De Vries v Timbercorp Finance Pty Ltd (in liq)
[2021] VSCA 265
•21 September 2021
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S EAPCI 2021 0028
| ANTONY DE VRIES | First Applicant |
| and | |
| RIAD TAYEH | Second Applicant |
| v | |
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Respondent |
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| JUDGES: | KYROU and McLEISH JJA and LYONS AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 2 September 2021 |
| DATE OF JUDGMENT: | 21 September 2021 |
| MEDIUM NEUTRAL CITATION: | [2021] VSCA 265 |
| JUDGMENT APPEALED FROM: | [2021] VSC 37 (Riordan J) |
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CORPORATIONS – Managed investment scheme – Initial loans by lending entity to members in respect of scheme application fees due to responsible entity – Lending entity seeking recovery of loans from scheme members – Application fees required to be held in trust – Book entries recorded payment of fee amounts by lending entity to responsible entity – Money paid from holding company account to trust company to hold on behalf of responsible entity – Further book entries recorded that amount as owed by responsible entity to holding company – Whether responsible entity borrowed money from holding company in contravention of Corporations Act 2001 (Cth) s 601GA(3) – Holding company in position of net indebtedness to responsible entity at all relevant times – No borrowing within meaning of s 601GA(3) – Loans recoverable.
CONTRACT – Inferred contract – Stage loans in respect of ongoing managed investment scheme costs – Lending entity seeking recovery of loans from scheme members – Ongoing costs due from members allegedly paid by lending entity to related responsible entity by means of book entries in accounts – Whether failure of consideration on part of lending entity by virtue of it making no payment to responsible entity – Whether agreement inferred between related companies to make payment by book entries – Whether inference of agreement open without movement of money – No requirement of movement of money – Inferred agreement to pay by book entries – Loans recoverable – White v Timbercorp Finance Pty Ltd (in liq) (2017) 123 ACSR 284, applied – P’Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42, applied – Timbercorp Finance Pty Ltd (in liq)v Tomes [2019] VSC 519, followed – Leave to appeal refused.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr V R W Gray | JBT Lawyers |
| For the Respondent | Mr P Solomon QC with | Mills Oakley |
| Dr C Parkinson |
KYROU JA
McLEISH JA
LYONS AJA:
The applicants, Antony De Vries and Riad Tayeh, invested in several managed investment schemes promoted by the Timbercorp group of companies. The respondent (‘Timbercorp Finance’) was a member of that group. It lent the applicants money to fund their investments in the schemes. Ultimately, the schemes failed. Timbercorp Finance, now in liquidation, brought proceedings against the applicants to recover outstanding loan amounts. It succeeded before a judge in the Trial Division and judgment was entered against the applicants in the sum of $4,861,088.72.[1] They now seek leave to appeal.
[1]Timbercorp Finance Pty Ltd (in liq) v De Vries [2021] VSC 37 (‘Reasons’).
For the reasons that follow, leave to appeal should be refused.
Background
The Timbercorp group developed, marketed and managed more than 30 agribusiness investment schemes. This involved acquiring land, water rights and infrastructure for the agricultural businesses and attracting investors to those businesses through the structure of managed investment schemes under the Corporations Act 2001 (Cth). In that context, the group provided finance to investors (also termed ‘growers’) to facilitate them acquiring interests in the schemes.
The Timbercorp group comprised a holding company, Timbercorp Ltd, along with more than 40 wholly-owned subsidiaries. Timbercorp Ltd was the only company in the group which had an operating bank account.
Two subsidiaries are presently relevant. Timbercorp Securities Ltd (‘Timbercorp Securities’) was the responsible entity for the managed investment schemes. As mentioned, Timbercorp Finance provided finance to investors in the schemes. In particular, it offered loans to pay a grower’s liabilities to Timbercorp Securities for:
(a) a scheme’s initial application fees (‘initial loans’); and
(b) management and operational costs, rent, and licence fees in respect of the managed investments (‘stage loans’).
Between 1992 and 2009, the Timbercorp group invested more than $2 billion in agribusiness investment schemes on behalf of 18,500 growers, most of whom financed their investments by borrowing from Timbercorp Finance. Some investors had several loans, in respect of multiple investment schemes.
In April 2009, administrators were appointed to Timbercorp Ltd, as well as Timbercorp Securities and Timbercorp Finance. Some months later, creditors resolved to wind up the companies and the administrators were appointed as liquidators.
