Daswan Australia Pty Ltd v Linacre Developments Pty Ltd (in liq)
[2018] VCC 40
•6 February 2018
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-17-00848
| DASWAN AUSTRALIA PTY LTD and JUDITH LORRAINE TONINI | First Plaintiff Second Plaintiff |
| v | |
| LINACRE DEVELOPMENTS PTY LTD (in liquidation) and CHRISTOPHER JUSTIN PAUL AND CHRISTOPHER WILLIAM PAUL v DASWAN AUSTRALIA PTY LTD and JUDITH LORRAINE TONINI | First Defendant Second Defendant Plaintiff by Counterclaim First Defendant by Counterclaim Second Defendant by Counterclaim |
JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 30 November, 1, 4, 5 December 2017 | |
DATE OF JUDGMENT: | 6 February 2018 | |
CASE MAY BE CITED AS: | Daswan Australia Pty Ltd & Anor v Linacre Developments Pty Ltd (in liq) & Anor | |
MEDIUM NEUTRAL CITATION: | [2018] VCC 40 | |
REASONS FOR JUDGMENT
Subject: CONTRACT DISPUTE
Catchwords: Deed of Compromise; release of defendant debtors and bar to proceedings; whether release and bar operated in the events the occurred; whether essential time limit breached; whether plaintiff creditors elected to affirm deed in face of breach of essential time provision; no essential time stipulated; release and bar operative; plaintiffs’ claim for amounts in addition to the compromise sum payable under deed dismissed; counterclaim for moneys paid by defendants; successful as to part
Legislation Cited: Personal Property Securities Act 2009; Supreme Court Act 1986; Australian Consumer Law
Cases Cited:Mount Bruce Mining Pty Limited v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; Osborn & Bernotti t/as GO4 Productions v McDermott t/as RA McDermott & Co &Karmine Pty Ltd [1998] 3 VR 1; McDermott v Black (1940) 63 CLR 161; Bartlett v Mouncey [1998] FCA 418; National Australia Bank Limited v Pollak (2001) 186 ALR 44; on appeal, Pollack v National Australia Bank [2002] FCAFC 55; Craine v Colonial Mutual Fire Insurance Company Limited (1920) 28 CLR 305; Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99; B.P. Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266; Bowes v Chaleyer (1923) 32 CLR 159; Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235; Carr v JA Berriman Pty Ltd (1953) 89 CLR 327; Carbon Black Lab Pty Ltd v Launer [2015] VSCA 126; Highmist Pty Ltd v Tricare Ltd [2005] QCA 357; Cameron v UBS AG (2000) 2 VR 108; Mahoney v McManus (1981) 180 CLR 370; Buckeridge v Mercantile Credit Services (1981) 147 CLR 654; Morgan Banking Co Limited v Newman & Carlton [1927] IR 520; Williams v Frayne (1937) 58 CLR 710; Carter v White (1883) 25 Ch D 666, 670; Hancock v Williams (1942) 42 SR (NSW) 252; Chambers v Rankine [1910] SALR 73; Greer v Kettle [1938] AC 156; OneSteel Manufacturing Pty Ltd (administrators appointed) [2017] NSWSC 21; Commonwealth Bank of Australia v Anand [2011] NSWSC 613; Yorke v Lucas (1985) 158 CLR 661, cf Houghton v Arms (2006) 225 CLR 553; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
Judgment: (1) On or before 20 February 2018, the parties must bring in Short Minutes to give effect to these reasons.
(2)Costs reserved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr I Upjohn QC with Ms S Kelly | Latep Legal |
| For the Defendants | Mr JP Moore QC with Mr R Craig | Mills Oakley |
HIS HONOUR:
Background
1 This proceeding concerns the proper construction of a Deed of Compromise entered into by a number of parties, including the plaintiffs and defendants to this proceeding, following the failure, at least as a profit making venture, of a retail and residential development known as “The Element” at 221 Glenhuntly Road, Elsternwick carried out by the first defendant, Linacre Developments Pty Ltd (“Linacre”).
2 On 2 November 2007, Andrew Peter Kanis, as settlor, executed a Deed of Settlement creating the Linacre Developments Trust. Linacre, the first defendant, was trustee of that deed. The deed established a discretionary trust in orthodox terms. The second defendant, Mr Paul, was both guardian and appointor in accordance with the terms of the deed and was also the primary beneficiary. (Court Book “CB” 2966-3001)
3 Mr Paul was the sole director and secretary of Linacre between 16 October 2007 and 28 October 2016. (CB 161, [4]) Mr Paul graduated from university with an Arts Degree in English literature and history and, in 1994, he worked at ANZ McCaughan, a stockbroking subsidiary of the banking group. Later, he was employed by Bell Potter Securities as a private client adviser and by Merrill Lynch. (T212)
4 In 2002, he began his involvement with Lechte Corporation. His mother, Jennifer, is a director of Lechte Corporation and the wife of another director of that company, Mr Peter Lechte (who is Mr Paul’s stepfather). That company and its associates specialise in property development and management, together with project management, sales and marketing. (CB 161, [5]-[6])
5 According to his evidence, Mr Paul’s role at Lechte “has been in development management, where I have been involved in all aspects of the development of various construction projects, including dealing with finance brokers, banks and investors”. (Ibid, [7])
6 In the course of this work, Mr Paul has been director of a number of companies associated with Lechte Corporation which, in broad terms, were each incorporated to carry out specific real estate development projects; what are sometimes described as “special purpose vehicles”. (T211-212)
7 Mr Paul said:
“The most common types of development structures I have been involved with at Lechte Corp are joint ventures. These involved setting up special purpose vehicles and inviting joint venture funding. Sometimes we would also arrange for additional third-party funding or mezzanine finance to get a project up and running, and then we would always also ask a senior bank for any further any funding (sic) and to fund the project construction itself.” (CB 161, [8])
8 He said he had been involved in “about 10 projects altogether” and that these were “a wide range of projects, from residential to serviced apartments, retail shops, townhouses, and land subdivisions, on both small and large scales”. (Ibid, [9])
9 The development at 221-229 Glenhuntly Road, Elsternwick was the first project in which he was sole director of the relevant company and the first project in which he guaranteed developer company’s obligations. He said:
“All previous projects at Lechte Corp were run under my mother, Jennifer and/or my stepfather, Peter, as directors and guarantors along with other joint venture partners in the respective projects.” (CB 162, [10])
10 In mid-2010, Lechte identified a site at 221-229 Glenhuntly Road, Elsternwick as a development prospect. (T162, [13])
11 Linacre entered into a contract to purchase this land which was comprised in Certificate of Title, Volume 3296, Folio 013 by contract dated 16 September 2010. The purchase price was $4,120,000 with a 10 per cent deposit of $412,000 which was paid as to $10,000 on signing and, as to the balance, on 18 October 2010. The contract was subject to a “due diligence period” expiring 5.00pm on 18 October 2010. (CB 3035-3046)
12 Mr Calman is a director of the first plaintiff, Daswan Australia Pty Ltd (“Daswan”) which was registered in 1976 and was previously known as Calman Australia Pty Ltd. According to Mr Calman, Daswan:
“has been the primary corporate vehicle for the conduct of various businesses since [its incorporation in 1976]. [Now] Daswan’s primary business function is investment.” (CB 127-8, [3])
13 According to Mr Calman, “Daswan engages with a range of business partners in the course of conducting its investment business”. (CB 128, [5]).
14 Mr Paul said that his mother and stepfather, who were acquainted with Mr Calman through friends, introduced Mr Calman to him as a potential investor. According to Mr Paul, “During 2010, I had numerous discussions with Calman regarding potential projects, knowing that he was interested in investing in one of Lechte Corp’s projects”. (CB 162-163, [15])
15 According to Mr Paul, Mr Calman introduced him to Mr Alistair Philp, “who was a financier and mortgage broker working for Heritage Finance”. (CB 163, [16])
16 The investment model employed by Linacre did not entail the use of any equity capital whatsoever. Both the holding deposit of $10,000 and the balance of deposit payable at the end of the due diligence period were borrowed. (T228)
17 According to Mr Paul, Mr Philp of Heritage “prepared a proposal document for Judith Tonini (Tonini), the second plaintiff in this proceeding, outlining the terms of her loan and the Project generally”. (CB 163, [17]) This proposal entailed a total loan of $1.2 million:
“required on a draw-down basis over 12 months to cover the planning permit and marketing, … $412,000 of which is required tomorrow, Monday 18th October 2010 to pay the deposit … (and refund Lechte their initial $10K …”(CB 3052)
18 According to the proposal, “the security for this loan will be a first rank in charge (fixed and floating) over Linacre Developments Pty Ltd and a guarantee from the director [Mr Paul]”.
