Cockerill, Graham Douglas v Westpac Banking Corporation

CATCHWORDS

CONTRACT - economic duress - whether agreement to release bank from all claims and causes of action in connection with an offshore commercial loan given by the bank was executed under economic duress - discussion of principles - whether pressure applied was illegitimate - admissions made by bank for purposes of trial - whether pressure induced the applicants to enter into the agreement - whether agreement affirmed by applicants by their subsequent conduct - whether purported rescission of agreement valid.

CONTRACT - innocent misrepresentation - representation as to indebtedness - whether right to set-off excluded by mortgage - representation as to private rights - falsified by admission made - whether induced applicants to enter into agreement.

CONTRACT - rescission at common law - restitutio in integrum not possible - rescission in equity - practical justice between the parties.

PRACTICE AND PROCEDURE - trial of preliminary issue pursuant to O 29 r 2 of the Federal Court Rules - admissions made of particulars to amended reply for the purposes of the trial of the preliminary issue - proper construction of admissions - appropriate relief.

Federal Court Rules O 29 r 2

National Bank Ltd v Claffey [1917] 2 IR 281
Braybrooks v Whaley [1919] 1 KB 435
Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 (CA)
Equiticorp Finance Ltd (In Liq) v Bank of New Zealand (1993) 32 NSWLR 50 (CA)
Scolio Pty Ltd v Cote (1991) 6 WAR 475
Deemcope Pty Ltd v Cantown Pty Ltd [1995] 2 VR 44
Searle v Keayes, unreported, Federal Court of Australia, 19 May 1995, Tamberlin J
Food Delivery Services Pty Ltd v ANZ Banking Group Limited (1996) 19 ACSR 345
News Limited v Australian Rugby League (1996) 58 FCR 447
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447
Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152
Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366
Shivas v Bank of New Zealand [1990] 2 NZLR 327
Caratti v Deputy Commissioner of Taxation (1993) 27 ATR 448
CTN Cash & Carry v Gallaher [1994] 4 All ER 714 (CA)
Barton v Armstrong [1976] AC 104
Glandore Pty Ltd v Elders Finance & Investment Co Ltd (1984) 4 FCR 130
Contractor Services Pty Ltd v Esanda Finance Corporation Ltd (1990) ATPR 41-020 Angelatos v National Australia Bank (1994) 51 FCR 574
Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] 1 QB 833
J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 61 FLR 108 (FC)
Maskell v Horner [1915] 3 KB 106
Occidental Worldwide Investment Corp v Skibs A/S Avanti [1976] 1 Lloyd’s Rep 293
In re Hooper & Grass’ Contract [1949] VLR 269
Knutson v Bourkes Syndicate [1941] 3 DLR 593 (SC (Can))

Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 (CA)
Walker v Department of Social Security (1995) 56 FCR 354 (FC)
Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 (CA)
Westpac v Eltran Pty Ltd (1987) 14 FCR 541 (FC)
In re K L Tractors Ltd [1954] VLR 505
Coca-Cola Financial Corporation v Finsat International Ltd [1996] 3 WLR 849 (CA)
Groongal Pastoral Co Ltd (In Liquidation) v Falkiner (1924) 35 CLR 157
Cooper v Phibbs (1867) 2 LR HL 149
MacKenzie v Royal Bank of Canada [1934] AC 468 (PC)
Andre & Cie S A v Ets Michel Blanc & Fils [1979] 2 Lloyd’s Rep 427 (CA)
Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102
Urquhart v MacPherson (1878) 3 App Cas 831
Alati v Kruger (1955) 49 CLR 216

Graham Douglas Cockerill, Arthur David Thomas Dingle and Valerie Jean Dingle v Westpac Banking Corporation
No NG 29 of 1991

Cooper J
Brisbane
20 December 1996

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION

No NG 29 of 1991

BETWEEN:

GRAHAM DOUGLAS COCKERILL,
ARTHUR DAVID THOMAS DINGLE
and VALERIE JEAN DINGLE

Applicants

AND:
WESTPAC BANKING CORPORATION

Respondent

JUDGE MAKING ORDER:  Cooper J
WHERE MADE:  Brisbane
DATE OF ORDER:  20 December 1996

MINUTES OF ORDER

THE COURT DECLARES THAT:

The matters pleaded in paragraph 22 of the amended defence do not operate to release Westpac from any claim or cause of action which the applicants had or may have had against Westpac arising out of or in connection with the offshore commercial loan or any foreign currency transaction which includes the causes of action sued on in proceedings number NG 29 of 1991.

THE COURT ORDERS THAT:

The application be adjourned to a date to be fixed by the District Registrar for directions as to the hearing and determination of the remaining issues in the proceedings.

The respondent pay the applicants’ costs of and incidental to the hearing of the preliminary issue, including reserved costs, if any, to be taxed if not agreed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION

No NG 29 of 1991

BETWEEN:
  GRAHAM DOUGLAS COCKERILL,
  ARTHUR DAVID THOMAS DINGLE
  and VALERIE JEAN DINGLE

Applicants

AND:
WESTPAC BANKING CORPORATION

Respondent

CORAM:  Cooper J
PLACE:  Brisbane
DATE:  20 December 1996

REASONS FOR JUDGMENT

The applicants are Graham Douglas Cockerill, Arthur David Thomas Dingle and his wife, Valerie Jean Dingle. In 1983 and 1984 the applicants were customers of the Westpac Banking Corporation (“Westpac”). In 1984 the applicants entered into an agreement with Westpac involving an offshore commercial loan denominated in Swiss francs. On 16 February 1988, the offshore commercial loan was brought “onshore”, the applicants having entered into new financial facilities with Westpac in February 1988 to allow this to occur. The applicants allege that their dealings with Westpac, in relation to the entering into of the 1984 agreement and in the offshore commercial loan being brought onshore, have caused them substantial loss and damage. On 26 October 1990 each applicant became bankrupt upon the presentation of his or her own petition.
On 25 January 1991 the applicants filed proceedings against Westpac in the New South Wales District Registry of the Court. The proceedings were initiated with the consent of their then trustee in bankruptcy. However, the trustee would not himself agree to
be a party to the proceedings. The proceedings were transferred to the Queensland District Registry of the Court by order of Beaumont J on 14 March 1991.
On 24 April 1991 Westpac, by notice of motion, sought dismissal of the proceedings on the ground that the applicants were bankrupts suing in respect of causes of action which had arisen before bankruptcy. The notice of motion was adjourned by Pincus J pending the outcome of developments in the applicants’ bankruptcies. Ultimately, on 17 October 1991, a new trustee, Ivor Worrell, consented to be joined as an applicant to the proceedings. By order of Pincus J made on 24 October 1991 the trustee was unconditionally joined as an applicant to the proceedings. An amended statement of claim was ordered to be delivered by 14 November 1991. An amended application and statement of claim were filed by the trustee as “second applicant” on 12 November 1991.
By notice of motion filed 28 February 1992 Westpac sought that the claim of the applicants as “first applicants” to the proceedings be dismissed. The order sought was made by Drummond J on 9 March 1992 on the ground that the trustee was the only competent applicant.
Westpac filed a defence on 4 June 1992. Relevantly for present purposes, the defence contained an allegation that, by an agreement made on 9 February 1988, Westpac had been released by the applicants from any claim or cause of action in connection with the offshore commercial loan or any currency transaction which included the transaction sued on.
Meanwhile, in the administration of their bankrupt estates, each of the applicants had proposed a compromise to his or her creditors which provided for an
annulment of each applicant’s bankruptcy. Each of the proposed compromises was accepted by the respective creditors on 7 October 1992. On 12 November 1992 Westpac commenced proceedings to have the compositions declared void and annulled. Those proceedings were dismissed at first instance by Drummond J and ultimately, on 16 December 1993, by a Full Court of this Court.
The applicants applied on 23 June 1994 to be substituted for the trustee as applicants to the proceedings. Westpac opposed the application. On 17 July 1994 Drummond J ordered that the applicants be substituted for the trustee in the proceedings commenced by the trustee by amended statement of claim dated 11 November 1991 and filed 12 November 1991.
On 16 March 1995 the applicants delivered to Westpac a proposed further amended statement of claim in respect of which formal leave to amend was given on 28 June 1995 in accordance with a draft marked “A” and tendered in proceedings before Drummond J on that date. On 10 April 1995 Westpac filed an amended defence in response to the proposed further amended statement of claim. The applicants filed a reply to the amended defence on 28 June 1995. On the application of Westpac, Drummond J, on 28 June 1995, made the following order :-

