Everdure P/L v BLE Capital Ltd

Re: EVERDURE PTY LTD and IAN JAMES MacPHERSON
And: BLE CAPITAL LIMITED and BLE CAPITAL INVESTMENTS PTY LTD
No. WA G80 of 1991
FED No. 505
Trade Practices - Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

Trade Practices - misleading or deceptive conduct - interlocutory injunctive relief - manufacturer of gas and electrical appliances - requirement for working capital - to fund expansion in markets and product range - corporation providing risk capital and loan finance packages - represented as "patient" investor and "supportive" partner - alleged representation of long term commitment to provide working capital promptly when required - no such commitment after initial advance - short term loans on allegedly onerous conditions - claim for interlocutory mandatory injunction requiring payment of moneys repaid under protest - interlocutory injunction restraining enforcement of loan - criteria for interlocutory mandatory injunctions - whether serious case to be tried - balance of convenience - interlocutory injunctions refused.

Practice and Procedure - interlocutory mandatory injunctions - criteria for.

State of Queensland v. Australian Telecommunications Commission (1985) 59 ALR 243

Redland Bricks Ltd v. Morris (1970) AC 652

Shepherd Homes Ltd v. Sandham (1971) 1 Ch 340

Locabail International Finance Ltd v. Agroexport (1985) 1 WLR 657

American Cyanamid Co. v. Ethicon Ltd (1975) AC 396

Films Rover Ltd v. Cannon Film Sales Ltd (1987) 1 WLR 670

Businessworld Computers Pty Ltd v. Australian Telecommunications Commission (1988) 82 ALR 499

Carson v. Minister for Education (Qld) (1989) 25 FCR 326

HEARING

PERTH

#DATE 15:8:1991

Counsel for the Applicants : Mr R.H.B. Pringle QC

and Mr P.F. Fletcher

Solicitors for the Applicants : Solomon Brothers

Counsel for the Respondents : Mr M.W. Odes and

Mr P. Mendelow

Solicitors for the Respondents : Parker and Parker

ORDER

1. The claim for interlocutory relief is dismissed.

2. The costs of the claim for interlocutory relief be reserved.

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

JUDGE1

Introduction

In 1987 Everdure Pty Ltd ("Everdure") a manufacturer of gas and electrical appliances was seeking funds for working capital to finance proposed expansion of its product range and the markets in which it competed. Arrangements were made with BLE Capital Limited ("BLEC") under which it took up some equity in Everdure and advanced it moneys. Subsequently, relations between the two companies became strained as Everdure sought additional finance from BLEC which BLEC would only provide on terms regarded by Everdure as onerous. Everdure now contends that before the initial advance was made BLEC had represented that it was going to make a long term investment in Everdure and should be viewed as a patient, long term investor and partner in the company's business. Importantly, according to Everdure, BLEC promised to provide loan funds needed by Everdure for working capital promptly when required to do so. By reason of these and other representations which it now says were misleading or deceptive in contravention of the Trade Practices Act 1974, Everdure complains that it was induced to enter into the initial agreement with BLEC and that because of that commitment and BLEC's subsequent refusal to do other than provide short term finance on disadvantageous terms, it has suffered loss and damage. Causes of action based upon breach of contract and unconscionable conduct are also raised. Everdure has sought orders for interlocutory injunctions against BLEC pending the trial of this action. After hearing argument on its claim for interlocutory relief on 12 and 13 August 1991, I reserved judgment and subsequently dismissed the claim on 15 August 1991 indicating that these reasons, then under preparation, would be published shortly afterwards. The reasons so far as they deal with matters of fact depend upon extensive affidavit evidence which was put before the Court. Any views on matters of fact expressed in these reasons however, are purely provisional. There was no cross-examination upon any of the affidavits which conflict on various matters. It may be anticipated that there will be additional evidence at trial and that some of the evidence set out in the affidavits may not be admissible. The function of the Court in determining whether or not to grant interlocutory relief involves an assessment of whether the applicant has a serious case to be tried and, where possible, the strength of that case weighed against the detriment to either party depending upon whether injunctive relief is granted or withheld.

Everdure - Origins and Growth

Everdure is a Western Australian company which manufactures and sells gas and electrical appliances. It has been in existence since 1935 when it began manufacturing electric hot water systems. In 1976 Ian James MacPherson purchased all its issued shares and assumed the office of managing director, a position he still holds. The company then operated from premises at Oats Street, Carlisle. From the time that he took control of the company, Mr MacPherson considered that it had the potential to expand its activities into manufacturing gas hot water units and other gas appliances. Within 3 years of his acquisition of Everdure it had designed and manufactured a new range of electric shower heaters for export to Asia and had won an Export Achievement Award from the Western Australian Government. There are now four different models of this product marketed entirely in South East Asia. In 1980, Bendigo Holdings Pty Ltd, the trustee of the I.J. MacPherson Family Trust, in conjunction with another company, purchased land at Sheffield Road, Welshpool. Two factory units were built on the land and the company moved into one of them and subsequently, as it expanded, moved into the second. The total factory area was later increased by construction of a roof covering an open area between the two units.
In 1982, Everdure began producing a gas fired hot water heater which has established what Mr MacPherson describes as a strong market share in Western Australia. In 1987 manufacture of another new product, the Crusader Gas Room Heater, commenced. There was seen to be a large potential market for that appliance in the Eastern States, and in the year ended 30 June 1987 demand was greater than Everdure's ability to supply it. According to Mr MacPherson, the company then had insufficient capital to provide the facilities and manpower necessary to supply the major retailers who wanted to sell the product in Western Australia. It could supply only one of five major gas appliance distributors in the Eastern States. Moreover, MacPherson had plans to move the company into the design and manufacture of improved gas fired barbeques and a number of other new lines and for expansion by the acquisition of other businesses.
The Search for Funds - Contact with BLEC
In 1987, MacPherson and his general manager, John Ferguson, began making approaches to banks, financiers and venture capital corporations. One such corporation was prepared to invest significant working capital by taking up shares in Everdure but wanted control of the company, a proposition which was not acceptable to MacPherson. Subsequently a member of an accounting firm doing work for Everdure, gave him promotional literature relating to BLE Capital Ltd ("BLEC") and a copy of its 1986 Annual Report. BLEC is a company owned as to 60% by the Westpac Banking Corporation and 40% by Investors in Industry Group plc, a United Kingdom company. The business of BLEC as at July 1987 involved the provision of risk capital finance packages to small to medium sized businesses. In the 1986 Report provided to MacPherson, the chairman's address, which appeared at the front, included the following passage:

"Our philosophy is to support good management to develop their businesses to maximum potential and to remain a supportive minority shareholding partner on a long term basis. We have gained a reputation in the market place as a provider of attractive tailor-made capital finance for developing under-capitalised businesses with no intent to acquire control or to interfere with management."

The address emphasised the difference in approach to equity investment between BLEC and some of its competitors who, it was said:

"... largely seek quick capital appreciation and/or the opportunity to engineer a majority shareholding and ultimate control, and do not provide the patient support which is so often vital for the sound development of young businesses."

The general manager's report offered similar comparisons and the observation that:

"We prefer to take a lower profile in our client organisations and to let their managements run the business themselves."

Other statements in the 1986 Annual Report, included the following:

"BLE Capital's philosophy is to remain invested in a business for as long as we can continue to make a contribution, in the form of funding support and advice. When this support is no longer required, we are able to assist the business to prepare to enter its next phase of growth, such as through listing or sale."

And further:

"BLE Capital sees its role to be a supportive partner in the business."

And:

"Further, as part of its ongoing support, the Company stands ready to invest additional funds to enable growth of a business to continue. A number of further investments of this kind have been made to date."

In July 1987, MacPherson contacted John O'Farrell, then the Western Australian Manager for BLEC. He and Ferguson visited O'Farrell at BLEC's offices in Perth. MacPherson took with him a document in the nature of a business plan setting out Everdure's history, current and projected product ranges and plans for expansion and capital needs. Forecasts of turnover were included along with projected profitability for 1988, 1989 and 1990. Balance sheet projections for the years ended 30 June 1988 to 30 June 1990 inclusive were also set out. The document was one which MacPherson had taken to other bankers and financiers on earlier approaches. He and Ferguson went through the business plan with O'Farrell and discussed with him Everdure's plans for expansion, the introduction of new products and its need for ongoing working capital to enable it to fully realise profit potential. O'Farrell's recollection of the meeting is to that extent broadly consistent with MacPherson's. He said however, that he formed the impression that if finance as requested were provided that would satisfy the ongoing working capital requirements and the requirement to enable the Crusader products to be launched in the Eastern States. According to O'Farrell, MacPherson's need was for additional working capital which would enable him to achieve the forecasts in the business plan.
At this point it is helpful to refer to the salient features of the business plan. In the first section entitled "Company History" it was stated that turnover had increased 292.2% from $1,170,000 in 1982 to $3,420,000 in 1987. Based upon a development of the available Australian market for existing fully developed products, projected turnover was said to show an increase to $8,470,000 by 1990, provided that the company's capital requirements could be met. At p.8 of the plan the statement was made that the directors considered that the company's ability to exploit immediately available markets and develop identified new markets overseas depended, inter alia, upon increased manufacturing facilities and additional operating capital. Under the heading "Manufacturing Facilities" it was said:

"To be achieved in two steps. Firstly, increase existing capacity to achieve production forecast for 1987/1988.

Secondly, further increase capacity for forecast 1989/1990 production."

The point was made that this contemplated increased capacity in the first year (1987/1988) followed by a year respite and a further increase in the third year (1989/1990). The first step development required expenditure of $179,000 on additional items of plant and the third year development some $109,000. Operating capital requirements in terms of stock on hand and in progress (including raw material components) was quantified at $400,000 initially for hot water heaters and $554,000 for space heaters. The increase in space heaters under production in 1989/90 would require an increase of $220,000 in finished stock and $334,000 work in progress and raw materials. This was summarised as follows:

"1987/88 1989/90 Hot Water Stock $400,000 $ 400,000 Space heater stock $554,000 $1,158,000 $954,000 $1,558,000"

The difference, it was pointed out in argument, reflected an increase of $604,000 in working capital. Under the heading "Summary - Additional Capital to be Raised" the following appeared:

"1987

The Company requires an injection of $1,183,000 which will enable the forecasts for 1987/88 to be achieved. This fresh injection of funds would be used as follows:

(a) replace the Natwest loan of $ 455,304

(b) purchase additional plant and equipment $ 179,000

(c) fund ongoing research and

development $ 50,000

(d) additional working capital (mainly for stock) $ 498,696 $1,183,000"