19 A joint venture agreement was proposed showing Linacre as the owner and borrower, Lechte Corporation as the developer, Daswan as investor and Abreuvoir as “introducer”. The role of Abreuvoir as introducer was to “handle all credit applications as and when they fall due”. (CB 3053)
20 It will be recalled that Mrs Tonini was to advance the funds to cover the deposit payable on 18 October 2010. As a result, it was necessary for Mr Paul and Ms Tonini to meet at law firm Rockwell Bates in Flinders Lane, where one of the practitioners, Ms Diane Pelosi, was preparing security documents for Mrs Tonini’s advance to Linacre “on the run”. (T108, L4-14)
21 According to Mrs Tonini, she relied on Rockwell Bates and Mr Philp of Heritage Finance to secure her investment. (T111, L12-15)
22 This was the first time that Mrs Tonini had made an investment like this. (T124, L30-31). She said it entailed investing “all of my savings, most of my super”. (Ibid, L22-23) Mrs Tonini said that Mr Philp gave her “a spreadsheet showing the monthly drawdowns I would make to Linacre and the interest component I would receive each month. This was the first time I had seen that document”. (CB 146, [10A])
23 The security documents executed in Mrs Tonini’s favour consisted of a Loan and Guarantee Agreement, a document headed “Deed of Charge” and a document styled “Heads of Agreement”. (Ibid, [13]). The Loan and Guarantee Agreement (CB 3108-3137) showed Linacre as the Borrower and Mrs Tonini as the Lender. Mr Paul was described as the Guarantor. It provided for a total loan of $1.2 million. (CB 3132)
24 The agreement required Linacre to “apply the proceeds of all Loans for the sole purpose specified in item 10 of Schedule 1”. (CB 3117, [4]) Item 10 described the purpose for which the loan funds were to be applied as follows:
“… the repayment of the deposit under the Contract of Sale and then further, in respect of the town planning, marketing, development and selling expenses associated with the Property as incurred by the Developer.” (CB 3132)
25 The “Developer” was defined as “Lechte Corporation”. (CB 3112)
26 The securities provided to secure the advance were a personal guarantee, a fixed and floating charge and a caveat. (CB 3133) A drawdown schedule appeared at Schedule 3. (CB 3135)
27 The loan funds were repayable one year from the date of the agreement (viz 18 October 2011). (CB 3119, [7] – 3132, item 7)
28 The interest rate was 2 per cent per month for 12 months and the default interest rate was 32 per cent per annum. (CB 3132, items 5 & 6)
29 The Deed of Charge (CB 3138-3178) was a standard fixed and floating charge over the assets of Linacre in favour of Mrs Tonini. The charge was fixed as to all fixed assets (Clause 3.1(a)) and floating as to all other assets. (Clause 3.1(b)). (CB 3150)
30 Clause 4.1 obliged the company to register the charge “in such places where failure to do so would render such charges void as against a liquidator or judgment creditor”. (CB 3151) Mrs Tonini was authorised, herself, to register the charge. (Clause 4.2, CB 3151)
31 The Heads of Agreement, once again bearing the date 18 October 2010 (CB 3093-3107), showed the parties as Linacre, Lechte, Daswan, Abreuvoir Holdings Pty Ltd, Mrs Tonini and Mr Paul. The purpose of the venture was said to be the completion of the acquisition of the subject property by Linacre and the development of the property by Lechte and:
“(c) the provision of additional funds for the purposes of the Joint Venture from time to time by either:
(1)agreement between the parties from Daswan to Linacre at an interest rate of not less than 24% per annum; or
(2)sourcing the additional funds from a third party lender agreed by the parties.” (CB 3098)
32 The final purpose was the sale of the developed property. (Ibid, Clause 3.1)
33 Clause 4 provided that Linacre should be the owner of the property “and borrow such funds as required from time to time for the purposes of the Joint Venture”. Abreuvoir was to be the “introducer” and handle credit applications. According to paragraph (c) of clause 4, “Daswan shall provide Additional Finance from time to time on the terms set out in clause 3.1(c)”. (Clause 4(c), CB 3099)
34 The phrase “Additional Finance” is capitalised in clause 4(c), suggesting that the phrase is specially defined in the document. Reference, however, to the definitions clause 1.1 indicates that this is not so. (CB 3095)
35 Mrs Tonini said she parted with a cheque for $412,000 on 18 October. She continued, “I recall that the real estate agent sat outside in the lobby all that time waiting for the final documentation so that he could collect the cheque for the deposit”. (CB 146, [14])
36 Mrs Tonini said:
“I did not see any other documentation prior to signing the agreements. There was no time to do any due diligence. In signing the agreements, I relied on security I had been told I would get, along with the personal guarantee from Mr Paul. I would not have loaned the money to the Project if I had through [scil thought] it was at risk. I was not in a financial position to risk my superannuation like that. I trusted in what I was told – which was that the loan and guarantee agreements gave me security over the Property and the assets of the Project.” (CB 147, [15])
37 Mrs Tonini received notification dated 19 October 2010 from ASIC showing that her charge over the assets of Linacre had been lodged. (Ibid, [15A]) A few days later she said she “signed” a document headed “Personal Guarantee”. (Ibid, [16]) (CB 956-979)
38 This document expressed as a deed is, in the version shown in the Court Book, signed, sealed and delivered by Mr Paul. It obliged Mr Paul to pay the Secured Monies on demand. (Clause 3.1, CB 968) Secured Monies was ascribed the same meaning as it bore in the Deed of Charge. (Clause 1.2, CB 965)
39 Mrs Tonini said that she advanced the monies provided for in her loan agreement according to the drawdown schedule. At times, she said, Mr Paul pressed for the advance of the monies a few days earlier, which she did “if I could”. (CB 147, [18]) Mrs Tonini said that on 18 October 2011 she received a letter from Mr Paul. (CB 148, [21]) The letter was dated 12 October 2011. It sought an extension of Mrs Tonini’s loan to Linacre “for a period of 24 months, or repayable sooner at the Lenders (sic) discretion”. The letter recorded, “The total Loan Amount is now $1,250,000, being the sum of $1,200,000 used for the Linacre Developments project at Elsternwick, and $50,000 used for Active Living Communities Project at Clayton.” (CB 3233)
40 Mr Paul sought confirmation that the non-default interest rate of 24 per cent [per annum] applied and that “no penalty or default interest will apply through this extension period”. He asked “that the interest will be added to the accrued interest loan account and payable at the end of the period”. He proposed that a payment of $8,000 per month “will be made to your nominated bank account on a monthly basis and will be deducted from the accrued Loan Interest Account at the end of the extension period”. (CB 3233)
41 The letter appears to have been forwarded to Mrs Tonini by an email dated 18 October. (CB 3232)
42 The following day [19 October 2011], Mrs Tonini replied:
“I agree to the extension, however will only require an amount of $6,000 per month at this stage. I would like to reserve the right to increase this amount to $10,000 per month with 30 days notice in writing to you. I don’t believe this will be required, but just covering all contingencies. Michael and Alistair [presumably Messrs Calman and Philp] spoke last night, and Alistair will talk with you today in regards to this and having the documentation drawn up.” (Ibid)
43 Mrs Tonini executed a Deed of Variation. (CB 3409-3414) The document in the Court Book is undated. (CB 3410)
44 Mrs Tonini also executed a document styled Deed of Amendment dated 23 December 2011 (CB 3546-3553), which was expressed to be between Linacre, herself and Mr Paul.
45 Mrs Tonini said that she was repeatedly pressed by Mr Paul through the agency of Mr Calman and Mr Philp to provide additional funds to keep the project afloat. She said that this worried her “constantly”. She “didn’t want the project to fall over and lose the $1.25 million” she had already loaned. (CB 148, [25])
46 Eventually, she said she was pressed to lend $270,000, which she declined to do, and “Mr Paul then said she would sell me apartment 9.05 and use the $270,000 as the deposit”. She said she would lend the money on that basis. She continued “I felt that I at least had a bit of security by this deal. I had to sell down more shares in the Tonini Superannuation Fund to finance this amount”. (CB 148, [26])
47 She said that on 18 October 2012 she executed a document called “Loan Agreement” and advanced $270,000. (CB 3704A-3704W) Some weeks later, she said Mr Paul told her there had been an offer to purchase apartments 9.04, 9.05 and 9.06, which were to be converted into one set of premises. He asked if she would relinquish her entitlement to apartment 9.05, which she eventually agreed to do, substituting apartment 7.07. (CB 149, [30]-[31]) She said she advanced a further $86,000 to the project, having sold down more shares in her superannuation fund to do so. (Ibid, [32])
48 Linacre did not repay the loan she had made on the extended due date of 23 December 2013. (CB 150, [39]) She took legal advice. She was concerned that if word got out that there was a shortage of money, the entire project was at risk. On that basis, she decided not to take immediate steps to recover the loan or enforce the guarantee. (CB 150, [40]-[41])
49 On 18 November 2011, Mr Calman attended the office of Rockwell Bates and executed a Joint Venture Agreement as a director of Daswan. (CB 133, [37], CB 3344-3414) The parties to the Joint Venture Agreement were Linacre as “Proprietor”; Elsternwick Developments Pty Ltd, described as “Developer”; Daswan, described as “Investor”; and Abreuvoir Holdings Pty Ltd, described as “Introducer”. (CB 3349) Clause 8.2 headed “Introducer and Agreed Funding” provided that the Introducer would handle all credit applications, but had a discretion to “allocate the management and execution of Credit Application to a Third Party without seeking the approval of the Management Committee”. (CB 3368) The investor – that is, Daswan – was obliged by clause 8.1(a) to “finance and/or … procure all necessary financing arrangements (at its discretion) to the Proprietor [viz Linacre]”. The total amount was to be $2.9 million and the interest rate was to be 24 per cent per annum. (CB 3368, clause 8.1) Clause 8.3 provided that if Daswan were unable to provide or procure the agreed funding, it was obliged to advise the other parties of such and the manager – that is, Elsternwick Developments Pty Ltd – might seek appropriate alternative funding. (CB 3368-3369)
50 On 23 December 2011, Mr Calman, as a director of Daswan, executed a document styled “Loan and Guarantee Agreement” and a Deed of Charge”. (CB 134, [40]) The Loan and Guarantee Agreement (CB 3517-3545) showed Linacre as the Borrower, Daswan as the Lender, and Mr Paul as Guarantor. The loan amount was “up to $1.7 million”, the repayment date was 24 months from the date of the agreement “or as extended as agreed in writing by the parties”. The interest rate was 24 per cent [per annum] and there was no default interest rate. According to Mr Calman, Mr Paul executed a mortgage in favour of Daswan over the property. (CB 3621A) Mr Calman said “That mortgage was held in escrow”. (CB 134, [41])
51 Construction of the development began in 2013. (CB 136, [55]) Again, as at 23 December 2013, Linacre failed to repay the amounts it had borrowed from Daswan. (CB 136, [57]) The monies had been drawn down progressively, with the last advance being made on 23 November 2012. (CB 135, [45])
52 In the period December 2013 to August 2015, Linacre continued in default. (CB 137, [59]) Mr Calman said:
“Because of the risk associated with the ANZ [Bank] withdrawing its support, I made a decision that it was in Daswan’s interests that the Project continue to completion.” (Ibid)
During this period, Mr Calman said he received “regular phone updates from Mr Paul” stating that project was “on track and that we would all make money”. (Ibid, [60]
53 On 21 January 2014, Mrs Tonini executed a contract to purchase Apartment 707. She also executed a document styled “Deed of Amendment and Acknowledgement”. (CB 151, [45], 3820) By early 2015, Mrs Tonini’s relationship with Mr Paul “deteriorated significantly” and they had some fiery telephone conversations. She said Mr Paul assured her that the project would be a success and would make money. (CB 151-152, [49]). According to Mrs Tonini, the project reached official completion “in about early 2015”, and Latep Legal, which was then acting for Mrs Tonini, served Linacre with a default notice under the Tonini loan agreement. (CB 4488) This notice was copied to Mr Paul. (CB 152, [55]-[56], CB 4484‑4487)
54 In May 2015, Mrs Tonini instructed Mr Patel, who had previously worked at Rockwell Bates Lawyers and had taken over acting for the plaintiffs when Ms Pelosi departed on maternity leave, then moving to a new firm Latep Legal to register her security. [I was informed that the original charge had been deleted to facilitate borrowing from other parties.] According to Mrs Tonini, she relied on Mr Patel to effect a proper registration of the Deed of Charge. (CB 152, [57]) Sometime later, in June 2015, Mrs Tonini instructed Mr Patel to engage Mr Craig Seymour of BPS Advisory to assist in dealing with Linacre to ensure that Mrs Tonini “got the best deal possible”. (Ibid 152, [58])
55 None of the securities executed in favour of Mrs Tonini or Daswan referred to the existence of the Linacre Developments Trust which, as previously noted, was created in 2007 at the time of Linacre’s initial incorporation. The Deed of Compromise made no reference to this trust nor did the Heads of Agreement. To all intents and purposes, in accordance with all this documentation, Linacre was acting beneficially for itself and not as trustee of any trust.
56 It went further than this, however. Clause 6(d) of Mrs Tonini’s Deed of Charge (CB 3153) stated, “the Chargor [that is, Linacre] holds the Charged Property in its own full, absolute and entire beneficial ownership, and not as trustee or fiduciary for any third party”. (Clause 6(d) CB 3153)
57 Clause 16.1 provided:
“The Chargor [viz Linacre] warrants to the Chargee [that is, Mrs Tonini] that the Charged Property is either beneficially owned by the Chargor or held by the Chargor as trustee under a Trust under the terms of which the Chargor is empowered to charge the assets of the Trust in the manner herein set out which assets the Chargor for itself on behalf of its co-trustees (if any) and for any successor as trustee of such Trust hereby charges as constituting part of the Charged Property and in respect of such Trust the Chargor covenants that it will not resign from the trusteeship or cause itself to become disqualified from continuing to act as trustee and that it will not exercise any Power discretion or authority vested in it under the Trust in any way which would reduce the value or effectiveness of this security and that any notice of a proposal for a change of trustee shall be deemed to constitute a breach of the covenants hereof unless previously consented to in writing by the Chargee [viz Mrs Tonini].”