Timbercorp Finance ultimately commenced recovery proceedings against defaulting borrowers, including the applicants. In the applicants’ case, Timbercorp Finance sought to recover the outstanding principal and interest on three initial loans and six stage loans.
By agreement at trial, the question of the applicants’ liability under the various loans was determined by reference to a representative initial loan and a representative stage loan. Both of the representative loans related to a particular scheme, the ‘2006 Almond Early’ scheme.
In each of the representative loan agreements, cl 1 was materially the same. It provided that Timbercorp Finance agreed to lend to the grower ‘the loan amount by paying it to Timbercorp Securities … as payment’ of the grower’s liability to Timbercorp Securities. In the initial loan agreement, the grower’s liability was relevantly ‘the balance of [the grower’s] application money for lots’.[2] In the stage loan agreement, the liability was relevantly the ‘balance of [the grower’s] invoice for … lots’. None of the other provisions of the loan agreements are presently relevant.
[2]The loan agreement used italics to designate defined terms.
The mechanism by which Timbercorp Finance made the mandated ‘payment’ to Timbercorp Securities in satisfaction of the grower’s liabilities is of critical importance to the present application.
Following execution of the relevant loan agreement, journal entries were recorded in the general ledgers of Timbercorp Securities and Timbercorp Finance which were said to show:
(c) a discharge of the grower’s liability to Timbercorp Securities;
(d) a corresponding liability owed by the grower to Timbercorp Finance; and
(e) a corresponding liability owed by Timbercorp Finance to Timbercorp Securities.
In respect of the initial loans, a further step occurred. The holding company, Timbercorp Ltd, transferred a corresponding amount of money to an account maintained by Trust Company of Australia Ltd (‘Trust Company’) to be held on Timbercorp Securities’ behalf. This transfer was recorded in the general ledgers of Timbercorp Ltd and Timbercorp Securities as an amount owed by Timbercorp Securities to Timbercorp Ltd. It is convenient to refer to this double entry as the ‘Trust Company entry’ and to the payment as the ‘Trust Company payment’.
Evidence as to the journal entries was given on behalf of Timbercorp Finance by Mr Owain Stone, a forensic accountant who assisted the liquidators of the Timbercorp group of companies. In his first witness statement, he described the above journal entries. He described the last step set out above in the case of the initial loans as recording ‘an intercompany loan … owing by [Timbercorp Securities] to [Timbercorp Ltd]’. Later, he described the relevant entries as recording Timbercorp Securities’ ‘indebtedness to [Timbercorp Ltd]’ for the amount of money paid by Timbercorp Ltd to Trust Company.
In a supplementary witness statement, Mr Stone explained what he meant by ‘indebtedness’ in this context. He said that, while the entries in question indicated ‘an indebtedness in respect of this specific transaction, ie [Timbercorp Securities] owed money to [Timbercorp Ltd] for this transaction’, this was ‘in the context of [Timbercorp Ltd] owing significantly larger sums of money to [Timbercorp Securities] at that time (and throughout the month in which the transaction was recorded)’. He relied upon and produced trial balance summaries for Timbercorp Securities showing that there was no overall indebtedness by Timbercorp Securities to Timbercorp Ltd at any stage during the relevant month. Further, even if all the credits identified for the relevant month had occurred before any debits, there would still have been no such indebtedness during that month.
In cross-examination, Mr Stone described the financial relationship between Timbercorp Securities and Timbercorp Ltd as ‘an overall account’ or a ‘running account’. He disagreed with the characterisation of the indebtedness of Timbercorp Securities, under the final step described above, as a loan.
Judge’s reasons
The applicants relevantly defended the recovery proceedings by contending that the initial loans and stage loans were unenforceable, for different reasons.
They contended that the initial loan agreements were unenforceable for illegality. The premise of that submission was that the further step involved with the initial loans — in particular, the Trust Company entry — involved Timbercorp Securities borrowing or raising money for the purposes of the managed investment scheme within the meaning of s 601GA(3) of the Corporations Act. That provision relevantly provides that a responsible entity lacks power to borrow or raise money for the purposes of a managed investment scheme unless those powers are specified in the scheme’s constitution. From that premise, it was submitted that: (a) s 601GA(3) was contravened because the scheme constitutions gave Timbercorp Securities no such power; (b) Timbercorp Finance was involved in the contravention; and (c) as a result, the initial loan agreements were unenforceable because performance of those agreements was unlawful.