“UPON the undertaking by the respondent by its senior counsel that the respondent will not object to the Judge who hears and determines the preliminary issue hearing and determining any other issues that may remain for decision thereafter on the ground that that Judge may already have, in the course of determining the preliminary issue, reached conclusions or expressed opinions on the credit of the applicants or any other witnesses who may be called in relation to that determination of the preliminary issue THE COURT ORDERS THAT:
1.Pursuant to O 29, r 2 the issue of whether, in consideration of the respondent granting the applicants a loan of Australian dollars with concessional interest rates to pay out the applicants’ offshore loan, the applicants agreed in writing, on 5 February, 1988 or, alternatively, on
9 February, 1988, to release the respondent from any claim or cause of action which the applicants had or may have had against it arising out of or in connection with the offshore commercial loan or any foreign currency transaction, which includes the causes of action sued on in proceedings number NG 29 of 1991 be tried separately and before the trial of any of the other issues in the action.

2.The costs of and incidental to the respondent’s notice of motion be costs in the proceedings.”

In order to persuade Drummond J to make the order, Westpac made the qualified admission that it admitted, for the purposes of the hearing and determination of the separate issue only, the facts alleged in the particulars to paragraph 2.6 of the reply. As appears from his Honour’s reasons, the order was made on the basis of this admission and the undertaking set out above.

On 7 July 1995 Drummond J granted the applicants leave to amend the reply and ordered that the separate issue be set down for hearing. The consequence of the amendment was in part that the particulars previously in paragraph 2.6 of the reply now appeared in paragraph 2.4 of the amended reply.

In order to identify the issues to be determined in a preliminary way and to place the admissions in context it is necessary to set out certain parts of the pleadings.

In paragraphs 1 to 35 of the further amended statement of claim the applicants alleged against Westpac and its officers and employees conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth), or alternatively, in breach of a duty of care, or in breach of contract and, insofar as the charging of withholding tax was concerned, unjust enrichment of Westpac, whereby the applicants suffered loss and damage.

Westpac, by paragraph 22 of its amended defence, pleaded :-

“22. Further, as to paragraphs 1 to 35 of the further amended statement of claim, the respondent says that if, which is denied, the respondents have been negligent or have breached section 52 of the Trade Practices Act as alleged, then:
(a)in consideration of the respondent granting the partners a loan of Australian dollars with concessional interest rates to pay out the partners’ offshore loan, the partners agreed in writing, on 5th February or alternatively, on 9th February 1988, to release the respondent from any claim or cause of action which they had or may have had against it arising out of or in connection with the offshore commercial loan or any foreign currency transaction, which includes the causes of action sued on herein;

(b)in the premises the claims of the applicant herein have been released and the applicant is not entitled to maintain such claims against the respondent.”

The applicants, by their amended reply, pleaded :-

“2.As to paragraph 22 of the Amended Defence, the Applicants say :-

2.1The Applicants repeat the Further Amended Statement of Claim.

2.2In the period 17 August, 1987 to 9 February, 1988 the Respondent by Mr Jack Allen, its offshore commercial loans Manager, represented to the Applicants in trade or commerce that :-

(a)there was no possibility that the Respondent had :-

(i)Engaged in conduct in contravention of Section 52 of the Trade Practices Act, 1974 (Comm);

(ii)Given negligent advice;

(iii)Breached its contractual duty to exercise due care, skill and diligence in the giving of advice to the Applicants; or had

(iv)Contravened Section 261(1) of the Income Tax Assessment Act, 1936, (Comm) in its dealing with the Applicants.

(b)the Applicants were liable to the Respondent for all payments of withholding tax, made by the Respondent in
relation to the Applicant’s Foreign Currency loan;

(c)the Respondent was owed the sums of money for withholding tax stated in the Foreign Currency loan statements issued periodically; and

(d)the Applicants were liable for the entirety of the capital loss sustained by the Applicants by reason of the Foreign Currency loan.

(e)the Respondent was entitled to appoint a Receiver/Manager over each of the businesses conducted by the Applicants and known as Rum City Motor[s], Cycle Spot and Moto Sales;

(f)the Respondent was entitled to sell each property of the Applicants over which it held a mortgage;

(g)the Applicants had no legal or commercial alternative other than to do what the bank required;

(h)the Respondent would appoint the Receiver/Manager over each business of the Applicants and commercially destroy the Applicants if they did not do what the Bank required.

2.3In addition to the representations in paragraph 2.2, in the period to 22 January to 9 February, 1988, the Respondent by each of Messrs Allen, Murphy and Thomas represented in trade or commerce that :-

(a)the Applicants were indebted to the Respondent in the sum of approximately $5,750,000.00;

(b)the Respondent was entitled to appoint a Receiver/Manager over each of the businesses conducted by the Applicants and known as Rum City Motor[s], Cycle Spot and Moto Sales;

(c)the Respondent was entitled to sell each property of the Applicants over which it held a mortgage;

(d)the Applicants had no legal or commercial alternative other than to execute a letter in the form of the letter dated 1 February, 1988; and

(e)the Respondent would appoint a Receiver/Manager over each business of the Applicants and commercially destroy the Applicants if they did not execute a letter in the form of the letter dated 1 February, 1988.

2.4Each of the representations in paragraph 2.2 and 2.3 were [sic] false and/or misleading and/or deceptive and/or negligent and/or in breach of the obligation owed by the Respondent to the Applicant to exercise due care, skill and diligence when giving advice.

PARTICULARS

(a)The Respondent was liable in damages to the Applicants for a sum not less than the alleged indebtedness of the Applicants to the Respondent by reason of its contravention of Section 52 of the Trade Practices Act and/or negligence and/or breach of contract.

(b)Any liability for withholding tax to the Respondent by the Applicants was avoided by Section 261(1) of The Income Tax Assessment Act; and

(c)The Applicants could resist any attempt by the Respondent to realise any security over the Applicants’ assets.

2.5Each of the representations in paragraphs 2.2 and 2.3 were [sic] relied upon [sic] the Applicants when executing the letter dated 1 February, 1988..

2.6Each of the representations in paragraphs 2.2 and 2.3 constituted illegitimate pressure exerted by the Respondent on the Applicants.

2.7In all the circumstances the Applicants executed the letter dated 1 February, 1988 on each of 5 and 9 February, 1988 under duress.

2.8Further, the execution of the letter dated 1 February, 1988 on each of 5 and 9 February, 1988 resulted from :-

(a)a mistake on the part of the Applicants induced by the representations of the Respondent in paragraphs 2.2 and 2.3 above; and

(b)the misleading and/or deceptive conduct and/or advice and/or breach of its contractual obligations to exercise due care, skill and diligence when making the representations in paragraphs 2.2 and 2.3 to the Applicants.

2.9By reason of the matters set out in this paragraph the Respondent is not entitled to rely on the letter dated 1 February, 1988 which was signed by the Applicants on each of 5 and 9 February 1988.”

On the hearing of the separate issue leave was given to the applicants, without objection, to substitute the word “realise” for “release” in paragraph 2.4(c) and the word “illegitimate” for “unlawful” in paragraph 2.6. The applicants did not press the unenforceability of any agreement constituted by the letter executed by them on 5 and/or 9 February 1988 releasing Westpac from any claim or cause of action arising out of the offshore commercial loan transaction on the grounds pleaded in the amended reply other than duress and innocent misrepresentation.