58 The definition of the word “Trust” according to clause 1.1 (CB 3147) was “the Trust (if any) referred to in Item 1 of the Schedule”. The Schedule (CB 3177) under the heading “Trust” shows the text “not applicable”.
59 When the plaintiffs’ charges were eventually lodged for registration in 2017, they were registered by reference to Linacre’s Australian Company Number (ACN) but not by reference to the trust’s Australian Business Number (ABN). The effect of this was that, as noted below, the charges were ineffective insofar as they pertained to the trust’s assets, including the development project for which the loan advances were made.
60 On 1 June 2015, Mrs Tonini attended a meeting at the offices of Evans Ellis, a law firm acting for Linacre and the Lechte group. The Calmans and Lechtes were in attendance, as well as Mr Paul, Mr Seymour, a consultant engaged to advise the plaintiffs, and others. She said:
“During the meeting, Mr Paul, along with Mr Eliau [of Evans Ellis] said that there was no money left in the Project, that it would not make a profit and that there was no money to repay the loans.” (CB 153, [59])
61 In the wake of this disclosure, negotiations to achieve a compromise were instituted and, according to Mrs Tonini, there were 29 drafts of the Deed of Compromise. She said, “I read every one of them”. (CB 153, [61])
62 There was a due diligence process allowing Mr Seymour to investigate the situation. He provided a report to Mrs Tonini. Mr Seymour had been instructed as to the background of the transaction, attended meetings and reviewed security documents and publicly available records “to see what monies were likely to be available, and where they could be sourced from”. (CB 117-118, especially [22]) Insofar as he engaged in a due diligence investigation, he said he was hampered by demands from Evans Ellis “that I destroy notes and working papers after providing advice to Daswan and Tonini”. (CB 118, [20]) He considered an advance draft of a Deed of Compromise. Mr Seymour provided a report to Mr Calman, Mrs Tonini, Mrs Calman and Mr Patel of Latep Legal. (CB 121, [37], CB 4114-4124) Mr Seymour reported:
“… we believe that the project has failed to achieve its targeted objectives because it was undercapitalised and because Linacre’s management was constantly fighting ‘financial fires’ to obtain sufficient funding to complete the project”. (CB 4118)
63 In light of the fact as narrated that not one cent of cash equity capital was employed in the project, to say that it was “undercapitalised” is something of an understatement. Mr Seymour considered issues of corporate insolvency, the ability of a liquidator to undo transactions and so forth.
64 According to the report under the heading “Merits of Deed of Compromise”, Mr Seymour said:
“Whilst we categorically appreciate that the management of the project and the communication between Linacre and you has been poor and in that regard we make specific reference to the overall tone of ‘negotiations’ over recent months, including Evan Ellis’s responses to our due diligence generated questions; we cannot impress more strongly that any liquidation of the company would be to your extreme detriment”. (CB 4122)
65 Mr Seymour said the recoveries with respect to Apartment 707 would be $260,645 and $2,877,250 on the loan transaction. He continued:
“It is expected that any such returns would be available in perhaps 12-18 months from the commencement of a liquidation, noting that any Part 5.7B recoveries [under the terms of the Corporations Act] could delay the payment of dividends beyond that time.
In all of the circumstances, we strongly and unequivocally recommend that you execute and settle upon the Deed of Compromise without delay and take all possible steps to ensure that Linacre is not placed into liquidation.” (CB 4123)
66 Enlarging upon the opinions he formed in July/August 2015 in his viva voce evidence, Mr Seymour said:
…So essentially it was obvious that the project was grossly under-capitalised, that there had been a number of lenders of last resort used and that the interest rates were onerous to say the least, but the project essentially had no commercial prospects of success once it was apparent that all of that debt was required at those interest rates. (T140, L5-11)
67 He continued:
…So in that context our advice to the clients was, "Look, you're on a hiding to nothing from the stage where all these other lenders came in after you." (Ibid, L12-15)
68 Mr Seymour provided advice to Mr Patel, the solicitor for the plaintiffs in an email dated 9 June 2015. He copied that email to Mrs Tonini and Mr and Mrs Calman. (CB 4496-4499)
69 In that advice, he said of Mr Paul, whom he identified as “CP”:
“CP is impecunious and, notwithstanding his equity involvement in both the Clayton and Carlton projects, it is our view that he/his financial affairs has/have been deliberately set up to offer a nil return under a BRB scenario.” (CB 4498)
70 The “BRB scenario” referred to by Mr Seymour is one in which Linacre was placed in liquidation and Mr Paul was bankrupt. He added:
“Please note:- there is no scenario available that provides for any return in the short term whatsoever yet provides a retention of rights to pursue Chris Paul personally. Whilst we may dislike the outcomes on the table, the reality is that CP has good insolvency advice and his advisers have a strong understanding of their bargaining position – i.e. their capacity to take the offer off the table and to be seen to have acted reasonably in doing so. This should not be underestimated.” (CB 4499)
71 As to Mr Paul’s insolvency advice, in his viva voce evidence Mr Seymour said:
“There’s a whole industry called Insolvency Pre-Packs and Pre-Insolvency … It’s a particularly distasteful part of the industry and this was a classic example of it. … So what happens is a solicitor or an adviser, I use the term broadly, will package up a set of circumstances in such a way that the offer presented to the creditors is palatable from the perspective that anything else represents a materially worse outcome and it seeks to use insolvency law in a way that it’s not intended.” (T143, L23 – T144, L4)
72 He continued:
“The essence of it is that the debtor and his advisers will essentially use the gaps in insolvency law … to look after one segment of an audience, and it can be the secured creditor provisions or whatever, and then stall for time effectively with unsecured creditors and then leave them in an invidious position of, ‘Take it or leave it’, and then use the threat of an insolvency appointment as leverage against the debtor [scil creditor] in a commercial negotiation, and within the first 90 seconds of the first meeting I attended on this file, Mr Eliau’s opening remarks were, ‘There’s nothing in it for you and we’ve had a chat with David Ross at Hall Chadwick’, and it was very obvious from that point on that this was a pre-pack.” (T144, L8-24)
73 The parties executed the Deed of Compromise on 14 August 2015.
The Deed of Compromise
74 Since the Deed of Compromise is central to this proceeding, it is necessary to consider its terms in some detail. There were some 10 parties, including the plaintiffs, Linacre and Mr Paul. The other parties were described as “Associated Creditors”. (CB 4572-4590)
75 Clause 1.4 stated that the deed contained “the entire agreement between the parties with respect to its subject matter …”. (CB 4577)
76 Clause 4.1 provided that upon exchange of the deed between the parties, the lenders would provide a letter of satisfaction in respect of the settlement of Lot 707 – an issue to which I will return below –, withdraw a caveat registered against certain lots on the development plan and subdivision which had been sold, but these sales had not settled, and remove the caveats they had lodged on Unsold Lots upon registration of new mortgages to which they would become entitled.
77 Their default notices were to be withdrawn (CB 4577). In return, Linacre was to:
“(i)ensure the proceeds from the sale of the Unsettled Lots will be used solely to pay down the NAB Loan, other than payments under the sum of $5,000.00 each, and no more than $20,000 in aggregate; and
(ii)grant to the Lenders the securities pursuant to clause clause 5.3 & 5.4.” (CB 4578)
78 Clause 5.3 (CB 4579) provided that subject to the consent of NAB as first mortgagee, the lenders would obtain second ranking securities over the Unsold Lots and the “Associated Creditors”, being entities associated with the Lechte family, would subordinate their claims to these new securities.
79 The term “Unsold Lots” was defined to mean Lot numbers R1, R2, 101 and 401 of the development. (Clause 1.1, CB 4576) The net proceeds of sale of these allotments after repayment of the NAB as first mortgagee and the clearing of sale costs were to be the source of the compromise payment under the deed.
80 Clause 5.4 of the deed entailed an irrevocable direction to Maddocks Lawyers, who had acted on the sale of the units for Linacre, to apply the net proceeds of sale in the manner described. The compromise payment was defined by clause 1.1 to mean $3.4 million. (CB 4574)
81 Clause 5.2 provided as follows:
“5.2 Payment Terms
The Compromise Payment will be paid as follows:
(a)upon the exchange of the Deed, an initial payment of $750,000.00 (‘Initial Payment’) will be paid to the Lenders; and
(b)the balance of the Compromise Payment (‘Balance Sum’) shall be paid to the Lenders:
(i)from the Net Settlement Proceeds from the sale of the Unsold Lots which settles on or before 30 September 2015; and/or
(ii)by way of transfer of ownership of any Unsold Lots in accordance with clause 6.1.” (CB 4579)
82 Clause 5.5 provided as follows:
“5.5 Nature of Compromise Payment
(a)Upon payment of the Compromise Payment and the assignment of the Residual Rights under clause 11, as between the parties only, the Lenders agree and acknowledge that:
(i)no further monies will be due or payable to the Lenders in respect of the Transactions, including under the Loan Agreements, whether presently owing or at some time in the future; and
(ii)any and all liabilities, guarantees, warranties, representations and indemnities granted under or in respect of the Transactions, whether arising under the Transaction Documents or otherwise, shall not be exercisable or enforceable by the Lenders.
(b)The Company and Paul acknowledge that the balance of the Debt remains payable however the Lenders agree not to pursue the balance of moneys owing to the Lenders pursuant to the Loan Documents for a period of two (2) years.
(c)The Company shall be hereby entitled to rely on this clause 5.5 as sufficient evidence of such matters contained hereunder.
(d)Nothing in this clause 5.5 affects the rights of a nominee under clause 11.1 to enforce the Residual Rights.”
83 Clause 6 dealt with Unsold Lots. It provided as follows:
“6.1 Sale of Unsold Lots
(a)The Compromise Payment will be paid and discharged in full upon the sale of the Unsold Lots and Unsettled Lots in the Development.
(b)In respect of the Unsold Lots, the Parties hereby agree and acknowledge that:
(i)the Company must apply any and all settlement proceeds from the sale of Lots 201 and R3 towards the repayment of monies due and payable under the NAB Loan, with the outstanding balance of the NAB Loan to be secured solely against Lot 401 by way of registered mortgage granted to NAB;
(ii)by 30 September 2015, the Company must do all things necessary and required to discharge any registered mortgages (i.e. the NAB mortgage), other than the Lender Mortgages, against the Unsold Lots; and
(iii)on or before 30 September 2015:
Athe Company will do all things necessary and required to sell all of the Unsold Lots at best possible price, in view of meeting its obligations under this Deed; and
Bsubject to clause 5.4, present to the Lenders or their authorised representative unconditional Contracts of Sale of Land in respect of the Unsold Lots.
(c)If the Company fails to comply with clause 6.1(b), the Lenders may, by written notice to the Company, require the legal and beneficial ownership of the Unsold Lots to be transferred to the Lenders.