Turnover forecasts were provided. For 1987/88 to 1989/90 it was said there would be "further increases in turnover of 41.6%, 27.5% and 36.8% respectively, mainly as a result of expanded space heater sales. The figures for those respective years were $4,855,826, $6,192,830 and $8,471,652. Actual and projected net profits were set out at p.15 of the plan. The table for 1982 to 1987 inclusive made provision for adding back interest payments. No interest payments were shown for 1988, 1989 and 1990 where projected net profit figures were $484,141, $646,181 and $962,108 respectively. The way in which these figures were arrived at was shown in more detail on three separate pages setting out projected sales figures, costs and overheads for each of the three years. No provision was made for interest payments. Projected balance sheets for the years ended 30 June 1987 to 30 June 1990 inclusive were also set out. Issued capital was shown as increasing from $10,000 in the first year to $2,975,000 in 1987/88 and 1988/89 and $4,871,000 in 1989/90. Goodwill for these four years was shown as $4,998, $1,796,998 (for 1987/88 and 1988/89) and $2,979,998 for 1989/90. The balance sheets also included, as an asset of the company for the year ended 30 June 1987, an inter company transfer of $413,646. This referred to a loan to MacPherson. The balance sheet projections showed that sum being repaid in the 1987/88 financial year.

Following his meeting with MacPherson and Ferguson, O'Farrell began an investigation of the company and its requirements which took about 8 weeks. During this time the three men met on a number of occasions to discuss the company's future. According to O'Farrell, all the discussions were directed to an advance of one sum. It was envisaged, he said, that BLEC would put together a business package that would provide sufficient working capital to meet the projections contained in the forecast. To substantiate the figures contained in the business plan, he asked Everdure to provide him with a monthly phased detailed budget for the year ended 30 June 1988. A budget was provided but it was MacPherson's evidence that it had been produced prior to 1 July 1987 and reflected projected performance under the existing financial structure of Everdure. It could not be used by BLEC to determine what funding to offer Everdure in August 1987. And it is true that while the document referred to showed a net profit of $343,021 for 1987/88 after an operating profit of $484,141, it also indicated that for the month of February 1988 there would be a negative figure for "cumulative cash" of $728,943. This was said to reflect the peak borrowing requirement necessary in that year to achieve the budgeted profit. On this basis, according to MacPherson, the budget could not be made to work unless additional capital were injected into the company and it was for that very reason he had begun the search for equity funding.
O'Farrell on the other hand, said that the cash flow referred to in the budget was prepared on the assumption that all funds required were available out of overdraft, that is before injection of funding. The budget, he noted, showed the same profit as the forecast for 1987/88 in the business plan, that is $484,141. He said that he had modelled Everdure's funding requirements based upon what appeared in the budget. Subsequently he told MacPherson that BLEC was prepared to become involved with Everdure. BLEC, he said, would want a 25% interest in the company by way of preference shares. It would also be a requirement that MacPherson refinance his personal affairs and repay to Everdure a loan of $422,000.
The First Agreement
A formal letter of offer was sent by BLEC to Everdure on 21 August 1987. The copy exhibited to MacPherson's affidavit is stamped "Received 27 August 1987 Phillips Fox" from which it appears that Everdure's solicitors were then involved in advising on the transaction. The letter offered to "grant facilities" to Everdure on various terms and conditions. The facilities and their purposes were described as follows:

"1. Facilities:

$ 39,996 Subscription for 3,333 Convertible Cumulative Preferred Participating Ordinary Shares (A Class Shares) of par $1.00 at a premium of $11.00 and representing 25% of the total issued capital of the company. "A" share class rights are annexed in A. $530,000 Twelve year term loan. $200,000 Overdraft guarantee to Westpac Banking Corporation.

2. Purpose: ($'000s)

Repayment of Natwest facility

Term Loan 459 Come and Go Facility 304 763 R and I Bank Overdraft 146 Working Capital 283 1,192 ===== Provided By:

Repayment of Loan due from

I. MacPherson 422 BLE Capital facility 770 1,192 ===== In addition, hire purchase arrangements are to be made to acquire further plant and machinery to a total of $180,000."

Conditions precedent included key man insurance on MacPherson's life "to be mortgaged to BLE Capital for the duration of the loan and overdraft facilities". MacPherson was to warrant that he would use his best endeavours to repay his indebtedness to Everdure by 31 December 1987. Repayment of the BLEC loan was to be by twenty half yearly instalments of $26,500. Security for the advance was to be by way of a first mortgage debenture over the assets and undertaking of the business. There was provision for interest to be paid quarterly, in arrears. The guarantee facility was to be reviewable annually and a renewal fee of 2% of the facility was payable in advance. General terms were proposed under which BLEC's consent would be required before Everdure acquired shares or provided guarantees or credit, factored its book debts or disposed of assets worth more than $50,000 in any one year.