The questions raised on the issue stated by Drummond J involve a determination of the issues raised in paragraph 22 of the amended defence and paragraph 2 of the amended reply. The question is whether or not the applicants are entitled to maintain these proceedings against Westpac having regard to the matters pleaded in paragraph 22(a) of the amended defence.

The Admissions made by Westpac
On the hearing of the issue there was some controversy as to the extent of the admissions made by Westpac. Therefore, it is important at the outset to find the content and extent of the admissions made. Westpac admitted, on the limited basis, the facts alleged in the particulars to paragraph 2.6 of the reply (paragraph 2.4 of the amended reply). To be properly interpreted the particulars have to be read in the context of the amended reply. So read the particulars relate to the periods during which and times at which the representations alleged in paragraphs 2.2 and 2.3 were made.

Particular (a) stated :-

“(a)The Respondent was liable in damages to the Applicants for a sum not less than the alleged indebtedness of the Applicants to the Respondent by reason of its contravention of Section 52 of The Trade Practices Act
and/or negligence and/or breach of contract.”

This particular involves the following assertions of fact :-

(a)At the time the representations were made and during the relevant period, including 1 February to 9 February 1988 inclusive :-
(i) Westpac was liable in damages to the applicants.
(ii)The damages for which Westpac was liable was a sum not less than the alleged indebtedness of the applicants to Westpac. In context, that means the sum of approximately $5,750,000 pleaded in paragraph 2.3(a) of the amended reply.

(iii)The liability of Westpac in damages to the applicants was by reason of its contravention of s 52 of the Trade Practices Act and/or negligence and/or breach of contract. In context, the wrongful conduct of Westpac referred to is that conduct pleaded in paragraphs 1 to 35 of the further amended statement of claim to which paragraph 22 of the amended defence pleads. That is, the conduct related to the entering into of the offshore commercial loan and the decision to bring that loan onshore.

Particular (b) stated :-

“(b)Any liability for withholding tax to the Respondent by the Applicants was avoided by Section 261(1) of The Income Tax Assessment Act.”

This particular involves the following assertions of fact :-

There was no liability in fact enforceable against the applicants by Westpac to pay withholding tax or an amount equal to withholding tax to Westpac.
At all material times the applicants were entitled in fact to repayment of such sum as had been paid as withholding tax.

Particular (c) stated :-

“(c)The Applicants could resist any attempt by the Respondent to realise any security over the Applicant’s assets.”

This particular involves the following assertions of fact :-

The applicants had available to them effective grounds in law to resist any attempt by Westpac to realise any security over the applicants’ assets.
In context, “to realise any security” meant to take the steps identified in paragraphs 2.2(e), 2.2(f), 2.2(h), 2.3(b), 2.3(c) and 2.3(e).

I reject the submission made by counsel for Westpac that “realise”, in the context in which it appears in the pleading and for the purposes of the admission, has as its meaning the precise legal meaning, “to convert property into cash”. It is unnecessary to decide whether “to realise any security” has the fixed limited meaning as contended for by counsel for Westpac or whether it encompasses the exercise of any right or remedy by way of enforcement of the security to procure performance of the grantor’s obligations under the security, whether or not default has occurred on the part of the grantor. However, there is authority for the proposition that “realisation of a security” involves all means of realisation, including ejectment, sale, foreclosure or otherwise realising the security, and is not limited to realisation by sale (National Bank Ltd v Claffey [1917] 2 IR 281 at 282).

Depending upon the context and/or the words of the statute or instrument in question, the courts have always recognised a distinction between enforcement or realisation of a security by sale and steps taken towards enforcement or realisation by sale (see National Bank v Claffey at 282; Braybrooks v Whaley [1919] 1 KB 435 at 439 - 440, 441). In the present case, the concept provided for in paragraph 2.4(c) of the amended reply is wider than realisation of any security over the applicants’ assets. It encompasses “any attempt by [Westpac] to realise”. As a matter of construction “any attempt ... to realise any security” includes any step taken by Westpac towards realisation.

Viewed objectively, the representations pleaded in paragraphs 2.2(e), 2.2(f), 2.2(h), 2.3(b), 2.3(c) and 2.3(e) of the amended reply were representations as to the existence of rights available to Westpac under securities held by it over :-

(a)Each of the businesses conducted by the applicants and known as Rum City Motors, Cycle Spot and Moto Sales (paragraphs 2.2(e) and 2.3(b));
(b)Each property over which Westpac held a mortgage (paragraphs 2.2(f) and 2.3(c));
(c)Each business of the applicants (paragraphs 2.2(h) and 2.3(e)).

Paragraph 2.4 of the amended reply was objectively intended by the pleader to identify the falsity of the representations in paragraphs 2.2 and 2.3. Paragraph 2.4(a) relates specifically to paragraphs 2.2(a), 2.2(d) and 2.3(a), but also goes to the question of “entitlement” asserted under paragraphs 2.2(e), 2.2(f), 2.2(h), 2.3(b), 2.3(c) and 2.3(e) and the represented absence of an alternative course of action pleaded in paragraphs 2.2(g) and 2.3(d). Paragraph 2.3(b) relates specifically to paragraphs 2.2(a)(iv), 2.2(b) and 2.2(c). Paragraph 2.4(c) relates specifically to the represented entitlement of Westpac to act in furtherance of its interests and against the interests of the applicants as pleaded in paragraphs 2.2(e), 2.2(f) and 2.2(h) and paragraphs 2.3(b), 2.3(c) and 2.3(e).

It follows, in my opinion, that the admissions in terms of the pleading include the admission that the applicants in fact were entitled to prevent Westpac appointing a receiver and manager over the property identified in paragraphs 2.2 and 2.3 of the amended reply and/or to prevent Westpac from selling such property over which it held a mortgage and
that, having regard to the admissions made in respect of paragraphs 2.4(a) and 2.4(b), Westpac had no right at the time pleaded to take any of the steps pleaded in paragraphs 2.2(e), 2.2(f), 2.2(h), 2.3(b), 2.3(c) and 2.3(e) of the amended reply.

Background and Facts
Although the period during which the relevant conduct is alleged to have occurred begins on 17 August 1987, any conduct occurring in the period is to be viewed against the matrix of facts then obtaining. It is also necessary to understand the background to and context in which the relevant conduct occurred. It has therefore been necessary to set out in some detail the course of dealings between Westpac and the applicants

From about 1974 the applicants carried on business in partnership as “graziers, retailers and property developers”. In late 1983 they decided to finance the construction of an office building on a site owned by them at Milton Road, Brisbane (“the Milton building”). Development finance was provided by Tricontinental Corporation Limited (“Tricontinental”). The applicants had intended to sell the Milton building upon its completion as they did not have the financial capacity to retain ownership of it.
In or about the middle of 1984 the applicants decided to, or became aware that they might be able to, retain ownership of the Milton building by refinancing the Tricontinental borrowings in an overseas currency. After discussions with certain officers of Westpac, the contents of which discussions are not relevant to the preliminary issue, the applicants entered into a loan agreement on or about 17 October 1984.
Pursuant to that agreement the applicants borrowed $1,000,000 “onshore” and
$2,000,000 “offshore”. The offshore component of the loan was an advance of more than CHF4,200,000. The loan was an interest only loan with the principal sum to be repaid on 12 November 1987. Interest was payable six-monthly in arrears in the same currency as the advance. That is, interest on the offshore component of the loan was payable in Swiss francs and interest on the $1,000,000 onshore was payable in Australian dollars.
The loan was secured by various securities granted by the applicants, including bills of sale over the businesses known as “Moto Sales”, “Rum City Motors” and “Cycle Spot” carried on by the applicants in Bundaberg. It was a term of the loan agreement that Westpac could request, and on request the applicants were obliged to provide, additional security cover to maintain the debt/security ratio below 65 per cent.
Between early November 1984 and mid to late 1985 and again during the course of 1986 there was a considerable weakening of the Australian dollar against the Swiss franc. By the middle of 1986, the applicants’ total indebtedness to Westpac had grown to about $5,000,000. The deterioration in the exchange rate meant that the interest payments on the offshore component of the loan were significantly higher in Australian dollar terms.
On 12 March 1986 Westpac, by David John Ewington, the then manager of its Bourbong Street, Bundaberg branch, wrote to the applicants as follows :-

