Cash Resources Aust Pty Ltd v Brett

[1996] QSC 32

IN THE SUPREME COURT

OF QUEENSLAND  No. 2044 of 1991

Brisbane

Before the Honourable Mr. Justice Lee

[Cash Resources Aust Pty Ltd v Brett]

BETWEEN:
  CASH RESOURCES AUSTRALIA PTY. LTD (A.C.N.004792330)
  Plaintiff
AND:
  PETER BRETT
  Defendant

REASONS FOR JUDGMENT - W.C. LEE J.

Judgment Delivered  08/03/1996

CATCHWORDS:     EVIDENCE - whether evidence, prima facie unchallenged, must be accepted - whether inferences may be drawn where evidence of witness rejected.

Le Murav  The Victoria Insurance Company Ltd. [1971] Qd.R. 198, Allied Pastoral Holdings Pty. Ltd.  v  Commissioner of Taxation (1983) 1 N.S.W.L.R. 1, Paric  v  John Holland Constructions Pty. Ltd. [1984] 2 N.S.W.L.R. 505, Steinberg  v  F.C.T. (1975) 134 C.L.R. 640, Bella-Lewis  v  Thompson (App No. 220 of 1994, 27 February 1996) considered.

NEGLIGENCE - BREACH OF RETAINER - duty of care of valuer of real property to a factoring company in a falling market - whether the duty of care extends indefinitely even when only fraudulent non-existent debts factored.

Banque Bruxelles S.A.  v  Eaglestar Insurance Co. Ltd [1995] 2 W.L.R. 607 considered.

RELIANCE - whether the plaintiff relied on valuation and to what extent - debts factored exceeded security based upon valuation - later debts fraudulent -whether plaintiff entitled to continue to rely on valuation.

CAUSATION - whether same test applies to both tort and contract - whether valuation was merely precondition to plaintiff's loss - whether valuation a cause of plaintiff's loss.

Marchv.  E. & M.H. Stramere Pty. Ltd. (1991) 171 C.L.R. 506 considered.

REMOTENESS - whether losses were in the reasonable contemplation of the parties or the kind of loss foreseeable by a reasonable man - whether losses due to plaintiff's negligence in factoring fictitious debts outside scope of plaintiff's business - whether such losses foreseeable.

CONTRIBUTORY NEGLIGENCE - whether plaintiff contributed to its own losses - whether distinction between contract and tort.

COUNSEL:K. Fleming QC with him P. McQuade for the Plaintiff

1st day - S. Doyle for the Defendant

2nd day - R. Wensley QC with him S. Doyle for the Defendant

3rd & 4th days - R. Wensley QC for the Defendant

Thereafter - Defendant in person

SOLICITORS: Flower & Hart for the Plaintiff

1st - 4th days Clayton Utz for the Defendant

Thereafter - Defendant in person

HEARING DATES:     4, 5, 6 and 7 October 1994

16, 27 and 28 February 1995

8 and 9 May 1995

IN THE SUPREME COURT

OF QUEENSLAND  No. 2044 of 1991

Brisbane

Before the Honourable Mr. Justice Lee

[Cash Resources Aust Pty Ltd v Brett]

BETWEEN:
  CASH RESOURCES AUSTRALIA PTY. LTD (A.C.N.004792330)
  Plaintiff
AND:
  PETER BRETT
  Defendant

REASONS FOR JUDGMENT - W.C. LEE J.

Judgment delivered   08/03/1996

INTRODUCTION
           The plaintiff, Cash Resources Australia Pty Ltd ("CRA") is a factoring company.  Its Head Office is in Melbourne.  It has branches in various States, including Queensland.  It claims damages against the defendant for alleged negligence and/or breach of retainer following a valuation by the defendant dated 5 September 1990 in the sum of $975,000.00, of real property (a house and land) owned by a company Olympus Nominees Pty Ltd ("Olympus") and situated on a river frontage block at Nerang on the Gold Coast.  CRA thereafter took a third mortgage over that property behind the National Australia Bank and the National Australia Savings Bank as security which CRA alleges was to ensure the performance by Olympus of its obligations to CRA pursuant to an Invoice Financing Facility agreement to a limit of $200,000.00 entered into between them on 28 September 1990 and guaranteed by the directors of Olympus, Mr. J.E. Sullivan and Mrs. D.I. Sullivan (Exhibit 3).  The facility had previously been formally approved by CRA on 31 August 1990, subject to some eight conditions including a "Fire Sale" valuation by the defendant.

Australia generally was in a state of recession after 1988-1989 for some years.  The evidence shows that property values were in serious decline from 1989 and throughout 1990 and even more so after the date of the above valuation.  It was well known to CRA, and no doubt generally, that the building industry was in a state of depression and that the economy in general was undergoing difficulties over that period after 1989 causing fluctuations in property values.  Indeed, this is the general effect of the allegations in para. 3(e) of the Further and Better Particulars of the plaintiff's Statement of Claim.  CRA alleges that the property was grossly overvalued, that it relied on the valuation in entering into the facility, and has suffered damages as a result of default by Olympus which was wound up by order of the Court on 1 July 1991 on its own application filed on 11 June 1991 (Exhibit 80).  A provisional liquidator was appointed on 12 June 1991 (No. 442 of 1991).  CRA alleges that but for the defendant's valuation, it would not have entered into the facility with Olympus at all so that the defendant is liable for all losses CRA suffered, however caused, many months later after several months of successful dealings with Olympus, and even if those losses were due to CRA's own negligence (which CRA has denied) and were substantially the result of fraud committed on it by Olympus in its desperate attempt to survive in the last month or so before its collapse and more than nine months after the defendant's valuation. 

The defendant has denied negligence and that any conduct on his part brought about any losses suffered by CRA.  He alleges that any losses suffered by CRA were entirely caused or substantially contributed to by the negligence and failure to mitigate by CRA which in effect means by its Board and in particular its former Managing Director Mr. Roberts in Melbourne as well as by the Finance Manager for Queensland Mr. Walder, who also was in control of the entire Queensland operations.  Extensive particulars, 36 in all, have been alleged in the Defence.  There is no counterclaim by the defendant against the directors and others personally for contribution pursuant to the provisions relating to joint tortfeasors, for any negligence which, if the defendant's allegations are made out, might have been attributed to them in causing CRA to act as it did, thereby suffering losses: cf. AWA Ltd  v  Daniels t/a Deloitte Haskins and Sells and ors (1992) 10 A.C.L.C. 933.

The case is quite complex and involved considerable detail.  There were some 97 documentary exhibits, some of a complex and incomplete nature which caused much confusion throughout the hearing.  Some exhibits were duplicated in whole or in part due to similar ledgers and other documents held in Head Office in Melbourne as well as in the relevant branch in Brisbane.  Some contained obvious errors admitted during the hearing and some were presented in such a way and in such an order (due in part to the order of witnesses) that collation into a logical sequence and their interrelation both inter se and in respect of oral evidence was made very difficult and in some cases almost impossible.  Some were inadequately explained.  It is unfortunate that in cases of this type, a bundle of documents in chronological order could not have been agreed upon before the trial.

There were numerous issues in the case, but ultimately they come down to the following, some of which on the evidence overlap others:-

1. whether the defendant was negligent or in breach of his retainer on 5 September 1990;

1. whether CRA relied on the defendant's valuation in entering into the facility on 28 September 1990 (Exhibit 3);

1. whether CRA continued to rely on the defendant's valuation when and after it extended the facility to $250,000.00 on 28 February 1991 (Exhibit 1) without reference to the defendant, and without a further valuation, following its receipt of the very unfavourable report dated 26 February 1991 by its auditors, Messrs. Coopers & Lybrand (Exhibit 9), concerning Olympus' financial prospects and the insecure nature of CRA's exposure to Olympus at that time;

1. whether losses suffered by CRA, all of which occurred after 28 February 1991, were caused by any negligence or breach of retainer by the defendant on 5 September 1990;

1. whether losses or any of them suffered by CRA were foreseeable or too remote;

1. the quantum of the plaintiff's losses;

1. whether the plaintiff was contributorily negligent either in entering into the facility in the first place or in granting the increase on 28 February 1991 and its conduct thereafter; and

1. whether the plaintiff mitigated its loss. 

The onus is on the plaintiff to establish all elements of its cause of action including the extent of its losses, whereas the onus is on the defendant to establish contributory negligence and/or failure to mitigate by CRA.  Notwithstanding submissions by Counsel for CRA that the defendant (after he became unrepresented and gave evidence himself), did not lead significant evidence on all of these issues, it is clear that the defendant's onus may be discharged either by evidence adduced by him or by evidence adduced throughout the plaintiff's case (i.e. oral or documentary), or both.

The case took an unusual course.  The case for the defendant was conducted from the outset by solicitors acting for the defendant's professional indemnity insurers who were funding the defence.  It was initially set down for only two days to commence on 4 October 1994.  It could never have finished in two days, even without amendments by the defendant to his defence.  For various reasons apparent from the transcript, the estimates extended considerably.  Junior Counsel appeared for the defendant for the first two days only.  In the afternoon of the first day he indicated that he was unable to continue past the second day's hearing.  As a result, Senior Counsel was engaged to represent the defendant.  He appeared with junior Counsel for the defendant on the second day, and alone on the third and fourth days, i.e. 6 and 7 October 1994 when the case was adjourned to a date to be fixed in 1995 when it was expected to take a further 7-10 days.  In the end, because of later developments the hearing occupied eight days in all, in broken stages.

Shortly prior to the resumed hearing on 27 February 1995, Senior Counsel acting on behalf of the defendant to that time sought leave on behalf of the solicitors for the professional indemnity insurers to withdraw from the case.  It appears that on 9 October 1991, the defendant had entered into a scheme of arrangement with his creditors pursuant to Part X of the Bankruptcy Act.  See Exhibit 90.  Counsel for CRA admitted the defendant's statement that CRA and its solicitors were aware of this fact before the writ was issued on 29 November 1991 (338).  It was said that this arrangement was the reason why the defendant's professional indemnity insurers withdrew their funding of the defence based on the allegation that the defendant had failed to disclose this arrangement to his insurers at the appropriate time so that, it was said, no liability existed under the policy.  See Exhibit 90 and cls.7 of the Professional Indemnity policy.  Very late in the proceedings, CRA sought and was given leave nunc pro tunc to proceed with the action.  It was said that leave to proceed was either overlooked initially or was not previously considered necessary.  It was not suggested that the Court should be concerned with these particular questions in the present proceedings.  Both parties desired that the substantive action be resolved.

The withdrawal of the defendant's solicitors was not opposed by the defendant's trustee (Exhibit 74) or by the defendant himself. He indicated that he could not afford to obtain legal assistance but said that he was aware of his rights and wished the case to proceed.  Thereafter he conducted his own case with obvious disadvantages.  There were very lengthy written submissions handed to the Court subsequently by both the plaintiff and the defendant plus an additional four schedules and accompanying explanation by the plaintiff at my request, with copies to the defendant for his comments which were made.  The accompanying explanation is marked Exhibit 93, and the four schedules are marked Exhibit 94, Exhibit 95, Exhibit 96 and Exhibit 97 respectively.  There were three separate written submissions by the defendant.  All written submissions will be placed with the papers.  A further two days hearing subsequently occurred during which extensive oral submissions were made.  They were transcribed.  All of the lengthy submissions, oral and documentary, have been carefully considered.

