contribution in the event, which has happened, of the company being unable to meet the appellant’s loan account. Nor were the resolutions about loan accounts inconsistent with the proposition that the company would be responsible for the cost of funds to the directors. On the contrary, the resolutions showed the company’s awareness (and the parties’ awareness) that these external borrowings by the directors were nevertheless for company purposes.
I am equally unconcerned about the absence of contemporaneous accounts as regards the cost of funds to the directors and the spectre of accounting complications. The directors had other matters on their minds at the relevant time. And, in short, they trusted each other in many ways. They were not at that stage thinking of the “what ifs” that might eventuate if the company proved unable to meet its obligations under the directors’ loan accounts.
The appellant’s claim does not involve the taking of accounts, because the two men arranged matters in such a way that all external debts were discharged. The appellant’s claim is confined to equalising the burden of the SMK loan.
This is not to say that there may be no outstanding issues as regards quantifying the sum which the respondent should be ordered to pay. For one thing, the current balance of the SMK obligation will need to be ascertained. That will involve an inquiry as to the present state of the appellant’s indebtedness to SMK having regard to the terms of the mortgages, any renegotiation of its terms that has occurred, and such payments on account of capital or interest as have been made.
I do not, however, see the appellant’s claim being pegged by reference to the internally negotiated loan account arrangement. After all, the cost of the borrowing was always higher, and the company has (with the participation of the respondent) incapacitated itself from repaying the appellant’s loan account. The balance of the SMK loan has climbed rapidly since and at least partially in consequence of the respondent’s refusal to make contribution when first asked to do so in 1994.
I have already indicated why there is, in my view, no need to make allowance for what Basten JA describes as the personal use by Mr Brooker of the $345,000 repaid by the company, which was not used by him in immediate reduction of the SMK loan.
I agree with McColl JA that, for the reasons she gives, the defences of laches, acquiescence and delay should be rejected.
A declaration of entitlement should be made. I would not withhold declaratory or mandatory relief on discretionary grounds. SMK’s mortgage debt remains due and enforceable. I do not think it essential that equitable relief be withheld simply because judgment has not been entered against the appellant (cf Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242 at 245).
Disposition
For these reasons the appellant is, in my view, entitled to a declaration that the respondent is required to contribute equally to the discharge of the outstanding obligations under the SMK loan arrangements, with consequential orders for payment of the appropriate sum. The parties should be directed to file agreed short minutes no later than 10 February 2007. If agreement cannot by then be reached the parties should, within a further 14 days, exchange written submissions detailing their outstanding differences and indicating why their preferred orders should be made. Hopefully, this Court will be able to resolve any outstanding issues without the need to refer the matter to an Associate Justice.
Costs should follow the event with the respondent receiving a certificate under the Suitors’ Fund Act.

McCOLL JA: Frederick Clarkson Brooker, the appellant, sought a declaration that between May 1977 and January 1995 a partnership existed between Nicholas Macarthur Friend, the second respondent, and himself for the conduct of a building, construction and development business, alternatively a declaration that for that period a joint venture existed between them for the conduct of such a business. Friend & Brooker Pty Ltd, the first respondent, was said to be the corporate vehicle of either the partnership or the joint venture. Insofar as the joint venture was concerned the appellant asserted that he and the respondent owed each other fiduciary duties, to act in good faith in the interests of the business and of each other in arranging for the loan of funds to the “business” by friends and family and for the repayment of those loans and to co-operate in accounting to each other so that any profit or loss ultimately incurred by the business be shared equally between them. He claimed to be entitled to a full account of all dealings and transactions between the parties arising out of the partnership or joint venture and/or to damages or equitable compensation for loss he suffered by reason of the respondent’s refusal to make equal contribution to the repayment of his personal borrowings for the purposes of the business. Nicholas J gave judgment for the defendants and dismissed the proceedings: Frederick Clarkson Brooker v Friend Pty Limited & Anor [2005] NSWSC 395.
The first respondent ceased to trade in 1995, was deregistered on 26 July 1996 and took no part in either the trial or the appeal. I shall, therefore, refer to Mr Friend as the respondent.
Statement of the Case
The only evidence at the trial, apart from documentary material, was given by the appellant and a Mr Peterson, to whom I shall refer in greater detail in due course. This is an aspect of the proceedings upon which the appellant strongly relies.
The facts are in large measure uncontroversial and can conveniently be taken from the judgment below:
“Background
7 The following narrative is of events which provide some background for the better understanding of Mr Brooker’s claims. Most of these matters were not in dispute and in any event there was ample evidence for the finding that each took place.
8 In about May 1977 Mr Brooker and Mr Friend resigned from their employment as engineers with John Holland Constructions Pty Limited with the intention of together establishing an engineering and construction business.
9 On 18 July 1977 the company was incorporated to which Mr Brooker and Mr Friend were appointed directors. Their respective family trusts became equal shareholders through a common trustee, Naya Nominees Pty Limited.
10 Between about July 1977 and about 1979 the principal activity of the company was civil engineering construction. In 1979 the scope of the business was widened to include property purchase and development.
11 In about 1980 Mr Brooker and Mr Friend were advised by their accountant, Mr Joslin, that carrying out property development through a trust structure would give them discretion as to the distribution of profits. The advice was accepted, and unit trust structures with corporate trustee companies were used for projects. These included the projects at No. 44 Bridge Street, Sydney and Doohat Avenue, North Sydney by Ilenace Pty Limited, and at No. 11 Hardie Street, Neutral Bay by Duvana Pty Limited. Syelight Pty Limited, a company in which Mr Brooker and Mr Friend each owned one half of the shares, undertook the development of the Neutral Bay property for Duvana Pty Limited. …
12 From time to time money was borrowed for use by the company in its business. Funds were obtained by way of direct borrowings from third parties including banks, family members, and friends. Mr Brooker and Mr Friend also, separately, borrowed funds which each on-lent to the company, which loans were reflected in the directors’ loan account as unsecured loans.
13 On about 16 January 1984 the company entered into a contract with the Eurobodalla Shire Council (the council) for the construction of a sewerage reticulation work at Narooma for the sum of $2,531,062.48 (the Narooma contract). To finance the works the company arranged an overdraft facility for $350,000.00 with the ANZ Bank. Funds were also obtained by way of loans from other parties.
14 In about August 1984, at Mr Brooker’s suggestion, it was agreed that all loans from family members and friends should be consolidated into the directors’ loan account, and he instructed the company’s accountant to proceed accordingly.
15 In September 1985 the Narooma contract reached practical completion. In about January 1986 the company submitted a claim for the sum of about $1,000,000.00 to the council for quantities underpaid. The claim was rejected in about April 1986.
16 By early 1986 the company’s account, and the account of the associated company, Syelight Pty Limited, with ANZ Bank had been frozen. In order to fund a construction contract in Canberra which the company then had with Blue Circle Southern Cement Limited arrangements were made to use the account of Ilenace Pty Limited with another bank.
17 In November 1986 SMK Investments Pty Limited (SMK) through its director Mr Graham Richard Peterson agreed to lend Mr Brooker the sum of $350,000.00. These monies were on-lent by Mr Brooker to the company and were applied, inter alia, to repay loans from various lenders.
18 From mid-1987 to mid-1990 Mr Friend secured and managed to completion a number of small construction contracts for the company. Funds were provided through Ilenace Pty Limited and the personal accounts of the directors. Since about July 1990 the company has not been involved in construction work or other trading activity.
19 During 1991 the company was engaged in litigation with the council in respect of its claim. On 6 September 1991 it was paid the sum of $193,680.00 by the council.