“We advise that following review of the group facilities with the Bank the existing arrangements are to continue for the present.
However as no cash flow projections at monthly/quarterly rests are or will be available, review of 30-6-86 financial accounts by not later than 30-9-86 is sought. Please arrange with your Accountants for prompt attention to this matter.
It is to be noted that the gearing ratio (shareholders funds to assets) at 27% is high and group is heavily dependent on achieving income levels to service borrowings. Excluding inter-group loans, the current ratio at 380% is very
high and indicates that group is overstocked.
The facilities are covered by landed security with the chattel items providing an acceptable margin for onshore lending. However, the position has deteriorated markedly since approval, because of depreciation of $A, and a Sinking Fund should be established.
The ability to continue to service existing commitments is assessed as :-
·.    N.P.B.T. to 30-6-85  $150
·.    Depreciation  $11
·.    Interest paid  $349
$510

Liabilities

Bank M$1.0 at say 20%  $200
Euro loan M$3.2 at say 7%  $225
Other $136 at say 18%  $25
$450

Margin of $60 to provide for taxation and enter into a significant Sinking Fund is inadequate and realisation of surplus assets through reduction in stock levels is required.
In the above circumstances we must insist that working accounts remain under our firm control, as at present, and any temporary overdraft assistance will depend on level of credit support and prior arrangement.
If the position relative to offshore exposure continues to deteriorate the debt load will reach a level whereby it is unable to be serviced from earnings and debtors will have no alternative but to realise on commercial property to clear/reduce liabilities.”

(Generally, money figures in internal correspondence and file notes prepared by officers of Westpac are in thousands of dollars or other currency. Unless stated otherwise, any emphasis appearing in documents quoted is original emphasis).

Towards the end of June 1986 Mr Cockerill had a conversation with Graham Anthony Jensen, Westpac’s District Commercial Manager at Bundaberg, in relation to an overdraft excess in the “Rum City Motors” account. Mr Jensen told Mr Cockerill that control of the applicants’ accounts, including the offshore commercial loan account, was now with
Jack Arthur Allen, Westpac’s Queensland Manager, Offshore Commercial Loans. Mr Jensen told Mr Cockerill that he (Jensen) no longer had authority to approve temporary excesses on any of the applicants’ accounts. Mr Jensen wrote to the applicants on 27 June 1986 to confirm the contents of his conversation with Mr Cockerill and to ask that they meet with him before 4 July 1986 to discuss the “future conduct” of their accounts. Mr Jensen confirmed that an early meeting of the applicants with he and Mr Allen was necessary “if we are to avoid some of the difficulties I see ahead if we don’t.”
Messrs Jensen and Cockerill discussed the applicants’ “overall position” at length on 2 July 1986. Mr Jensen’s file note of their conversation recorded that Mr Cockerill was told that Westpac required :-
“.Cash flow on all accounts to 30/9/86
.Debtors/creditors by age
.Historical trading results for individual accounts”

The file note concluded :-

“Graham was made aware that he had to adopt firm measures, be that reduction of staff, stock or whatever to keep trading accounts in credit. I also suggested they seriously consider what sections of their business they might sell, including Milton, in light of the weakending [sic] dollar and debt blowout. He realises that the Bank may force sale of security if he cannot keep his working accounts in credit and provide for offshore and onshore interest. Graham believes if he sold any security and came on shore they would be worse off. He accepts that an early meeting of partners with Jack Allen is imperative.
ACTION On receipt of cash flows etc I will forward an interim review to Manager Offshore Loans with Mr Allen. This should be by 11/7/86.”

On 10 July 1986 Mr Jensen sent an internal memorandum to Mr Allen reporting the applicants’ position. The memorandum concluded :-

“Debtors are very much aware of the seriousness of their position and have taken steps to endeavour to operate their accounts in a net credit position in view of their overall liabilities to the Bank.
They do not believe their position would be improved if they came ‘on shore’ at present. Their concern is, that sale of Milton premises or any of their business’s [sic] at this time might not return them sufficient to cover all debts. They would prefer to meet their commitments by trading their way out, if possible and allowed by the Bank.
We have stressed they need to provide for both onshore and offshore interest costs. In future rental income from Milton property will be placed in a flexible deposit to assist. Also Mr Cockerill has instigated a direction to car salesman [sic] that they are to get an additional $100:00 out of every deal and as sales vary from 30 - 40 units a month this could mean $40,000 could be gathered in from this source in one year.
At present sale of a large boat appears very likely and the expected $15.0 to $20.0 will be placed in a sinking fund.

They are aware that the following measures are to be pursued as necessary to maintain accounts in credit:

.Wholesaling of cars as necessary
.Stock reduction.
.Stock control measures to be closely monitored.
.Purchases to be in lesser quantities unless very favourable creditor terms apply and a market advantage is obvious.
.Control of overheads, especially personnel.

When their offshore interest is due in November, they could have difficulty meeting total payment.

Our exposure is certainly not comfortable, and debtors acknowledge this. They realise full well it is of paramount importance they keep their trading accounts in credit and provide for interest.
I believe they possess business acumen and will be able to ‘hang on’ business wise, provided of course our economy does not completely fall over.
No top up security is available, and should a forward exchange contract be requested their ability to cover would be in doubt.
To force a sale of security or securities under present market conditions could prompt litigation.

RECOMMENDATION

.Trading accounts to be closely monitored, and should any unfavourable trend arise against cash flow projections, we report promptly.
.Further review with cash flow be rendered by 30/9/86 when Balance Sheets/Trading Results are to hand.”

Mr Allen replied by internal memorandum dated 14 July 1986 which included the following :-

“The information provided is insufficient for an accurate assessment to be made of the position. However, I consider there is potential for substantial losses and continuation of unarranged excesses on working accounts cannot be justified.
Run of account Rum City Motors No 1 indicates substantial excess for some time. Frankly I have my doubts that customers can correct the position by 31/7/86.
The ‘cash flow’ figures supplied are of little value and I feel customers lack any real financial management within the business.
Debts in Working Accounts are not to increase, with report by 31/7/86 if not cleared. Cheques are to be returned to control the position and customers advised accordingly.
....

Any lack of co-operation to provide information would leave us no alternative but to take steps for recovery. A full review is to be submitted with this information as soon as possible with brief report on progress by 31/7/86.
At next report we would like to know:

.Do customers have Milton property on the market and if so at what price?
.Are customers confident of sale by say 30/6/87 and prepared to meet the market to effect clearance of loan by 12/11/87?
.How do customers intend to clear overall debts on the basis that F.X. position does not improve (which seems very possible)?
.Sale of Milton property would appear insufficient to clear offshore loan. Are other properties on the market? If so, full details.
.Are customers giving consideration to an immediate sale of assets so that they would be in a position to retire offshore loan should favourable ‘blip’ occur? (F.X. position at 12/11/87 may not be favourable).
.What are the aspects of litigation to which you refer? Please elaborate fully and advise on possible grounds and whether our files provide adequate defence to any claims. State Manager Lending letter of 4/10/84 set out requirements. Please confirm that acknowledgement is held. We note that we declined customers’ request to provide total $3,000 offshore. (They would now have owed us $5,629).

As total exposure now exceeds security cover (even if working accounts debts clear) initial Bad and Doubtful Debt R8A1 and R8A2 is to be rendered in terms of Methods Manual Lending 5.4
While it is appropriate that I discuss this situation with customers there is insufficient information available and discussion now would be of little
consequence. Once we are provided with detailed review I would be happy to do so.
In these situations any delays can only worsen the position and customers could also suffer. A firm stand is required to obtain the information we need if we are to be in a position to advise.”