(d)If the Lenders acquire the legal and beneficial ownership of Unsold Lots (or any balance thereof):
(i)the Compromise Payment will be deemed to have been paid in full and clause 5.2 will be deemed to have been satisfied; and
(ii)in accordance with clause 8 of this Deed, the Company, the Developer and the Project Manager shall be irrevocably and unconditionally released from the performance of any duties, obligations, covenants, representations and warranties contained under this Deed; and
(iii)the Company waives all its rights, interests and entitlements in any settlement proceeds arising from the subsequent sale of any Unsold Lots and acknowledges that the Lenders, to the exclusion of all other Parties, are entitled to the full sum of settlement proceeds arising from any sale of the Unsold Lots, regardless of whether or not the actual settlement proceeds received by the Lenders exceeds or will exceed the total Compromise Payment,
and all Parties are entitled to rely on this clause 6.1(d) of such matters contained hereunder.
(e)Nothing in this clause 6.1 affects the rights of a nominee pursuant to clause 11.1.” (CB 4580-4581)
84 Clause 8 provided that on satisfaction of clause 5.2, the Parties granted one another a general release:
“save and except for:
(e)any Causes of Action issued to enforce this Deed;
(f)any Causes of Action between the Associated Creditors and the Company; and/or
(g)any Causes of Action associated with the enforcement of the Residual Rights pursuant to clause 11.”
Clause 9 entailed a general bar to proceeding “for which a release has been given under clause 8…”. (CB 4582)
85 Clause 11.1 was headed “Automatic Assignment” and provided that “Subject to the satisfaction of clause 5.2, the Lenders hereby assign” their rights under the transaction documents. These were described as the “Residual Rights” and the assignment was to be to a party nominated by Linacre. (CB 4583)
86 In the miscellaneous provisions clause 16, it was stated at paragraph (i) :
“Unless otherwise provided herein, time is of the essence of this Deed in respect of any date or period determined under this Deed.” (CB 4585)
Events Subsequent to Deed of Compromise
87 The above survey of the terms of the Deed of Compromise demonstrates that its central provision is clause 5.2, which provides for the manner in which the compromise payment would be made and describes the circumstances which would entitle Mr Paul and Linacre to the release provided for. The $750,000 payment provided for in clause 5.2 of the initial payment was made on 14 August, as required and contemplated. (CB 139, [76])
88 The next date mentioned in clause 5.2 is 30 September 2015. No further payments had been made to the plaintiffs by that date. (CB 140, [79])
89 Latep Legal sent a notice of default to Linacre via its director, Mr Paul, stating that since payment of the balance of the compromise amount had not been made by 30 September 2015 and, accordingly, the release and associated rights to which Linacre would have been entitled had payment been made by scil30 September had not come into effect. Accordingly, demand was made under the original loan transaction document. Mr Patel sent separate notices to similar effect, one on behalf of Daswan and the other on behalf of Mrs Tonini. (CB 4974-4975) Evans Ellis, on behalf of Linacre, replied by email letter dated 16 November 2015 asserting that clause 5.2 of the deed had been “fully complied with by our client, including by making the titles of the remaining Unsold Lots … available to your client”. Therefore, it was said, the release and bar to proceedings provided for by clauses 8 and 9 had become effective. In any event, clause 5.5(b) imposed a two-year moratorium on enforcement if the release had not taken effect. The letter stated:
“10. Your client ultimately failed to elect to accept the transfer of the ownership of the remaining Unsold Lots.
11. Your client cannot rely on its own tardiness as entitling it to payment in lieu of the transfer. The parties in the Deed of Compromise expressly dealt with your client’s rights if the Unsold Lots were not settled by 30 September 2015.” (CB 4979)
90 As to taking the transfer of Unsold Lots in specie in satisfaction of the balance of the compromise amount, Mr Calman, in his witness statement, said:
“In consultation with Mary [his wife], I had decided that Daswan’s interests were not served by accepting a transfer of the unsold lots in satisfaction of Linacre’s obligations under the Deed. I made that decision for a number of reasons. First, the lots remained unsold and that suggested to me that there would be ongoing difficulty in securing sales. Second, the responsibility for securing sales and payment of the associated costs, such as marketing and agent’s fees, would fall to Daswan. Third, the sale of the unsold lots would require a substantial investment of my time which would divert me from focussing on Daswan’s other business interests.” (CB 141, [83])
91 The sale of Lot 401 settled on 27 August 2015, with the entire proceeds being paid to National Australia Bank. On 28 October 2015, Lot 101 settled. Mrs Tonini received $209,565.16 and Daswan received $341,922.11. The sale of Lot R2 settled on 31 March 2016, with Mrs Tonini receiving $307,487.44 and Daswan $604,479.51. (CB 141, [84-86]) Lot R1 was the last remaining unsold lot. Settlement of that sale took place on 20 January 2017. (CB 189-190) The net proceeds of the sale of this lot were insufficient to pay the outstanding balance of the $3.4 million compromise amount. As a result, there was a top-up payment of $255,682.03. Mr Paul said he borrowed these amounts from Lechte Corporation No 1 Pty Ltd and provided two ANZ Bank cheques payable respectively to Daswan and Mrs Tonini for their entitlement. (CB 190, [129]) Mr Paul said that, after settlement, he realised that the plaintiffs—
“…had received $21,633.24 more than the $3.4 million Compromise Sum. This arose because, when Patel circulated his reconciliation in December 2016 (prior to settlement of Lot R1), I carried forward these figures and mistakenly believed that Linacre had only made payments totalling $2,254,820.98 towards the Compromise Sum, when in fact, Linacre had paid $21,633.24 more than that.” (CB 191, [131])
92 The partners of insolvency firm, Hall Chadwick, were appointed as joint and several administrators of Linacre on 25 January 2017 and they were appointed as liquidators on 2 March 2017. (Ibid, [132])
93 On 19 May 2017, Messrs Ross and Albarran, as liquidators, commenced a proceeding by Originating Motion seeking orders that they be entitled to resort to the company’s bank account and that the charge over the assets of Linacre in favour of Daswan and Tonini was unperfected as at 25 January 2017, the date of the commencement of administration and therefore the “relation back” date for the purposes of the liquidation. They consequently had vested in Linacre by “operation of s267 of the Personal Property Securities Act 2009”. (CB 155, [77] and CB 224-5)
94 Mrs Tonini said that as a defendant in the proceeding she obtained legal advice and prepared submissions. (CB 155A, [79])
95 Mr Ross of Hall Chadwick, one of the liquidators, swore an affidavit in support of the Originating Motion. He referred to a Deed of Settlement establishing the Linacre Developments Trust and noted that the trust had an Australian Business Number. (CB 232, [11] & [12]) Mr Ross said, “save for one possible exception, my investigations and those of my staff indicate that the Company has only ever acted as the trustee of the Trust and did not trade in its own right”. (CB 233, [17])
96 Mrs Tonini said:
“As the proceeding went on, I was informed by my legal representatives that Linacre had run the Project as trustee of a Trust and that all the assets of the Project were held on trust for the Trust and that this meant that my securities did not secure the assets of the Project. This was the first time I understood that the Trust existed, or that the existence of the Trust had an impact on the security that I thought I held. This was a further shock to me.” (CB 155A, [80])
97 She said that she “incurred legal fees in defending the Supreme Court proceeding”. (Ibid, [82]) She produced those fees. The total fees were $12,402.50 inclusive of GST.
98 Mr Calman gave a similar account and produced the legal fees which he had paid to Latep Legal on behalf of Daswan in the same sum of $12,402.50 inclusive of GST.
This proceeding
Amended Statement of Claim
99 By their Amended Statement of Claim, the plaintiffs alleged the existence of the original Loan Agreements and the Deed of Compromise. In it they said that since the balance of the compromise amount “was not paid to Daswan and Tonini from the Net Settlement Proceeds from the sale of the Unsold Lots that settled on or before 30 September 2015 or by way of consensual transfer of ownership of Unsold Lots in accordance with clause 6.1”, Linacre was in breach of the Deed of Compromise and Linacre did not “have the benefit of the releases contained in the Deed”. As a result, the plaintiffs under the original loan transaction documents remained entitled to their full rights. They sought declaratory relief as to the non-operation of the releases in the Deed of Compromise and relief in accordance with the terms of the original loan transactions. They also sought leave to proceed against the first defendant, Linacre, which is now in liquidation. I was informed that leave to proceed had been granted, but Linacre was unrepresented at trial. Mr Upjohn QC, who appeared for the plaintiffs with Ms Kelly of counsel, informed me that no relief was sought against Linacre beyond its being generally bound by the determinations in the proceeding.
100 The plaintiffs said that by reason of Linacre’s breach of the compromise deed in failing to comply with clause 2, Daswan and Tonini lost the use of the money which should have been paid and they sought interest under the Supreme Court Act 1986 for the period 1 October 2015 to 20 January 2017.
Further Amended Defence and Counterclaim
101 In his Further Amended Defence and Counterclaim, Mr Paul, as second defendant, denied the allegation by the plaintiffs that Linacre had failed to satisfy the requirements for the release provided for in the compromise deed. On one interpretation of that deed, he said, it did not require Linacre to pay the plaintiffs $3.4 million on or before 30 September 2015. He said, if Linacre did not make that payment on or before 30 September 2015 and the plaintiffs did not elect to take a transfer of the Unsold Lots under clause 6.1(c) of the compromise deed, the proper construction of the compromise deed was “that any entitlement to payment of the compromise payment would be satisfied by the application of the Net Settlement Proceeds of all Unsold Lots”. He said the payments in the sum of $3,421,633.24 had been made.
102 On the second interpretation of the deed, he said that Linacre was not required to pay $3.4 million on or before 30 September 2015, and if such payment was not made by that date and the plaintiffs did not elect to take a transfer of the Unsold Lots under clause 6.1(c), there was an express or, alternatively, an implied term that the sum of $3.4 million was to be paid in full—
(a) as and when the Net Sale Proceeds from the sale of the Unsold Lots were received, and
(b)if there was a shortfall following the sale of the last Unsold Lot, by paying that shortfall.
On this interpretation, it was said, there had been a mistaken overpayment of $21,633.24.
103 Next, it was said that if there were an obligation on Linacre to pay the full compromise payment on or before 30 September, the plaintiffs waived or elected not to enforce that requirement by accepting the later instalments on 28 October 2015, 29 March 2016 and 20 January 2017 and insisting on those payments as a condition for releasing the “lender mortgages” granted under clause 5.3 of the compromise deed in order to allow settlement of the sales of the Unsold Lots to proceed. Accordingly, it was said, the plaintiffs “have no rights against Mr Paul under the Tonini Loan Agreement, the Tonini Guarantee, or the Daswan Loan Agreement”.
104 Mr Paul contended that the notices of default dated 30 October 2015 were ineffective or, alternatively, were waived by the plaintiffs’ subsequent actions. As to the claim for payment of interest under the Supreme Court Act for the period 1 October 2015 to 20 January 2017, Mr Paul did not admit this allegation and said further that he was not liable under the Deed of Compromise for any loss caused by Linacre’s breach. By way of counterclaim, Mr Paul alleged that on 20 January 2017, he paid the plaintiffs $255,682.03. He said that in the events that had occurred, Linacre’s obligations under the Deed of Compromise were satisfied without the making of that payment at all, or, alternatively, without the need for the payment of some $21,633.24, being part of the larger sum. He said the refusal to settle without payment of these amounts “was illegitimate, as it amounted to a breach of the Deed …”. It was said that he was entitled to restitution from the plaintiffs of either $255,682.03 or $21,633.24.