The fact that there were no qualified lawyers acting on behalf of the defendant for the balance of the case has made the task, particularly of the defendant and of the Court, unduly difficult.  Notwithstanding that the defendant was a business man, he did not understand the rules of evidence and procedure and did not appear to be in possession of relevant documents, transcripts etc throughout the case, despite constant warnings to him that he should be in possession of all material as the case progressed.  He apparently ultimately obtained material from his former solicitors late during addresses although he did not appear to have a transcript and all exhibits.  In spite of every indulgence extended to the defendant by both the plaintiff and the Court, there was an obvious limit beyond which the Court could not assist him in the conduct of his case.  Unlike inquisitorial systems, the Court's role in an adversarial system is to decide on the evidence presented, and not to investigate.

Not only because of limited assistance given to the Court by the defendant, but also because of the complicated way in which the case was presented and the exhaustive evidence led by the plaintiff to explain its conduct, as well as the many allegations pleaded, the whole of the interacting evidence, as well as the submissions both oral and documentary, therefore required a closer and more detailed examination than might otherwise have been the case.

Extensive cross‑examination had been completed of Mr. Roberts and various other witnesses before Counsel for the defendant withdrew, but no cross-examination of any substance occurred of Mr. Walder, the Finance Manager for Queensland of CRA, who had the overall management of the Queensland operations and who had detailed dealings with Mr. Sullivan, the Managing Director of Olympus which conducted its business in Queensland.  Mr. Walder played a key role in securing this business for CRA and in its implementation, extension and supervision right up to Olympus' liquidation.  Mr. Roberts and other directors and/or secretary at CRA's Head Office in Melbourne, were the persons responsible for approving the facility on behalf of CRA.  Nevertheless Mr. Roberts and no doubt the other directors relied substantially on Mr. Walder's investigations and recommendations both initially and throughout the existence of the relationship with Olympus as well as on the due local implementation by Mr. Walder of all conditions of the approval imposed by the Board and on his due close supervision of Olympus' performance.  There were only two questions asked of Mr. Walder by the defendant but which were not without significance, although there is considerable material, both oral and documentary, (substantially that led by CRA itself), which when carefully considered, allows Mr. Walder's evidence, as well as that of other witnesses, to be adequately assessed without infringement of the rule in Browne  v  Dunn (1894) 6 R. 67.

Whilst it is correct, as Counsel for the plaintiff submitted, that where evidence is probable and sworn to and is not contradicted, it may be more confidently accepted by a tribunal and should usually be accepted: Le Mura  v  The Victoria Insurance Company Ltd. [1971] Qd.R. 198 at 206, there is no absolute rule which requires a Court to automatically accept what on its face may appear to be unchallenged evidence: Allied Pastoral Holdings Pty. Ltd.  v  Commissioner of Taxation (1983) 1 N.S.W.L.R. 1 at 18; Paric  v  John Holland Constructions Pty. Ltd. [1984] 2 N.S.W.L.R. 505 at 507. This is particularly so where there are bases which appear from documentary evidence and evidence of the witness himself as well as that of other witnesses which throw doubts, qualifications or explanations on the alleged unchallenged testimony. In such circumstances, the bald principle stated in Le Mura is not applicable.  See also Steinberg  v  F.C.T. (1975) 134 C.L.R. 640 at 694 per Gibbs J., applied by Davies J.A. in Bella-Lewis  v  Thompson (App. No. 220 of 1994, 27th February 1996, p.7) dealing with the drawing of inferences where a witnesses' testimony is disbelieved.  The plaintiff must prove its case.

OVERVIEW

CRA carries on the business of factoring of debts which involves the buying at a discount of debts owed to other companies or individuals carrying on a business.  In its pristine form, factoring has been regarded (particularly overseas) as a sign of financial maturity or sophistication whereby the working capital of an organisation is maximised in a legitimate way in an otherwise financially sound business.  Such businesses may include those considering expansion or which are entering a stage of rapid growth in a period of economic upswing, often involving a time delay between the accumulation of trade debts and trade assets such as stock on the one hand and income (and profits) from sales on the other. 

On the other hand, as this case starkly demonstrates, factoring may operate during a downswing in economic activity.  Businesses seeking to use this type of facility may include those with a good background performance but which, for various reasons, are facing a period of financial stringency and are in urgent need of working capital to enable them to survive, continue trading, and to meet their ordinary business obligations as they fall due.  Hopefully such businesses will be able to be restored to self-sufficiency if their performance and economic conditions improve, although not all do so.  Also businesses which are otherwise commercially insolvent and with indifferent or poor prospects, may seek this type of facility as a last resort.  Whatever their background and prospects, these businesses all require a more immediate cash flow than otherwise might be achieved by the payment to them by their customers of their debts in the ordinary course which could vary from seven to 30 days or even longer depending upon the particular contracts between the business whose debts are factored and its customers.

Factoring differs somewhat from conventional money lending by which a lender, such as a bank or other finance house, lends monies to another on some type of security, usually consisting of bricks and mortar.  Factoring of debts involves the purchase by CRA of assets of the other business subject to certain terms and conditions.  Those assets are the debts purchased.  Ordinary lending institutions do not purchase assets in this way.  Usually, but not always, there is additional security taken by the factoring company which purchases those debts, to provide protection or a backup, in whole or in part, in the event of its customer's default.  This requirement appears to be more common in cases where the customer is suffering a liquidity crisis.  CRA contended that it was a company which always required security.  A factoring company which takes security therefore has the advantage over conventional lending institutions in that it not only acquires assets (i.e. the debts of its customer), but also has a backup security.

For all practical purposes, factoring may be broadly described as a method of financing whereby debtors of a business are used to finance that business.  Effectively credit sales of a business are converted into cash sales even though not for their full face value.  However it is characterised, this case illustrates that it is a method of providing ready finance to a business in urgent need of working capital or an immediate cash flow, to enable it to carry on its business effectively and hopefully to overcome its liquidity problems, although not all do so as in this case.  Mr. Walder said that the usual requirement for this facility was to enable the company to meet its obligations as they fell due in the normal course of business.  Mr. Roberts said that such organisations have usually been declined finance or additional finance by their banks or lending institutions, hence their last resort if possible to a factoring facility.

Other advantages may accrue to a successful business which sells its debts in this way if it is prudent in its operations and is otherwise able to meet its obligations as they fall due.  For example, it may provide the opportunity to take advantage of favourable prices for further stock purchased for other projects by reason of its then capacity to make early payment, thereby attracting discounts.  The evidence which overall shows a hand to mouth operation, does not specifically show whether Olympus was ever able to take any such advantage.

Debts purchased may be of two types.  The first type was described as notified debts which operate by way of legal assignment of debts to CRA for valuable consideration.  The factoring company then becomes the legal owner of the debts and takes over the onerous task of collection of the debts directly from the debtors involved.  They effectively become CRA's debtors.  The second type consists of non-notified debts whereby the other business, which sold the debts to CRA, collects the payments from its debtors in the usual way but banks the proceeds not to its own account but to the credit of CRA's bank account by the use of CRA's stationery provided to it.  It is a confidential arrangement between CRA and its customer whose debtors have no knowledge of CRA's involvement.  This minimises the risk that debtors of such a business and others will gain knowledge of the financial arrangements and condition of the business whose debts are being purchased.  Such knowledge might well result in detriment to that business.  It was said that this involved an equitable assignment of the debts so that CRA became the equitable owner of the debts.  See Exhibit 3, cls.3, 4.4.  This is the type of business arrangement entered into between CRA and Olympus pursuant to the above Invoice Financing Facility.

It may be here noted in context that immediately after the final collapse of Olympus on 12 June 1991, CRA promptly gave notice to all debtors whose debts to Olympus CRA had purchased (factored) but which remained unpaid, that the debts were thereupon owing directly to CRA, thus, it was said, resulting in a legal assignment of those debts to CRA at that stage (273, 324, 407).  This appears to have been authorised by cls.18, 4.4 of Exhibit 3 and is a right which CRA, as lawful attorney of Olympus, could have exercised at any stage of the relationship if it so wished, and without notice to Olympus or any advance warning to the debtors.  Some of those assigned debts were paid directly to CRA without demur and apparently promptly, and some after issue of legal process.  As will appear from evidence raised during CRA's case, the bulk of unpaid "debts" were non-existent debts factored by CRA late in the relationship and probably in May 1991 due to the fraud of Olympus when Olympus was in extremis and were also probably the subject of notification, having regard to Mr. Walder's evidence (324) and submissions (407).

CRA purchased debts of Olympus at 80% of the face value of copy invoices Olympus charged to its customers and which it sent to CRA for factoring.  CRA paid those sums to Olympus, less a further 3% as its initial fee: see Exhibit 3 cls.6.  By virtue of the confidential arrangement with Olympus, CRA was constrained somewhat as to the effectiveness of its methods of checking with Olympus debtors, the validity of debts tendered by Olympus to CRA before they were factored.  It appears that CRA utilised the name of a firm of chartered accountants and auditors (Venn Milner & Co.) in whose name CRA's office staff made somewhat surreptitious enquiries purportedly in the name of Olympus, from some only of the debtors of Olympus, said to be a sample of 20% of the value of batches of invoices tendered for factoring.  Apparently those debtors were told that the enquiry was merely an audit on behalf of Olympus.  Mr. Walder used this system (240, 248, 249), but Mr. Roberts, whilst saying that CRA used the name of its chartered accountants (114), was decidedly uncomfortable with any system by which an enquiry was made of Olympus debtors but in the name of Olympus, suggesting that in some respects it was "not quite honest" (114-5).  This may be a pointer to the question of whether such method of checking was sufficient or effective or prone to difficulties confronted by Mr. Walder's staff in eliciting reliable information.  See below.

Olympus in turn was obliged, as CRA's agent and without charge, to collect payment of the full debt from its debtors according to its ordinary terms of trading with the debtor, but then to bank the total proceeds to CRA's bank account. See Exhibit 3, clauses 5, 8.  Upon regular reconciliation by Olympus to CRA, CRA refunded the 20% margin to Olympus.  Reconciliation usually occurred monthly: clauses 5, 6.  CRA's fee of 3% of the face value of the invoice already deducted as its initial fee was then adjusted upwards or downwards according to the collection performance of Olympus.  i.e. the earlier Olympus collected and banked the debt to CRA's bank account, the less was CRA's fees.  It could go down to 2% on speedy collection, or it could increase considerably if collection was delayed; see the table in cls.5 of Exhibit 3.  This fee was the source of revenue earned by CRA in its factoring business.  The documents and the accounting systems in both the Brisbane office and Head Office in Melbourne were quite complicated and required close analysis.