The applicants contended that the stage loan agreements were unenforceable for failure of consideration on the part of Timbercorp Finance. This was said to be because the mechanism by which Timbercorp Finance purported to make the cl 1 ‘payment’ to Timbercorp Securities to discharge a grower’s liabilities (namely by a journal entry recording a liability owed by Timbercorp Finance to Timbercorp Securities (the ‘stage loan journal entry’)) involved no actual transfer of funds, and instead relied on ‘merely notional’ book entries.
The judge rejected both submissions.
He rejected the contention that the Trust Company entry involved Timbercorp Securities borrowing or raising money. This was because at the time of each of the relevant Trust Company payments, Timbercorp Ltd was substantially indebted to Timbercorp Securities. As a result, the payments by Timbercorp Ltd to Trust Company to be held on behalf of Timbercorp Securities, and recorded as amounts owing by Timbercorp Securities, only had the effect of ‘reducing the amount owed’ by Timbercorp Ltd to Timbercorp Securities. Such a result could not constitute borrowing or a loan ‘in any sense’, including for the purposes of s 601GA(3).[3] Having rejected that premise, the judge did not need to address the balance of the submission.
[3]Reasons [47]–[49].
In respect of the stage loan agreements, the judge concluded that the stage loan journal entries constituted payment, pursuant to an inferred agreement to pay by way of journal entries. In doing so, he followed the reasoning of Kennedy J in respect of stage loan agreements sued upon in an earlier case, Timbercorp Finance Pty Ltd (in liq) v Tomes.[4] In that case, Kennedy J followed the approach taken by this Court in White v Timbercorp Finance Pty Ltd (in liq),[5] which concerned initial rather than stage loans.
[4][2019] VSC 519 (‘Tomes’).
[5](2017) 123 ACSR 284; [2017] VSCA 361 (‘White’).
In White, this Court concluded that the relevant cl 1 payments were made by way of a journal entry agreement.[6] The existence of such an agreement could be inferred because: (a) Timbercorp Finance and Timbercorp Securities were wholly-owned subsidiaries of the same holding company, and shared common directors; (b) only the holding company held an operating bank account; and (c) the financial accounts were independently audited and the subject of directors’ declarations that they gave a true and fair view of the financial position of the relevant companies. In those circumstances, the Court concluded that the absence of a journal entry agreement would defy ‘commercial sense’. The Court held that the agreement crystallised before the relevant payments were made.
[6]Ibid 323 [147], 325 [155] (Ferguson CJ, Santamaria and McLeish JJA).
In the course of its reasons, the Court in White added that one of the reasons why the journal entries in respect of the initial loan agreements constituted performance was because they were not ‘simply notional’, which in turn was because they were accompanied by corresponding payments to Trust Company.[7] As mentioned, corresponding payments to Trust Company were made only in respect of initial loans.
[7]Ibid 325 [155].
In Tomes, Kennedy J rejected a submission that this Court’s approach in White compelled the conclusion that, without the corresponding payments to Trust Company, the stage loan journal entries were ‘notional’ and did not constitute performance on the part of Timbercorp Finance.[8] This was because:
[8]Tomes [2019] VSC 519, [145]–[148].
(f) each of the factors on which this Court in White expressly relied to infer a journal entry agreement, including the group structure, single operating account, common directors, and the directors’ declarations and audits in respect of the accounts, were equally present in respect of the stage loans;
(g) it was improbable that Timbercorp Finance and Timbercorp Securities had reached a journal entry agreement in respect of initial loans but not stage loans;
(h) this Court’s opinion in White that the corresponding Trust Company payments assisted in showing that the journal entries were more than ‘notional’ did not indicate that the presence of corresponding payments was determinative, particularly given that the Court accepted that the journal entry agreement crystallised before any such payments were made.
Following the reasoning of Kennedy J in Tomes, the judge in the present matter similarly concluded that there was a journal entry agreement in respect of the stage loans, meaning that payment had been effected, and that there was no failure of consideration on the part of Timbercorp Finance.[9]
[9]Reasons [53].
Proposed grounds of appeal
There are two proposed grounds of appeal, which correspond to the above submissions:
1. The trial judge erred in finding that no step … in relation to the initial loans involved [Timbercorp Securities] borrowing or raising money for the purposes of the relevant schemes, within the meaning of s 601GA(3) of the Corporations Act.