Reply and Defence to Counterclaim
105 In addition to denials and non-admissions, the Plaintiffs said that insofar as Mrs Tonini’s charge over the assets of Linacre was found by the Supreme Court to have been unperfected and therefore ineffective under the Personal Property Securities Act 2009, as at 25 January 2017, being the date of commencement of administration for Linacre, such failure was induced by misleading or deceptive conduct of Linacre and/or Mr Paul, and that in the circumstances, it was unconscionable for Mr Paul to rely on the conduct pleaded in his defence to defeat Mrs Tonini’s claim. They said further that Mr Paul was “estopped in equity from relying” on those matters. Insofar as the failure to perfect the charge derived from a failure to provide in the security document for Linacre’s status as trustee, they referred to various clauses in the security document which they said amounted to representations that Linacre was not acting as trustee, which representations were acted upon. Similar representations were said to have been made to Daswan. Mr Paul, it was said, was knowingly concerned in, or party to, Linacre’s contravention. It was said further that the plaintiffs had suffered loss and damage by reason of the misleading or deceptive conduct in their inability to access as chargees $178,702 cash at bank held by Linacre as at the date of its liquidation. They also claimed legal fees in defending proceedings taken by the liquidator which, they said, they were entitled to offset against any counterclaimed amount.
Deed of Compromise
106 The pivotal question in this proceeding is whether, in the events that have occurred, the Deed of Compromise operated so as to grant the defendants a release upon the payment of the whole of the compromise payment. It will be recalled that this did not occur until as late as 20 January 2017. As at the date of execution of the Deed of Compromise in mid-August 2015, there were a number of possible scenarios. Had the whole of the compromise payment been made by 30 September 2015, it would have been clear that these defendants would take the benefit of the release and bar to proceedings provided for in clauses 8 and 9 of the deed. Had the “Balance Sum” been paid after 30 September as a result of the settlement of sales of the Unsold Lots pursuant to unconditional contracts of sale which had been presented to the plaintiffs on or before 30 September 2015, again it would seem that the defendants would be entitled to the release and bar to proceedings. Had the plaintiffs elected to take transfers in specie of the Unsold Lots, again, the releases and bar to proceedings would have taken effect. Had Linacre, by act or omission, demonstrated an unwillingness to perform its obligations under the Deed of Compromise or perform them only in a materially different manner from what was laid down in the deed, the plaintiffs would have been at liberty to accept this as a repudiation and no releases would have taken effect.
107 The scenario which occurred in fact was that the Unsold Lots were not sold and settled by 30 September. There were no unconditional contracts for their sale presented to the plaintiffs on or before 30 September 2015, and the plaintiffs elected not to take a transfer of the Unsold Lots in specie. This scenario does not seem to be directly catered for.
Plaintiffs’ Contentions
108 Mr Upjohn QC and Ms Kelly submitted that in the circumstances the release and covenant not to sue did not take effect.
109 Mr Upjohn QC and Ms Kelly took me first to the principle as to construction of commercial contracts enunciated by the High Court in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116-7 [46]-[51] per French CJ, Nettle and Gordon JJ. They said that these principles were in conformity with earlier statements of principle by the Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352; and Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35].
110 They said that clause 5.1 of the deed set out the essential terms of the compromise. They noted that clause 5.1(f) entailed an agreement by the plaintiffs to assign the residual rights in accordance with clause 11. The giving of the releases in clause 8, referred to in clause 5.1(g), was, they submitted, part of the consideration for the grant of the releases under clause 8. Clauses 5.1(f) and 5.1(g), they said, formed “part of an interlocking series of provisions that, read together, operate[d] to preserve the Debts on both execution and performance of the Deed”.
111 They said that clause 5.2 established a mechanism by which the payment was to be made, which they said was “bifurcated”, entailing an initial payment of $750,000 and provision for the payment of the balance. They said the use of the disjunctive “and/or” indicated that the mechanisms were not exclusive and could be used in combination, allowing payment of monies generated by the settlement of sales of Unsold Lots, but also satisfaction by way of transfer of ownership of Unsold Lots in whole or in part. They said:
“On one view, clause 5.2(b)(i) can be construed so that the time obligation does not attach to the obligation to pay but, rather, it serves to delineate the pool of monies from which the payment is to be made. On another view, because the monies are to be paid from net settlement proceeds, the clause assumes that payment will be made on the day of settlement with the effect that, the obligation is to pay on or before 30 September 2017.”
112 They said clause 5.2 should not be regarded as derogating from the obligation to pay the compromise payment imposed under clause 5.1:
“Rather, cl 5.2 must be read as imposing an obligation on Linacre to settle the Unsold Lots by 30 September 2015 and to pay the Balance Sum from those settlements (and thereby paying the Balance Sum on or before 30 September 2015). The text and context of the Deed compel that conclusion.”
113 They said the obligation to pay the compromise payment was imposed by clause 5.1, rather than clause 5.2, and said:
“The words ‘will’ in the chapeaux to cl 5.2 and ‘shall’ in cl 5.2(b) are both imperative and directory.”
114 They said business people would not, in the circumstances, have understood the obligation to repay to be permissive, only, or conditional on the sale of the Unsold Lots by 30 September, nor would it be appropriate to consider the obligation to pay at large or constrained only by an obligation to pay within a reasonable time. There was no obligation, they said, upon the plaintiffs to accept payment in specie. The transfer would be “`in accordance with clause 6.1’”, but they said that clause granted a discretion on the plaintiffs. They said clause 5.2 needed to be “read harmoniously” with clause 6.1.
115 They noted that clause 6.1(a) required payment to be made upon the sale of the Unsold Lots; that is, at the same time, not from those sales. They said:
“The word ‘sale’ is not employed to distinguish between the entering of a contract of sale and the settlement of that sale: it is used in its general form to denote the transfer of ownership of the Unsold Lots. The obligation in cl 6.1(a) must be read with the obligation in cl 6.1(b). And, in contrast to cl 6.1(d), c 6.1(a) does not use the language of deeming.”
116 They noted that clause 6.1(b) required application of the sale proceeds of Lot 201 and R3 to the repayment of the National Bank loan. They noted that whilst this provision is under a clause that refers to “Unsold Lots”, in fact, those allotments were properly characterised as “Unsettled Lots”. The purpose was to ensure that the proceeds from those Unsettled Lots were “applied to the NAB loan to maximise the funds that [would] be available to the [plaintiffs] from the sale of the Unsold Lots”. The obligation in clause 6.1(b)(ii), to do all things necessary to discharge mortgages attached to the Unsold Lots, was to clear title for the plaintiffs’ mortgages.
117 Next, they noted that clause 6.1(b)(iii) was couched in absolute terms requiring, first, that Linacre do all things necessary and required to sell all of the Unsold Lots at the best possible prices which, they said, was imperative and required nothing less than the achievement of the object, the sale of the Unsold Lots by 30 September. This was in conformity with the general obligation as to payment and would permit Linacre to meet its obligations under clause 5.2. They said the obligation to provide an unconditional contract contained in clause 6.1(b)(iii)(B) “does not affect the obligation to pay the Balance Sum from the proceeds of the sale of the Unsold Lots”. Since no unconditional contracts were presented on or before 30 September, they said:
“It follows that Linacre also did not do everything ‘necessary and required’ to sell all of the Unsold Lots at the best possible price: two lots remained unsold, a situation that could not persist if everything ‘necessary and required’ had been done.”
118 In those circumstances, the plaintiffs became entitled to require the transfer of the Unsold Lots under clause 6.1, but this, they said, was a permissive and discretionary entitlement, not an obligation upon the plaintiffs. They were given a right to elect. In the events that occurred, unless the plaintiffs elected to take a transfer in specie, which they did not, Linacre was in breach of its obligations under the Deed of Compromise.
119 This construction, they said, was supported by the absence of any provision for the payment of interest on what was defined in the deed as the “Balance Sum”. They said the plaintiffs had been deprived of their investment capital for an extended period of time and the interest at the high rate of 24 per cent, which they had been promised under their loan arrangements. The default under Mrs Tonini’s loan agreement, in particular, had placed her in a difficult position of financial hardship and she had been pressing for payment. The Deed of Compromise provided for the return of no more than the principal sum. They said, since relations between the parties had cooled or become embittered “tells against a construction that permitted Linacre to pay the Balance Sum at an indefinite point in the future (or even a point in the future bounded by an implication of reasonable time)”.
120 Insofar as it was contended on behalf of Mr Paul that Linacre might have a claim for breach of the Joint Venture Agreement and/or the Heads of Agreement against Daswan for failing to obtain the promised funds, they said no evidence was called along those lines and Mr Calman, during his cross-examination, was not confronted with any alleged breach on the part of Daswan. They said:
“Absent any evidence of such a dispute, or that Daswan was informed of this potential claim against it, the Court is not permitted to take this into account as part of the background that informed the parties when they made their compromise.”
121 They said that clause 5.5 specifically preserved the debt as payable and there was no merger. There was also a provision for a two-year moratorium. They said the underlying cause of action was not destroyed. This was important for the purposes of the assignment of residual rights provided for in clause 11.
122 The covenant not to sue in clause 5.5(a) operated only if two conditions were satisfied — the payment of the compromise payment and the assignment of the residual rights.
123 They said that clause 11.1, providing for the assignment of residual rights, operated in conjunction with clause 5.5(a), which operated only on the assignment of the residual rights, and clause 11.1 took effect subject to satisfaction of clause 5.2. Therefore, they said, there was a requirement that the “Balance Sum be paid within the time prescribed by clause 5.2(b)”.
124 They said there were three broad categories of accord and satisfaction created by clauses 8 and 9 that would have become operative. Again, Mr Upjohn QC and Ms Kelly conceded the obligation as to the sale of the Unsold Lots created by clause 6.1, insofar as it pertained to 30 September 2015, required the provision to the lenders as at that date of unconditional contracts of sale. (Clause 6.1(b)(iii)B) If, therefore, the Unsold Lots had been made the subject of unconditional contracts as at 30 September 2015, even if they had not settled, it would seem that Linacre would have qualified for the release and bar to proceeding. Again, if as at 30 September the plaintiffs had taken the Unsold Lots in specie by virtue of clause 5.5, the effect would be similar to a foreclosure; that is, the security property would be taken in full satisfaction of the mortgage debt.
125 Australian law, they said, recognised three types of accord — accord executory, which, they said, comprised a unilateral contract. They referred to Osborn & Bernotti t/as GO4 Productions v McDermott t/as RA McDermott & Co &Karmine Pty Ltd [1998] 3 VR 1, 10 per Phillips JA (Winneke P and Charles JA agreeing). The second, they said, was an accord and satisfaction constituted by the plaintiffs agreeing to accept the agreement itself, not the performance of it as satisfaction of the debt. In such a case, if the agreement was not performed, the remedy was an action for breach of the agreement and not any right to recover the original debt. The third category, they said, was conditional accord and satisfaction in which the discharge of the original liability is conditional on the performance of the contract.