CRA had other rights.  See cls.7 of Exhibit 3 which allowed CRA to apply the 20% retention and initial fee to satisfy any unpaid balance of any debt purchased more than 120 days prior to the commencement of the current month, or at CRA's discretion, in satisfaction of the whole or any part of any sum owing by Olympus to CRA, or to recompense any loss or damage or expense CRA suffered or incurred.  Clauses 6 and 9 also allowed CRA a right of set off.  Clause 10 also significantly gave CRA extensive rights of recourse to Olympus of any debt it sold to CRA, which Olympus was obliged to repurchase in certain circumstances.  Mr. Roberts said that this right was exercisable if a debt was unpaid at 120 days (118).  After exercise of this right, CRA could commence recovery action against Olympus if the debt was not repurchased.  There is no evidence that CRA ever exercised any of these extensive powers, no doubt because, according to CRA, the debts it purchased which resulted in its losses were those purchased very late in its relationship with Olympus before Olympus collapsed.

The facility agreement by cls.2 provided clear definitions of "debt" and "due date of debt".  Clause 4 also imposed stringent warranties on Olympus and the guarantors, the Sullivans, (inter alia) that debts (or invoices) offered for factoring, were owing in full and payable in full to Olympus not later than the second day of the month following the date of the invoice, that the debtors involved had not sought to repudiate the debts, and that the debtors had no right of set off or counterclaim.  In addition Mr. Sullivan of Olympus in para. 50 of the application for the facility (Exhibit 8), represented that invoices were not raised until the project manager of various jobs approved of Olympus' progress claims against its customers, because according to CRA, such approvals removed any dispute as to their enforcibility.  Mr. Roberts said that this was important (72-73), even though, after agreeing in cross-examination that a simple and effective method of vouching the validity of debts offered by Olympus for factoring would have been to check with the project manager involved, he said in reexamination (126) that not all building contracts had a project manager. 

Nevertheless, Olympus was engaged in the building industry for which the great bulk of its work was directed.  Mr. Walder in his facsimile to Mr. Roberts of 28 February 1991 (Exhibit 21), said that "bulk of work is coming from the medium size builders in the shopping centre/factory type work".  Mr. Roberts said (127) that Olympus was "contracting with various people, Government departments, major builders and the like and we believed that he was continuing along that basis".  It would be surprising if such jobs did not have a project manager or equivalent, having regard also to para. 50 of Exhibit 8, to Mr. Roberts' evidence overall, as well as to the evidence of Mr. White as to the necessity for completing "projects" after Olympus collapsed.  It is nevertheless accepted that notwithstanding para. 50 of Exhibit 8, some small part of the business activities by Olympus was probably with ordinary trade debtors where no project manager was involved.

The foregoing provides an indication that anyone with general knowledge of factoring of debts and of CRA's business, and in particular with the terms of Exhibit 3, were justified in expecting that the debts (invoices) offered by Olympus to CRA for purchase and which were in fact purchased by CRA, were properly checked and in fact legally enforceable debts, and not fictitious or fraudulent "debts" tendered by Olympus in breach of its contract with CRA and which got past CRA's alleged checking system.  It is a contradiction in terms to call such transactions "debts".  They were not debts at all and were outside the scope of CRA's business.

It is immediately apparent that this arrangement was a very risky one for CRA.  This accords with the overall evidence.  It involved in the first place considerable care before entering into the arrangement, particularly as Olympus was suffering from a severe liquidity problem, and was "out of the ordinary" as Mr. Roberts said.  When commenting on Coopers & Lybrand's report of 26 February 1991 (Exhibit 9), Mr. Walder said that Olympus was insolvent at the outset (i.e. at "take up").  See his comments written on Exhibit 9.  Mr. Roberts also said that Olympus was insolvent at the beginning (123).  He also said that 50% of the companies "that we look at" were in fact insolvent (118).  It appears that CRA has factored debts for companies in receivership where CRA had guarantees from the receivers as to any debts factored.

Nevertheless, in the face of those admissions as to insolvency of Olympus, and the evidence generally, including in particular the report of Coopers & Lybrand (Exhibit 9), Counsel for CRA attempted during the evidence (314-7) and addresses (pp.39/56 of the written submissions and pp.472-4) of the transcript), to discredit CRA's auditors' report (i.e. Coopers & Lybrand) that Olympus was insolvent at the outset (or at least on 30 June 1990), by asserting that had the value of the real property been correctly shown in Olympus' balance sheet at 30 June 1990 as $1.1 million (478), rather than $516,620.00, the company was not then in fact insolvent.  If that submission succeeded, it would also tend to show that both Mr. Roberts and Mr. Walder were incorrect in their statement that they knew that Olympus was insolvent "at take up" when in fact Olympus would then have been a viable company with which CRA could confidently do business.  No doubt this submission was designed to answer the defendant's allegations that CRA was negligent in entering into the facility in the first place with an organisation in such a state.  (At transcript p.472 line 35, the word "wrong" should be inserted to read "...Coopers & Lybrand were wrong saying...".  At 474 line 25 the word "solvent" should be "insolvent", and the words "said it" should be deleted from line 24.)

After commencement of the relationship, its success depended on Olympus selling only valid and enforceable debts as the facility agreement expressly required (and not fraudulent, fictitious or wrongly inflated "debts") to CRA at their proper value, and also on a proper collection and banking procedure by Olympus on CRA's behalf.

Notwithstanding the express facility requirement that all debts factored were fully due and payable by the debtors of Olympus, Mr. Roberts said that from about the time CRA granted the increase in the facility on 28 February 1991 (Exhibit 1), there was a high risk that a company which was insolvent and desperate to survive would be tempted into selling to CRA, non-existent debts or debts overstated or debts not yet due, such that CRA should exercise extreme care in checking such debts before they were purchased.  Indeed, Mr. Walder was also aware of the risk of fraud, at least before Coopers & Lybrand were engaged on 4 February 1991 to conduct an audit for CRA (Exhibit 31)(245, 308), prior to the granting of the extension on 28 February 1991.  See also at 245 where he referred to the dangers for CRA in an "ordinary facility", and at 54/112 where Mr. Roberts also referred to the dangers.

This arrangement once entered into also required very close monitoring by CRA of all aspects of its dealings with Olympus and the taking of timely remedial action such as immediate discontinuation of further purchases of Olympus' debts as it could do at any time as Mr. Roberts said (70) in order to prevent further losses, exercising some or all of its extensive powers under the agreement, e.g. cls.18 of Exhibit 3, and "getting out" should such course become necessary, as both Mr. Roberts and Mr. Walder asserted would be done speedily if the need arose.  Indeed, Mr. Roberts expressly stated that CRA could buy a debt "only once today", stop any further purchase, make its fee and move on (70).

CRA was thus exposed to the risk that "debts" fraudulently offered for sale to CRA by Olympus were non-existent or were otherwise valid debts but wrongly increased in amounts.  CRA has alleged that this occurred in the latter part of its dealings with Olympus after about March 1991, and probably in May 1991.  Notwithstanding that CRA raised the question of fraudulent invoices during its case, it has not provided details or proved what part of its claim constituted such "debts" as compared with unpaid bona fide debts, despite enquiries by me in this regard.  I agree with the defendant's submission that this could easily have been done by CRA who apparently discovered these "debts" only during its investigations into Olympus' affairs after it collapsed (240, 324, 498).  Not one had been discovered to be fraudulent before it was purchased by CRA and before the collapse of Olympus at the end of its relationship with CRA.  There is no evidence that CRA had rejected any invoices tendered to it by Olympus for factoring.

Messrs. Flower & Hart, solicitors acting for CRA said in a letter to CRA of 1 June 1992 (Exhibit 61) that "many of the debts factored were fraudulent debts" which was said to be the reason why CRA could not claim its losses under the assigned Trade Indemnity Insurance Policy which covered only losses which flowed from CRA's purchase of bona fide debts owed to Olympus.  Junior Counsel in his written submissions at p.50 said that the "main" reason for CRA's losses were from this cause.  Nevertheless the effect of CRA's stand was that it was entitled to any losses it suffered, many months later, from whatever cause, even if the bulk if not all of those losses occurred as a result of the fraud of the "borrower", and even from the negligence of CRA in not checking and ascertaining their validity before purchase, rather than only losses which might flow from the "ordinary" business failure of Olympus which otherwise honestly (or at least non-fraudulently) complied with its agreement with CRA.  It was said that this flowed because CRA would not have entered into the facility if the defendant's valuation had come in at a substantially lower figure representing a true "Fire Sale" value so that all losses it suffered, of whatever nature and whenever they occurred, plus interest and other charges thereon, were "caused" by the defendant's negligence or breach of retainer and were not too remote.

Mr. Roberts said that the only unpaid invoices were those factored by CRA in March, April and May 1991 (86).  All others had been repaid.  Mr. Walder said that when Olympus went into liquidation, there were a lot of "uncollectable debts" and that "most of them were in 30 days", i.e. May invoices.  He also said that unrecoverable, non-existent and fraudulent debts occurred in May and June 1991 and that CRA had no difficulty whatsoever with respect to any debts factored to the end of April 1991 (324), indicating that all invoices factored to the end of April 1991 were probably duly repaid.  His evidence that some debts were purchased in June must be incorrect.  See Exhibits 26, 27 but in particular Exhibit 28 which shows that the last invoices purchased occurred on 30 May 1991 ($18,630.00).  Mr. Roberts agreed with this (86).  This also accords with the document Schedule 1 handed to the Court by solicitors for the plaintiff subsequent to the hearing (Exhibit 94).  It is headed "List Of Debtors And Face Value Of Debts Purchased On A Monthly Basis Which Remain Outstanding At The End Of Each Month".  Schedule 2, "Outstanding Debtors As At 31 May 1991"(Exhibit 95), is to similar effect.  So also is Schedule 3 ("Schedule Debts Owing At 31 May 1991 Per Aged Debtor's List And When Due") (Exhibit 96).  Indeed, the explanation by solicitors for CRA in Exhibit 93 concerning Schedule 2 (Exhibit 95), shows that no debts were purchased between 1 June 1991 and 11 June 1991 when Olympus finally collapsed.

CRA was also exposed to the risk that Olympus, which collected the proceeds from its debtors, failed to pay the proceeds to the credit of CRA's bank account.  It was suggested that this may also have occurred although again CRA has not attempted to prove details or the extent of its claim which was due to this possible cause.  It might be thought to have been a simple exercise to establish whether or not there were losses from this cause.  CRA simply asserts its entitlement to the "balance of its ledger" of $200,710.76 at 11 June 1991 (most of which included "fraudulent" debts), without proof of its contents (254), plus other expenses, costs and interest hereinafter referred to (see para. 6 of the Further and Better Particulars and Exhibit 75), showing a total of $348,731.97 as at 4 October 1994 (Exhibit 75), plus interest to judgment.  It is not known what precise portion of that sum and interest and other expenses in relation to such sums, were the result of fraud by Olympus.  It is tempting to infer from the above exhibits, particularly Exhibit 94, as well as Mr. Walder's evidence, that the debts purchased in May and outstanding at 31 May 1991 totalling $152,502.80 were all fraudulent "debts", although a close examination of these documents and other evidence renders such an inference unsafe.  As indicated, the onus is on CRA to prove the extent of its losses caused by any negligence or breach of retainer on the part of the defendant and that such losses, in the case of tort, were reasonably foreseeable and not too remote, and in the case of breach of retainer, were within the reasonable contemplation of the parties at the outset.  See below.