20 On 9 June 1993 the council paid the company the sum of $1,634,964.00 pursuant to the arbitrator’s award of 19 March 1993. At about the end of June 1993 various creditors of the company were paid from the proceeds of the first payment from the council. Mr Brooker and Mr Friend each were paid the sum of $63,638.00.
21 On 3 March 1994, after further litigation, the award was increased by the sum of $256,898.00. On 19 September 1994, pursuant to a deed of release the council paid the company a further sum of $900,000.00.
22 In about October 1994 and on 25 January 1995 there were meetings between Mr Brooker and Mr Friend during which Mr Friend denied personal liability for the SMK loan or an obligation to share equally in its repayment. It appears that the parties have been in dispute since then.
23 On 8 February 1995 Mr Brooker and Mr Friend met at the office of the company’s solicitors, Foulsham & Geddes. It was agreed that from the proceeds of the payment of $900,000.00 from the council the sum of $213,933.00 should be applied in payment of the ANZ Bank and small creditors. It was also agreed that the balance of about $687,000.00 be paid out equally to the parties by instalments by way of loans from the company.*
24 During the period 24 August 1995 to 3 March 1998 from the proceeds of the third payment received from the council advances were made to each of Mr Brooker and Mr Friend of the total sum of $345,000.00 in various amounts as interest free loans. The sum of about $6,000.00 remains as an asset of the company.
The SMK loan
25 In these proceedings Mr Brooker claims that in November 1986 SMK lent to the joint venture or partnership and, in effect, to him and Mr Friend, the sum of $350,000.00. He asserts that he and Mr Friend personally borrowed money for the purposes of the business and hence are personally liable to the lender for it. Mr Friend denies the claim. It is convenient to determine this issue before turning to the others.
26 The circumstances of the loan were that in November 1986 Mr Brooker spoke to Mr Peterson about the financial difficulties of the company, and expressed a need for the sum of $350,000.00. Mr Peterson agreed to provide it. A few days later Mr Brooker had the following conversation with Mr Friend:
“I said: ‘Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council’.
He said: ‘What do you think?’
I said: ‘We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan’.
He said: ‘Well then, we should do it’.”
27 Thereafter arrangements were made pursuant to which SMK provided the funds to Mr Brooker. On 8 November 1986 the sum of $20,000.00 was paid to Mr Brooker in advance of settlement. On 23 December 1986 the balance of $330,000.00 was applied, inter alia, to discharge the company’s loans from Trade Credits Limited, Alcon Investments Pty Limited and G. A. and A. G. de Bakker, and to pay Mr Brooker the sum of $37,183.95. The monies were treated by the company as having been lent to it by Mr Brooker as its accounts show (TB 1270).
28 The loan was secured by first mortgage over the property of Mr Brooker’s wife at No. 12 Milner Street, Mosman for which Mr Brooker was guarantor, and by a second mortgage over the property jointly owned by Mr Brooker and his mother at No. 4 Selwyn Street, Artarmon.
29 In evidence Mr Peterson acknowledged that any claim for recovery of the loan would be made against Mr Brooker and not against the company or Mr Friend.”
* [The appellant submits that this sentence does not accord with his evidence that the balance was used to pay outstanding loans advanced by various lenders to one or both of the parties].
The SMK Loan

The primary judge first dealt with the question whether the SMK loan was lent to the appellant and the respondent so as to render them personally (and equally) liable for its repayment. He made the following findings:

all the documents as to obtaining and securing the SMK loan demonstrated it was made to the appellant and/or his wife: [30];
the appellant “himself had no doubt that he was liable” to SMK for the loan as demonstrated by ([30]):
“… the separation of loan account document (FCB 16) prepared by him in which the disbursements made from the SMK loan are credited only to his loan account, as was the amount of $250,000.00 which was repaid to SMK in July 1993 from the proceeds of the payment from the council”;
and ([31]):
“…the letter from Mr Brooker’s solicitors to Mr Friend’s solicitors of 30 May 2002 (Exhibit 1) in which the following is stated:
‘7 In or about December 1986 the loan from, inter alia, Trade Credits Pty Limited and from Mr de Bakker was refinanced by a loan from SMK Investments Pty Limited to Mr Brooker. Mr Brooker remains liable to SMK Investments Pty Limited for the balance due under this loan and interest. The loan was secured by mortgage over Mr and Mrs Brooker’s property at 12 Milner Street, Mosman and 4 Selwyn Street, Artarmon’.”;
there was no evidence the respondent agreed to be jointly liable for, or to contribute to, the repayment of the SMK loan and that it was:
“… difficult to accept that, if in truth he held the belief that Mr Friend was equally liable for this loan, Mr Brooker proceeded with the borrowing, and procured the securities from his wife and his mother, without first obtaining Mr Friend’s acceptance of such liability. That there is no evidence that there was even discussion as to liability is remarkable having regard to the financial difficulties then facing the company, and the likelihood that it may have been unable to repay Mr Brooker the monies which he had on-lent to it. The absence of evidence as to these matters is … further indication that there was no agreement to the effect claimed in these proceedings. This doubt is reinforced by the delay until about October 1994 when Mr Brooker first claimed that Mr Friend was equally liable for the loan.” ([75]);
the fact that on 30 June 1993 the respondent agreed that the company should pay SMK the sum of $250,000.00 in partial repayment of Mr Brooker’s borrowing on an occasion when, according to the appellant, the respondent altered the amount referable to the loan but said nothing about it and there was no evidence that the issue of joint liability was raised, did not support the agreement alleged ([76]).

His Honour rejected, as implausible, in the face of the evidence to the contrary, the appellant’s evidence that “the monies were jointly borrowed by Mr Friend and himself”: judgment at [32].
66 The appellant submits that, in so finding, the primary judge failed to take into account his unchallenged evidence concerning the circumstances in which the SMK loan was arranged as set out in paragraph [26] of the judgment.
The relationship between the parties
The primary judge then dealt with the relationship between the parties.
Mr Brooker’s case at trial, as recorded by the primary judge (at [33]) was that the relationship between the parties was either a partnership or joint venture which existed outside and beyond the company which was merely the vehicle through which the business was conducted. He said the parties’ agreement was as set out in para 8 of his affidavit of 25 November 2002 (described by his Honour, at [34], as “the para 8 conversations”):
“34 The plaintiff’s evidence was that during 1976 and 1977, whilst working on the same project in Canberra, he and Mr Friend had a number of conversations in which they discussed establishing a construction business together, its operation, how it would be financed, and how contributions, losses and profits would be shared. In his affidavit of 25 November 2002 (para 8) he said:
‘8 In mid 1976 I was assigned to a new project in Queanbeyan, the Googong Water Treatment Plant and moved to Canberra for the purpose. Mr Friend also worked on the same project and lived in Canberra. I worked with Mr Friend on this project until in or about 1977. Whilst in Canberra I had discussions with Mr Friend in relation to establishing a construction business together. During these conversations we discussed in considerable detail the direction of the business, how it would be operated, how it would be financed and how contributions, losses and profits would be shared. During the course of these various conversations the following was said:
(a) In relation to the structure of the venture and contributions:
I said: ‘The partnership should be a 50:50 in every respect’.
He said: ‘Yes of course’.
I said: ‘There will not be a hierarchy between us with one in charge and the other subordinate. We will draw equal salaries and plough as much back as we can into the business, but of course we shouldn’t draw any salary until we have a cash flow to support it’.
He said: ‘I agree with all that’.
I said: ‘When we are drawing a salary I will need enough to support my family’.