126 They referred to McDermott v Black (1940) 63 CLR 161, 184-5 per Dixon J, and Osborn’s case [1998] 3 VR 1, 9 [30]-[35]. Accord, for the present arrangement, should be regarded as an accord and satisfaction subject to a condition precedent, since clause 8.2 was offered if only “on satisfaction of clause 5.2”. This preserved the existence of the debt which, they said, was important for the assignment contemplated by clause 11. The exception to the release referring to the enforcement of the residual rights was subject to the covenant not to sue contained in clause 5.5(b), which was necessary to prevent the plaintiffs from exercising those rights whilst they remained preserved as “residual rights” for the purposes of clause 11. They said that in Osborn’s case, where performance was lacking in a conditional accord and satisfaction, it was open to a plaintiff to accept the performance, but if there was none, to proceed, treating the agreement as repudiated and either sue on the original cause of action or sue on the compromise.
127 They referred to Osborn’s case [1998] 3 VR 1, 10-11. This approach, they said, was adopted by Cooper J in Bartlett v Mouncey [1998] FCA 418, and Madgwick J in National Australia Bank Limited v Pollak (2001) 186 ALR 44; on appeal, Pollack v National Australia Bank [2002] FCAFC 55. They said that since clause 5.2 had not been satisfied, there was no assignment and no release. When payment was not made on and from 30 September 2015, the allotments had not been the subject of unconditional contracts, nor had the plaintiffs elected to take a transfer in specie. Linacre was in default. The default, they said, was a repudiation which the plaintiffs did not accept “and the obligation to pay the Balance Sum enured for the benefit of the [plaintiffs]”. They are therefore entitled to sue on the underlying debt.
128 They denied that there had been any effective waiver or election. They said:
“The pleaded conduct does not give rise to waiver. Waiver requires an election which, if made, is the abandonment of a right.”
129 They referred to Craine v Colonial Mutual Fire Insurance Company Limited (1920) 28 CLR 305, 320 per Isaacs J. They said:
“…failure to pay by 30 September did not relieve Linacre of its obligation to pay the Settlement Sum [viz the Compromise Payment] and late payment of the Balance Sum did not enliven the release in cl 8.”
The failure to pay on Linacre’s part, which they said was a repudiation, was not accepted by the plaintiffs and the compromise deed therefore remained in force. They said:
“There is no inconsistency in the [plaintiffs] accepting payment of the Equivalent Sum [scil the Compromise Amount] while also suing on the Debts: such a course is in conformity with the terms of the Deed. That being so, no occasion for making an election arises.”
Alternatively, they said, the plaintiffs, if they were not entitled to sue upon the original loan agreements, suffered loss and damage by the failure of Linacre to pay the balance of the compromise amount on or before 30 September 2015, and they sought interest accordingly.
Contentions on behalf of second defendant
130
Mr Moore QC and Mr Craig, on behalf of Mr Paul, submitted that where the Unsold Lots remained unsold as at 30 September and the plaintiffs did not elect to take a transfer in specie, Linacre’s obligation “was to continue to try and sell those lots within a reasonable time and apply the proceeds to the
Compromise Payment”. They said that the obligations which Linacre was obliged to perform by 30 September 2015 were to be found in clause 6.1; namely:
(a)do all things necessary and required to discharge any registered mortgages other than the Lender Mortgages, against the Unsold Lots (clause 6.1(b);
(b)do all things necessary and required to sell all of the Unsold Lots at the best possible price, in view of meeting its obligations under the Deed (clause 6.1(b)(ii));
(c)present to the Lenders or their authorised representative unconditional Contracts of Sale in respect of the Unsold Lots (clause 6.1(b)(iii)); and
(d)pay to the Lenders all Net Settlement Proceeds generated from the sale of any Unsold Lots which had settled by that date (clause 5.2(b)(i)).
131 They said to hold otherwise would be contrary to the text of the deed which recognised that the compromise payment was to be derived from the Unsold Lots. They referred to clause 5.2 and 6.1(a). They said that the parties contemplated that some of the Unsold Lots might be awaiting completion of their sales on 30 September 2015 — clause 6.1(b)(iii)(B); or that the Unsold Lots might remain unsold on 30 September 2015 — clause 6.1(c). Therefore, they said, it could not be thought that the whole payment should be made by 30 September.
132 The plaintiffs’ construction was inconsistent, they said, with the objective background facts that the Unsold Lots were known to be the only source of settlement proceeds if the plaintiffs elected not to receive a transfer in specie where the Unsold Lots had not been sold by 30 September. They contended:
“Linacre remained obliged to continue to try to sell the Unsold Lots at the best possible price, and to pay the [plaintiffs] the proceeds of settlement when the lots were sold.”
133 They said a construction which avoided that which was capricious, unreasonable, inconvenient or unjust would be preferred to one that did. They referred to the judgment of Gibbs J in Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99. They said that conclusion could be reached “by exegesis or implication”. They referred to the 9th Australian edition of Cheshire and Fifoot’s Law of Contract [10.40]. They said the construction for which they contended could be reached by a term implied as a matter of fact. They referred to the well-known formulation by the Judicial Committee in B.P. Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266, 283. The proposed implied term, they said, was reasonable and equitable, necessary to give business efficacy and so obvious as to go without saying. Implication of the term contended for was necessary because the plaintiffs —
“…would never take up the transfer of Unsold Lots as contemplated by clause 5.2, but rather opportunistically wait for their sale and return of the proceeds and then sue for the entire debt under the Loan Agreements.”
134 They submitted that where the plaintiffs had declined to take a transfer in specie, their “only entitlement was to the proceeds of sale. To hold otherwise would be to give the words in cl 6.1(a) no work to do.” They submitted the parties could not have intended so drastic a result as to enable the plaintiffs, when sale had not been made by 30 September, to elect not to take transfers in specie and thereafter elect to receive the proceeds of sale from the Unsold Lots, and then sue Linacre and Mr Paul for the entire amount owing under the original loan agreement. Given that they said the plaintiffs had no real commercial leverage, such a scenario was entirely unrealistic. They referred to the evidence of Mr Seymour. It could not be right, they said, to assume that Linacre lost forever the right to releases once the plaintiffs refused to take a transfer in specie, even if the deed was not terminated. They said, even if the submissions were not accepted and no release took effect, clause 5.1(c), which imposed an obligation to forebear exercising rights under the loan agreements, did come into operation.
135 They said, even if Linacre was regarded as not having complied with its obligations to make the compromise payment, since the deed was never terminated, it was not competent for the plaintiffs to seek to proceed under the original loan agreements. They noted that an innocent party may, in the face of a breach of an essential term, decline to terminate the contract and insist upon its continuing operation, reserving the right to damages. They referred to Bowes v Chaleyer (1923) 32 CLR 159; Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235. They said this was what the plaintiffs had done. They said that where the contract contained a requirement to perform subject to an essential time stipulation that was not met when the other party set a new time for performance, the result was that performance would be required in a reasonable time, and a further notice making time of the essence may need to be issued before the innocent party could terminate the contract.
136 They referred to Carr v JA Berriman Pty Ltd (1953) 89 CLR 327, 348‑9 per Fullagar J; Carbon Black Lab Pty Ltd v Launer [2015] VSCA 126 at [56]; and Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 at [49] per Keane JA, as he then was, where his Honour said that in such circumstances where the innocent party continued to insist on performance of the contract, it would remain on foot for the benefit of both parties. When payment was not made by 30 September 2015, on their construction, the plaintiffs had a right to terminate the deed and revert to reliance on the original loan agreements and securities, but they deliberately elected not to terminate the deed.
137 Mr Moore QC and Mr Craig referred to a multiplicity of instances by which they said the plaintiffs “repeatedly and regularly referred to and affirmed existence of the Deed and required performance of the obligations arising thereunder”. They said:
“What the [plaintiffs] suggest is that the Deed remained on foot but only for their benefit. The [plaintiffs] say that all those parts of the Deed that would otherwise have operated for the benefit of Linacre and Mr Paul became ineffective.”
They said such an interpretation was contrary to authority. Accordingly, once the plaintiffs elected to affirm the contract, performance had to occur within a reasonable time. They continued:
“An objective background fact, as identified above, was that the sale of the Unsold Lots would be uncertain and had already taken considerable time. In the circumstances, where liquidation was only likely to deliver returns within 18 months from its commencement, Mr Calman’s assessment that `they had two years to do it’ was apposite. As events transpired, the Compromise Payment was paid in full, within 18 months of the Deed, the final payment being made on 20 January 2017.”
Conclusions
138 Neither party contended that on the material point, the Deed of Compromise was unambiguous or susceptible of only one meaning, so that in accordance with the third of the principles enunciated in the joint judgment in Mount Bruce Mining Company, it is proper to consider surrounding circumstances. To use the classic formulation by Sir Anthony Mason, we may consider “objective background facts which were known to both parties and the subject matter of the contract — Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352 per Mason J (as he then was). The principal objective circumstance here is that, as Mr Seymour stated in his evidence, when he was engaged to provide expert advice to the plaintiffs in the run-up to the execution of the Deed of Compromise, he found that they were confronted with an “[insolvency] pre-pack”. (T144, L24) His advice to the plaintiffs was “you got set up and done over”. (T140, L17) Linacre and its other members stole a march on the plaintiffs. The basis of Mr Seymour’s opinion was well known to the defendants and their advisors. He believed they had contrived the situation (See [72]).
139 Mr Moore QC and Mr Craig submitted that the plaintiffs could be regarded as having a further legal vulnerability based upon Daswan’s being in breach of the fundraising obligations which it undertook under the Joint Venture Agreement. By reference to the clauses relied upon, this suggestion has some surface plausibility. Nevertheless, as Mr Upjohn QC and Ms Kelly submitted, this was not pursued in cross-examination. Had this alleged potential liability of the plaintiffs been more real than apparent, I would have expected Mr Calman to have been confronted with it. Accordingly, I put that consideration to one side.
140 If the submissions made by the plaintiffs as to the operation of clause 5.2 are to be accepted, the effect is that the plaintiffs obtained from the weak position just described, an arrangement of the very potent type where a defendant is entitled by the early payment of a compromise sum to obtain a substantial reduction in the size of its liability, but failing timely payment must shoulder the entire liability asserted by its creditors. These are fairly common settlement terms obtained by plaintiffs in a strong position. An example is to be found in Cameron v UBS AG (2000) 2 VR 108. One usual feature of such arrangements is that the terms of settlement entail an acknowledgement on the part of the defendant of liability for the larger sum, but embody an arrangement whereby it may obtain a release by payment of a substantially smaller sum. This structure is necessitated, as Cameron’s case demonstrates, by the need to avoid the operation of the rule against penalties. If these parties had a joint and overt intention to create a regime such as this, the drafting techniques are well-known. The deed would scarcely have taken the form that it did if this were their joint intention. It is difficult to conceive that they would have employed the somewhat perplexing and ambiguous terms which we find in the Deed of Compromise.
141 I am fortified in that view by the thought that, following a period of deliberation and the review of more than 20 drafts, the Deed of Compromise was executed on 14 August 2015. If 30 September 2015 was to be regarded, as the plaintiffs would have it, as a “drop dead date”, after which Linacre and Mr Paul are to be regarded as having lost the ability to obtain releases under the Deed of Compromise, a bare six weeks seems to be a very short period of time to obtain unconditional contracts of sale for the Unsold Lots, much less settle those sales. According to the evidence, the development had been marketed since 2012. Construction was completed in February 2015. (Agreed Chronology paragraph 28, CB 206D) The first round of settlement of units commenced 20 February 2015. (Chronology paragraph 29, CB 206D) The unsold units were obviously the ones which were most difficult to market. Given the relative negotiating strengths of the parties, it would seem unlikely that Linacre and Mr Paul would undertake so tight and difficult a deadline. To put it another way, an arrangement which was setting up the compromise to fail would not be a business-like arrangement. It would be an arrangement that reasonable business people would be unlikely to enter into.