2. The trial judge erred in finding that the journal entries with respect to the stage loans were not merely notional in the sense that they were unaccompanied by any actual transfer of funds such that there was no performance within the meaning of clause 1 of the loan agreements in respect to the stage loans and they are therefore unenforceable for failure of consideration.
Proposed ground 1 — the initial loans
The applicants submitted that the judge erred by holding that the Trust Company entries did not constitute borrowings. They contended that the evidence was consistent with borrowings having occurred. In particular, as mentioned above, Mr Stone had described the Trust Company entries as ‘recording [Timbercorp Securities’] indebtedness to [Timbercorp Ltd]’ for the amount paid by Timbercorp Ltd to Trust Company. His witness statement described the Trust Company entries as ‘intercompany loans’.[10] These ‘loans’ were recorded in the general ledgers of Timbercorp Ltd and Timbercorp Securities to show Timbercorp Securities owing Timbercorp Ltd the amount paid to Trust Company on its behalf.
[10]See [14]–[16] above.
The applicants also relied on a letter dated 13 March 2015 from the respondent’s lawyers, in which the arrangement was described as follows:
[I]n order to advance funds to settle the initial application funds or invoices pursuant to its obligations under the Loan Agreements, Timbercorp Finance borrowed funds from [Timbercorp Securities], which in turn borrowed funds from Timbercorp [Ltd].
Further, it was said to be wrong for the judge to conclude that the payments could not constitute borrowings on the part of Timbercorp Securities simply because the effect of the payments was to reduce Timbercorp Ltd’s indebtedness to Timbercorp Securities. That conclusion was said to overlook critical aspects of the financial arrangements between the various entities.
Elaborating on that submission in oral argument, counsel for the applicants submitted that it was not correct to regard the transactions between Timbercorp Ltd and Timbercorp Securities as part of an integrated ‘running account’ as Mr Stone had done in his oral evidence. Rather, individual companies within the Timbercorp group maintained a suite of accounts. Counsel submitted that, at the end of each month, these individual accounts were reconciled, and the net balances between Timbercorp Ltd and each Timbercorp group company were thereby ascertained; Mr Stone described that process with respect to the loan balance between Timbercorp Securities and Timbercorp Finance. Counsel submitted that the ‘critical fact’ was that on any given day during the month, as between Timbercorp Ltd and Timbercorp Securities, there was a debit and credit balance on the relevant individual accounts within the suite of accounts. As a result, at any point in the month when there was a transfer entry outstanding on an individual account, that was a borrowing by Timbercorp Securities and an amount owed to Timbercorp Ltd, which it was at liberty to demand.
In our opinion, these arguments cannot be accepted. The applicants have not established that the judge erred in concluding that, given there was a net indebtedness of Timbercorp Ltd to Timbercorp Securities at the time of the journal entries, those entries could not constitute a loan or borrowing by Timbercorp Securities ‘in any sense, much less for the purposes of s 601GA(3)’ of the Corporations Act.
First, this was a defence raised by the applicants at trial which also formed the basis of their counterclaim that the initial loan agreements were illegal and unenforceable by reason of the respondent’s involvement in Timbercorp Securities’ alleged contravention of s 601GA(3). The onus was on the applicants to establish each element of this defence and counterclaim.
Secondly, it is important to note again the nature of the Timbercorp group, being a group of related companies with intercompany accounts. It reported as a consolidated group with consolidated accounts.
Thirdly, while there was undoubtedly a suite of accounts within the Timbercorp group, on the evidence before the judge, the only relevant loan accounts between Timbercorp Ltd and Timbercorp Securities were those identified in an appendix to Mr Stone’s first statement, namely:
(1) the account of Timbercorp Ltd headed ‘Loan — Timbercorp Securities Ltd’, number 11-1208; and
(2) the account of Timbercorp Securities headed ‘Loan — Timbercorp Ltd’, number 12-2420.
Fourthly, on the evidence of Mr Stone and the journal entries themselves, it is clear that a credit in one of these two accounts resulted in a corresponding debit in the other.
Fifthly, it is also clear from Mr Stone’s supplementary statement (and accepted by the applicants) that at all relevant times the amount Timbercorp Ltd owed Timbercorp Securities far exceeded the amount that the relevant journal entries showed that Timbercorp Securities owed Timbercorp Ltd. Mr Stone’s unchallenged evidence was that, given the size of the opening balance owed by Timbercorp Ltd to Timbercorp Securities (as shown in the Timbercorp Securities trial balance summaries for the relevant month), even if all the credits in that month had preceded any debits, there would still never have been any net amount owed by Timbercorp Securities to Timbercorp Ltd.