Mr Jensen sent a letter to the applicants on 16 July 1986 requesting the information which Mr Allen required in order to complete a “full review” and advising that Mr Allen, whilst prepared to meet with them to discuss their position, thought it premature to do so until the information requested was supplied.

According to Mr Cockerill, the applicants met with Mr Allen shortly before the receipt of Mr Jensen’s letter of 16 July 1986. Mr and Mrs Dingle recalled the first meeting with Mr Allen in Brisbane “within two or three months” of receipt of Mr Jensen’s letter of 27 June 1986 referred to above. Mr Allen’s evidence was that the first meeting with the applicants took place in February 1987. It seems to me in light of the concluding paragraphs of Mr Allen’s memorandum that the applicants were genuinely mistaken in their recollection and that they were in fact referring to a meeting with Christopher Phillip Murphy, Mr Allen’s assistant, which took place on 21 or 22 August 1986. In any event, nothing turns upon it. I should add that, for reasons which will become apparent, my rejection of the applicants’ evidence on this point should not be taken to reflect adversely on the credibility of any of them.

On 18 July 1986 Mr Jensen wrote to the applicants advising that the “recent downward exchange rate movements” had resulted in the Australian dollar equivalent of the offshore commercial loan exceeding 65 per cent of the security value held by Westpac, thereby triggering the “top-up” clause in the loan agreement. Mr Jensen asked that the
applicants contact him to arrange a meeting to discuss the matter. The applicants had no or no valuable unencumbered assets to offer by way of additional security. The foreshadowed meeting does not seem to have taken place, although the issue was briefly discussed at the meeting on 30 July 1986 referred to below.

Mr Cockerill again met with Mr Jensen on 30 July 1986. Mr Cockerill supplied more information to be included in the report to Mr Allen. He also indicated that the applicants did not want the Milton building sold and the loan brought back onshore as they would be unable to afford the interest payments on the onshore amount. According to Mr Cockerill, Mr Jensen told him that the Milton building was to be sold and the loan brought back onshore. Mr Cockerill’s evidence is supported by Mr Jensen’s file note of the meeting and by Mr Jensen’s report to Mr Allen by internal memorandum dated 5 August 1986 and was not contradicted by Mr Jensen.

In his report, which refers to the issues raised by Mr Allen in his memorandum of 14 July 1986, Mr Jensen wrote :-
“In addition to above, you requested answers to the following:-

.Debtors are not prepared to sell Milton Place or any other assets at this juncture and we believe would only do so if forced.
.See above.
.See above.
.In discussions with debtors there is a general feeling (not specific intent) that if the Bank takes action under its security that Litigation could take place against the Bank. However, we have found no grounds for such claims from perusal of our files. Acknowledgement is held.

Your comments 29/7/86 attached to an initial R8A1/R8A2 return refers.

As requested we advise :-

.As mentioned earlier, debtors are not prepared to sell assets at this juncture and we believe will only do so if forced.
.Debtors have indicated that a sinking fund of $6000 a month will be established.”

On 21 or 22 August 1986 Mr Cockerill and Mrs Dingle met with Messrs Jensen and Murphy in Bundaberg. Mr Cockerill’s evidence was that Mr Murphy told them that the Milton building was to be sold to reduce the applicants’ indebtedness to Westpac and that if it was not sold, Westpac “would appoint a receiver/manager and move against us”.

In my view, the proposition was not put by Mr Murphy quite as strongly as that. The previous correspondence and evidence suggests that discussions had not yet reached the stage of ultimatums. Also, the applicants were not yet formally in default under the loan agreement, no notice of default having been sent by Westpac. However, it is entirely consistent with the other evidence and course of dealings that Mr Murphy raised the prospect of forced sale of assets over which Westpac held security if the applicants did not meet their principal and interest obligations under the loan agreement or sell assets themselves to reduce indebtedness and enable them to meet the obligations.

As to what else occurred at the meeting, Mr Murphy’s file note provides an accurate account :-

“Called at D.C.B.C. Bundaberg and met with Graham Cockerill and Mrs Dingle - Mr Dingle could not attend due to farm contract commitments.
The Dingles seem to be hard working rural types while Cockerill is a car salesman type.

Explained the operations and role of our unit.

Debtors are confident that loans can continue to be serviced - not on an onshore basis however.

No top-up is available as we hold all security.

Debtors were informed that at this time the Bank would not roll-over loan and that they should be giving serious consideration to selling Milton property - funds could be utilised to repay F.D.A. and balance held on I.B.D. awaiting a favourable ‘blip’ in the market which would allow them to retire part of the O.C.L.
Cockerill said that their Estate Agents had advised that it was not the right time to sell the Milton property - Rent review was presently being done and this would add to the value of the property on a capitalisation basis. After this had been carried out they then would give consideration to the sale.
They also said that the previous manager had originally indicated at the outset that if the need arose loan could be extended. I said that there was no mention of this on our files and at this time the Bank would not consider the loan being rolled over.
Working Account has reduced back to $34 through good trading during July which is continuing to this date.

D.C.M. is to address comments in our letter of 6/8/86 as a separate matter.

Figures will not be ready from accountants until late September. At review D.C.M. is to address:

.Non top-up - Singapore to approve.
.Customers may formally request extension of loan - this to be addressed now.
.Decision on sale of Milton property.
.The ongoing viability of ‘core’ business.

We also discussed the benefits of switching loan to USD at an appropriate CHF/USD rate. Cockerill said that this was information he had also received from other sources and would give consideration to this in the light of Cash Flow etc and if higher interest rate could be serviced.”

Following the meeting, the foreshadowed review of the applicants’ position by Westpac seems to have occurred and on 3 November 1986 Mr Murphy contacted Mr Jensen and asked that he arrange an appointment for Mr Murphy with the applicants. Mr Murphy indicated to Mr Jensen that he would be “requesting” that the applicants sell the Milton building to reduce their exposure.

At about this time the applicants began to default in the payment of interest on the offshore commercial loan. On 12 November 1986 an interest instalment of about CHF140,000 could not be met and was rolled-over until 12 December 1986.

On 19 November 1986 Messrs Cockerill and Dingle together with their accountant, Peter Sawyer, met with Messrs Jensen and Murphy. Mr Murphy prepared a file note setting out the details of the meeting. Mr Murphy’s file note is consistent in all material respects with the file note of the same meeting prepared by Mr Jensen :-

“As stated in review, figures presented are unaudited and as such Bank can place no reliance on such. Customers reject having audited accounts on a cost basis and even if accounts were audited and then qualified for any small point no reliance could be placed on these. Customers have been informed that the Bank places no reliance on the figure produced - this was not challenged. At review customers had suggested that they would like to discuss, around March 1987 a roll-over of the loan. They are not prepared to ‘write off’ their losses and are banking on a reversal of economic conditions and an improvement in the F.X. rates.
We believe that vehicle business is clearly at risk and economic predictions show that this area will be greatly affected.
Customers were advised that the only way for them to protect their business, both vehicle and rural, was to sell the ‘Milton Place’ property and reduce their borrowings.
It was also pointed out that their business was struggling at the time they went offshore and the cheaper interest rates have enabled them to survive this far, position has now been compounded by the devaluation of the dollar. Customers have agreed to the sale, however request the Bank’s consideration to a proposal:
That they undertake to sell ‘Milton Place’ property now, proceeds be utilised to repay onshore facility, balance to be held in say ‘Security Realisation Account’ on I.B.D. or Bank Bills depending on yields. Bank give a firm commitment that O.C.L. due 9/11/87 be rolled for a further 5 years.
Subject to establishment of a sinking fund or annual reduction at the rate of $250 p.a. After 5 years balance of Offshore Loan - say $1M - be brought back on-shore or refinanced.
Accountants confirm that debtors would have the capacity to meet this reduction arrangement after meeting interest costs - this is of course offset to a large degree by ‘Security Realisation interest’.
Debtors also asked what would be the case if they refused to sell property and sit in there for the long term. They were advised that as they were in default for non provision of top-up and payment of interest, Bank would be forced to sell property for them - this of course we did not wish to do.
The Bank as we see it has three options:

1.As debtors are now in default the Bank can demand payment and if not received proceed with sale of all security properties.
2.Agree to proposal, which will leave the Bank exposed for a further 5 years, carrying the F.X. exposure with no top-up to offset any downward rate movement. However the rates may improve over the period, which would result in a reduction in our exposure and a recoupment of losses to debtors.
3.Leave debtors in default and continue the loan at the Bank’s pleasure. This would be subject to sale of ‘Milton Place’ also. Should favourable or adverse F.X. rates occur the Bank would then be in a position to reduce its exposure by appropriating ‘Security Realisation Account’ to the O.C.L.