CRA also faced the ordinary business risk that some of Olympus' genuine debts which had been purchased, became bad debts, thus, as indicated, giving CRA the right of recourse to Olympus which was required to "repurchase" those debts or, if Olympus was unable to do so by reason of its liquidity problems, giving CRA recourse to the Trade Indemnity Policy (Exhibit 15).  Mr. Roberts was acutely aware of the strict conditions of such a policy (see p.43 and Exhibit 60), which he insisted should be and was assigned to CRA (and to be strictly monitored by CRA to ensure that Olympus complied with its strict terms), as a condition of entering into the facility in the first place (Exhibit 16 Condition 4).  If Olympus had been honest in its dealings with CRA (i.e. non-fraudulent), and had complied with its agreement with CRA and with the terms of the Trade Indemnity Policy (Exhibit 15), even if its business otherwise failed, CRA would probably have suffered no loss.  However, because of the fraud by Olympus, this was said to have given the insurer the right to avoid the policy (Exhibit 61), although there was no evidence of any attempt by CRA to test the attitude of the insurer at least with respect to valid debts if any which had not been repaid at winding up.  This is a ground of complaint by the defendant - Defence para. 8(d).

However viewed, all of the losses suffered by CRA were not incurred until after purchase of debts, real or fraudulent, after February 1991.  All debts purchased to that time had been duly repaid.  The debts which caused losses, according to Mr. Roberts, were some of the debts purchased in or after March, April and May 1991 and, on Mr. Walder's evidence, substantially in May 1991.  Also on Mr. Walder's evidence, it is clear that much if not all of CRA's losses arose because of fraudulent invoices tendered by Olympus to CRA which CRA purchased in May 1991.

It was said on behalf of CRA that before it entered into such a facility, it always required security and other conditions according to the type of business activity engaged in by its customer, in this case Olympus.  Evidence was given in this regard by Mr. Roberts, as well as by Mr. Walder.  For those customers engaged in other than the building or related industries, the stated invariable practice by CRA was to require real property security to the extent of 50% of the limit of the proposed financing facility. 

In the case of Olympus, which traded under the name "Jaeden Aluminium Fabricators", engaged as it was in the manufacture and sale of aluminium products such as windows, doors etc. to builders engaged in projects in the building industry, CRA alleged that its invariable policy was to require real property security to a minimum of 100% of the limit of the proposed facility to cover its maximum exposure at any time.  This was said to be due to the fact that there were more difficulties in the building industry regarding payment of debts by debtors (usually builders, subcontractors etc) to their suppliers (in this case Olympus).  The building industry was generally regarded as being more volatile and risky, the calibre of debtors to suppliers in that industry were not always of the highest order, and there were other problems including those associated with retentions and progress payments on building projects.  Mr. Roberts insisted that debts factored must always exclude retentions (Exhibit 16, Condition 3), and there is no reason to conclude that retentions were ever factored.  Retentions were those parts of progress claims by Olympus on its customers, which the customers were entitled under their contract with Olympus, to hold back to ensure performance by Olympus of maintenance if any, and to give some protection to them if Olympus failed to continue with further work under its contracts with those customers, involving them in some possible expense of recalling tenders to complete their work on the projects involved.

Recourse to any security appears to have been a last resort because in the first instance, the agreement allowed CRA to have recourse to Olympus to repurchase overdue unpaid debts if Olympus' finance allowed it to do so.  Another course was either action against Olympus and/or notification direct to the customers of Olympus whose debts had been factored and unpaid, with action directly against them if the assigned debt remained unpaid.  Another right was recourse to the Trade Indemnity Policy which, it was said, depended for its effect upon Olympus having complied with the stringent conditions of such a policy (and not committing fraud).  Any recourse to the real property or other security would only then follow if absolutely necessary.

As indicated, a factoring facility, particularly with a company in the position of Olympus, required very strict and honest (non-fraudulent) performance by Olympus of its obligations to CRA as well as closer than usual supervision by CRA.  In accordance with CRA's stated policy, which set the standard of care it was required to take, and may be taken to be the standard of care of a reasonable factoring company, it also required care by CRA to ensure that all of the conditions of any approval for the granting of such a facility were duly complied with, and that the value of any security it obtained remained current throughout the relationship and remained sufficient to cover its exposure at any time during that relationship.  This appears to accord with the express terms of cls.16.2.1 of Exhibit 3 "...such mortgage to secure all monies owing from time to time by the vendor (Olympus) to CRA", and was particularly important because of the widely known downturn in the economy as well as in the building industry in particular with its obvious depressing effect on values of real property security.  Clause 16.2.3 also envisaged security over personal property "...to secure all monies owing from time to time by the vendor to CRA".  Of importance also was the precarious financial position of Olympus from the outset and ever since until its final collapse.

In order to give effect to an arrangement with Olympus, agreement was required to be reached with the National Australia Bank which had already held a first mortgage over the subject property (Exhibits 11 and 30).  This was to secure an overdraft facility to Olympus not exceeding $700,000.00.  Also the National Australia Savings Bank had already held a second mortgage over that same property to secure a loan which appears to have fluctuated over and under $50,000.00 during 1990 (Exhibits 11, 17, 30, 78, 86 and 87).  The National Australia Bank also held a first mortgage debenture over all of the assets and undertaking of Olympus dated 13 April 1987 (Exhibit 29), which included all debts owing to Olympus.  CRA was able to enter into the Invoice Finance Facility with Olympus to buy debts owing to Olympus only if the bank first conceded a priority to CRA to allow CRA to purchase debts already charged to the bank, up to the proposed facility limit of $200,000.00.  The bank concession to CRA and CRA's ability to purchase debts to the value of that concession were to go hand in hand.  CRA could not purchase debts without this priority.  Nor could it legitimately purchase debts in excess of such a priority.  CRA's second mortgage debenture over the assets of Olympus, entered into on 29 September 1990 (Exhibit 4), was subject to the bank's first charge.  Also, because of CRA's stated policy of requiring real property security, CRA also required the bank to limit the priority the bank retained in respect of the two securities over the house property so that CRA could take advantage of the realisable value of the property over and above the bank's priority limit, i.e. by entering into a third mortgage which it was hoped would give it an "equity" over and above the bank's agreed limit. 

The bank on 18 October 1990 conceded priority to CRA initially to the extent of $200,000.00 to enable CRA to purchase debts of Olympus to that amount (Exhibits 29 and 50) which was increased to $300,000.00 on 11 February 1991 (Exhibit 51), and reverted to $250,000.00 on 1 May 1991 (Exhibits 52, 53, 54).  CRA in fact increased its exposure to Olympus in factoring Olympus debts well above the $200,000.00 limit and indeed above the extended facility limit of $250,000.00 granted on 28 February 1991.  See e.g. the allegations in para. 8(m) of the Defence, which are based on documents in evidence, showing limits of up to $293,300.56, subject to some evidence as to carry over bankings.  Those variations were not in any way referred to the defendant, nor was any subsequent valuation of the real property obtained until the defendant was asked by CRA to do a review which he did on 12 June 1991 after the collapse of Olympus (Exhibit 10).  That valuation showed a figure of approximately $900,000.00 if marketed in an orderly fashion but a figure of $750,000.00 "should the property be marketed as Mortgagee in possession in today's climate...".

Also the bank conceded priority to CRA over and above a limit of $750,000.00 plus bank charges, interest etc. without limit (Exhibit 30), thus enabling CRA to enter into the third mortgage arrangement with Olympus (Exhibits 5 and 11), providing the value of the property exceeded the amount of the bank's priority.  The allegation in para. 6(b) of the Statement of Claim that CRA took a second mortgage behind the National Australia Bank's first mortgage is incorrect and caused much confusion at the trial.  It was clearly a third mortgage.

The details of all of these arrangements with the bank were made locally by Mr. Walder alone and not by Mr. Roberts or any other director in Melbourne.  Mr. Roberts said that he did not deal with the bank with respect to anything (61-2) although he was concerned that the bank might put pressure on Olympus to reduce its overdraft facility because the bank had released $200,000.00 of its book debts to CRA (62), and thus had reduced its own security.  A fortiori if the bank relaxed $250,000.00 or $300,000.00 as it did.  The defendant had no knowledge of these arrangements.  It is immediately apparent that the value of any such security over real property of Olympus was prone to fluctuations depending upon bank charges, interest etc. as well as the continuing inherent value of the real property itself. 

It is therefore necessary to examine in detail, steps taken by CRA before it entered into the Invoice Finance Facility with Olympus and before its agreement to extend the facility to $250,000.00 on 28 February 1991, as well as its conduct and dealings with Olympus over the period of the facility.  References to the evidence which often bears upon more than one issue, will be mentioned in context as necessary, unfortunately involving some repetition, with findings as may be appropriate. 

Care has been taken not to view the conduct of CRA with the benefit of hindsight after the collapse of Olympus which, in retrospect, appeared to have been inevitable from the start.  Its conduct must be viewed in the circumstances prevailing at times material to the issues raised in this case.  Likewise, the valuation by the defendant should be viewed in the light of circumstances existing at 5 September 1990.  Due allowance has also been made for the lapse of time between the events and the trial, and its effect on memories of witnesses.

STEPS TAKEN AND CRA'S CONDUCT

It appears that some time during August 1990, Mr. Walder was approached by Messrs. Hall Chadwick, Public Accountants, to see if CRA might be prepared to entertain an application for a finance facility with Olympus which was said to be suffering from a severe liquidity problem and shortage of an adequate cash flow but otherwise said to be a basically sound business.  Messrs. Hall Chadwick had previously acted for Olympus and CRA.  It appears that Mr. Walder relied upon Messrs. Hall Chadwick in the (unaudited) financial statements provided and explanations offered, as well as upon Mr. Sullivan's representations, and did not make separate enquiries into the financial affairs of Olympus of the style conducted by its own auditors, Coopers & Lybrand in February 1991 (Exhibit 9), which Counsel for CRA said was then part of CRA's "normal procedural aspects" (480) in auditing its clients.  Of course, at that stage, Olympus was not a client.  Messrs. Hall Chadwick no doubt relied to some extent on information from Mr. Sullivan in the unaudited accounts prepared (Exhibit 87) and explanations offered.  Unfortunately no relevant officer from Hall Chadwick was called to give evidence.  The evidence overall shows that Mr. Sullivan was very personable, persuasive and indeed optimistic.

The only independent checks made were in accordance with two of the conditions referred to in Exhibit 16.  One was a credit check through a trade organisation (Exhibits 44-45), and the bank (Exhibit 46).  These matters constituted one of the many allegations of contributory negligence - para. 8(h) of the Defence.