He said: ‘Well I won’t need that much. I can draw what I need and leave the rest in as loan’.
I said: ‘When the business is at the point where it no longer needs any financial input from us and each of us has got back what we have put in, like undrawn salary and such like, then we can start drawing profits – sharing everything equally’.
He said: ‘You know sometimes when two people are in business together it might appear as though one is working harder than the other but it is often the case that the other one is making an equally important contribution in a conceptual or creative way that is not so obvious’.
I said: ‘Don’t worry Nick, we will each put in to the best of our ability but at the end of the day what we take out will be 50:50. There won’t be any argument about that’.
(b) In relation to the business name:
He said: ‘The business name should be Friend and Brooker’.
I said: ‘I agree, we can’t have Brooker and Friend it sounds too much like a wedding invitation’.
(c) In relation to incorporating a company:
I said: We will have to run the partnership through a company structure. We will need to protect ourselves against bad debts and such like. To protect our personal positions we should establish a company and carry out all trading through the company’.
He said: ‘Yes I agree’.
(d) In relation to banking:
He said: ‘We should approach the ANZ for banking services. My family has a long association with the bank’.
I said: ‘I agree’.
(e) In relation to the business premises:
I said: ‘It makes sense that we use my house in Annandale. We can use the lower level as our office’.
He said: ‘That is a good idea and I could live upstairs if that is okay by you’.
I said: ‘Yes, of course’ ”
[Counsel for the respondent conceded at trial that these conversations were “really not in dispute” but argued they were insufficient to establish the appellant’s case.]
His Honour also recorded the following evidence as relevant to the relationship issue:
“39 The following is a relevant passage from the cross-examination (Tp 63):
‘Q. Just to understand then before I take you to the remaining conversations, your position is that you formed a company to trade through and your understanding was if in the end the company failed and, let's say, was wound up and you had undrawn salary or you had put money in that the company couldn't afford to repay you, that your understanding is that the agreement between you and Mr Friend was that each of you would pay to the other directly across the top of the company, even though it had failed, any amount which was necessary to equalise your contributions?
A. Yes, that's exactly what I say.
Q. And it doesn't matter that your sole source of business, the company, had failed and that either of you may not have had the money to pay, it would just be an obligation that would be there forever between you?
A. It would be an obligation which if it could not be met immediately would be met in time’.
And at Tp 64:
‘Q. … You tell his Honour that the arrangement between you was that one way or another if the company made a loss and there wasn't enough to repay either of you out of the company, your arrangement extended to one paying across the top the other the extent of his contribution unrepaid; is that right?
A. As far as was necessary to equalise the losses, yes.
HIS HONOUR:
Q. Can I understand that your understanding was that this was the effect of a private arrangement between you and Mr Friend really outside the operations of the company?
A. Yes.
HAMMERSCHLAG:
Q. And you derive that, you say, from conversations which are set out in your affidavit?
A. Yes, and the way in which we conducted the business.
Q. Well, the way in which you conducted the business was to accrue loan accounts and at all material times pay each other out 50/50, right, of what there was?
A. Well, there were never any payouts.
Q. In what way then do you tell his Honour that's the way you conducted it?
A. By the way in which we kept records of contributions in order to have those records when the time came to equalise those before either sharing surplus or sharing loss’.
40 Mr Brooker relied upon the para 8 conversations (set out in para 34) as the evidence of the agreement. His evidence was (Tp 67):
‘Q. Just go back to para 8. In the middle of the page you say, ‘When the business is at the point where it no longer needs any financial input and each of us has got back what we have put in’. By that you meant from the returns of the business; correct?
A. Yes.
Q. ‘Like undrawn salary and such like we could start drawing profits sharing equally.’
A. Yes.
Q. What you meant by that was you would each put in whatever, once the company was in a position to pay you back it would pay you back in accordance with your contributions, and then after that you would share equally?
A. That's correct.
Q. And that's what your understanding is. At the end of the day, if and when the company could pay each of you back the money it owed it would do so, and whatever was left over would be shared between you equally?
A. Yes, that's correct.
Q. There is nothing in this conversation that says anything about you being liable to him personally or he being liable to you personally across the top of the company for any ultimate shortfall in either of your contributions, is there?
A. I believe that's implicit in that part of the conversation.
Q. And that is the conversation which you under your oath tell his Honour from which you derive this agreement between you outside the affairs of the company, that one would be liable to the other for any shortfall when the company couldn't pay?
A. Yes.
Q. And you say you made that agreement at a time at which either of you had almost nothing to your names?
A. Well, that seems to be a double question. We made it at that time, but neither of us had nothing to our names.
Q. Each of you had very little, you have told his Honour, and also you were perfectly conscious of the fact that you were about to embark on an enterprise in a risky field of endeavour?
A. Yes.
Q. Let me put it to you squarely, Mr Brooker. I want to suggest to you that the evidence that you have given his Honour this morning, to the extent that you said the same thing yesterday, that you understood there was an agreement between you two young men at the time that either of you would be liable to the other on failure of the company to be able to pay each of you personally across the top, is untruthful?
A. That's not right. That's exactly how I understood the relationship between us’.” (emphasis added)
The primary judge found:
“42 [The appellant] could recall no discussions with Mr Friend pursuant to which he ever agreed with him that he would undertake personal liability for any debts of the company. He accepted that there was no discussion in which it was agreed that they would decide at some time whether or not to pay creditors which the company could not pay, or that each at some time would take responsibility for any debts owed by the company to any other person.
…
50 In cross-examination, Mr Brooker said the agreement relied upon was as conveyed in the para 8 conversations. He agreed that during the conversations no reference was made to any loss in relation to loans or credit given, or to any guarantee or security. He claimed a specified amount from each defendant, but made no claim for account. He accepted that the first time when such a claim was made was on 26 April 2002 by the amended statement of claim.”
No partnership accounts were kept. All accounts concerning the business were kept by the company: judgment at [43].
When the company experienced financial difficulty after 1984, its activities were financed by funds raised from time to time by personal borrowings by the parties which were on-lent to the company, as well as by loans directly to the company: judgment [44].
The primary judge recorded the post-1984 events as follows:
“45 In August 1984, at Mr Brooker’s suggestion, it was agreed to consolidate all loans from family and friends into their own account with the company. He said that business was then on the brink of insolvency and its books were to be inspected by accountants on behalf of the bank. He felt that the bank would look more favourably upon the balance sheet if those debts were shown as being to the directors. The balance sheet for the year ended 30 June 1987 gave effect to this treatment and reflects the SMK loan of $350,000.00 which had been on-lent by Mr Brooker.
46 On 8 December 1993 there was a directors’ meeting attended by the parties. A record of it is TB 301. It was resolved to accept interest on loans raised by directors at Supreme Court rates, calculated from 1 July 1984. Having regard to the time spent on company affairs, particularly in relation to the litigation of the claims against the council, it was also resolved to accrue for each director fees of $15,000.00 per annum for the years ended 30 June 1985 and 30 June 1986, and $5,000.00 per annum for the years ended 30 June 1987 to 30 June 1993. The priority for payment of debts of the company was also settled.
47 On 3 January 1995 the accountant provided to the parties a balance sheet as at 31 December 1994. It recorded the only assets as $732,818.00 which was the balance of cash received from the council after payment of some trade creditors. Liabilities included an item for creditors at $669,911.00 and an item in respect of directors’ loan accounts and superannuation at $2,055,181.00. In cross-examination (T pp 50-51) Mr Brooker agreed he had a moral obligation to take nothing for the directors but to pay out the trade creditors and the bank. He said it was his wish to pay SMK, being the one remaining creditor, all of the money that was available for each to contribute to ensure that it was paid out in full. He said it was his intention not to take any money for himself.