After receiving the letter MacPherson and Ferguson met with O'Farrell. It was MacPherson's evidence that he was "very concerned to ensure that the disposal to BLEC of a quarter of the company would not occur unless the funding which the company would need over the next 12 years was secured". O'Farrell, he said, told him on 23 August 1987 that BLEC had deep pockets, was happy with Everdure's management, and was "going to be taking a long term investment position with the investment with Everdure" and that this meant that all additional working capital that Everdure might reasonably require over the next 12 years would be provided by BLEC. At the expiry of that period, Everdure would have to refinance to enable BLEC to exit the business or else BLEC's shares in Everdure would have to be sold so that it could realise the investment. While he could not say what were the precise words used at the time, MacPherson "firmly" remembered O'Farrell saying to himself and Ferguson "words to the effect that the funds we would need for the expansion of Everdure's business to enable it to become a highly profitable operation within the 12 year period would be provided". Everything he had read in the BLEC literature and was told by O'Farrell, he said, reinforced the impression that BLEC was to be viewed not as a lender, but as a patient long term investor and partner in the business. He claimed that he was also told that the 25% shareholding in Everdure was the only equity which BLEC would take in the company. And the low price being paid for the shares by BLEC was said to be the incentive required to persuade BLEC to take the long term risk of giving funding support to Everdure. MacPherson understood this to mean that "BLEC was prepared to stick its neck out in support of Everdure with all necessary funds, within reason, over the long term, namely the next 12 years". And although the $200,000 overdraft guarantee to the Westpac Banking Corporation was said to be reviewable annually, O'Farrell, he said, told him that this requirement related to the annual renewal fee of 2% but subject to payment of the fee there was no reason why the guarantee should not run for the same period as the 12 year loan.