Sixthly, the oral evidence of Mr Stone was to the effect that, in the circumstances of the Timbercorp group, the two intercompany loan accounts between Timbercorp Securities and Timbercorp Ltd were in effect ‘running accounts’. Mr Stone gave this evidence when being cross-examined as to whether the journal entries reflected a loan from Timbercorp Ltd to Timbercorp Securities. His evidence was consistent and reflected, for example, in the following passages:
[W]hat [the entry] records is that [Timbercorp Securities] has an indebtedness to Timbercorp Limited for the balance liability paid for that specific amount but in the context where there is a running account as between [Timbercorp Ltd] and [Timbercorp Securities], if I reduce the amount by which [Timbercorp Ltd] owes me money because I have an indebtedness for something else, I wouldn’t characterise that as a loan.
Well, it’s part of an overall account between, a loan account as between [Timbercorp Securities] and [Timbercorp Ltd] but, in fact, at that point [Timbercorp Ltd] owes [Timbercorp Securities] money so … reducing that amount is the effect of it, so it’s not a loan, it’s a reduction of the balance that is owed by [Timbercorp Ltd] at that stage. So I wouldn’t characterise it as a loan.
Further, throughout the relevant period, neither Timbercorp Securities nor Timbercorp Ltd called for payment of any money recorded as owing. There was no demand for payment of an amount recorded as owing at the time a relevant entry was made, nor was there any demand for payment of the net amount owing at month’s end.
Significantly, the applicants did not seek to lead evidence at trial from another accountant to challenge Mr Stone’s evidence that the two loan accounts were current or running accounts and that, at all relevant times, the amounts owed by Timbercorp Ltd to Timbercorp Securities exceeded the amounts recorded in the Trust Company entries.
In the circumstances, the judge was entitled to accept and rely upon Mr Stone’s conclusion that the intercompany loan accounts between Timbercorp Securities and Timbercorp Ltd were in effect a current or running account as between them. It was equally correct for the judge to accept that the size of the opening balance owed by Timbercorp Ltd to Timbercorp Securities in the relevant period meant that the Trust Company entries could not give rise to any net amount owed by Timbercorp Securities to Timbercorp Ltd.
The applicants have not established that, contrary to Mr Stone’s evidence, there were multiple separate accounts between Timbercorp Ltd and Timbercorp Securities which did not operate on a consolidated basis. The evidence of Mr Stone does not bear that out. In particular, although he referred to a monthly reconciliation between Timbercorp Finance and Timbercorp Securities, he said nothing about a corresponding practice as between Timbercorp Securities and the parent company, Timbercorp Ltd.[11] Mr Stone’s evidence neither identified the suggested multiple accounts nor an accounting arrangement from which the existence of such accounts might be inferred. In circumstances where, despite being cross-examined as to the existence of a loan, it was not put to Mr Stone that such accounts existed or that he was wrong to describe the arrangement as a running account, there is no basis for disturbing the judge’s findings in this respect.
[11]Rather to the contrary, the evidence showed that the net balance of the loan account between Timbercorp Securities and Timbercorp Ltd was rolled over at the end of each month.
Nothing in the letter of 13 March 2015 upon which the applicants relied[12] casts doubt on the above conclusions. The proper characterisation of the relevant transactions turns on the matters we have discussed, rather than on a shorthand description employed by the respondent’s legal representatives.
[12]See [29] above.
Leave to appeal on the first proposed ground should be refused.
Proposed ground 2 — the stage loans
The applicants submitted that the judge erred by holding that each stage loan journal entry constituted the payment required by cl 1 of the loan agreements. Instead, they submitted that he ought to have declined to follow Tomes and found that these journal entries were ‘notional’ and unaccompanied by any payment of money. The applicants submitted that this Court in White had identified a condition that must be satisfied if the journal entries were to constitute payment: namely, that they were accompanied by the movement of ‘real money in bankable form’.
In oral argument, the applicants submitted that an agreement to pay by journal entry could not be inferred. First, it was said to be inconceivable that an agreement of such crucial significance would not be recorded in writing. They relied on the fact that the scheme was a sophisticated commercial enterprise involving multiple legally-prepared documents and very large sums of money.