48 On about 20 November 1995 the parties met in Mr Foulsham’s office when Mr Brooker produced a copy of the separated loan accounts (FCB 16) and invited discussion about it. Mr Friend then left the meeting. It appears that there were no subsequent communications between the parties prior to the commencement of these proceedings. Mr Brooker asserts that the partnership was then terminated.
49 On 27 December 2000 these proceedings commenced with the filing of the statement of claim. It includes in para 2.3 the allegation that the agreement provided:
‘To the extent that either of them suffers any loss in relation to loans made or credit given to the Company or guarantees or security given for the benefit of the Company they shall make contributions one to the other to the intent that the losses are born equally’.
50 In cross-examination, Mr Brooker said the agreement relied upon was as conveyed in the para 8 conversations. He agreed that during the conversations no reference was made to any loss in relation to loans or credit given, or to any guarantee or security. He claimed a specified amount from each defendant, but made no claim for account. He accepted that the first time when such a claim was made was on 26 April 2002 by the amended statement of claim.”
At trial Mr R Forster of Senior Counsel, who appeared with Mr S White for the appellant, submitted that the relationship between the parties was a partnership in which they bore all losses equally, alternatively that their agreement was that upon payment of a debt by one, the other was obliged to reimburse him one half. The primary judge recorded (at [51] – [52]) that the basic structure of the relationship was to be found in the para 8 conversations which were also said to establish the agreement for the partnership to be run through a company, thereby protecting the parties from personal liability for debts incurred by the company, but with the consequence that each would share personal liability for the loans of the other which had been provided to the company. The relationship was said to entitle the appellant to a full accounting between the parties from 1977, that liability for repayment of the SMK loan should be borne equally and there should be an accounting to assess the amount contributed by each to enable equalisation of the losses incurred in their venture: see judgment at [54].
Mr D Hammerschlag of Senior Counsel who appeared for the respondent below with Mr H Packer, submitted, in substance, that whatever agreement existed prior to July 1977, did not survive incorporation of the company: judgment at [55] – [56]. He argued that the question of sharing liability for personal borrowings, which were on lent to the company, was not discussed and that it could not be assumed the parties “even turned their minds to this issue in a conversation in which all that was said about personal liability was that incorporation would protect them from it”. Mr Hammerschlag also contended that the proposition that a partnership continued after incorporation was insupportable, pointing out that thereafter there existed none of the necessary features of a partnership at law. He also contended that even if an entitlement to an account was found, no such order should be made relevantly for present purposes because of the appellant’s laches as demonstrated by the facts that:
“… although on Mr Brooker’s case the alleged partnership terminated in about November 1995 no claim for equitable relief was made until the amended statement of claim was filed … on 26 April 2002. During the intervening period the interest claimed to be payable on the SMK loan increased the total debt substantially to the present amount of about $1,300,000.00. Furthermore, between 24 August** and 3 March 1998 Mr Brooker received from the company the total sum of $345,000.00 by way of loans, the proceeds of which have paid personal expenses and he is not in a position to repay them to the company. It is also submitted that a relevant consideration in the exercise of discretion is Mr Peterson’s evidence that having regard to Mr Brooker’s financial straits, he is not presently proposing to claim against Mr Brooker for repayment of the SMK loan”: see judgment at [59].
** 1995: see judgment at [24]
The primary judge said that the question whether there was an agreement between the parties which established a fiduciary relationship as a partnership, or a joint venture, or one based on a relationship of trust and confidence turned on the para 8 conversations: judgment at [60], [65]. As to those conversations he found:
“69 Analysis of the evidence in the para 8 conversations` shows that there were various conversations on the subject of establishing a construction business together. There is no indication as to whether the passage quoted is the whole or a part of the conversation. In respect of each there is nothing indicative of date, occasion, or context, although there is sufficient for the inference that the conversations took place between mid-1976 and sometime in 1977.”

He accepted (at [70]) “that the parties commenced business in partnership in May 1977” and inferred that “…was in accordance with the matters discussed in the para 8 conversations”. He then said:
“The company was incorporated on 18 July 1977 but there is no evidence as to whether the conversation in para 8(c) in relation to incorporation took place before or after the commencement of the partnership in May 1977. It is uncertain whether it was always intended that the parties should operate through a corporate structure, or whether it was decided to do so after they began operating as a partnership and had seen the benefits of incorporation, and agreed to change the nature of their relationship in order to obtain those benefits. There is thus no evidence as to the context and circumstances in which the conversation as to incorporation took place, these being matters relevant to ascertaining the content of any agreement.
71 In the end, the court is left to consider the natural and ordinary meaning of the words in the para 8 conversations. It is to be kept in mind that Mr Brooker could recall no discussion with Mr Friend in which he agreed to undertake personal liability for any debts of the company. He agreed that there was no discussion with Mr Friend in which it was agreed that they would decide at some time whether or not to pay creditors which the company could not pay, or that each at some time would take responsibility for debts owed by the company to other persons.
72 In my opinion all that relevantly can be taken from the para 8(c) conversation with regard to the other conversations in para 8 is that at some time the parties agreed to establish a company in order to protect themselves from personal liability for debts incurred in the conduct of the business. It demonstrates the common intention to cease carrying on business in a relationship which exposed them to personal liability for its debts, and to replace it with a corporate structure under which there was no such exposure. In my opinion that is as far as the evidence goes. Mr Brooker’s subjective understanding of the arrangement is irrelevant.
73 In my opinion nothing in the para 8 conversations indicates that the parties turned their minds to the notion of continuing the partnership or any other relationship after the company had taken over the operation of the business, or that a business relationship should continue to operate outside the company under which each owed a fiduciary duty to the other. Furthermore, there is simply no evidence that the parties agreed that the business would be conducted by the company subject to each accepting personal liability for the debts of the other to a third party.
74 It seems to me that the parties, with the benefit of professional advice, incorporated their business because it was commercially advantageous to do so in that it protected the personal position of each. Mr Brooker impressed me as an experienced businessman well aware of what was required for the protection of his interests. It is reasonable to expect that there would have been some record of an agreement intended to operate outside the corporate structure whereby the parties preserved the risk of personal liability for the debts of each other where the proceeds were on-lent to the company. The absence of such evidence suggests that there was in fact no such agreement.
75 There is also no evidence that Mr Friend agreed to be jointly liable for, or to contribute to, the repayment of the SMK loan. It is difficult to accept that, if in truth he held the belief that Mr Friend was equally liable for this loan, Mr Brooker proceeded with the borrowing, and procured the securities from his wife and his mother, without first obtaining Mr Friend’s acceptance of such liability. That there is no evidence that there was even discussion as to liability is remarkable having regard to the financial difficulties then facing the company, and the likelihood that it may have been unable to repay Mr Brooker the monies which he had on-lent to it. The absence of evidence as to these matters is, in my opinion, further indication that there was no agreement to the effect claimed in these proceedings. This doubt is reinforced by the delay until about October 1994 when Mr Brooker first claimed that Mr Friend was equally liable for the loan.
76 In reviewing the evidence concerning the SMK loan I have not overlooked that on 30 June 1993 Mr Friend agreed that the company should pay SMK the sum of $250,000.00 in partial repayment of Mr Brooker’s borrowing. In his affidavit of 30 April 2004 (para 7) Mr Brooker says that at the meeting on that date Mr Friend altered the amount referable to the loan but said nothing about it. There is no evidence that the issue of joint liability was raised. This occasion provides no support for the existence of the agreement alleged.