Exhibit 44 shows that on 29 June 1990, a default notice for non-payment of a debt of $1,024.00 was issued against Olympus and on 26 October 1989, a District Court plaint had been issued against Olympus by Allan and Wendy Huish claiming the sum of $14,893.00.  It was alleged that CRA did not check out these matters or satisfied itself that Olympus had a consistent pattern of paying its debts (para. 8(o),(q) of the Defence).  The bank note (Exhibit 46), guardedly stated:

"Business is suffering effects of slow-down and failure, in a building sector and equity has tight prospects of ongoing trading.  Are reasonably sound with a full management plan in place still fairly dependent on improvement in the industry but has good work in hand at the present time."

Mr. Roberts said that Olympus had a prior factoring facility with Custom Credit (112).  Its duration or details and Olympus' condition during its currency were not canvassed in evidence but, on Mr. Roberts' overall evidence, it indicates that Olympus had been suffering from liquidity problems for some time prior to CRA's involvement.  Apparently no attempt had been made by Olympus to otherwise raise extra finance on the security of its assets, particularly the house property already twice mortgaged to the bank.  If it did, such attempts were unsuccessful, hence its approach to CRA.  Indeed, at 30 June 1990, Exhibit 17 shows that the overdraft alone was $848,160.96 (up from $176,701.00 as at 30 June 1989) and that the debt to the savings bank was $48,050.18, totalling $896,211.14.  There was no debt to the Savings Bank at 30 June 1989 (Exhibit 17).  The additional loan was raised during year ended 30 June 1990.  Mr. Hollis (solicitor recently employed by the bank and who gave evidence) said that this debt was incurred in 1989, and therefore after 30 June 1989.  With Olympus' overdraft fluctuating and at times very much over the limit of $700,000.00 which Mr. Hollis said was arranged in March 1990, (no doubt with personal guarantees by Mr. & Mrs. Sullivan - Exhibits 84, 85), it is unlikely that Olympus could have raised any extra finance based on "equity" if any remaining in the heavily mortgaged house property because of its otherwise negative asset position which Mr. Walder correctly described as a "deficit".  The evidence of Mr. Roberts otherwise shows that the inability of a business to obtain finance or extra finance from its bank or regular lender is the usual reason why a business in the position of Olympus seeks a facility of this type. 

On 28 August 1990, (a date which emerges from all of the evidence notwithstanding Mr. Walder's understandable difficulty after the time lapse in recalling when the first meeting occurred), Mr. Walder for the first time met Mr. Sullivan who was the Managing Director of Olympus at the office of Olympus at Slacks Creek, Brisbane.  Present also was Mr. Terry Van der Veld of Messrs. Hall Chadwick who was not called to give evidence.

Mr. Walder's role was not only to manage the Queensland enterprise but also to secure business on behalf of CRA.  It was in his interests as well as that of CRA to secure this business if possible.  Notwithstanding that the final decision to enter into a finance facility rested with CRA's Head Office in Melbourne (involving approval by Mr. Roberts and two other directors or one other director and secretary), I formed the clear impression from all of the evidence, both oral and documentary, that Mr. Walder was anxious to secure and maintain this business relationship and assist Olympus as far as he could.  It may also be confidently inferred from all of the evidence that Mr. Walder and Mr. Roberts were favourably impressed with Mr. Sullivan's optimism and explanations.  They were inclined to accept uncritically his forecasts of improvement from time to time.  By way of example only see pp.92, 103-4 and Mr. Walder's acceptance of Mr. Sullivan's statements that the boat "Glass Cutter" was unencumbered as well as Mr. Walder's statements in Exhibit 21 of 28 February 1991 and in Exhibit 22 of 21 March 1991.  As will appear, Mr. Sullivan misled Mr. Walder and Mr. Roberts in certain respects.

Mr. Roberts left all of the local investigations and negotiations entirely in the hands of Mr. Walder who made recommendations.  Mr. Roberts said Mr. Walder was a very experienced man (115).  After grant of the approval by the Board on 31 August 1990, Mr. Roberts left all of its implementation and compliance with CRA's stated eight conditions to Mr. Walder to put into effect locally (84).  However it appears from Mr. Roberts' evidence (113 and elsewhere), that he also was anxious to help Olympus out as far as he could and expressed the view that had the facility been withdrawn after the unfavourable report of Coopers & Lybrand of 26 February 1991 (Exhibit 9) to CRA, Olympus would have been forced to close its doors.  He said that CRA was not in the business of putting companies out of business.  He agreed that he wanted to see Olympus continue to trade and that he wanted to "help them out".  He "hoped they'd get out of their problems".  He said that CRA took a risk at that time.  These factors formed the basis of a considerable attack by the defendant who alleged that CRA brought about its own losses all of which occurred very late in its relationship with Olympus, even if his valuation was negligently performed.

The first formal step was the completion by Mr. Walder and Mr. Sullivan of a Finance Application to CRA on a CRA printed form (Exhibit 8).  The evidence shows that this important document was completed by Mr. Sullivan with Mr. Walder in the presence of Mr. Van der Veld (of Hall Chadwick) at the first meeting.  Mr. Roberts has accepted that this was so (47).  Senior Counsel in his opening (25) said it was made at the first meeting which he said occurred on 29 August 1990.  Exhibit 8 is signed by Mr. Sullivan.  A date of 29 August 1990 appears thereon, although the date 28 August 1990 appears in the first page thereof whereby a copy was sent to Messrs. Flower & Hart solicitors for CRA.  I find that this was in fact prepared on 28 August 1990, although the precise date is not important.

Exhibit 8 is a lengthy document which contained or attached a good deal of financial information which CRA considered essential before it agreed to consider entry into any finance facility with Olympus.  CRA expected that the document would be accurately completed.  Mr. Walder answered "yes" to the question "Do you in fact go right through the application form and verify the statements that are made as you are able to?"(220).  As indicated, Mr. Roberts said that Mr. Sullivan completed the form with Mr. Walder (47) who was a "very experienced man" (115).  Both Mr. Roberts and Mr. Walder were questioned at different stages throughout their evidence about various contents of that document and other documents and information said to be provided and accompanied with it.  Mr. Walder was questioned in relation to it during several stages of his evidence-in-chief (e.g. transcript 219-20, 297-299, 303-304, 308-9 particularly in the context of his responses to Coopers and Lybrand's report of 26 February 1991 (Exhibit 9) and his notes in relation to it), and 313-4.

In para. 18 of Exhibit 8, Mr. Sullivan disclosed that Olympus had a current overdraft of $750,000.00 with the National Australia Bank, Underwood.  He did not mention any Savings Bank loan.  Under the question "other loans", he said "nil", which is repeated on p.3 cls.18(2).  He there referred only to the overdraft as a "come and go", which is apt to describe a fluctuating bank overdraft of the type well-known in business and banking circles.  Mr. Walder obtained an asset and liability statement from Mr. Sullivan which, he said, was sent to Mr. Roberts in Melbourne along with Exhibits 8, 16 and financial statements.  It was not placed in evidence.  Mr. Walder said he accepted Mr. Sullivan's statement that CRA's exposure to the bank at 28 August 1990 was $750,000.00 (221).  There is no evidence that he independently checked this with the bank at the time.  Exhibit 46 does not deal with it.

By para. 19, it was disclosed that the bank held a First Mortgage Security.  This was over the house property owned by Olympus (Exhibits 11 and 17) which was the subject of the later valuation by the defendant on which CRA said it relied.  That property is a large residential property of 1665 square metres situated on land the equivalent of two blocks in size at 18 Fitzwilliam Street, Carrara on the Gold Coast, with an absolute frontage to the Nerang River.  It is a double storey residence containing on the ground floor an entry, two bedrooms, study, bathroom, toilet, laundry and dining areas, a kitchen, television room, family room, lounge bar and breakfast room.  On the first floor is the parent's retreat area, master bedroom, ensuite with walk-in robe.  Detached from the main building was a fully self-contained double guest quarters with bedroom and ensuite, a fully tiled in-ground concrete pool and heated spa, a full size tennis court with lights, a large timber jetty on concrete piers and a brick/corrugated galvanised steel double garage/workshop having two electric doors.  The site also had the advantage over other properties in the area as it extended out into the river thus giving commanding views of the river itself (146).

As already indicated, the bank also held a Savings Bank Mortgage over the same property which ranked second to the first mortgage and prior to CRA's subsequent mortgage.  See Exhibits 11, 17, 78, 86 and 87.  This property was an asset of Olympus yet Exhibit 8 did not disclose that second mortgage or any debt owing to the Savings bank in respect of it.  The two separate debts to the bank readily appear from a cursory examination of Exhibit 17, part of which accompanied the application (Exhibit 8).

Mr. Walder said (224 and elsewhere on more occasions than one) that the combined debt, as far as he could recall, was $750,000.00, i.e. $700,000.00 for the Trading Bank overdraft and $50,000.00 for the Savings Bank loan.  As indicated, he accepted Mr. Sullivan's statement that this was Olympus' exposure to the bank at 28 August 1990 (221).  The actual amount at that date cannot be precisely ascertained from Exhibits 78 and 86.  Exhibit 78 shows that on 17 August 1990, the overdraft alone was $756,718.94 and Exhibit 86 shows that on 31 August 1990 the Savings Bank loan stood at $50,286.16, totalling over $800,000.00, depending upon movement in the overdraft balance in the meantime, although it appears that at the subsequent date of the facility (Exhibit 3), 28 September 1990, the total debt happened to be then below $750,000.00.  (See Exhibits 86, 87 which were produced by Mr. Hollis after giving evidence following questioning by me.)  The evidence does not show that Mr. Walder adequately checked those figures with the bank at that time.

Despite attempts by me during the case to have clarified the precise amounts owing to the bank at various material times, as Senior Counsel in his opening for the plaintiff appears to recognise was necessary (19), and indeed as Mr. Roberts considered appropriate by his reference to the fact that CRA took steps to ensure that the interest or the payment component relative to the loan to the bank was fairly adhered to (80) to ensure that the value of CRA's security was not eroded (45), the precise amounts owing to the bank under both loans at various material times throughout the relationship with Olympus were not clearly established by evidence from the bank or by documentary evidence.  The evidence shows that at best, Mr. Walder made only quarterly enquiries of the bank.  See Exhibit 55, lodged after Olympus collapsed.  Mr. Hollis, who had worked for the bank for six weeks only before the trial, assisted the Court as far as he could in procuring copies of various bank statements which nevertheless contained certain gaps.  As indicated, after giving evidence, he produced the statements Exhibits 86-87.  The balance owing at the date of winding up of Olympus (12 June 1991) is of little assistance in establishing what occurred during the relationship, particularly as that final balance may well have been reduced by the injection of funds from CRA by reason of the large number of fictitious "debts" sold by Olympus to CRA for which CRA paid large sums of money to Olympus in May of 1991.