Secondly, it was said that it would be absurd for Timbercorp Securities to have impliedly agreed to accept a journal entry rather than cash, which Judd J described in Timbercorp Finance Pty Ltd (in liq) v Collins as ‘crucial’ for the commercial viability of the scheme it was managing.[13] Counsel submitted that, in contrast to cash, a journal entry was nothing more than a book-keeping notation that created no legal rights and was subject to reversal at any time.
[13](2016) 119 ACSR 478, 539 [272] (Judd J); [2016] VSC 776. This was the decision upheld by this Court in White.
Further, it was said that, if there had been an agreement between Timbercorp Finance and Timbercorp Securities to pay by journal entry rather than actual money, this would have involved Timbercorp Securities accepting a promise by Timbercorp Finance to pay at an unspecified future date. It was said that to accept such an obligation in extinguishment of the grower’s liability to pay the ongoing scheme costs would have involved Timbercorp Securities breaching the statutory duties in s 601FC(1)(a), (b) and (c) of the Corporations Act, which provide that:
(1)In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must:
(a) act honestly; and
(b)exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position; and
(c)act in the best interests of the members and, if there is a conflict between the members’ interests and its own interests, give priority to the members’ interests; …
Counsel submitted that it was not in the best interests of members of the scheme for Timbercorp Securities’ right to recover unpaid ongoing operational expenses to be extinguished in return for an undocumented promise by Timbercorp Finance to pay money at some undetermined future date. That was said to be especially so given that, since Timbercorp Finance had to borrow money in order to fund the initial loans, it presumably did not have the capacity to fund the stage loans without borrowing. This, it was said, risked the solvency of the scheme.
In the course of argument, counsel for the applicants referred to this Court’s decision in White. In particular, he argued that the following passage, which he accepted did not represent the ratio of the case, showed that the presence or absence of an actual payment was a matter of vital importance in considering whether an agreement to make payment by means of book entries was to be inferred:
[T]he principal question is whether Timbercorp Finance complied with cl 1 of the Loan Agreement. That was the relevant agreement between Timbercorp Finance and Mr White. Mr White was entitled to be lent the ‘loan amount’ by Timbercorp Finance ‘paying it to Timbercorp Securities … as payment of the balance of [his] application money’. In deciding whether an agreement between Timbercorp Finance and Timbercorp Securities that payment of the application money could be made by journal entry should be inferred, the obligations of Timbercorp Finance to Mr White would not be irrelevant. If the journal entries were simply notional, there might not have been performance under cl 1 of the Loan Agreement; that circumstance would tell against inferring the necessary agreement. But the journal entries were not simply notional. They were accompanied by payment by Timbercorp Finance to the custodian (by Timbercorp Ltd on behalf of Timbercorp Finance). As set out above, in Equuscorp, the High Court spoke of debts that ‘were created and satisfied at all points in the chain’ and that, ‘of most particular relevance to the present matters, in accordance with its obligations under the written loan agreements, Rural Finance had applied the money it lent in payment of the application moneys due from the respondents for the units being bought’.[14]
[14]White (2017) 123 ACSR 284, 325 [155] (citations omitted) (emphasis added).
It may be said at once that nothing in this passage suggests that the payment of money, or otherwise, is decisive (or ‘vital’) to the identification of an inferred agreement that an obligation to pay money may be satisfied by means of book entries. Rather, it was one of a number of factors to which the Court made reference. The critical factors included the group structure and shared directors, the use of a single group bank account, and the auditing of and declarations as to accounts. The Court held that, having regard to those factors, the absence of a journal entry agreement in the circumstances would defy ‘commercial sense’.[15]
[15]Ibid 323 [147].
The proper approach to identifying the suggested inferred agreement is that articulated in P’Auer AG v Polybuild Technologies International Pty Ltd,[16] which this Court cited earlier in its reasons in White.[17] Whelan JA (with whom Ferguson and Kaye JJA agreed) explained:[18]
[T]here are circumstances where acceptance of an offer can be inferred in the absence of express consent. This will be the case if an objective bystander would conclude from the offeree’s conduct, including his silence, that the offeree has accepted the offer and has signalled that acceptance to the offeror.
Further, and more generally, it is now accepted that the existence of a contract can be established or inferred where a manifestation of mutual assent must be implied from the circumstances.