77 What happened was that from the time of incorporation the partnership ceased, just as the parties intended. The effect of incorporation changed the basis upon which the business had been conducted since May 1977, not only with regard to third parties, but also as between themselves. Thereafter their relationship was as co-directors of the company, and the assets and liabilities associated with the business were the company’s. Exhibit B depicts the interrelationship of corporate structures and unit trusts by which the business operated.
78 As Mr Friend’s counsel submitted, it is apt to refer to the passage in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at p 691 per Young, J:
‘Unfortunately, it very often happens in cases in this court that a person has arranged his affairs for commercial or fiscal reasons employing a particular structure, which with respect to creditors and the Government he expects to be recognized as no sham, but when it comes to a dispute with his former wife or former business associates it is not in his interests to maintain the structure and he pleads before this Court that one must not look at the structure at all but rather at the ‘realistic’ or ‘practical’ effect of what has happened. I do not find this sort of submission attractive. So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better, for worse, for richer or poorer, in commercial sickness or commercial health’.” (emphasis added).
His Honour concluded (at [79]) that the appellant had “failed to prove any agreement pursuant to which the existence of a fiduciary relationship with Mr Friend was established after the incorporation the company”. He dismissed the summons and ordered the appellant to pay the costs. He did not deal with the respondent’s claims that, if the appellant had established his claim, relief ought be denied to him on discretionary grounds.
Grounds of Appeal
The appellant relies on a number of grounds of appeal which can be reduced to the following complaints:
1.The primary judge erred in finding that the parties’ agreement to establish a company in order to protect themselves from personal liability for debts incurred in the conduct of the business demonstrated a common intention to cease carrying on business in a relationship which exposed them to personal liability for its debts and to replace it with a corporate structure under which there was no such exposure.
2.The primary Judge erred in failing to find that the agreement initially reached between the parties remained in effect at all material times.
3.The primary judge should have found that the conduct of the parties subsequent to the making of their agreement was relevant in determining not only whether such an agreement had been formed, but also whether it remained in effect at any particular point of time and that the evidence of such conduct should have satisfied him that the said agreement remained in effect at all times.
4.The primary judge should have found that the agreement of the parties was that each would contribute equally to any loss incurred by the other party in respect of any personal liability undertaken by that other party for the purposes of the business.
5.The primary judge erred in restricting his assessment as to the existence or otherwise of a fiduciary relationship to evidence of an agreement, and then only to evidence of an agreement based solely on the para 8 conversations and failed to take into account other conversations and other evidence in assessing the existence and nature of any fiduciary relationship.
6.The primary judge should have found that there was a joint venture fiduciary relationship between the parties in relation to the business which included an obligation of the respondent to share equally with the appellant any loss incurred by the joint venture business.
7.The primary judge erred in not finding that the appellant had obtained the respondent’s agreement to the SMK loan and that the respondent had agreed that he would contribute equally to any loss personally incurred by the appellant by reason thereof.
The grounds of appeal did not expressly complain that the primary judge erred in failing to find a partnership existed between the parties, but the appeal was conducted on the basis that such a ground was relied upon and one of the orders sought was a declaration that a partnership had existed. I have proceeded on the basis that the issue of partnership has been squarely raised.
Submissions on Appeal
The appellant’s submission focused on four topics:
(a)the initial conversations between the parties about establishing a business;
(b)the primary judge’s findings about what the appellant accepted in cross-examination about the available evidence about an agreement and the relevance and admissibility of evidence of conduct subsequent to the initial conversation;
(c)the primary judge’s analysis of whether a fiduciary relationship existed between the parties; and
(d)the evidence, or lack thereof, of any conversation between the parties about accepting liability for the SMK loan.
The appellant’s submissions: the initial conversations
Mr Forster, who again appeared with Mr M S White for the appellant, noted that the appellant was not challenged, nor contradicted, on the para 8 conversations and the primary judge accepted they occurred. He accepted the para 8 conversations were important as they were directed to the nature and structure of the business the parties were to establish. Indeed, he submitted that the key to the parties’ relationships was the para 8(a) conversation that the business would be “50:50 in every respect”. Mr Forster argued that the para 8 conversations indicated the width of the agreement between the parties to treat each other in such a way as to achieve an equal outcome in the business. He submitted that the primary judge erred in failing to take that matter into account.

Mr Forster also submitted that the primary judge led himself into error in concluding (at [70]) the appellant had not established when the para 8 conversations (particularly the para 8(c) conversation) took place and, secondly, made inconsistent findings which depended on the time when that conversation occurred having been demonstrated.
Mr Forster argued that timing of the para 8 conversations was established by the appellant’s evidence that they occurred “whilst in Canberra” while he and the respondent were engaged on a project. As he had resigned from that project in April or May 1977 (para 9 of his first affidavit) and commenced business with the respondent in May 1977, Mr Forster contended the agreement to operate the business through the medium of a company was always part of the original agreement in which the partnership was established. Accordingly, the primary judge had erred (at [72]) in concluding the para 8(c) conversation demonstrated a common intention to cease carrying on business in a relationship which exposed the parties to personal liability for its debts, and to replace it with a corporate structure under which there was no such exposure.
Mr Forster argued, by reference to those portions of paras [70], [72], [73] and [77] of the judgment which I have underlined (see [77] above) that the primary judge had “progressed from being unable to identify the time or context of the conversation in para 8(c) to a finding that the decision to incorporate a company occurred after the establishment of the partnership in May 1977 and amounted to a decision to change the nature of the relationship between [the parties] so as to no longer constitute a partnership”. He argued that, in so finding, the primary judge failed to take into account, inter alia, the subsequent references by the appellant and the respondent to each other as partners, a term also used by their solicitor, as late as August 1983.
Mr Forster also argued that once the primary judge apparently accepted the para 8 conversations took place in Canberra before the establishment of the partnership in May 1977, the agreement to operate the business through the medium of a company was always part of the original agreement to establish a partnership. Mr Forster submitted that the company was simply a medium for the working of the joint venture between the parties, which operated “over the top of” the company.

He contended that the agreement to incorporate the company did not constitute a subsequent agreement to change the nature and basis of the original partnership but, rather, was always part of the agreement between the parties as, too, was the term that the “partnership should be 50:50 in every respect”. He submitted that, to the extent his Honour found otherwise, that finding was in error and contrary to the unchallenged evidence.
The appellant’s submissions: the course of conduct case
Mr Forster submitted that the primary judge erred (at [68]) in construing the para 8 conversations as the only available evidence of the agreement, rather than having regard, too, to the appellant’s case that the parties’ agreement arose from, and was evidenced by, those conversations as well as by a course of conduct. He argued that the appellant gave considerable uncontradicted evidence of a course of conduct giving rise to an understanding between the parties from which an agreement should be inferred that they would equalise their contributions to the business, including personal borrowings of funds on-lent to it.
Mr Forster also pointed to other aspects of the parties’ conduct: their reference to each other as “partners”, the fact that they incurred personal liabilities to their friends and family in order to raise capital for the business and conversations between the two men in which, when drawings were discussed, it was agreed they be in equal amounts.
Mr Forster argued that the primary judge had not addressed the significance of the appellant’s evidence that the parties’ raised finance from time to time by personal borrowings on lent to the company as well as by loans directly to the company. It was this “type of liability which the appellant should be found to have had in mind when he was asked in cross-examination about why the business incorporated the company”. He submitted that it was apparent from the evidence that the appellant drew a distinction between trading debts/trade creditors and other borrowings for the purpose of the business. The company vehicle provided the “usual protection” to the principals behind the company against trade debts incurred in the operation of the business but, when capital raising was required, the company was not intended to be an obstacle to the parties’ agreement to equalise such personal liabilities incurred for the benefit of the business.