142 If 30 September 2015 were intended as a drop dead date, it would have been easy to employ language which would make that plain. The parties have refrained from doing so. Clause 5.2(b) provided for payment of what it describes as the “Balance Sum” from the net proceeds of sale of lots which settle on or before 30 September 2015, or by transfer in specie. This regime leaves open an ambiguity as to what is to occur in the circumstances which pertain here. It also creates a problem as to what is to occur in the event that, in obedience to clause 6.1(b)(iii), Linacre obtained unconditional contracts of sale for the Unsold Lots and presented them to the lenders “on 30 September 2015”. In that scenario, clause 5.2(b)(i) would not operate because the settlements would not occur on or before 30 September 2015. Nor could (ii) operate because, in the case of unconditional contracts of sale, beneficial title would have passed to the relevant purchaser. Perhaps what would be contemplated in such a situation would be the transfer to the plaintiffs of the rights of Linacre as vendor under an uncompleted contract, though query if this would amount to the transfer of “the legal and beneficial ownership of the Unsold Lots”, as contemplated by clause 6.1(c) and (d).
143 None of this, of course, deals with the fact that, as previously explained, under clause 6.1 the plaintiffs had a right, but not a duty, to take the Unsold Lots in specie in satisfaction of their entitlement to the compromise payment. This apparently was a situation negotiated by the plaintiffs. It is tempting to consider that when this matter was conceded by Linacre and Mr Paul, there was a failure by the parties to make consequential amendments to clause 5.2 or to consider its operation in circumstances such as the present. If this is a correct interpretation of events, one will seek in vain for a “harmonious” interpretation allowing all provisions of the deed to operate together, leading to a rational outcome in all circumstances. It would seem the present scenario, which, as explained, is the one which as at 14 August was the most likely outcome, has not been directly catered for. There is a major conceptual gap in the operation of the deed.
144 Clause 5.2 has now been complied with. The entitlement to a release and to bar proceedings created by clauses 8 and 9 arose as at 20 January 2017, before this proceeding was commenced. By virtue of clause 16(i) (CB 4585), “time is of the essence … in respect of any date or period”. Absent any issues of waiver or election, if 30 September were a date by which payment of the “Balance Sum” was required, failure to pay the amount by close of business on that date would have enabled the plaintiffs to treat the compromise deed as discharged. But there are two problems with reaching this conclusion which would lead to judgment for the plaintiffs for the amounts which they claim.
145 First, as a textual matter, the date 30 September appears only to be significant as to the mode or source of payment of the balance sum, rather than being established as a date by which payment must necessarily have been made. Secondly, even if that were wrong and failure by 30 September to pay the balance sum was in breach of a term of which time was of the essence, that breach would have presented the plaintiffs with a duty to elect either to affirm the deed, in which case, in accordance with the authorities referred to by Mr Moore QC and Mr Craig, the right to discharge the compromise arrangement forthwith would be lost unless then exercised - subject, of course, to the ability of an aggrieved person in such circumstances to defer electing whilst avoiding during the period of deferment any step which might in itself be regarded as an election.
146 In this case, without the necessity of a tedious narrative of events, the plaintiffs complained of a breach by a notice dated 30 October — that is, a month after the alleged breach of an essential time stipulation — but elected to proceed with the Deed of Compromise. One may debate just how valuable the new registered securities were and what advantage was derived from the postponement of the related creditors’ claim. It cannot be said, however, that these benefits were so minimal as to be illusory. The plaintiffs, quite prudently one would think, decided to derive what they could from the Deed of Compromise, and only once this process had been completed on 20 January 2017 did they seek to revert to reliance upon the original loan transaction documents. The better view, however, is that the issue of election did not arise because there was no breach of an essential time limit.
147 It may be objected that such a determination gives unreasonable concessions to Linacre and Mr Paul, leaving to them to pay the “Balance Amount” when convenient for them. I note, first, that there was no evidence before me which would enable me to determine that the delay in realisation of the Unsold Lots was the result of other than commercial difficulties in finding buyers. In any event, the essence of the compromise arrangement, both according to its terms and the advice and interpretations provided by Mr Seymour, was that the Unsold Lots were to provide the source of payment of the balance amount. Unless the plaintiffs saw fit to take those Unsold Lots in specie, they were necessarily at the mercy of the market in waiting for purchasers to come forward and settle.
148 I am inclined to the view that the absence of any provision for interest to be payable on the compromise amount to the plaintiffs was the result either of a failure to analyse the scenarios which might present themselves in practice, or else perhaps from the view that the payout to the plaintiffs was to be sourced from the Unsold Lots and the plaintiffs were required to bear the cost of delay in realisation, which would necessarily have been the case had the plaintiffs taken up the option of taking a transfer in specie. I prefer these two interpretations to one which would have the absence of an interest clause stand as a factor invalidating the analysis I am inclined to adopt, as explained above.
149 There remains the issue of Linacre’s breach of clause 6.1(b)(iii) of the Deed of Compromise. By close of business on 30 September 2015, it had not done all things necessary to sell all the Unsold Lots at the best possible price, nor had it presented to the plaintiffs or their authorised representatives unconditional contracts of sale in respect of those Unsold Lots. No issue of election stands in the way of the plaintiffs being entitled to damages for breach of this obligation. The claim in the amended Statement of Claim, paragraph 13A, is for interest under the Supreme Court Act 1986 for the period 1 October to 20 January 2017. The Statement of Claim did not identify which section of the Supreme Court Act was said to be the source of the interest entitlement.
150 Section 58 of the Act provides for the award of interest on debts or sums certain. This section would not seem to be applicable because this part of the plaintiffs’ claim appears to be for damages rather than for a debt or sum certain. Section 59 provides for damages in the nature of interest in proceedings for “trover or trespass concerning goods”, and proceedings “on any policies of insurance”. Section 60 provides for the award of interest in damages claims, but “from the commencement of the proceeding to the date of judgment”.
151 There appear to be no other powers to award interest under the Supreme Court Act. Aside from the difficulty in finding a power under the Supreme Court Act to award interest under the Supreme Court Act on this basis from a date before the commencement of the proceeding, 1 October as a commencement date for the award of interest would be problematic. Linacre would have been plainly in compliance with its obligations in this regard under clause 6.1 if it presented unconditional contracts for the sale of the Unsold Lots on 30 September.
152 There would then be a question as to when the purchase monies generated by settlement of those sales would be available. There was evidence, for instance, that retail allotments require longer settlement dates than do the sale of residential units. Given that the whole of the balance amount had been paid before the proceeding was commenced, there would appear to be no provision in the Supreme Court Act which would authorise the award of interest for the delay in paying the balance sum until 20 January. In the circumstances, it is unnecessary to consider whether, if there were a statutory obligation on the part of Linacre to pay interest, Mr Paul’s guarantees would extend to that amount.
Failure to perfect security interests
153 In closing submissions, Mr Moore QC and Mr Craig conceded that the plaintiffs’ failure to perfect security could not, in light of the terms of the guarantee given by Mr Paul in favour of Mrs Tonini, discharge his liability under that guarantee. They pressed the point, however, with respect to the liability of Mr Paul as guarantor of the Daswan loan.
154 They submitted that since, with respect to the Daswan loan, Mr Paul would be entitled to be subrogated to securities held by Daswan at common law and pursuant to s52 of the Supreme Court Act [they referred to Mahoney v McManus (1981) 180 CLR 370; Buckeridge v Mercantile Credit Services (1981) 147 CLR 654]. Interference with or impairment by the plaintiffs of the value of one of their securities would discharge Mr Paul. They referred to Buckeridge’s case.
155 This result flowed, they said, from an express or implied term of the guarantee contract that the security be obtained, perfected or protected, or the duty to exercise reasonable care not to lose or diminish the value of the securities. [Morgan Banking Co Limited v Newman & Carlton [1927] IR 520, 538; Williams v Frayne (1937) 58 CLR 710; Carter v White (1883) 25 Ch D 666, 670; Hancock v Williams (1942) 42 SR (NSW) 252; Chambers v Rankine [1910] SALR 73; Greer v Kettle [1938] AC 156].
156 They said that it was an implied term of the Daswan loan agreement that Daswan would obtain, perfect and maintain the security, and Daswan was also under a similar obligation based upon its equitable duty. Daswan, they said, failed to discharge that duty by not registering its charge against the Australian Business Number for the Daswan Developments Trust. They said that Daswan also failed to resist the application by Linacre’s liquidators that it be declared that the relevant charge had vested in the company’s liquidation by the operation of s267 of the Personal Property Securities Act.
157 They said that breach of the equitable duty discharged Mr Paul only to the extent that the security by way of charge had been diminished in value, but if there was an implied condition to maintain the security which was breached, then Mr Paul was entirely discharged from any guarantee liability.
158 They said that s153 of the Personal Property Securities Act required the lodgement of a financing statement for the full effectiveness of a security. Schedule 1 of the Personal Property Securities Regulations 2009 required that the financing statement provide particulars of an Australian Business Number where the grantor of the security was a trust which had been allocated an Australian Business Number. Failure to record this information rendered the registration defective. They referred to s165(b) and s164(i) of the Personal Property Securities Act. They said that according to the summary of agreed facts, the relevant Australian Business Number of the trust was not recorded and Daswan’s registration was defective. They submitted that by virtue of s267 of the Personal Property Securities Act, the Daswan security became ineffective immediately prior to the appointment of the administrators.
159 This conclusion, they said, was supported by the decision of the Supreme Court of New South Wales in the matter of OneSteel Manufacturing Pty Ltd (administrators appointed) [2017] NSWSC 21. They said, it did not matter whether or not the charge document itself refers to the trust, all that was required was the proper registration. The failure to do so was a clear breach of the implied term and the Daswan duty had drastic consequences.
160 Insofar as the plaintiffs relied upon clause 22 of the Daswan loan agreement to avoid these consequences, that clause, they submitted, was not effective to do so. The clause stated: “The guarantee shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations or any instrument or agreement evidencing any Obligations”. They submitted that in accordance with established principle, such a clause needed to be construed against the creditor.
161 They said an effective clause should contain “an exhaustive list of the possible ways in which the creditor’s dealings with the security may wholly or partially discharge the guarantor”. For instance, if the creditor is to be absolved from liability to perfect a security, this event should be expressly stated. That is not the case with clause 22(c). They referred to Commonwealth Bank of Australia v Anand [2011] NSWSC 613 [14] and [47]. They said the expression “Obligations”, as defined in the Loan Agreement, refers to contractual obligations of Linacre and Paul arising under the agreement or any other security agreement. They continued:
“In circumstances where the Daswan Loan Agreement provides a specific definition for the Daswan Charge … if the mutual intention of the parties to the Daswan Loan Agreement was to exclude liability of Daswan to Paul for failing to perfect the Daswan Charge … then that is what should have been stated. Instead, clause 22 of the Daswan Loan Agreement is vague and expansive in its wording, does not appear to apply to the defined term for the securities that are granted under the Loan Agreement (even though a defined term exists), and does not expressly state, as required, that the creditor is not liable for a failure to perfect the Daswan Charge.”