For present purposes it is clear that the total debts to the bank as well as their character and make up were not correctly stated at the date of the application in respect of which Mr. Walder agreed that he went right through the application form and verified the statements made (220) and notwithstanding that the financial accounts Exhibit 17 showed two debts to the bank.  If he did so, and particularly as Mr. Van der Veld was present and presumably knew something of Olympus' affairs, it is strange that the application form Exhibit 8 was not amended or corrected or explained by an accompanying memorandum, at least before it was transmitted by facsimile to Mr. Roberts in Melbourne along with all other documents including the Client Document Resume, the financial accounts Exhibit 17 and otherwise (41), for consideration at Board level before approval was granted on 31 August 1990 (Exhibit 16). 

The same figure of $750,000.00 was also inserted by Mr. Walder in the Client Document Resume Exhibit 16 which he prepared on 28 August 1990 and repeated in this way in his memorandum to Mr. Roberts of 7 September 1990 (Exhibit 18).  On its face, Exhibit 16 refers only to a mortgage to the National Australia Bank ("NAB") and not to the National Australia Savings Bank, a different entity.  This is the way Mr. Roberts (and therefore the Board) viewed these documents when the facility was approved on 31 August 1990, because as late as February 1991, he said that he did not know of the second mortgage to the National Australia Savings Bank (106) when questioned about the Coopers & Lybrand report of 26 February 1991 (Exhibit 9) which showed a bank overdraft alone of $737,000.00 when Olympus' bank overdraft limit was supposedly only $700,000.00.  Mr. Roberts said he only learned of the second mortgage subsequently when he sighted the title at a time not stated.  Also he said (45) that when he approved the facility in conjunction with fellow directors, he believed he had $350,000.00 worth of real estate by way of second mortgage, not third mortgage.  This indicates that Mr. Roberts by his statement that "I glance through them" (the financial statements) before approving the facility on 31 August 1990 (65), either did not notice the two separate debts shown as owing to the bank, or if he did, he did not appreciate their significance.

The facsimile dated 3 September 1990 from Mr. Walder to Mr. Sullivan (Exhibit 47) shows that originally, it referred to "Mortgage (2nd) to be registered over Vol 5888 Fol 19".  It was changed to "Mortgage (3rd) to be registered...".  This was inserted before the facsimile was sent to Mr. Sullivan indicating CRA's approval subject to conditions.  This is made clear by Mr. Sullivan's acknowledgment in reply Exhibit 48.  Mr. Walder knew by no later than 3 September 1990, that there were two prior mortgages in favour of the bank and before Flower & Hart pointed this out in their letter to CRA dated 5 September 1990 (Exhibit 23).  Yet Mr. Roberts in approving the facility was apparently never made aware of or told at any stage of the existence of the second mortgage in favour of the National Australia Savings Bank.  On his overall evidence, this is something that he would have been unlikely to forget or overlook had he been made aware of it.

Mr. Roberts at one stage said that the precise debt owing to the bank was irrelevant (65-9), no doubt because of the priority given by the bank to CRA over its own limit (Exhibit 30), although he later qualified this statement.  This statement is at odds with his concession that the bank's interest, costs and charges if CRA had to exercise its power of sale could eat into CRA's equity (80) and erode its security (45).  The reference to "their equity" should be "your equity".  It is also at odds with his expressed concern in evidence-in-chief (61) about any priority agreement with the bank particularly where Olympus exceeded its overdraft limit as revealed in Coopers & Lybrand's report of 26 February 1991 (Exhibit 9)(62) although he also qualified this somewhat during reexamination (120-1).  The overdraft alone was then $737,000.00, $37,000.00 over the limit.  Nevertheless examples such as this were in his view a reason that the bank might insist on Olympus reducing its overdraft because the bank had given up priority of debts to the extent of $200,000.00 initially, (subject to later variations), thus putting pressure on Olympus' capacity to carry on business. 

As indicated, Mr. Roberts also said (80) that CRA took steps to ensure that the interest on the payment component relative to the loan was fairly adhered to.  Obviously this was a matter of concern to CRA and should have been regularly taken into account.  The evidence shows that the enquiries at the bank did not occur more frequently than quarterly, and particularly during the period after 28 February 1991 when Mr. Roberts emphasised that Mr. Walder was to watch the account closely and during which period Mr. Walder said that he watched the account "like a hawk" (Exhibit 21).

It was therefore incorrect to assert that the precise amounts of the debts owing to the bank from time to time were entirely irrelevant, as this also depended upon bank charges and interest over and above the combined sums of $750,000.00, as well as upon its effect on the capacity of CRA to carry on business at various stages, which may have provided an indication to CRA that action on its part required consideration.  CRA's security could well have been eroded.  It has already been noticed that the bank overdraft at 30 June 1989 was only $176,701.00, but at 30 June 1990, it had increased dramatically to $848,160.96 plus the National Australia Savings Bank debt of $48,050.18 (totalling $896,211.14).  As indicated, there was no savings bank loan outstanding as at 30 June 1989 (Exhibit 17).

Mr. Walder correctly recognised in evidence that a reduction in overdraft was an improvement.  Conversely, it would have been obvious to a prudent and hard headed business man and experienced Finance Manager, regularly engaged in assessing numerous financial returns when considering applications for the grant of a facility, and not necessarily a qualified accountant, that a dramatic increase in overdraft facility and a turn around from a net profit from trading of $101.786.00 for the year ended 30 June 1989 to a loss situation of $119,308.56 (in truth $376,260.00) as at 30 June 1990, points to an opposite inference, particularly in a business engaged in an industry in a state of recession and undergoing very tight liquidity and business failure (Exhibit 46).

Paragraph 25 of Exhibit 8 refers to an unpaid group tax by Olympus in the sum of $55,000.00, to which much attention was directed in the evidence of Mr. Roberts and Mr. Walder.  It again was the subject of attack by the defendant.  This sum does not appear to accord with the letter Exhibit 67 from the Stamp Duties Office to Hall Chadwick dated 12 September 1990 referring to payroll tax outstanding of $34,389.30, or the letter from the Australian Taxation Office to Olympus of 14 September 1990 showing group tax outstanding of $79,203.49 and prescribed payments tax of $17,944.48.  These figures total $131,537.27 unpaid taxes and were obviously incurred prior to the date of the two letters and prior to the date of the application, Exhibit 8 on 28 August 1990.  This is clear as reference is made to May and June 1990 arrears of group tax and/or prescribed payments tax of $20,261.25 as well as a demand for additional payments of $4,000.00 per month.  The payroll tax outstanding of $34,389.30 appears to have been adjusted downwards to $27,225.30 by the Stamp Duties Office's letter of 7 November 1990 to Hall Chadwick (giving a total of $124,373.27).  It shows unpaid payroll tax back as far as June 1988 with penalties, which were waived if strict conditions were complied with.  Even so, payroll tax returns for May and June 1990 had not been lodged at 12 September 1990 or 7 November 1990 in respect of which demands were made and would involve an additional liability of Olympus at 30 June 1990.  Indeed, the first Balance Sheet in Exhibit 17 does not appear to record any such liabilities unless inappropriately included in the description "Trade Creditors".  The position is unclear in the second Balance Sheet in Exhibit 17.

In any event, it is clear that Mr. Sullivan grossly understated his outstanding taxation liabilities in the application form Exhibit 8 in para. 25 thereof.  This is forcibly confirmed by Mr. Roberts' evidence (78) as follows:-

"You had not received audited accounts?  The accounts you received you knew were not audited?--  Correct.

You knew that group tax was not paid?--  Yes.

Did you know that other tax was not paid?--  They didn't divulge that.  There was no indication that it hadn't been paid. 

The answer is you didn't know at the time?--  No."

Against the heading "Other Taxes" in para. 25, nothing was shown.  Outstanding group tax alone was $79,203.49 in addition to the above outstanding payroll tax and prescribed payments tax.  It will be recalled that Mr. Walder agreed that he went right through the application form Exhibit 8 to verify its contents.  Yet he did not amend, or cause Mr. Sullivan to amend para. 25 of Exhibit 8 to correctly record total taxation liability.  This is all the more surprising, given that Mr. Van der Veld of Hall Chadwick was present and with Olympus had, prior to receipt of Exhibit 67, made application to the Australian Taxation Office to pay outstanding taxation liabilities by instalments (304) suggesting that he as well as Mr. Walder either accepted Mr. Sullivan's statement without question or did not check the figure of $55,000.00 in Exhibit 8.

Mr. Walder's evidence at 304 concerning the notation "see file note" against that item in para. 25 of Exhibit 8 (dated 28 August 1990) indicates that this was a reference only to an arrangement to be made with the Taxation Authorities as to time to pay.  The arrangement was not known by Mr. Walder or Mr. Roberts or in place on 28 August 1990 as Exhibit 67 demonstrates.  Mr. Roberts in effect confirmed this (69) although it is clear that he did not personally make arrangements with the Taxation Authorities as his evidence at 69, if correctly transcribed, appears to indicate.  He left all taxation arrangements with Mr. Walder to follow up locally (81, 106).

Mr. Walder said that he received two documents forming part of Exhibit 67 from Hall Chadwick in relation to the question of outstanding taxes (304).  The first is dated 12 September 1990 referring to payroll tax outstanding at $34,389.30 and the second was the letter dated 14 September 1990 from the Australian Taxation Office showing group tax outstanding at $79,203.49 and prescribed payments tax of $17,944.48.  These were not in fact received by Mr. Walder prior to the facility being formally entered into on 28 September 1990 (Exhibit 3).  It is clear from his evidence at 305-6 that those letters were not received by him from Hall Chadwick until he received Hall Chadwick's letter dated 3 October 1990 (Exhibit 69), i.e. after the facility was entered into on 28 September 1990.  Indeed, Exhibit 69 has a stamp "R/S 22 Oct 1990".  Exhibit 69 is an apparent response to Mr. Walder's letter to Hall Chadwick of 28 September 1990 (Exhibit 68), the date the facility Exhibit 3 was entered into, in which he said "We also await your confirmation of verbal advices that an agreement has been reached with the Taxation Department.  Please forward a copy of this agreement."  As indicated, Mr. Walder said at 304 that Hall Chadwick and Olympus had made application to the Australian Tax Office for time to pay arrears by way of instalments.  He said that it was clearly stated that a firm arrangement had to be in place prior to proceeding with the facility and that he would receive a written confirmation of the arrangement.  Mr. Roberts for his part said that he did not see the letters regarding tax arrangements (81).  All of the evidence persuades me that the most that Mr. Walder knew at 28 September 1990 was advice that a verbal arrangement had been entered into, and not as to its details or as to the actual outstanding taxes, the subject of the arrangement.  This was not known until he received Exhibit 69.

When commenting on Coopers & Lybrand's report of 26 February 1991 (Exhibit 9), Mr. Walder wrote on p.2 alongside outstanding group tax liabilities at that time of $90,204.61, that "this was the case when take up was arranged - Hall Chadwick monitor monthly".  At p.3 was also a reference to payroll tax of $17,225.00 still outstanding and $27,781.00 owing for prescribed payments tax.  Those three sums then totalled $135,210.61 unpaid taxes.  Mr. Walder at 312-3 confirmed that he was aware of the outstanding taxes "at take up".  Mr. Roberts also said (121) that was the case when "take up" was arranged.