Mr Forster submitted that the primary judge had failed to address the appellant’s case that there was an arrangement between the parties outside the corporate vehicle, of which the corporate vehicle formed a part. He argued that in circumstances where the respondent, through his counsel, had accepted that the relationship between the parties was a quasi-partnership, his Honour ought to have applied the proposition that the relationship of mutual trust and confidence between the parties was not subsumed by the establishment of a corporate structure through which their business was conducted.
The appellant’s submissions: fiduciary relationship
Mr Forster submitted that the errors in the primary judge’s approach to the question of the nature and content of the agreement between the parties infected his approach to the question whether a fiduciary relationship existed. Thus, he contended, his Honour erroneously confined his consideration of whether a fiduciary relationship existed to the para 8 conversation. He also argued the primary judge took too narrow an approach to the question of what constitutes, or what may constitute, a fiduciary relationship, contending such a relationship can be determined both by the terms of an agreement and/or the nature of the relationship between the parties: James Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 408; Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 97 per Mason J; Schipp v Cameron [1999] NSWSC 997 at [730]; Pizzale v Gumina Enterprises Pty Ltd (1994) 13 WAR 88 (esp at 120-121).
Mr Forster argued that the primary judge’s error in assessing the likely timing of the conversation between the parties about the incorporation of the company led to his erroneous conclusion (see judgment at [77]) that the parties intended to put an end to the existing fiduciary relationship when they incorporated the company. He submitted that the primary judge relied erroneously (at [78]) on Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 in holding (at [79]) that there was no evidence of any agreement pursuant to which “the existence of the fiduciary relationship with Mr Friend was established after the incorporation [of] the company.” He sought to distinguish Morgan on the basis, at least, that there the plaintiff sought to have the Court determine the parties’ rights by disregarding the corporate structure, whereas the appellant sought to establish an overarching relationship which recognised the role of the company.
Mr Forster argued that, having regard to the primary judge’s finding that a partnership came into existence in May 1977, he ought to have found that the relationship of trust and confidence he accepted had been formed by at least the majority of the para 8 conversations, and the conduct of the parties in commencing business in Sydney in May 1977, did not come to an end because the parties had implemented their agreement to operate the business through a corporate vehicle. He submitted the primary judge should have found that a fiduciary relationship had arisen because it was an ordinary incident of the relationship between prospective partners having regard to the mutual confidence and trust likely to be apparent at that time. He contended that even on the primary judge’s findings there was no further or other discussion at the time of incorporation, which had the effect of changing the basis of the business relationship established before the incorporation, particularly the sharing of everything “50:50”.
Mr Forster argued the evidence indicated the parties engaged in unequal, and seemingly ad hoc, arrangements for funding the business through family and friends and via various bank accounts and entities. He submitted that the appellant’s undisputed evidence of the parties’ conversations supported the submission that in separately, and unequally, personally incurring debts to financiers, friends and family, the parties relied on each other and trusted each other to conduct themselves and to apply the funds for the purposes of the business and to render an accounting to each other in due course, including in relation to personal liabilities incurred by them in respect of monies which they on-lent to the company. Were it otherwise, he contended, the parties would no doubt only have committed themselves to equal, or at least approximately equal, obligations to third parties.

If an overarching joint venture agreement were established, in 1977, which allocated equally the cost of funds required by the joint venture, one would have expected there to be some form of partnership accounts. Otherwise, it would not be possible for one partner to know what were the costs of funds which had been incurred by another partner in obtaining financial accommodation for the business. Nor would it be possible, without any documentation, to keep a running account over two or more decades. For the reasons given by McColl JA, the evidence failed to establish the existence of any relevant agreement to that effect in 1977.
(1)(b) Specific oral agreement: November 1986
There were several loans obtained from SMK, two preceding the $350,000 loan obtained in December 1986, and two succeeding it. The later loans are not in dispute, because Mr Brooker appears to have accepted that they were not obtained on account of the joint venture. The two earlier loans are not in issue because they were paid out. The question is then whether there was any specific agreement in relation to responsibility for the $350,000 loan.
Mr Brooker gave evidence of a conversation he had with Mr Graham Peterson (on behalf of SMK) with respect to a possible advance of $350,000, whilst the dispute between the company and the Council was being resolved, being for a period which he hoped would not exceed 12 months: affidavit, 25/11/02, par 159. Two or three days later he had a conversation with Mr Friend which was said to include the following exchange (at par 160):
“I said: ‘Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council.’
He said: ‘What do you think?’
I said: ‘We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan.’
He said: ‘Well then, we should do it.’”
There are two objective circumstances surrounding the SMK loan. The first is that the proceeds of the loan were almost entirely (if not entirely) expended in meeting financial obligations of the company. Secondly, the documentation in relation to the loan was limited to the execution of a mortgage by Mr Brooker and two members of his family who were joint owners of the property over which the loan was secured.
According to the epitome of mortgage, interest was payable on the loan at the rate of 19.5%, reducible to 18.5% on prompt payment. Most of the quarterly payments of interest, however, were not made within the prescribed period and unpaid interest was capitalised. Mr Peterson gave evidence that he had later agreed to a variable interest rate: affidavit, 15 November 2004, par 13.
The primary case made by Mr Brooker was that Mr Friend was a co-borrower from SMK. Although it may be said that Mr Friend knew that a loan was being taken out and agreed to that course, there is no evidence that he knew of the interest rate or other terms of the loan. Put on that basis, the Appellant’s case failed at trial: see [2005] NSWSC 395 at [32] and [75]. In my view, the challenge to his Honour’s conclusions on this issue should be rejected.
Put more broadly, and assuming there was some overarching agreement in relation to financial accommodation, there is no significant evidence that, in any other case, the cost of funds incurred by one of the directors was brought into account. If the SMK loan were a special case, there is no evidence upon which to found an express agreement by Mr Friend to be responsible for half of the cost of the funds.
The final contractual possibility which appeared to derive some limited support from Mr Peterson’s evidence, was that the loan was made to the company, at least as a co-borrower, if not the sole borrower. In that event, the interest payable on the loan should have been recorded as an expense in the company’s accounts. There is no financial accounting by the company showing such an expense, from 1986 until the date of trial. But even if there were, that would undoubtedly render the company insolvent and the lender would be entitled to look to Mr Brooker, and the provision of security by him and his family, for payment of the outstanding debt. Again, Mr Brooker’s interests will only be served if he can demonstrate liability on the part of Mr Friend personally.
A final problem with respect to the claim by Mr Brooker is that the contractual liability sought to be established is to meet one-half of the actual cost of the loan obtained by the other director. The amount sought is, however, an unpaid debt. If Mr Friend’s contractual obligation is to account to Mr Brooker, it would seem to be a precondition to a payment by Mr Friend that Mr Brooker had in fact paid the outstanding debt to SMK. That has not happened.
It follows that the Appellant cannot succeed on his contractual claims, however formulated.
(2) Equitable contribution
Alternatively, the Appellant asserted that he and Mr Friend had a fiduciary relationship which required the one to make good half of any costs or expenses incurred by the other in obtaining financial accommodation for the joint venture. This claim raises three issues on which Mr Brooker must succeed, namely that:
(1)the equitable obligation extends to cover contribution to pay interest on funds raised by personal loans to a director;
(2)an equitable right of contribution has crystallized where the primary debtor has not repaid his share of the loan, and
(3)relief should be granted, absent proof that payment of more than the share payable by the primary debtor is imminent.