Following their discussions with O'Farrell, MacPherson and Ferguson decided that they were satisfied that BLEC would honour its undertakings over the next 12 years. Accordingly, they countersigned the letter on 28 August. It contemplated by its terms the execution of a formal contract. On 29 September, Everdure, MacPherson, Ferguson, BLEC and a subsidiary, BLEC Investments, executed a formal contract. It is not suggested that there was anything in the agreement to oblige BLEC to provide finance over and above that set out in the August letter. The Articles of Association of Everdure were altered to allow for the issue of preference shares to BLEC. Further a $730,000 policy of insurance was taken out by Everdure over MacPherson's life and assigned to BLEC.
BLEC's Approach to Funding
O'Farrell took issue with MacPherson's account of what passed between them in August 1987. He accepted that he would have been at pains to reassure him that BLEC took a long term view of its investments. He denied that he promised to provide all additional working capital that Everdure might reasonably require over the next 12 years. As to that, he gave a detailed explanation of the procedures adopted by BLEC in assessing whether or not to finance a prospective client. In many instances, he pointed out, BLEC provides finance to clients whom banks would not support because of the higher risk nature of the funds required. Interest on the loans provided by BLEC is in line with normal commercial interest rates. BLEC, he said, looks to an equity involvement in the business funded by it to provide "a true reward for the financial risk taken by it in advancing the funds". The decision whether to advance funds is preceded by a detailed assessment of the business which requires extensive input from the client and is reliant, to a great extent, upon that input including profit and cash flow forecasts. BLEC uses an index of risk designated Potential Equity Loss Total or "PELT". This is a sum representing the difference between the estimated realisable value of the assets of the business discounted as a bank would for lending on security, and the total advance by way of loan together with the equity investment. In essence, the figure reflects the total sum advanced less the realisable value of the assets. A further index of risk is a risk reward ratio, which is an extension of the price earnings multiple ("P/E") commonly used in equity valuations. A PELT P/E ratio is calculated "to incorporate the equity type risk in the loan and the share investment.
O'Farrell said that in deciding whether to provide follow-on finance to an existing client, the procedure applied to new businesses is complied with to the extent that saving duplication of previous inquiries, each application is considered separately on its own merits. In deciding whether to provide follow-on finance to an existing client, according to O'Farrell, regard is had to BLEC's experience with the client's business management and performance in accordance with its original forecasts against which the initial funding package was made and to the present financial exposure of BLEC to that client. The procedures, he said, are to be strictly complied with at all relevant times by staff of BLEC prior to any funding package being approved. He maintains that they have been adhered to at all times by all members of BLEC staff with whom he has ever had any contact and that he himself has at all times strictly complied with them.
O'Farrell carried out his own PELT assessment of Everdure based on the projected profitability as contained in the budget and business plan. He prepared a proposal for submission to BLEC's Investment Committee, which proposal contained a Funds Flow Statement for Everdure for the years ended 30 June 1987 to 30 June 1990 inclusive. For 1988 he showed an operating profit before interest of $484,000 which was taken from the budget and the business plan forecast and demonstrated, he said, that the figures contained in those documents were the basis upon which he structured the funding package proposal. O'Farrell maintained that in light of the fact that the forecast related to the three years ended 30 June 1990 and that discussions and meetings with MacPherson and Ferguson in July and August 1987 related to initial funding, there were no other loan funds then contemplated to satisfy Everdure's funding requirements to 30 June 1990. Accordingly, he said, the sum discussed with Everdure at those meetings was the total to be advanced to satisfy the growth as presented in the forecast. Agreeing that he would have been at pains at the meeting of 23 August 1987 to reassure MacPherson that BLEC took a long term view of its investments, he said he would have explained that BLEC does not define the method of exit from the investment or the duration of its involvement. He also said that he would have made it clear to MacPherson that BLEC had the capacity to perform with further financial support on a commercial basis, and subject to acceptable performance. Although he could not recall stating those exact words, he maintains he would have said words to that effect because it was, and is, his invariable practice to communicate those matters to any present or prospective client. O'Farrell denied that he said, as alleged by MacPherson, that all additional working capital that Everdure might reasonably require over the next 12 years would be provided by BLEC. Having regard to the procedures to be complied with prior to BLEC providing on-going finance to a client, he would not, and could not, make such a commitment. He was prepared to say that he would have indicated that in appropriate circumstances additional working capital would be provided. He would not have stated more than that BLEC would give consideration to providing follow-on funding once Everdure was able to demonstrate progress as anticipated and reflected in the forecast. And in relation to the contention that he had told MacPherson that at the expiry of the 12 year period, Everdure must either refinance or BLEC's Everdure shares be sold, he denied saying anything about what "must" happen after a period of 12 years. To O'Farrell the only relevance of the 12 year period was that the first finance package would be repayable after a period of 12 years. Any condition to the effect that Everdure must refinance or enable BLEC to exit or sell its shares, would have been expressly included in the agreement. Under no circumstances, he said, would he have provided Everdure with what amounted to a blank cheque to enable it to insist upon follow-on funding as and when required. It was common ground between him and MacPherson that no specific amounts of additional funding were discussed. He also denied saying that funds needed for the expansion of Everdure's business to enable it to become a highly profitable operation within a 12 year period, would be provided. He had never discussed with either MacPherson or Ferguson a 12 year period in relation to ongoing financial support. To have made a statement to that effect, would have been tantamount to an open ended commitment on behalf of BLEC and completely contrary to its policy and requirements for the approval of further financial funding and contrary to his practice to comply with BLEC's policies and requirements.
As to the statement attributed to him that a 25% shareholding in Everdure was the only equity which BLEC would take in the company, O'Farrell recalled saying that if a company performed to plan and BLEC assisted with further expansion funding, it would not necessarily be its expectation to increase the equity percentage.
The divergence in the accounts of these early meetings given by MacPherson on the one hand and O'Farrell on the other, lies at the heart of this dispute. There was considerable argument and affidavit evidence on the question of what was, or was not apparent from the budget and business plan about Everdure's requirements and the true nature of its proposal. In the event, according to MacPherson's evidence, having entered into an agreement with BLEC on the terms proposed in its letter of 21 August 1987, Everdure found that its expectations of further long term loan and equity investment were not met and that BLEC would only provide short term finance and on conditions that Everdure had to accept because it had no realistic choice.
Everdure Seeks Additional Finance
Late in 1987, MacPherson wanted to increase Everdure's overdraft with Westpac to $360,000 to fund peak working capital requirements. He asked if BLEC would extend its guarantee to enable this to be done as it was the peak of the production run of room heaters for the winter season. O'Farrell told him that the further guarantee would be provided on condition that Everdure gave BLEC an option to acquire more of its shares in the event that the pre-tax profit failed to reached $500,000 cumulatively for the years ended 30 June 1988 and 30 June 1989. MacPherson regarded this as an unrealistic figure given that the projection for 1988 profit was $484,000 before interest. That projection had been made on the assumption of additional working capital of $498,000 whereas, after retirement of existing debts, effective additional capital from BLEC was only $283,000. The interest cost was $110,000 so the profit could only be $374,000. MacPherson said he was unhappy about BLEC's approach which implied that there was something wrong in the request for additional funds. He complained about this but to no avail. Because Everdure had a critical need for the additional funds and could not obtain them elsewhere, he had no option but to agree to BLEC's conditions.