Mr. Walder's handwritten note on p.2 of Exhibit 9 and his oral evidence confirming this at 312-3 cannot be correct first of all in the sense that those figures were not the sums in fact owing at "take up", i.e. when the facility was entered into on 28 September 1990 because of the contents of Exhibit 67.  The sums then outstanding totalled $131,537.27, later reduced by the letter of 7 November 1990 to a total of $124,373.27 if conditions were complied with.  The second reason is that from Mr. Walder's evidence at 304 and following, he received two of the documents comprising part of Exhibit 67 after 3 October 1990 and possibly as late as 22 October 1990 when it is clear that he would have been aware of the precise amounts owing at "take up".  On all of the evidence the inference is clearly open, that he and Mr. Van der Veld merely accepted without checking the figure of $55,000.00 stated by Mr. Sullivan as the total of unpaid taxes at that time, i.e. 28 August 1990 and it is the inference I draw.  Mr. Walder did not know of the correct taxes outstanding until he received the letter of 3 October 1990.

Neither can Mr. Roberts' statement (121) be correct that the outstanding tax referred to in Coopers & Lybrand's report of 26 February 1991 was the tax outstanding at take up, i.e. in September 1990.  He said (81, 106) that he had never seen the letters regarding tax arrangements which he left to Mr. Walder.  His evidence at 78 supports this conclusion.  He knew only of the $55,000.00 disclosed in Exhibit 8.  He did not personally make any arrangements with the Taxation Authorities.  However viewed, Exhibit 8 was incorrectly stated and neither Mr. Roberts nor Mr. Walder had correct information as to outstanding taxes at the date the approval was granted on 31 August 1990 or indeed when the facility was entered into on 28 September 1990.  However, what was of utmost importance was the knowledge possessed by Mr. Roberts (and the Board) on 31 August 1990 (Exhibit 8) and when the facility was entered into on 28 September 1990, rather than Mr. Walder's knowledge.

Mr. Roberts for his part said that the group tax arrears in any business is fraught with danger "as the tax man is more likely to wind up the company than anybody else" (61).  The arrangements made with the Stamp Duties Office and the Australian Taxation Office as referred to in Exhibits 67 and 69, imposed stringent conditions as to repayment.

It has already been noted that the total outstanding taxes by 12 February 1991 had grown to $135,210.61 (Exhibit 9).  Also at winding up, Exhibit 81, tendered by CRA, shows that the group tax debt had increased to $114,130.00, prescribed payments tax to $36,742.00 and payroll tax to $18,734.00, totalling $169,606.00 unpaid taxes, in addition to penalties of $52,232.00, totalling in all $221,838.00.  These "priority creditors" required close monitoring as Coopers & Lybrand urged in Exhibit 9 on 26 February 1991 and as Mr. Roberts himself particularly requested of Mr. Walder.

Of some importance is the answer to Question 16 of Exhibit 8 which on its face enclosed financial accounts for the years 1989 and 1990.  Mr. Walder, when shown Exhibit 17 which contained two sets of accounts for the year ended 30 June 1990, said that Mr. Van der Veld at the time of the first meeting on 28 August 1990, gave him all of that documentation (299), to which Question 16 of Exhibit 8 refers, during the process when Exhibit 8 was completed by him (Mr. Walder) and Mr. Sullivan with Mr. Van der Veld present.  Mr. Roberts agreed on several occasions that both sets of accounts were in the bundle which initially came to him in Melbourne at or about the time consideration was given to the approval of the facility, i.e. late August 1990.  Indeed at p.58, Mr. Roberts, in answer to a leading question concerning the contents of Exhibit 20, a facsimile from Mr. Walder to him of 29 January 1991 referring to the loss of $376,246.00 for the year ended 30 June 1990, agreed with the proposition that this was "part of the history going back to when you first approved the facility".  He also agreed that he had that information (i.e. in Exhibit 20) in front of him when he made the decision (58).  As will appear, Mr. Roberts was quite incorrect in these answers insofar as they suggest that he had knowledge of the loss of $376,246.00 and of certain other contents of Exhibit 20 (particularly of the total bad debts of $253,430.00), when he first approved the facility on 31 August 1990.

Also Mr. Roberts did not know the real taxation position.  Exhibit 8 showed a group tax outstanding of only $55,000.00.  CRA did not obtain an independent report such as that conducted by the auditors Coopers & Lybrand in February 1991 (Exhibit 9).  Olympus was in a serious financial position even at the outset as a cursory examination of the trading results for the year ended 30 June 1989 compared with 30 June 1990 clearly reveal.  A profit in 1989 resulted in a loss to June 1990.  The overdraft of $176,000.00 in 1989 rose to $848,000.00 at 30 June 1990.  In addition a further savings bank loan in the order of $50,000.00 was obtained from the bank in the year ended 30 June 1990.  Neither did Mr. Roberts know of the second mortgage to the National Australian Savings Bank at the time he approved the facility.

It was submitted on behalf of CRA that because the bank conceded priority to CRA with respect to purchase of debts due to Olympus up to certain amounts which were varied, as well as conceding priority over the real property security beyond $750,000.00, the bank must have considered that Olympus was a safe risk such that CRA could confidently deal with Olympus.  There is a converse inference.  Olympus was heavily indebted to the bank which had prior mortgages over the real property as well as a charge over the assets and undertaking of Olympus (subject to CRA's priorities), as well as guarantees from Mr. & Mrs. Sullivan (Exhibits 84 and 85) which were ahead of any of CRA securities and guarantees.  The bank was obviously not prepared to formally increase its overdraft facility to Olympus apart from allowing Olympus to overrun it at times.  Its interests were protected and it may well have been indifferent to the question of whether Olympus entered into a facility with CRA, whether as a last ditch chance for CRA or otherwise.  Unfortunately there is no relevant evidence from the bank on any of these matters.  In the state of the evidence, it is not possible to use the bank's concession as to priority in the way contended for by CRA, i.e. that it provided some evidence of prudent conduct by CRA in entering into the facility with Olympus at the outset and in continuing to deal with it thereafter.

Something was also made of the fact that CRA had, in addition to its rights under the facility Exhibit 3, obtained personal guarantees from the Sullivans.  It does not specifically appear whether Mr. Roberts or Mr. Walder knew of the guarantees to the bank when CRA took the personal guarantees by the Sullivans in Exhibit 3 on 28 September 1990.  Mr. Hollis said that the savings bank loan was granted in 1989 (i.e. the 1989-90 financial year).  As indicated, there was an overdraft at 30 June 1989 of $176,701.00 which had jumped to $848,160.96 at 30 June 1990.  Mr. Hollis said that the facility of $700,000.00 was granted in March 1990.  It would be surprising if Mr. Roberts and Mr. Walder did not know of the bank's personal guarantees by the Sullivans which would be relevant to allow them to form some assessment of the value to CRA of the Sullivans' personal guarantees contained in Exhibit 3.  They had Mr. Sullivan's assets and liability statement which was not tendered.  Mr. Sullivan appears to have been ready to give personal guarantees (see e.g. that given on 1 November 1990 to personally be responsible for the whole of the long outstanding debt of $119,083.45 owing to Pilkington Australia as set out at p.2 of Coopers & Lybrand's report of 26 February 1991 (Exhibit 9)).  That of course was long after the entering into of the facility.  At best, the taking of personal guarantees was a prudent course, even if they subsequently proved to be of no value.  See e.g. Exhibits 84, 85.

All of the foregoing gives rise to serious doubts concerning the extent to which CRA truly investigated the financial background and affairs of Olympus at or about the time that it entered into the facility.  Mr. Walder said that information had been supplied to him by Messrs. Hall Chadwick as well as representations made by Mr. Sullivan.  It has already been held that Mr. Walder was not in fact in possession of various items of essential information as at the date of the application on 28 August 1990 as contained in Exhibits 8 and 16 even though this is the effect of his oral evidence as well as the effect of various notations he made in writing on the Coopers & Lybrand's report of 26 February 1991 (Exhibit 9).  That was a damning report which as indicated referred to the insolvency of Olympus and made the strongest of recommendations to CRA to reduce its exposure because its position was not secured.

From the foregoing survey, I conclude that Mr. Walder did not in fact know or properly investigate the real position with Olympus at the outset and did not exercise proper care in checking the real position with Olympus.  Neither did Mr. Roberts who apparently relied on Mr. Walder, who in various material respects referred to above, did not fully and completely inform Mr. Roberts of all correct information, at the time Mr. Roberts granted the approval on 31 August 1990 or subsequently.  Their evidence took on a defensive appearance of endeavouring to justify or explain their conduct in causing CRA to enter into the facility in the first place when as a matter of fact, they were not in possession of all relevant information and did not in my opinion make the proper enquiries necessary at that stage.

In my opinion CRA's share of responsibility for any losses it suffered should be assessed at 60% due to its own negligence in entering into the facility in the first place for the above reasons.

The next question arises as to whether CRA was negligent in extending the facility of 28 February 1991 and its conduct thereafter.  Again Mr. Roberts did not know of the second mortgage to the National Australian Savings Bank.  He believed there was a meaningful security over the boat since day one.  He repeated this three times in his evidence as one of his reasons why, along with real property security, he extended the facility.  CRA failed to comply with its own standard of care in not putting into effect several of the essential steps it considered necessary when it entered into the facility in the first place.  There was no bank opinion obtained at that time.  There was no real look at the financial position of Olympus other than that contained in the report of Coopers & Lybrand which Mr. Roberts and Mr. Walder virtually said was irrelevant.  Nor was there a CRAA report obtained.  There was no "Fire Sale" valuation by the defendant or by any other valuer at that stage regardless of the knowledge of Mr. Roberts and Mr. Walder as to whether they knew that property markets were falling in value.  The security did not represent a minimum of 100 percent.  Instead, CRA appears to have relied upon what had been a good business relationship to that point of time including the good state of the debtors ledger with no exception noted.  Neither Mr. Roberts nor Mr. Walder wished to get out at that stage.  The business had been good to that date and was valuable to CRA.  Even though Coopers & Lybrand did not discover any defalcations or fraud by Olympus to that time, Mr. Roberts and Mr. Walder both knew that the company was insolvent then, which they asserted was the position at take up.  Mr. Roberts in particular was alarmed and foresaw an extreme danger of Olympus committing fraud, which in fact occurred.