Comments

1.We believe this action would not be in the Bank’s or customers’ interests and would draw adverse reactions. There is also a very big connection on the Dingle side which would be at risk.
2.This is an acceptable proposal, however, as stated, the Bank is faced with a continuation of its exposure for a further 5 years. Bank’s position could be protected by the inclusion of trigger clause that would automatically bring loan back onshore should F.X. rates fall to a pre-agreed level.
3.This proposal may be practical from the Bank’s point of view, with control resting firmly with us; however, if a decision was made to appropriate funds and at a future date proved to be wrong, would the Bank be open to legal challenge? This also places the Bank in the position of ‘managing the loan’. This course would also alienate debtors.

Summing Up

It is recommended that the Bank proceed with alternative 2 subject to documentation being drawn that would cover all contingencies and possible events of default.”

A copy of Mr Murphy’s note was provided to Mr Allen for his comments “prior to progression of review to State Loans Committee”. Mr Allen commented thus :-

“Immediate sale of ‘Milton Place’ is essential and if customers do not agree Bank will need to force the matter. Account is in default due to non payment of Interest, and past performance is not reassuring.
Clearance of onshore F.D.A. would reduce interest costs say $200 and interest earnings on balance funds from sale would just about cover offshore interest. Capacity to provide reduction $250 p.a. is still suspect and additional term of 5 years is not attractive. Ongoing F.X. exposure remains and there is nothing to support any improvement at this time.
I would prefer to see extension limited to plus 2 years, overall 5 years, subject to customers setting an agreed realistic target F.X. rate to apply sale proceeds $2,000 in reduction of O.C.L. plus $250 p.a. reduction.
Currency clause to be written into facility letter to provide us with default situation plus power to crystallise our exposure and return loan onshore.
Customers would need to appreciate any such ‘trigger’ would mean sale of all assets as ability to service onshore is not apparent.”

On 26 November 1986 an expanded and slightly modified version of Mr Murphy’s note quoted above together with Mr Allen’s comments were sent to Westpac’s State Loans Committee. Immediately following Mr Allen’s comments there appeared a recommendation signed by Mr Murphy :-
“(a)Debtors are to be formally advised that the loan is in default and that the loan is continued on the present terms and conditions only at the Bank’s pleasure with quarterly reviews next due 31/1/87.

(b)That the Bank give a firm commitment that the present O.C.L. debt of CHF 4,222 due 9/11/87 be rolled over for a further period of 2 years, subject to:

.Commercial property ‘Milton Place’ being sold immediately, at latest by say 28/2/87.
.Proceeds of sale be utilised to clear F.D.A. facility $1,000 and balance, minimum $2,000 be placed in interest bearing investment Security Realisation Account.
.Annual reductions of $250 p.a. be made, first due 31/1/88.
.Loan to be subject to a full review on 9/11/89 for a further continuance, maximum term of 3 years with an undertaking that any balance outstanding will be brought back onshore or refinanced.
.Loan documentation to include a default clause, that should the AUD/CHF exchange rate drop to 0.9500 or loan security ratio exceed 87%, funds held in Security Realisation Account be appropriated to reduce Offshore exposure and balance remaining after appropriate be brought back on shore.
.Debtors’ acknowledgment that should default clause be triggered, additional assets would need to be sold to enable resulting onshore facility to be serviced.
.An undertaking by debtors that should AUD/CHF exchange rate appreciate to 1.1500 or debt/security ratio reduced to 72% that they would take advantage of this improvement and reduce offshore liability by the amount held in Security Realisation Account.”

The interest payment due on 12 December 1986 could not be met and was again rolled over until 12 January 1987.

Mr Jensen prepared a letter to the applicants formally offering to vary the loan agreement on the terms set out in Mr Murphy’s recommendation. Mr and Mrs Dingle met with Mr Jensen on 2 January 1987 and were given a copy of the letter of offer for themselves and a copy for Mr Cockerill, who did not attend the meeting. Mr Jensen recorded in a note of the meeting that Mr and Mrs Dingle “reacted” to three conditions, namely :-
“. Sale of Milton by 28.2.87.
.Annual reductions of $250.0 commencing 31.1.88.
.Undertaking should exchange rate appreciate to 1.1500 or debt/security ratio reduce to 72% that they would take advantage of this improvement and reduce offshore liability by the amount held in Security Realisation Account.”

Mr Dingle indicated that he would discuss the conditions set out in the letter with Mr Cockerill and the applicants’ accountant.

On 12 January 1987 Mr Cockerill contacted Mr Jensen to discuss, amongst other things, the proposal contained in Mr Jensen’s letter. Mr Cockerill indicated that the applicants wanted to meet with Messrs Murphy and Allen to discuss the proposal.
Also on 12 January 1987 the applicants made a part payment of interest in an amount of about CHF53,300. The balance of the unpaid interest, more than CHF88,000, was rolled-over until 12 February 1987. On that day a further part payment of interest of CHF 63,472.50 was made by the applicants. The balance of the unpaid interest was rolled over until 27 February 1987.
On 16 February 1987 the applicants and their accountant, Mr Sawyer, met with Messrs Allen and Murphy to discuss Westpac’s proposal. The applicants would not agree to the sale of the Milton building at that time. Westpac’s offer was withdrawn and the applicants were asked to put a proposal before Westpac. Mr Cockerill’s evidence as to what occurred at the meeting, which was supported by Mr Dingle’s evidence and which I accept, was as follows :-

“All right. Can you tell me what the conversation - or what conversation took place concerning the offshore loans at that meeting?---The bank wanted the offshore loan brought onshore.
Who said that?---Mr Allen.

I see. Did he say anything else about the loan or the securities that the bank required?---The - well, he wanted the Milton property sold.
All right, and what was your response to that?---Well, we believed that we - if we sold Milton we couldn’t afford to pay the interest on the onshore loan.
I see.And did you say that to Mr Allen?---Yes.

And what did Mr Allen say to your objection?---That he wanted the Milton building sold and the loan brought onshore.

And was any indication - - -?---We were - we were there at the grace of the bank.

I see. Was any indication given as to what might happen if you did not?---He would appoint a receiver/manager and take control of the - the businesses and sell the building.
Had there been any discussion at this meeting concerning whether either party was at fault in relation to your predicament with the offshore loan?---Yes, I’d held the belief that Westpac had sold us the loan.
Well, did you say anything to Mr Allen concerning that?---I would’ve done at that stage, yes.

And do you recall what Mr Allen said about that?---It was our responsibility. We were the people who - who took the offshore loan and if we’ve
mismanaged the offshore loan it’s your - and we had mismanaged the offshore loan in his view.”

Mr Cockerill also gave evidence as to why Westpac’s offer was unacceptable to the applicants. The applicants were reluctant to agree to a sale of the Milton building immediately. A rent review was imminent and they considered that the Milton building would be worth more at a later date. The applicants also had concerns in relation to the floor and ceiling limits on the exchange rate at which the offshore commercial loan would automatically come onshore. Mr Cockerill said :-

“... On the bottom side, if we came onshore on the bottom end of the scale, we could not financially survive, we couldn’t afford to pay the interest. On the top side, if the dollar was rising, it would have been advisable to take advantage of that rise.”