It is important to emphasise that the circumstances in which a contract will be inferred, otherwise than by the traditional analysis of offer and acceptance, will be rare. It seems to me that the position was well summarised by Sundberg J in Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd when he said:
A contract may in certain circumstances be inferred from conduct, even where no offer and acceptance can be identified … However the existence or otherwise of an enforceable agreement depends ultimately on the manifest intention of the parties, objectively ascertained … Where mutual promises are sought to be inferred, the conduct relied upon must, on an objective assessment, evince a tacit agreement with sufficiently clear terms. It is not enough that the conduct is consistent with what are alleged to be the terms of a binding agreement. The evidence must positively indicate that both parties considered themselves bound by that agreement …[19]
[16][2015] VSCA 42.
[17]White (2017) 123 ACSR 284, 321–2 [145].
[18][2015] VSCA 42, [9]–[11] (citations omitted).
[19][2009] FCA 499, [39] (citations omitted).
The applicants’ argument under this proposed ground depends on distinguishing the present case from this Court’s decision in White. The relevant difference is that in White, which involved initial loans, the journal entries were accompanied by actual payments; namely, the Trust Company payments. Those payments reflected the fact that the application moneys due from the growers, which were to be funded by the initial loans, comprised scheme property which was required by the Corporations Act and the constitutions of the schemes to be held in trust, at least for a period of time.[20] No such requirement applied in respect of the stage loans, which were directed to funding the ongoing operation of the agricultural businesses.
[20]See White (2017) 123 ACSR 284, 288–9 [14], 290–1 [21].
In Tomes, Kennedy J held that the stage loans, like the initial loans in White, were paid by way of journal entry. We agree.
First, the features upon which the Court relied in White to establish an inferred agreement, and which were also established in Tomes, were all also present in this case. The companies involved were all part of the wholly-owned Timbercorp group; they shared common directors; the group business was operated through a single bank account; the companies’ accounts (including the consolidated group accounts) were all the subject of declarations by directors under the Corporations Act stating that they gave a true and fair view of the financial position of the entity in question; like declarations were made by independent auditors; and Timbercorp Securities’ audited accounts for the schemes themselves treated Timbercorp Finance as having made legally effective payments to it on behalf of growers.[21]
[21]In this regard, counsel for the respondent drew the Court’s attention to a two-page note summarising the matters said to support the inferred agreement prepared for the trial judge. The applicants raised no objection to the contents of the note.
Secondly, as Kennedy J pointed out in Tomes,[22] the existence of an inferred agreement in the case of the initial loans makes it more likely that there was a similar agreement in respect of the stage loans. If journal entries were found suitable for effecting payment in respect of the initial loans, it stands to reason that they were equally suitable in respect of the stage loans. As noted above, the Trust Company payment was readily explicable as necessary to satisfy a legal requirement to which the stage loans were not subject. In all other respects, the payment mechanisms were not relevantly distinguishable.
[22][2019] VSC 519, [146].
Thirdly, as Kennedy J also noted,[23] the transfer of funds which took place in respect of the initial loans occurred after the making of the relevant journal entries. The transfer was therefore properly regarded as made in performance of an inferred agreement which had already crystallised. This is relevant in two ways. It indicates, as we have already observed, that the making of the payment was not a critical factor in identifying the relevant agreement. It also suggests that, if subsequent conduct of that kind bears on the existence of an agreement, it can equally be said (as the respondent contended before us) that the parties acted consistently with an inferred agreement in respect of the stage loans in so far as Timbercorp Securities never pursued growers for the payments which had been due from them and which the stage loans were intended to satisfy.
[23]Tomes [2019] VSC 519, [147], citing White (2017) 123 ACSR 284, 323 [148].
Reliance on s 601FC does not assist the applicants. As the respondent pointed out in oral submissions, Timbercorp Finance had assets of approximately
$400 million at the relevant time and the accounts of Timbercorp Finance recorded that its borrowings from Timbercorp Ltd were not to be repaid unless Timbercorp Finance had the capacity to do so after the payment of external debts. This evidence sits uncomfortably with the applicants’ argument that, by exposing itself to Timbercorp Finance in respect of the stage loan amounts, Timbercorp Securities jeopardised the solvency of the schemes. In the absence of any other supporting evidence, it is impossible in those circumstances to infer, as the applicants contended, that the making of an agreement to accept an obligation on the part of Timbercorp Finance, recorded by way of book entry, in discharge of growers’ obligations to Timbercorp Securities, would have amounted to a breach of the provisions of s 601FC.
For these reasons, we would also refuse leave to appeal in respect of the second proposed ground.
Conclusion
Leave to appeal is refused.
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