O'Farrell's perception was different. As he put it, MacPherson approached him less than 12 weeks after settlement on the September loan and said that Everdure was in need of an additional $360,000. The budget, he said, had shown a peak funding requirement of $728,943 for February 1988 and it was on this requirement that BLEC's original investment was based. He regarded the cash flow forecast as having been substantially incorrect because of the request for a further $360,000. MacPherson, he said, presented a revised forecast at the time showing projected profits before interest for 1987/88 at $272,000 which reduced to $112,000 before tax. The request for additional funding caused considerable concern at BLEC. Had that requirement been anticipated, the initial transaction would have been concluded on different terms. MacPherson agreed to support his revised forecast by providing an option of 5% to 10% additional equity in Everdure if it failed to achieve cumulative profits for the years ended 30 June 1988 and 30 June 1989 of $400,000 and $500,000 before tax but after interest.
In BLEC's letter of 19 January 1988 offering to provide the $360,000 overdraft guarantee, a 12 year term loan of $60,000 was also offered. But this was subject to a condition that MacPherson himself lend Everdure $33,000. Because he had no way of meeting it, the term loan was not accepted. The inability to take up the loan allegedly damaged Everdure's profitability for the following year.
Early in July 1988 MacPherson approached BLEC again for additional funding for working capital in relation to extra stock manufactured to serve the company's expansion into the Eastern States. It took 3 months to approve the advance which was for $350,000 over 11 years. This, he said, was not the timely provision of funds which he had been promised in August 1987. The interest rate was to be higher by 0.5% than that imposed on the September 1987 loan. BLEC also required as a condition of the loan that its shareholding be increased to 35% by the issue of a further 953 preference shares at par and that it have the option of acquiring a further 5% in the event that the aggregate pre-tax profit of Everdure for the 1987/88 and 1988/89 periods did not exceed $500,000. MacPherson says he protested loudly to O'Farrell about what he saw as an increasing share grab which "had never been part of the deal with BLEC". O'Farrell being unmoved, McPherson and Ferguson decided that until Everdure had established itself as a profitable operation there were no realistic alternative sources of funds. The new loan agreement entitled "Deed of Variation - Loan and Guarantee Facility Agreement" was executed on or about 8 November 1988.
In March 1989, Everdure made an offer to purchase the business of Electra Enterprises Pty Ltd. The offer was accepted subject to finance by BLEC, but BLEC would only make finance available if its equity in Everdure were increased. MacPherson declined to meet that condition. He was, he said, extremely disappointed with the decision by BLEC.
MacPherson said that in October 1989 he asked for additional funding of $250,000 to enable Everdure to purchase lead time items such as tiles for its room heaters. He met more than once over November, December and January with Peter Nelligan, who had succeeded O'Farrell as BLEC's Western Australian Manager. After a meeting in January 1990 with Nelligan and Harold Tilley, BLEC's Managing Director, MacPherson and Ferguson agreed to go to BLEC's head office in Sydney to discuss the possibility of relocating their factory in Malaysia. A meeting took place in Sydney on 9 January 1990. On 11 January Nelligan sought more information and a schedule showing funding requirements. Nelligan denied that there was any approach of the kind described by MacPherson in October 1989. He said, however, that he met with MacPherson and Ferguson in late November 1989. At that time they requested $200,000 to $300,000 for further working capital as a result of unbudgeted warranty claim losses and lost sales due to an 8 week delay in dealings with suppliers in Malaysia. He told both of them that it would be very difficult for such an investment to be approved by BLEC's head office in Sydney. However, he began to prepare an internal application in relation to the proposed funding. Before he had completed that exercise, there was a further approach in December at which MacPherson and Ferguson advised that they would also need funding to move the Everdure manufacturing operation to Malaysia. This new proposal, which was subsequently supported by a feasibility analysis supplied by MacPherson, delayed consideration of the request for $200,000 to $300,000 additional finance.
It is common ground that BLEC offered additional finance to Everdure by a letter dated 1 February 1990. The letter offered to advance $250,000 and provide a guarantee of $250,000 from BLEC to Westpac. A put option to enable BLEC to increase its total shareholding in Everdure to 40% was included conditional upon any further advance over and above the existing facilities and the $250,000 then offered or if the business were not sold within 11 months. There was also a requirement that the shareholders of Bendigo Holdings Pty Ltd, the trustee of MacPherson's family trust, execute a 13 month option agreement with BLEC providing for the assignment of sufficient shares in Bendigo Holdings Pty Ltd to BLEC at no cost to provide it with a shareholding in Bendigo equivalent to its holding in Everdure. MacPherson considered that Everdure had no choice but to comply with these requirements and accepted the offer on behalf of Everdure. The purpose of the advance was described in the letter as "to fund immediate working capital requirements in order to prepare the business for sale". On 20 February 1990 a Loan and Guarantee Facility Agreement reflecting its terms was entered into between BLEC, Everdure, MacPherson and Ferguson.
In October 1990, a further $640,000 was advanced pursuant to a letter of offer dated 9 October 1990. This facility was described as a "loan at call" and its purpose was to "fund the working capital requirements of the business". $155,000 was to be advanced immediately and the balance drawn down as necessary to meet working capital requirements. It was a condition of the offer that Adfin Pty Ltd, a chartered accountant, be appointed by Everdure on terms acceptable to BLEC. This was in contemplation of that company preparing a report on Everdure's operation and structure. MacPherson claimed that he was told by Nelligan that the report was needed so that details of a restructuring to be implemented in August 1991 could be worked out. Nelligan, on the other hand, said that the purpose of the report was to provide an independent assessment of Everdure's existing and projected financial position and to develop a strategy to sell the business.
Adfin Pty Ltd prepared a report dated 30 October 1990. It concluded, in the light of Everdure's losses and those of a related Malaysian company, Aussjaya Manufacturing Sdn Bhd, that Everdure, which had share capital and reserves of only $46,000, was "clearly insolvent". But to the commitment of BLEC to provide a further $640,000 it was "probably acceptable for the group to trade on". According to the report the relief granted by the additional loan funding would be short lived and would not solve "the underlying problem of an inadequate capital base". Various recommendations were made in the report.
MacPherson commented in his evidence, that he had made arrangements in Malaysia for funding of up to $1 million at an effective rate of 4%, which funds would be available provided that a restructuring of Everdure's balance sheet could be effected.
After the provision of the report MacPherson had a number of meetings with BLEC to finalise the restructuring of Everdure. He referred to some 16 meetings from November 1990 through to May 1991. He produced a memorandum prepared by BLEC and entitled "EVERDURE/BENDIGO NOTES FOR PRELIMINARY DISCUSSION" which he described as listing BLEC's requirements for restructuring to occur. He said agreement was reached that in essence the restructuring of financial facilities by BLEC would result in a consolidated funding package of $3 million involving the provision of an additional $660,000 over and above "the existing $2,430,000". All that remained, he said, was for the head office of BLEC to implement the proposal upon confirmation being received that Everdure had reached a minimum profit for 1990/91 of $250,000.
On 13 March 1991, MacPherson sent a memorandum to Nelligan which, he said, summarised the agreement as to detailed terms of the restructuring which had then been achieved. Nelligan however, denied that any agreement was ever reached in relation to any restructuring. In this he was supported by the evidence of Robert Gee, Investment Manager for BLEC. Gee said that the true position was that a restructuring proposal was initiated by MacPherson on 30 November 1990 for consideration upon his return from Malaysia on 18 December. This view was consistent with the terms of a letter dated 30 November 1990 from MacPherson to Nelligan. The letter set out a restructuring proposal and asked that BLEC consider it and that they meet shortly after 18 December "to assess whether it is likely that we can achieve consensus on the proposal in principle". It is also to be noted in light of the allegations made in this action, that MacPherson in the letter expressed his belief that "... the current positive trend of achievement by Everdure Pty Ltd will soon justify the wisdom which BLE has shown in its support for Everdure".
The memorandum of 13 March 1991 proposed that BLEC increase its overdraft guaranteed to Westpac by $250,000 for the months of March, April and May 1991. In a follow up letter on 27 March 1991, MacPherson complained to Nelligan that due to "time restraints and your time consuming requirements for obtaining possible approval on $250,000" he had decided to make do with existing funding. This would, he suggested, affect the "bottom line come 30 June 1991" and have adverse effects in the first half of the following financial year. He then asked that BLEC finalise the restructure which they had first started discussing in November 1990. He asked for a written offer on restructuring by 30 April 1991 to be in line with the proposal of 13 March. The letter concluded:

"Should we not receive an offer which allows the company to proceed along the lines proposed, then I see no future for Everdure, in which case we will look to cease operations as of 1 May 1991."

MacPherson said in evidence that by this time he had become concerned that BLEC, while going through the motions of negotiating the terms of the restructure "as had been agreed in November 1990" was in fact not intending to proceed. On 5 June he said Nelligan told him that restructuring was not going to proceed. He said no reason was given. Nelligan on the other hand, said he advised MacPherson on that day in a meeting also attended by Ferguson and Robert Gee, that the relationship between BLEC and Everdure had broken down and that no further funds would be forthcoming. He also demanded immediate repayment of all facilities granted to Everdure and all interest in arrears of $219,525 and principal payments in arrears of $79,500, failing which a receiver would be appointed immediately. An alternative acceptable to BLEC was a sale of the business to be arranged by Adfin by 30 June 1991 with Adfin "to have control of the cheque book of Everdure". Everdure repaid $250,000 under protest early in June. On 14 June BLEC put its demands in writing.
MacPherson maintained that Everdure is now for the first time achieving significant profits after overcoming the difficulties of severe recession, unforeseen warranty claims arising from power surges on the State Energy Commission grid and high initial costs necessarily involved with the development of new products and expansion into new markets and the setting up of a manufacturing subsidiary in Malaysia to operate at greatly reduced production costs. BLEC, he says, has since early 1990 demanded and kept pressure on Everdure for an untimely forced sale of the business and has sought to coerce that sale by withdrawal of funding support. Its actions in this regard are, in his opinion, entirely without justification and contrary to every representation and agreement made by BLEC with Everdure and himself. MacPherson said that on the performance of Everdure and Aussjaya in the last financial year and the expansion and other changes that can now produce continuing benefits, the Everdure group can look forward to generating cumulative profits of over $5 million by September 1999, which he characterised as the "agreed exit date" for BLEC under the original arrangement. A failure to restructure now as agreed and a forced sale of the business or company would put at risk all the benefits worked for over the years. Unless Everdure, he said, receives the funds it needs to enable it to carry on business it must cease trading. Because of uncertainty over funding he has had to defer placing orders for component parts required for the production line. The position, he said, is now critical and unless funding is in place within the next three to four weeks Everdure's production line will close down with disastrous results for Everdure's business.
On 26 July 1991, BLEC made an offer to provide $350,000 by way of interim funding designated in the letter of offer as a "Standby loan facility". The purpose was described as "to fund the working capital requirements of the business". The funds were to be advanced at the discretion of BLEC with Adfin appointed by Everdure's directors to assist in determining each funding request and with power to approve any capital expenditure of $2,000 or over and the transfer of funds to Aussjaya. The loan would be at call. MacPherson did not accept the offer and contended that it would amount to the final step by BLEC in destabilising Everdure and Aussjaya and handing to BLEC total control of both companies.
On 29 June 1991 the present proceedings were instituted.
The Pleaded Case
By its amended statement of claim, Everdure pleads the initial "letter agreement" of 28 August 1987 (paras. 5 and 6) and the subsequent formal contract executed in September ("the first loan agreement") (para.8). It alleges that both the letter agreement and the first loan agreement were made in consideration of an oral agreement between Everdure and BLEC made in the July and August discussions between MacPherson and O'Farrell. The terms of the alleged agreement are:

"(a) That BLEC would become a joint venturer with MacPherson and Everdure by providing loan and equity funds to Everdure and that the venture was to last 12 years;

(b) That the loan funds which would be provided by BLEC were the initial advance and further loan funds needed by Everdure as working capital for the operation and expansion of its business promptly when those funds were requested over the ensuing 12 years;

(c) That notwithstanding the ongoing funding of the business by BLEC, its or a subsidiary's equity in Everdure would be limited to 25% of Everdure's issued capital from time to time."

BLEC's advance of $530,000 in September and the guarantee to Westpac in December are pleaded (para.9). Because of Everdure's financial vulnerability and the full disclosure to BLEC of its financial position, BLEC is said to have owed it and MacPherson "duties of a fiduciary nature not to use its strong position to exact unfair advantage from them or unjustifiably cause them damage" (para.10). BLEC is said to have made various representations in order to induce Everdure to enter the letter agreement and these are pleaded as follows:

(a) BLEC was a long term (up to 15 years) loan and equity investor;

(b) BLEC was supportive of its clients but did not interfere in management;

(c) BLEC did not seek majority interests or management control;

(d) BLEC's philosophy was to keep its investment in a business for as long as it could continue to make a contribution in the form of funding support or advice, and that when such support was no longer required, it was able to assist the business to enter its next phase of growth, such as through listing or sale;

(e) BLEC had large financial resources and was well able to provide whatever working capital Everdure should need;

(f) BLEC would provide the loan funds needed by Everdure for working capital promptly when required so that Everdure's business could become highly profitable within 12 years;

(g) BLEC was going to make long term investments in Everdure and should be viewed as a patient long term investor and partner in Everdure's business sharing the risks in order to share in the ultimate success;

(h) BLEC (or a subsidiary of BLEC) would not require any greater percentage of the equity in Everdure when further advances were made.