Mr Allen had no independent recollection as to what occurred at the meeting. However, there is in evidence a file note of Mr Murphy, the contents of which support to a large extent the evidence of Messrs Cockerill and Dingle and provide an insight into the attitude and intention of Westpac at this time :-

“Debtors called accompanied by their Accountant and met with writer and Queensland Manager O.C.L. - object of the meeting was to discuss proposal placed before them and O.C.L. in general.
1.Real estate agents advised that they would obtain a better price in say 2 years, this figure would be about $3.5M.

2.If property was sold now their $2M loss would have to be fully repaid from after tax profits, ie, capital gain on building is tax free.

3.Their view is that AUD/CHF exchange rate will improve and not fall in the longer term.

4.They believe that they have the cashflow to service and that business is going well and should improve. Unpaid interest is due to Dingle being unable to support Company cashflow at this time due to tax bill which has been paid and he will have the capacity again in the future.

The Bank’s position is that the loan is in default and the Bank is looking for an accelerated repayment. The Company is not in a position to top-up and the Bank will not carry any future exchange risk. The Bank has a number of options open to it, both involve converting loan to AUD.
Company was advised that the Bank would not continue loan on present terms offshore. However if they could meet guidelines and cashflow demonstrated the undoubted ability to meet onshore (reduced rate below 15%) interest rates then the Bank could consider bringing loan back onshore.
Debtors said that they would consider this provided interest rate was 13% and that F.D.A. was also afforded the reduced rate.
They were advised that it would be very unlikely that the Bank would consider reducing present F.D.A. rate and that there was no certainty that approval to bring loan onshore would be given. Policy covering this situation is still being promulgated but we could see the situation being:
1.Offer made 29/12/86 is now withdrawn.

2.Debtors will place a proposal before the Bank to bring loan back onshore.

We surmise the proposal will be unacceptable and we will have to make counter offers - we know that any counter offer involving sale of commercial property before 2 years is out and cashflow would be tested on other lines. That leaves us with the only other alternative - to proceed with default, transfer loan to AUD offshore and commence action for recovery.”

That Mr Allen said that Westpac wanted the Milton building sold and the loan brought onshore is entirely consistent with the position Westpac had reached by that time, which position can be seen from the previous correspondence and file notes which speak of the sale of the Milton building as the only way for the applicants to survive. The applicants’ evidence that Mr Allen spoke of the appointment of receivers is also consistent with references in the documents to Westpac’s remedies under the securities and “forced” sale of assets if the applicants did not meet their obligations under the loan agreement. Similarly, having regard to the view he had expressed in the correspondence, it is probable that Mr Allen told the applicants that their predicament was not Westpac’s responsibility and that they (the applicants) had “mismanaged the loan”.

(c)Also all moneys whatsoever already lent or advanced or which the Bank now or hereafter lends or advances or is or becomes in any way
whatsoever liable to lend or advance to for or for the accommodation of or on behalf of any person upon the order or request express or implied or under the authority of the Debtor and the Mortgagor or either or any of them acting either alone or jointly with any person;

....

(f)Also all moneys which the Debtor and the Mortgagor or either or any of them either alone or jointly with any person whether directly or indirectly or contingently or otherwise or whether by way of damages or otherwise presently is or hereafter may become liable to pay to the Bank hereunder or under or on any document or negotiable or other instrument or by reason of any other matter or thing whatsoever or as a result of or pursuant to any transaction or event;

(g)Also interest upon all such moneys as aforesaid or on so much thereof as shall for the time being be owing or payable or remain unpaid ...

all of which moneys and interest are intended to be secured by these presents and are hereinafter referred to as the ‘Moneys Hereby Secured’.”
(Emphasis added)

The offshore commercial loan and the fully drawn advance when they were made by Westpac to the applicants and the interest payable thereunder became “moneys hereby secured” within the meaning of that term as used in the bill of mortgage. This is because the definition includes monies advanced in the future to the applicants on any account. Those monies became money which fell within the personal covenant to repay in clause 1. Clause 44 operated to preclude the right to receive any monies payable hereunder, that is under clause 1, being diminished by the operation of any equitable set-off.

In my view therefore, the applicants, on 5 and 9 February 1988, did not have an enforceable equitable set-off, the operation of which was to extinguish the debt owing by them to Westpac. The first representation relied upon was therefore not false.

I turn to the second representation relied upon.
As I have said, I am satisfied that at the October meeting Mr Allen said words to the effect that if the loan was not brought back onshore and the Milton building was not sold, Westpac would appoint a receiver and manager to the businesses and that they would be ruined. These statements in my view carried with them the representations pleaded in paragraphs 2.2(e) and 2.2(f) of the amended reply

Similarly, I have found that on 5 and 9 February 1988 Mr Thomas told the applicants that if they did not sign the concessional interest rate letters a receiver and manager would be appointed to their businesses and used words to the effect that Westpac would exercise its rights and remedies against the applicants and their property. These statements in my view carried with them the representations pleaded in paragraphs 2.3(b) and 2.3(c) of the amended reply

The representations made firstly by Mr Allen and later by Mr Thomas were intended by them to induce the applicants originally to comply with Westpac’s determination to bring the offshore commercial loan onshore in order to crystallise Westpac’s foreign exchange rate loss exposure and to sell the Milton building and apply the proceeds in the reduction of the applicants’ debt. In February 1988 the representations were intended to induce the applicants to execute the concessional interest rate letters and the acknowledgement letter dated 9 February 1988 withdrawing the first concessional interest rate letter endorsed “under duress”.

The representations made by Mr Thomas did in fact to a significant extent induce the applicants to sign the concessional interest rate letter on 5 February 1988 and the two letters on 9 February 1988.
Counsel for Westpac submitted that the representations pleaded in paragraphs 2.2(e) and 2.2(f) and paragraphs 2.3(b) and 2.3(c) were not statements of existing fact but were expressions of opinion, instructions or statements of intention or desire which could not be falsified merely because the opinion was wrong or the intention may have been frustrated. In the context in which the statements and representations were made, they were not put forward as the personal opinion of the representor nor as statements of instruction, intention or desire. Objectively, the representation was that as a matter of fact Westpac had a legal entitlement to appoint a receiver and manager to the businesses and to sell the property of the applicants over which it held security. A representation as to a person’s private rights is a representation of a fact which, if false, will constitute actionable misrepresentation (Cooper v Phibbs (1867) 2 LR HL 149 at 170; MacKenzie v Royal Bank of Canada [1934] AC 468 (PC) at 476; Andre & Cie S A v Ets Michel Blanc & Fils [1979] 2 Lloyd’s Rep 427 (CA) at 430 - 431).

The admissions made by Westpac, as explained at the beginning of these reasons, that the applicants could resist any attempt by Westpac to realise any security over the applicants’ assets, falsifies the representations made in terms of paragraphs 2.2(e) and 2.2(f) and paragraphs 2.3(b) and 2.3(c) of the amended reply

Accordingly, I am satisfied that the applicants were induced to enter into the agreement pleaded in paragraph 22(a) of the amended defence by the misrepresentations made by Mr Thomas on 5 and 9 February 1988 as pleaded in paragraphs 2.3(b) and 2.3(c) of the amended reply.

Rescission
Economic duress and actionable innocent misrepresentation have the consequence that the contract induced thereby is voidable not void. Counsel for Westpac submitted that any attempt to avoid the agreement to release Westpac from any claim or cause of action in connection with the offshore commercial loan was ineffective because the applicants had not made and could not make restitution of the benefit received by them by way of the loan at concessional interest rates.