(a) Existence of fiduciary obligation
For the reasons given by McColl JA, it was open to the trial judge to conclude that there was no partnership, in the legal sense, between Messrs Brooker and Friend after the incorporation of the company: see [141] above. However, the conclusion reached by the primary judge that, following incorporation, their relationship was purely one of co-directors of the company, understates the true nature of the relationship: see [2005] NSWSC 395 at [77]. Furthermore, his Honour’s comment at [79] that “Mr Brooker has utterly failed to prove any agreement pursuant to which the existence of a fiduciary relationship with Mr Friend was established after the incorporation of the company” places, with respect, too much emphasis on the notion of agreement. As explained by McColl JA, the conduct of the parties over the years demonstrated the existence of a fiduciary relationship, in the nature of a joint venture, which was not confined to the management of the company. That follows from the fact that it was Messrs Brooker and Friend who arranged funding for the company from their own resources.
The legal principles upon which the Appellant relied were stated by Warren J (as her Honour then was) in Mathieson v Booth [2000] VSC 385 at [105]-[108]. In particular, her Honour stated:
“[105]It is well established that persons who combine in a joint business undertaking may owe each other fiduciary duties irrespective of the legal form of the undertaking: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Hill v Rose [1990] VR 129. It does not matter that they have not formed a partnership: United Dominions at 10. Nor does the use of a company structure preclude the existence of a relationship among the investors in the company of a fiduciary nature: Re Yenidje Tobacco Co Ltd [1916] 12 Ch 426; Re Wondoflex Textiles Pty Ltd [1951] VLR 458; Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. In United Dominions the High Court considered the nature of joint ventures and the duties that may flow therefrom. In the joint judgment of Mason, Brennan and Deane JJ (at 10-11) it was held that the terms "joint venture" is not a technical term and connotes an association of persons for a variety of purposes including a financial undertaking with a view to profit.
[106]In my view it is clear from the evidence that the business relationship between Mathieson and Booth was such that they owed each other fiduciary duties. They were involved in a number of joint investments over many years. Indeed, the very terms and effect of the restructure agreement were indicative of a relationship of mutual trust and confidence. In fact, a relationship of mutual trust and confidence was conceded by Booth in cross-examination. Booth said he expected Mathieson to do the fair thing by him and that, in turn, he expected Mathieson to be interested in Booth's financial well-being. Consideration of the authorities and commentaries in relation to the topic of joint ventures reveals that a fundamental [indicium] of a joint venture is the matter of trust: see United Dominions, supra; Biala Pty Ltd v Mallina Holdings Ltd (No. 4) (1993) 13 WAR 11, 57-8; also, Lehane, "Fiduciaries in a Commercial Context", in Finn, Equity and Commercial Relationships, pp.95-108. Furthermore, there was a constant usage by Booth of the expressions "partner" and "partnership" at various times in various documents. In my view this manner of expression conveyed the real nature of the relationship between Mathieson and Booth, that of a business partnership giving rise to mutual obligations. On these bases, therefore, I am satisfied that Mathieson and Booth mutually owed one another a fiduciary duty.”
It follows that an equitable right to equality of contributions will apply, although the content of the obligation will depend on the circumstances of the case. Support for this approach may be obtained more generally from the principles of unjust enrichment explained by Deane J, Mason J agreeing, in Muschinski v Dodds (1986) 160 CLR 583 at 621-623. That case involved a couple in a de facto relationship who purchased a property for both residential and commercial use. The funds to purchase the property were provided by Mrs Muschinski, although Mr Dodds was expected to provide further funds and labour in due course. That did not eventuate: both the personal relationship and the commercial venture collapsed. As stated by Mason J at p 599:
“The circumstances of the case, viewed in the light of the common intention that Mr Dodds was to take an immediate and unconditional interest in the property, did not make it inequitable that he should retain that interest, notwithstanding the failure of the projected development. But it would be inequitable for him to retain his interest without crediting to Mrs Muschinski the contributions which she made to the acquisition and improvement of the property. … I agree with Deane J that the general principle underlying the proportionate repayment of capital contributions to joint venturers on the failure of a joint venture is wide enough to support this aspect of the constructive trust.”
At p 621, Deane J stated:
“If the venture between Mrs Muschinski and Mr Dodds had been merely a commercial one involving the purchase, development, partial realization and use of the Picton land, there would be little room for argument about the appropriate characterisation, for the purposes of the relevant principle of equity, of Mr Dodds’ conduct in seeking to assert and retain the full benefit derived by him from Mrs Muschinski’s contribution without making any allowance to compensate her for the disproportion between those contributions and his own. The basis upon which Mrs Muschinski made her contributions was that Mr Dodds would, in due course, contribute, both in money and by labour, to the subsequent development. Their planned endeavour collapsed at a time when Mrs Muschinski had made all or almost all of her expected contribution to the overall venture, but Mr Dodds had made almost none of his. The parties had neither adverted to nor made special provision to deal with that situation. If no more than the commercial relationship had been involved, Mr Dodds’ conduct in seeking to catch and retain the unfair advantage of unforeseen circumstances by asserting his legal entitlement of a one-half interest in the property without assenting to any adjustment to compensate Mrs Muschinski for the unintended gross disproportion between their respective contributions would plainly be unconscionable for the purposes of the relevant principle of equity.”
The principles, affirmed in Baumgartner v Baumgartner (1987) 164 CLR 137 by all members of the Court, provide that, in general, equity will grant relief to equalise the contributions to a joint venture where the venture has failed, or prematurely ceased to operate, in circumstances for which the parties did not expressly provide. In the present case, that cannot be done by way of a constructive trust, because there is no valuable property in which the parties can share, the company being virtually insolvent.
Adopting that approach, the substantive issue is whether the business relationship extended to sharing the costs of any financial accommodation obtained for the purposes of the business, to the extent they were not met by the company, or whether those costs were to be met by the partner making the contribution. The fiduciary obligations imposed in accordance with equitable principles regarding unconscionable behaviour depend upon the existence of a relationship, and its scope, objectively determined, having regard to the intentions of the parties.
According to the Appellant’s pleading, the relationship between the parties terminated in January 1995, when he sought an accounting with Mr Friend as to their respective entitlements, a request which Mr Friend refused. For the reasons given by McColl JA, I accept that the relationship between parties required an equality of contributions in relation to the financial accommodation provided to the company. However, two problems remain.
First, it is common ground that, between 24 August 1995 and 3 March 1998, Mr Brooker received from the company an amount of $345,000. This was described by the trial judge as a payment “by way of loans”: [2005] NSWSC 395 at [59] and see [75] above. The fact that Mr Brooker did not use the funds to repay SMK, as noted at [132] above, is beside the point. It is unclear why the payments were said to be by way of “loans” from the company, presumably leaving Mr Brooker as a debtor of the company, rather than a payment in reduction of the directors’ loan account in Mr Brooker’s name. In any event, the relevant question for present purposes, is whether Mr Brooker, in his claim for equitable relief, should bring this payment into account in reduction of his claim for reimbursement by Mr Friend. If that were done, and subject to the question of liability for interest, it seems that the financial accommodation supplied by Mr Brooker, and ultimately sourced to SMK, has been repaid in full, or as to all but $5,000.