162 Mr Upjohn QC and Ms Kelly submitted that even if there were a breach of any duty to perfect, then Mr Paul would be discharged from liability “pro tanto, but no further”. It was for Mr Paul to provide evidence as to the value of the security which had been lost by way of failure to perfect, which he had failed to do. They said there had been no conduct of the lenders constituting neglect or default or the sacrifice or impairment of the securities. The lenders had registered their securities against the Australian Company Number of Linacre. They did so, relying through their legal representatives, on the terms of the loan and guaranteed documents which (a) did not disclose the existence of the trust; (b) in the case of charges, expressly disavowed the existence of a trust.
163 They concluded, “In such circumstances, equity will not intervene to aid Paul”.
164 The issue of defective or imperfect securities as a defence to a claim against a surety is customarily dealt with by “boilerplate” clauses in the relevant guarantee. Mr Upjohn QC and Ms Kelly conceded that such provisions in the Tonini guarantee were effective and confined to his client’s defence to the Daswan guarantee, which is to be found in the Daswan Loan and Guarantee Agreement.
165 Guarantee provisions are construed strictly against the creditor [O’Donovan & Phillips, The Modern Contract of Guarantee (3rd English ed. 2016) paragraph 5-002]. Clause 22(d) of the Loan and Guarantee Agreement (CB 3537) preserved the liability of the guarantor, Mr Paul, despite the “validity, regularity, or enforceability of the Obligations or any instrument or agreement evidencing any Obligations”.
166 The definition of “Obligations” in clause 1.1 of the Deed of Charge is as follows:
“Obligations means all of the obligations of performance of any contractual obligations and of payment of any Secured Moneys by a Security Party arising under this Agreement or arising under any other Security Agreement” (CB 3477)
167 The words are at a high level of generality and might on one view be thought to extend to any clause which created an obligation under any of the loan documents, including the Deed of Charge. The expression therefore extends to the charge in the clauses themselves in the Daswan Deed of Charge on Linacre’s assets. This view of the operation of the definition and therefore 22(c) is not, however, entirely plain.
168 Another view, which is narrower and stricter, is that the defined expression “Obligations” extends only to provisions such as covenants to pay. In accordance with the principles which inform the construction of guarantees, this narrower and stricter view of the definition should be adopted. This conclusion would support Mr Paul’s defence to the claim against him as guarantor by Daswan by reason of the ineffectiveness of the Daswan charge.
169 Daswan, however, contends that if this point were reached, viz that the Deed of Compromise did not take effect because of delay in the making of the compromise payment, but Mr Paul’s liability as guarantor for the larger and original amounts owing by Linacre under the Daswan loan document was removed by the failure to perfect the security by way of charge over Linacre’s assets as trustee, Mr Paul would be liable by way of damages for misleading or deceptive conduct to Daswan for the amount for which he might otherwise have been liable as guarantor. It was said Daswan was misled or deceived as to the trustee capacity of Linacre.
170 In broad terms, the Daswan security documents were executed without any reference contained in them to the trustee capacity. The same was true of the Deed of Compromise. A number of these documents went beyond mere omission of trustee capacities and included representations and warranties to the effect that Linacre was the beneficial owner of its assets.
171 In response, Mr Paul relied upon a series of documents and matters which were set out in his rejoinder and were said to have been sufficient to remove or counteract any actions on the part of Linacre or Mr Paul which could be regarded as misleading or deceptive.
172 In the circumstances, it is unnecessary to go into detail in these matters. It is sufficient to note that insofar as matters relied upon as constituting misleading or deceptive conduct are to be found as terms of contractual documents, the authorities say that not every term of contract is apt to be regarded as a representation as to present fact and, therefore, such as to fall within the traditional ambit of misleading or deceptive conduct.
173 Further, insofar as Daswan alleged misleading or deceptive conduct against Mr Paul, rather than alleging against him that he was a principal contravener by reason of what he did as a director of Linacre and the documents that he executed in that capacity and on his own behalf, it contended that he was “knowingly concerned” in the conduct.
174 Establishment of this would have required Daswan to prove not merely that the actions of Linacre or Mr Paul in fact misled or deceived, as would be necessary to make good such a claim against a principal contravener, but that Mr Paul knew of the deceptive nature of the actions of Linacre and himself. [Yorke v Lucas (1985) 158 CLR 661, cf Houghton v Arms (2006) 225 CLR 553]
175 In light of my finding that the Deed of Compromise did take effect so as to release Linacre and Mr Paul, it is unnecessary for me to reach any conclusions on these complex matters.
176 For similar reasons, it is unnecessary to consider the plaintiffs’ claim based on alleged unconscionability based upon the same primary factual allegations as the claim for misleading or deceptive conduct.
The counterclaim for monies paid under mistake
177 Mr Moore QC and Mr Craig for the second defendant, Mr Paul, based their client’s claim for the refund of monies said to have been paid under mistake on the principles enunciated by the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. They said:
“(a) The fact that a payment has been caused by a mistake is sufficient to give rise to a prima facie obligation to make restitution. The mistake is the factor that makes the enrichment of the payee unjust. The payee has the onus of displacing this inference;
(b) The inference arises whether the mistake is one of fact or law. The mistake is not required to be fundamental. The type of mistake is relevant only in so far as it bears on the injustice of the enrichment. Mistake includes not only cases of positive incorrect belief, but also ignorance.”
178 Insofar as Mr Paul made “a top up” payment on 20 January 2017 of $255,682.03, they said this payment was mistaken because it “was not required to be paid by Paul because Linacre’s obligations under clause 5.2 of the deed had already been satisfied by the sale of the Unsold Lots and the provision of those proceeds to the [plaintiffs]”.
179 The plaintiffs’ contention that in the events that happened no release accrued to Linacre and Mr Paul under the terms of the Deed of Compromise, if accepted, would necessarily negate the basis for the claim for monies paid under mistake.
180 I have accepted that Linacre and Mr Paul did obtain a release under the terms of the Deed of Compromise and that the effect of the deed was to cap their liability at the compromise amount of $3.4 million. In broad terms, I have accepted the contention made on behalf of Mr Paul that the source of that payment was to be the sale of the Unsold Lots.
181 The contentions for Mr Paul go further. They boil down to a view that not merely did the compromise deed cap the liability of Linacre and himself at $3.4 million, rather, they capped the liability to whatever could be raised by the sale of the Unsold Lots. I do not accept that contention.
182 Clause 5.1, in its final terms after recital of the consideration moving from the plaintiffs and subject to certain conditions, provided, “[Linacre] has agreed to pay to and for the benefit of [the plaintiffs] the Compromise Payment …”
183 Clause 5.2, headed “Payment Terms”, states “The Compromise Payment will be paid as follows.”
184 Whilst the matter now raised is, like so much else in this Deed of Compromise, cloaked in obscurity, in my view, the better interpretation of the deed is that there is a fundamental obligation on Linacre, and therefore Mr Paul as its guarantor, to pay the compromise payment.
185 Clause 5.2 and related provisions which pertain to the sale of the Unsold Lots, provide the mechanism whereby the payment will occur and say something, albeit that they do not make exhaustive provision as to the timing of that payment. Nevertheless, the obligation under Clause 5.1 to make the compromise payment of $3.4 million remains Linacre’s paramount obligation.
186 Mr Paul made no mistake and acted properly in rendering the “top up” on 20 January. The plaintiffs exercised no improper duress in requiring the payment. The smaller claim for monies paid under mistake is for some $21,633.24, which, according to Mr Paul’s statement ([131] CB 189) was the result of an error in reconciliation.
187 There seems to have been no challenge to Mr Paul’s evidence on this point. In accordance with the principles stated by the High Court in David Securities the grounds for a counterclaim for monies paid under mistake as to this amount have been made out and this counterclaim should succeed.
Claim for loss of monies held by Linacre at liquidation
188 My finding that the Deed of Compromise took effect and granted Linacre and Mr Paul a release from their liability to the plaintiffs as from 20 January this year necessarily entails the rejection of any claim by the plaintiffs to an entitlement to any persisting charge over the assets of Linacre and any loss suffered as a result of that charge’s being unperfected.
Unit 707
189 Mrs Tonini declined to make a further advance beyond the amounts provided for in her original loan agreement as varied, but agreed to advance a further $270,000 on the basis that it could be offset against the price of the unit which she would purchase, ultimately identified as unit 707.
190 This loan was documented by Maddocks, the solicitors for Linacre and Mr Paul. (CB 3704A-3704W) This loan agreement was the subject of a Deed of Acknowledgment as to the application of monies. There were submissions put by the parties as to the operation of this transaction.
191 As I understand it, these matters become relevant only if I determined the principal question as to the grant of the release to Linacre and Mr Paul in favour of the plaintiffs, viz that no release was granted. Given that I have reached the opposite conclusion, it is unnecessary for me to say anything as to the operation of the Loan Agreement and the Deed of Acknowledgment.
Claim for Legal Costs
192 With respect to the claim by Daswan and Mrs Tonini for total legal costs in the sum of $24,805, being the total of two bills of $12,402.50 rendered to each of them, (CB 5375 & 5377) the contention, as I understand it, is that but for the misleading or deceptive conduct of Mr Paul and Linacre, these legal costs would not have been incurred. Insofar as the proceedings were determined against the plaintiffs, these costs were effectively thrown away and therefore damages should be paid by Linacre and Mr Paul.
193 Assuming without deciding that it is established that Linacre, by its misleading or deceptive conduct, misled Daswan and Mrs Tonini as to the existence of the trust and that Mr Paul was knowingly concerned in that misleading or deceptive conduct, I am not satisfied that the incurring of the liability by the plaintiffs can be regarded as caused by the misleading or deceptive conduct for the purposes of s236 of the Australian Consumer Law.
194 The issue of the validity of the plaintiffs’ fixed and floating charges was treated as covered by the provisions of the Personal Property Securities Act. It was not suggested that there was any uncertainty as to the operation of that statute. The only element of uncertainty was as to the plaintiffs’ knowledge of the existence of the trust.
195 If, in the face of such a clear legal conclusion, they saw fit to incur legal costs in fruitlessly contending the opposite, can it be said that those legal costs were incurred by reason of the misleading or deceptive conduct rather than a failure on the plaintiffs’ part to bow to the inevitable?
196 It may be that if there were evidence as to the costs which the plaintiffs incurred, to be advised that their securities had not been perfected and were therefore effectively worthless, such costs could be regarded as the result of the misleading or deceptive conduct which I have assumed for the purposes of this analysis has been established, both against Linacre and Mr Paul.
197 As it is, however, the costs for which claim is made are not divided in this way. Accordingly, this part of the damages claim must fail for want of proof.
198 A more fundamental reason for rejecting the claim for these legal costs is that, on the findings I have made, the amounts owing under the relevant Deeds of Charge had been fully cleared by the operation of the Deed of Compromise. That being the case, the plaintiffs had no legitimate interest in seeking to assert the continued validity of those charges and, for that reason, the legal costs were not reasonably incurred. The claim for the legal costs therefore fail.
Disposition
199 I will direct the parties to bring in Short Minutes to give effect to these reasons. I have heard no argument on the question of costs, and so the question of costs will be reserved.
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