Such restoration, on counsel’s submission, would involve the payment by the applicants to Westpac of approximately $980,000, being the difference between the interest payable and paid by the applicants under the refinancing on 16 February 1988 and that which would have been payable if the interest rate arrangements which previously operated on the domestic loans between the applicants and Westpac had been applied to the refinancing.
The consideration passing to the applicants under the agreement to release Westpac from any claim or cause of action in connection with the offshore commercial loan was fully executed at the time the applicants sought to avoid the release. The loan agreement for refinancing having been entered into and performed by the parties, restitutio in integrum is not now possible. Thus, rescission at common law is not available (Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 110 - 111. For an example of the common law rule in relation to a contract of release from claims, see Urquhart v MacPherson (1878) 3 App Cas 831 at 837 - 838).
Therefore, the applicants must look to equity if they are to have a right of rescission. Equity, although following the common law, has been more flexible and has allowed rescission where, by the exercise of its powers, it can do what is practically just between the parties and thus substantially restore the status quo (Alati v Kruger (1955) 49 CLR 216 at 223 - 224, cited with approval in Vadasz at 111 - 112).
In attempting to determine what are the requirements of good conscience and practical justice as between the parties to the contract which is sought to be avoided, equity will have regard to what would have happened in the absence of the vitiating circumstance which operates to make the contract voidable. Thus, in Vadasz it was of significance that the guarantor would have entered into the guarantee to procure future supplies of concrete on credit if he had known the true facts. Therefore, to achieve what was practically just in Vadasz, it was sufficient to partially rescind the guarantee insofar as it provided for past indebtedness which was the subject of the misrepresentation. This result is to be contrasted with the situation in Commercial Bank of Australia v Amadio where the guarantor would not have given the guarantee in any event but for the unconscionable conduct. The distinction between the two situations which would have applied but for the vitiating conduct is the basis for the different relief in each case; partial rescission in the first case and total rescission in the second, notwithstanding that in each case the provision of future credit was the consideration for the guarantee (see Vadasz at 115). The Court (Deane, Dawson, Toohey, Gaudron and McHugh JJ) concluded in Vadasz (at 115) :-

“ ... The concern of equity, in moulding relief between the parties is to prevent, nullify, or provide compensation for, wrongful injury. If it appears that the other party would not have entered into the contract at all if the true position were known, the contract may be set aside in its entirety as in Amadio.
The appellant is ‘seeking the assistance of a court of equity and he who seeks equity must do equity’ Cheese v Thomas [1994] 1 WLR 129 at 136; [1994] 1 All ER 35 at 41. The Court must look at what is practically just for both parties, not only the appellant. To enforce the guarantee to the extent of future indebtedness is to do no more than hold the appellant to what he was prepared to undertake independently of any misrepresentation.”

In the absence of economic duress and the innocent misrepresentation which I have found, the applicants would not have agreed to release Westpac from any claim or cause of action in connection with the offshore commercial loan. The applicants and Westpac would have been left with their respective legal rights against one another. Further, I find that the applicants would not have entered into new refinancing arrangements which required them to pay interest at the same rates as they were previously paying for domestic commercial loans from Westpac. Neither the applicants nor Westpac would entertain future borrowings on that basis because both Westpac and the applicants knew that it was beyond the capacity of the applicants to service such borrowings at those interest rates. There would have been no benefit to either party in a continuation of that circumstance. It follows that Westpac would not have received the sum of approximately $980,000 from the applicants if it did not enter into the new loan arrangements with the applicants on or about 5 February 1988.

In the absence of the signed second concessional interest rate letter and the agreement to release Westpac in terms of paragraph (c) of that letter, Westpac would not have entered into the loan agreement in terms of the letter of offer dated 1 February 1988. In this case, Westpac had determined on 5 January 1988 that if Mr Allen’s option one in his “Bad and Doubtful Debt Report/Review” of 21 December 1987 as approved was not agreed to by the applicants, option two would be implemented. This second option involved the appointment of a receiver and manager to all of the businesses, including the Milton building, and the possible return to the applicants of the businesses “as soon as a workout situation can be determined by ‘soft’ loans in need.” If option two had been carried into effect, Westpac would have ended up in substantially the same position as it in fact did. It would have received the proceeds of the sale of the Milton building and, if necessary to attempt to achieve a work-out of the balance of the loan, it would have provided “soft” loans and been paid
interest on such loans at concessional rates. The only difference would have been that, as a matter of probability, Westpac would not have had the benefit of the release contained in the concessional interest rate letter, there being no objective reason for the applicants to give up their rights against Westpac after the appointment of a receiver and manager had occurred.

In looking to what is practically just to both parties, the exercise of a right to rescind the agreement to release pleaded in paragraph 22(a) of the amended defence does not require that the applicants pay or offer to pay $980,000 or thereabouts to Westpac. Nor does it require that the right to rescind be conditioned upon the applicants giving to Westpac credit for that sum against the payment of any damages which the applicants may ultimately recover against Westpac. The parties are substantially restored to their former positions if each side is left with such rights as each side had against the other arising out of their financial dealings, including the offshore commercial loan.

In filing these proceedings on 25 January 1991 the applicants evinced an intention not to be bound thereafter by the release contained in the concessional interest letters of 5 February 1988 and 9 February 1988. The assertion of rights to damages in respect of the conduct of Westpac in connection with or arising out of the offshore commercial loan was totally inconsistent with the continued existence of the agreement to release and, in my view, constituted an avoidance of it. If I am wrong in that view, then by the filing of the reply the applicants took steps to avoid the agreement.

Relief
The issue ordered by Drummond J to be tried separately and before the trial of any of the other issues in the action is that defined in paragraph 22 of the amended defence and paragraph 2 of the amended reply The admissions made by Westpac are for the purposes of determining the separate issue only and not for the purpose of determining any of the other issues in the action. Accordingly, the admissions made may be relied upon by the applicants to prove up any necessary factual element pleaded in paragraph 2 of the amended reply as an answer to the release pleaded in paragraph 22 of the amended defence. For the reasons outlined above the applicants were entitled to and did rescind the agreement for release pleaded in paragraph 22 of the amended defence. Beyond determining that the purported rescission by the applicants as an act avoiding the transaction ab initio was valid, no further consequential order is necessary to give effect to the rescission nor to achieve practical justice as between the parties (Alati v Kruger at 223 - 224; Vadasz at 112 - 116).

It follows in my view that, on the preliminary issue, it should be determined that the matters pleaded in paragraph 22 of the amended defence do not operate to release Westpac from any claim or cause of action which the applicants had or may have had against Westpac arising out of or in connection with the offshore commercial loan or any foreign currency transaction which includes the causes of action sued on in proceedings number NG 29 of 1991.
As the issues arising on the preliminary issue ordered by Drummond J are, as between the parties finally determined, the appropriate order is to declare in accordance with the determination made by me. The parties should apply for further directions as to the hearing and disposition of the remaining issues.

Costs
The applicants have succeeded on the determination of the preliminary issue and should have their costs, including reserved costs, if any, against Westpac, to be taxed if not agreed.

THE COURT DECLARES THAT:
The matters pleaded in paragraph 22 of the amended defence do not operate to release Westpac from any claim or cause of action which the applicants had or may have had against Westpac arising out of or in connection with the offshore commercial loan or any foreign currency transaction which includes the causes of action sued on in proceedings number NG 29 of 1991.

THE COURT ORDERS THAT:

The application be adjourned to a date to be fixed by the District Registrar for directions as to the hearing and determination of the remaining issues in the proceedings.
The respondent pay the applicants’ costs of and incidental to the hearing of the preliminary issue, including reserved costs, if any, to be taxed if not agreed.

I certify that this and the preceding one hundred and three pages (103) are a true copy of the reasons for judgment of his Honour Justice Cooper.

Date:20 December 1996

Associate

Counsel for the Applicants:                  P R Dutney QC with him G A   Moore
Solicitors for the Applicants:                Caruana Kay & Barry
Counsel for the Respondent:               R N Chesterman QC with him J C
Sheahan

Solicitors for the Respondent: Allen Allen & Hemsley

Date of Hearing:  5, 6, 7, 8, 9 February 1996
Place of Hearing:  Brisbane
Date of Judgment:  20 December 1996

[1996] FCA 1143

20 DECEMBER 1996