The second issue concerns the obligation to meet the cost of the loan to Mr Brooker. In my view, there are four factors which, taken together, militate against that being part of the mutual fiduciary obligations. First, the decision, taken in about August 1984, to consolidate all loans sourced to third parties who were family members or friends of one or other of the directors, into the directors’ loan accounts demonstrates that the directors gave express consideration to the method of accounting for these funds. Secondly, the directors had decided on 8 December 1993, that the company would pay interest at Supreme Court rates on the directors’ loan accounts. Thus, the company was required to pay a director interest on funds obtained by that director from any source, and regardless of whether interest was payable to the ultimate lender, and without regard to the rate of such interest. Thirdly, if there were an understanding that the directors would account, as between each other, not only for the capital element of any financial accommodation provided to the company, but also for the cost of funds to them, individually, such accounting would have required the preparation of separate and possibly quite complex accounts, so that the individual circumstances of each director could be known from time to time, and an attempt could be made to reconcile the different interest rates which might have applied to the loans from third parties to the directors and the directors’ loan accounts with the company. There is no evidence that any such contemporaneous accounts were kept. The fact that Mr Brooker provided material which constituted a reconstruction of such accounts provides no evidence that there was ever an understanding that such accounts should be kept. Nor was there a shred of evidence that any note had been taken of the cost of funds to a director with respect to the numerous other loans obtained from third parties for the business.
Fourthly, there is direct evidence of the intentions in the evidence of Mr Brooker. In his affidavit of 25 November 2002, Mr Brooker gave evidence of conversations with Mr Friend in October 1994 and on 25 January 1995. These conversations related to the expenditure of the third payment received from the Eurobodalla Shire Council, in the amount of $900,000. At a meeting stated to be in or about October 1994, at his home, Mr Brooker said he had explained that the amount would not pay “all the debts” and that “the debt to the Petersons [the SMK directors] is nearly a million dollars”. Mr Friend stated that he did not accept liability for the debt to the Petersons. However, at the meeting on 25 January 1995, Mr Brooker gave a somewhat different account of his own position, recording (affidavit, par 120), that he had said to Mr Friend:
“My calculations show that my contribution exceeds yours by approximately $900,000. Therefore, after payment of the ANZ Bank and other small creditors, the balance of the money held in trust by [the solicitor] should go to Mr and Mrs Peterson. To ensure that we contribute equally you will have contribute $276,000 and I will have contribute $92,000. We will then have enough to completely pay out the Petersons, the ANZ Bank and the other remaining creditors.”
The calculation of contributions to the SMK debt was apparently made on a 25:75 basis, in Mr Brooker’s favour. However, significantly, he seemed to be suggesting that the debt would be paid out with an amount of $368,000. Given the size of the debt with interest at that time, that statement appears to be inconsistent with an intention to recoup from the company (or Mr Friend) outstanding interest on the debt, at least at the rate claimed by SMK.
Taking this material as a whole, it should be accepted that each director was subject to a fiduciary obligation to meet an equal share of capital contributions. If such accounts were to be taken, they should make allowance for the personal use by Mr Brooker of the $345,000 paid by the company, which was not used by him in immediate reduction of the SMK loan.
(2)(b) and (c) Payment not imminent
Even if the Appellant and Mr Friend were to be treated as liable to equitable principles of contribution of the kind applicable to co-sureties, absent an imminent threat by the creditor (SMK) to recover from Mr Brooker, with a real possibility that he would be required and able to pay more than 50% of the liability, Mr Brooker would have no right of contribution from Mr Friend: see Harpley Nominees Pty Ltd v Jeans [2006] NSWCA 176 at [36]-[44] and see Mason and Carter, Restitution Law in Australia (1995) at [637]-[639]. Even if this conclusion were wrong, absent imminent recovery, relief should be refused on discretionary grounds: see again, Harpley Nominees at [36]-[47].
Mr Brooker did not establish that recovery of the moneys payable by him to SMK was imminent, or even reasonably foreseeable. The loan was incurred 20 years ago, in December 1986. The Court was taken to no evidence which suggested that the directors of SMK had threatened to take steps against Mr Brooker to enforce the outstanding obligations to repay capital and interest. Mr Brooker did not say in his affidavits that it had. Furthermore, he filed an affidavit sworn by Mr Peterson, dated 15 November 2004, in which no hint was given that Mr Peterson intended to take steps to have SMK enforce its legal entitlements against Mr Brooker. In giving oral evidence, Mr Brooker was cross-examined to the following effect (Tcpt, 6 December 2004, p 54):
“Q.Mr Peterson, your friend, has done nothing to try and recover the money from you, has he?
A. No.”

If it be necessary for Mr Brooker to establish that payment or loss by him was “imminent”, in accordance with the authorities referred to in Harpley Nominees, one is entitled to ask when it became imminent? It could hardly be said that there was pressure on Mr Brooker to pay SMK in October 1994, when he was asserting that Mr Friend had an obligation to contribute, or he would surely have told Mr Friend that. If it had been imminent at any stage prior to the trial of the proceedings, one might have hoped for a pleading to that effect at least by the stage of the fifth amended statement of claim filed on 3 December 2004. None is to be found. The last opportunity to establish that point was the evidence of Mr Peterson, given on 7 December 2004. No question was asked of him in chief to that effect. In cross-examination he agreed that Mr Brooker was a long-time friend. It was put to him that, to the extent that his evidence suggested he had lent to Mr Brooker and Mr Friend jointly, that was untrue. Cross-examination continued (Tcpt, 7 December 2004, p 125-128):
Q.Why haven’t you gone after him [Mr Brooker] for the money Mr Peterson?
A.I suppose because he’s a friend and (b) he’s not in a position to repay it at the moment.
…
Q.You’re not going to go after him for that money, you know he isn’t worth a row of beans?
A.Well, he’s not worth a great deal of money but he does have some assets, yes.
Q.           Well why aren’t you going after them?
A.Well as pointed out he’s an old friend, I’m not particularly interested in throwing him out of his house at this stage, or any future stage.
Q.The fact of the matter is you have effectively abandoned your claim against Mr Brooker because you know he’s got nothing and you’re not going to execute against him are you?
A.           I’m not planning to execute against him at the moment, no.
…
Q.Now is this the position Mr Peterson, that you’re not going to sue Mr Brooker for any money or turf him out of his house, but you’re here because you think you might get some money if Mr Brooker gets some money out of Mr Friend?
A.Well put it this way, and I will answer the question … because I see that in two parts. The first part is, well, he is at the moment looking at putting his house on the market, as I understand it, it is on the market, and when that house is sold I will expect to get some of the proceeds from that house. That’s half the point. The second half of the point is yes, it is certainly true that the more assets he has the more money that he has, the greater it’s going to be his capacity to service the loan and that’s obvious.
…
Q.And at the end of the day apart from any security you hold for Mr Brooker you’re content to look at [the corporate vehicle] as the borrower of the money is that right?
A.           I can’t say it’s ‘content’ but yes that’s what I’d have to do.”
There was no re-examination.
No finding was made by the trial judge as to whether recovery against Mr Brooker was “imminent” or not. In my view, the authorities establish that Mr Brooker is not entitled to relief against Mr Friend unless he can show that he is subject to imminent enforcement of his legal obligation. I am not satisfied that enforcement of any obligation to pay an amount in excess of 50% of the outstanding debt is imminent. Indeed, the evidence persuades me that Mr Peterson had no such intention. The authorities referred to in Harpley Nominees are either inconsistent with an entitlement to equitable relief in these circumstances or would indicate that such relief should be refused on discretionary grounds. There is no need to consider the issues of laches. In these circumstances, the appeal should be dismissed with costs.

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LAST UPDATED: 30/11/2007