Also the monitoring by Olympus from that time forward was grossly inadequate in spite of Mr. Walder's evidence of what he or his staff in fact did.  None of the fraudulent debts was discovered until after the collapse of Olympus.  These constituted the bulk of the invoices making up the initial total of $200,700.76 as at 11 June 1991 (Exhibit 75).  This demonstrates that there was little if any effective checking done of any of those invoices before factoring.  But even if there was, the 20 percent random checking system based upon the value of each batch was not adequate particularly having regard to Mr. Roberts' requirement to Mr. Walder at the head of Mr. Walder's facsimile of 28 February 1991 (Exhibit 21) that the situation was "not good WW to watch" (112).  Mr. Roberts said Mr. Walder was to watch all aspects particularly those mentioned in Coopers & Lybrand's report very closely, including priority creditors and taxation liabilities which appear to have progressively increased.  Mr. Walder said that it was not his responsibility to engage Hall Chadwick and he was not sure whether he got monthly profit and loss statements from Olympus as he said would be done to Mr. Roberts in the facsimile Exhibit 21.  The only figures provided by Hall Chadwick are the figures to 28 February 1991 received late March 1991 (Exhibit 22).  It has already been held that monthly statements were not in fact received.  Also there was at best no more than quarterly information sought from the bank as to the bank's position, a factor which Mr. Roberts said should be monitored to see if Olympus was adhering to its terms and conditions with the bank so that CRA's security was not eroded.

Also there was no adequate monitoring of the trade indemnity policy to ensure that Olympus strictly complied with its terms.  This would have been a valuable recourse to CRA in the event of Olympus' default.

In my opinion CRA was negligent in extending the facility as it did on 28 February 1991 for the reasons above mentioned (including those mentioned under the heading on Causation).  No losses had been incurred by it prior to that time.  All the losses occurred long after 28 February 1991.  In my opinion, CRA should be held totally to blame for losses which occurred after 28 February 1991 by reason of its negligence in extending the facility as it did at that time.

Alternatively, all of the foregoing factors make it clear that CRA should have got out of its arrangement with Olympus in February 1991 or certainly no later than March or April 1991, as Mr. Roberts and Mr. Walder said could be done virtually at the drop of a hat.  Mr. Roberts said that he could buy a debt, make his profit and move on (70).  For not doing so, CRA was entirely responsible for its own losses from that time forward.  No blame whatsoever can be attributed to the defendant who is not responsible for any of CRA's losses.

It was said on behalf of CRA that there was no evidence from the defendant, similar to that adduced from Mr. White after the final collapse of Olympus, as to what would have occurred if CRA had withdrawn any further purchases of invoices from Olympus from the end of February 1991.  This is contrary to Mr. Roberts' evidence at p.70 to the effect that he could have got out at any time even after purchasing one debt.  In addition, CRA had extensive rights under the agreement which have already been referred to.  All debts purchased by CRA to the end of February and indeed to the end of April according to Mr. Walder, were valid and enforceable debts, and gave CRA no trouble.  This is clear from the definitions in cls.2 of the facility (Exhibit 3) as well as from the express warranties given by Olympus by virtue of cls.4 of that document.  Also as Exhibit 8 indicated, Mr. Sullivan represented to CRA that invoices were raised after project managers had approved of CRA's progress claims to its customers.  This was done on the majority of debts factored.  This was a very important factor and avoided disputes.  Also the inference is clearly open that as all debts factored to the end of April were valid and enforceable debts, CRA could probably have recovered its losses pursuant to the Trade Indemnity Policy so that it would have suffered no losses had it got out.

Reference has already been made to the evidence of Mr. White about the possibility of some debtors taking the view that debts otherwise due and owing to Olympus should not have to be paid if Olympus did not carry on with further work, thus giving a possible right of set off or counterclaim.  It should be recalled that on winding up, CRA gave notices direct to debtors outstanding at that time, at least some of which were paid directly to CRA voluntarily and some after the issue of legal process.  There is no reason why as at 28 February 1991 or at some other time in March or at least by 4 April 1991, CRA could not have done the same and notified those debtors direct whereupon a legal assignment was effected to CRA as legal owner of the debts.  CRA had the right to issue those notices pursuant to cls.18 of Exhibit 3, as lawful attorney of Olympus as assignor.

The rights between the assignor (Olympus), the assignee (CRA) and the debtors are set out in Halbury's Laws of England, 1st ed. Vol. 4 para. 823 as follows:-

"Where the right of the assignor is subject to a set-off on the part of the debtor, the debtor may, provided the right has accrued before notice of assignment, equally avail himself of this right against the assignee.  Similarly in the case of a debt which accrues due before the date of the notice, but is not payable till after that date.  He may not set off an independent debt which has accrued since notice of assignment, though due upon a contract made before such notice, but he may set off a debt which has accrued since notice of assignment if it has arisen out of a transaction inseparably connected with the original debt.  He may also meet the plaintiff's claim by a counterclaim for unliquidated damages, provided that they arise out of the same contract; but he is not, of course, entitled to recover any damages, but only to set them off against the plaintiff's claim." (emphasis added)

The above principle is clearly stated by the Court of Appeal in England in Roxburghe  v  Cox (1881) 17 Ch.D. 520 per James L.J. at 526; see also Phipps  v  Lovegrove (1873) 16 L.R.Eq. 80 at 88 in a passage cited with approval by G.N. Williams J. in Re Partnership Pacific Securities Limited [1994] 1 Qd.R. 410 at 422-3. In Watson  v  Mid-Wales Railway Co. (1867) 2 L.R.C.P. 593 at 597-8, Bovill C.J. with whom Willes J. and Montague Smith J. appeared to have agreed, said:-

"The question in the case is, whether the plaintiff would be entitled in equity to a perpetual injunction to restrain the defendants at law from setting up the counterclaim by way of set-off; which again turns on the question of how far such a set-off would be allowed in equity.  No case has been cited to us where equity has allowed against the assignee of an equitable chose in action a set-off of a debt arising between the original parties subsequently to the notice of assignment, out of matters not connected with the debt claimed, nor in any way referring to it.  The plaintiff (as assignee) has a clear legal right."

Had CRA promptly issued notices to all debtors outstanding either at the end of February 1991 or at some subsequent date possibly up to 4 April 1991, it may clearly be inferred from the evidence of Mr. Walder that none of the debtors outstanding had any right of set off or counterclaim against Olympus at the time any such notice could have been given (even to the end of April 1991).  There is no question of any debt accruing in favour of any debtors against Olympus which could have accrued before or since any notice of assignment.  The only possibility is whether or not any debtor could have had a claim for unliquidated damages as Mr. White suggested was a possibility and which arose out of the same contract, i.e. between Olympus and its customer in relation to ongoing work in the future.

Mr. White conceded that any such rights would depend entirely upon the contracts between Olympus and its customers (at or prior to receipt of the debtor of a notice of assignment).  There is also the question of retentions which were not factored (Exhibit 16 Condition 3) and which composed that percentage of debts otherwise owing by the customer to Olympus to protect the customer against maintenance and to provide a buffer in the event Olympus ceased further work resulting in the possible necessity for the debtor to call fresh tenders and possibly to incur additional expense.  Mr. White's general evidence of various contracts which he said were part completed at 28 February 1991, advances CRA's submissions no further in this respect.

In concluding against CRA on this submission, I have also borne in mind Mr. Roberts' clear statement that CRA could have got out at any time even after buying a debt once only today, taking its profit and moving on.  I have also borne in mind that some debtors at least who received notice of assignment after the collapse of Olympus paid those debts without demur directly to CRA.  I have also borne in mind the specific terms of cls.4 of the facility agreement (Exhibit 3) and the express warranties Olympus gave to CRA that any customer who owed a debt to Olympus had not sought or intimated his intention to seek to repudiate the transaction and that the customer had no right of set off or counterclaim against the vendor in respect of the debts, even though those warranties would not of course bind any customer of Olympus.  I have also borne in mind that there is no evidence that any of the debts outstanding at winding up were unpaid because of a debtor's refusal to pay based upon any right of set off or counterclaim.  The evidence that McFarlane "initially" refused to pay does not support any such inference.  I have also borne in mind Mr. Walder's evidence that they had no trouble with all debts factored to the end of April 1991, which on any view suggests that they were all duly recovered.  The overall evidence does not support Mr. White's bold assertion that possible rights of set off may have existed.  In my opinion, the facts of this case do not support the submission that the defendant should have adduced further evidence to show that CRA would probably have suffered no such losses if it "got out" at an earlier stage before Olympus was finally wound up.  The likelihood that CRA would have suffered any such losses is no more than the remotest of possibilities.

Furthermore, the submission on behalf of CRA presupposes that if CRA ceased factoring further debts from Olympus at the end of February 1991, Olympus would automatically and immediately have collapsed.  Whilst this was a not unlikely consequence, the timing of such a collapse would not have been certain.  It may well have been delayed if CRA got out in February 1991, by likely attempts by Mr. Sullivan at that time to obtain other types of finance or restructuring as the evidence showed he was still attempting to do on 4 April 1991 (Exhibit 73) after which time it was probably too late.  Olympus had a prior factoring agreement with Custom Credit and may in February 1991 have had other avenues of investigation.  The situation which existed after Olympus was wound up cannot realistically be compared with what might have occurred had CRA got out at an earlier stage.

In the result, I conclude that CRA was negligent in not ceasing to factor further debts in favour of Olympus after 28 February 1991 or at least in March or early April 1991 when it could have issued notices to debtors and "got out" and insisted on payment direct from the debtors.  There is also the right then existing to CRA to claim on the Trade Indemnity Insurance Policy, given that the fraud of Olympus had not occurred until May 1991 and which Messrs. Flower & Hart stated rendered the policy void (Exhibit 61).  All debts factored at the end of April 1991, according to Mr.Walder, gave CRA no trouble.  See his letter to Mr. Roberts of 21 March 1991, Exhibit 22, in which he said that "we have added Trade Indemnity Protection with this client".

Accordingly, the losses which CRA suffered late in its relationship with Olympus were caused initially to the extent of 60% by its own negligence in entering into the facility in the first place but more importantly entirely by its own negligence or its own conduct in extending the facility on 28 February 1991 and its continued dealings with Olympus thereafter rather than getting out at an appropriate time.  The defendant's negligence on 5 September 1990 did not contribute even remotely to CRA's ultimate loss.

1. MITIGATION OF DAMAGES

   It is not necessary to discuss this aspect in any detail.  Much of what has been said above is also relevant here.  I have concluded that CRA did not unreasonably attempt to mitigate its ultimate loss.  The amount recovered of $197,549.20, exceeded the expenditure of $103,401.31 by $94,140.89.

CONCLUSION

The foregoing makes it clear that the plaintiff's claim against the defendant totally fails.  CRA in retrospect took a risk in entering into the transaction with Olympus without properly checking out Olympus' standing and prospects and without complying with its own standards and conditions at the outset and on 28 February 1991.  Notwithstanding its negligence in entering into the facility agreement in the first place, its relationship was successful at least to the end of February 1991, and on Mr. Walder's evidence, somewhat later.  Whilst the defendant was negligent in the valuation he performed on 5 September 1990, his negligence in no way caused or contributed to any losses suffered by CRA very late in its relationship with Olympus.  CRA was negligent in extending the facility in the way it did without compliance with its own standard of care and in its conduct thereafter.  This negligence was the entire cause of its losses.  CRA has not established a case for damages against the defendant.

There must be judgment for the defendant against the plaintiff.  I will now hear argument as to costs.