The offer which, when accepted, constituted the letter agreement, was allegedly made by reference to the Everdure business plan. It is said to have been apparent from that plan when read with the Everdure budget and from discussions held at the time, that loan capital provided by BLEC would need to be significantly greater than $1,183,000 to cover interest, fees and hire purchase instalments. It was also apparent from the business plan that Everdure was seriously short of working capital required promptly on a seasonal basis (para.11A(c)). The offer which provided for equity capital of $40,000 and accommodation of $730,000 also provided that Everdure's borrowings (from Natwest and the R. and I. Bank) totalling $909,000 were to be retired. On that basis it made no provision for additional working capital (11A(d) and (e)). The BLEC assessment procedures utilising PELT and PELT P/E were pleaded (11A(g)) and the fact that BLEC did not consider that it was obliged to advance any further funds to Everdure. On this basis, it was said, BLEC was obliged to qualify its representations by warning Everdure of those facts (11B). At no time prior to the execution of the letter agreement or the first loan agreement was any such warning given that BLEC might decline to furnish needed loan funds promptly, require additional equity, only provide short term loans or require advances by MacPherson (12). The conduct complained of in relation to the representations and the failure to qualify them was said to be in trade or commerce and misleading or deceptive (14 and 16). Everdure says it was induced by the conduct to enter into the letter agreement and the first loan agreement and to acquire over $180,000 worth of additional plant and equipment. MacPherson, it was said, was also induced to enter into the first loan agreement to repay $422,000 to Everdure and to guarantee its obligations under hire purchase agreements and to agree to a reduction in his equity (15).
The additional guarantee and funding arrangements made in January 1988, September 1988, February 1990 and October 1990 are set out (17-20). The restructuring agreement allegedly made in November 1990 was pleaded (17(d) and (e)) as is the allegation that BLEC informed MacPherson in June 1991 that it could not take place. The forced appointment of Adfin and the requirement that Everdure sell its business are also alleged (21) and the offer of $350,000 made on 26 July.
Everdure and MacPherson claim they have suffered loss and damage as a result of BLEC's misleading or deceptive conduct (22). It is also alleged that BLEC breached the pleaded oral collateral contract made in July or August 1987 (para.23) and damages are claimed in respect of that breach (24) and an alleged breach of the fiduciary duties referred to earlier (25). Alternatively, it is contended that the issue of shares in excess of 25% of Everdure's issued capital and the transfer of the Bendigo shares should be set aside in equity on the basis that it would be unconscionable for BLEC to retain them (26). In the alternative, s.52A of the Trade Practices Act 1974 is invoked.
What is presumably an alternative restructuring agreement is said to have been made in March 1991 and the letter of 26 July is relied upon as being inconsistent with that agreement for which specific performance is claimed.
The Interlocutory Relief
By its application Everdure claims the following interlocutory relief:

"(1) Until judgment in these proceedings or further order, an injunction restraining the Respondents and each of them whether by themselves, their officers, servants, agents or otherwise from enforcing or seeking to enforce repayment of the First Loan, the Second Loan and the Fourth Loan referred to in the statement of claim (other than principal or interest falling due under the terms of the First Loan and interest under the terms of the Second Loan and the Fourth Loan) or withdrawing any guarantees provided in respect of borrowings by the First Applicant.

(2) Until judgment in these proceedings or further order, an order that BLEC do forthwith advance to the First Applicant the sum of $350,000:00 for working capital on such terms as to the Court seem just.

(3) In the alternative to 2 above, until judgment in these proceedings or further order an order that BLEC do forthwith restore to the First Applicant the sum of $250,000:00 repaid to it by the First Applicant in June 1991, on such terms as to the Court seem just.

(4) Until judgment in these proceedings or further order, an injunction restraining BLEC Investments whether by itself, its officers, servants, agents or otherwise from selling, transferring or encumbering the shares held by BLEC Investments in the capital of the First Applicant."

There was some debate, in the light of paras. (2) and (3) of the claim, about the criteria for the issue of interlocutory mandatory injunctions. In State of Queensland v. Australian Telecommunications Commission (1985) 59 ALR 243, Gibbs C.J. adopted the high threshold approach to the grant of such relief propounded by the House of Lords in Redland Bricks Ltd v. Morris (1970) AC 652 and further enunciated by Megarry J. as requiring a "high degree of assurance" that at trial it would appear that the injunction was rightly granted - Shepherd Homes Ltd v. Sandham (1971) 1 Ch 340 at 351. In Locabail International Finance Ltd v. Agroexport (1985) 1 WLR 657, the Court of Appeal approved the approach taken by Megarry J. observing that it had not been displaced by the general review of the law relating to injunctions undertaken by the House of Lords in American Cyanamid Co. v. Ethicon Ltd (1975) AC 396. But Hoffmann J. in Films Rover Ltd v. Cannon Film Sales Ltd (1987) 1 WLR 670 characterised that approach as setting out a guideline rather than an independent principle:

"It is another way of saying that the features which justify describing an injunction as "mandatory" will usually also have the consequence of creating a greater risk of injustice if it is granted rather than withheld at the interlocutory stage unless the Court feels a "high degree of assurance" that the plaintiff would be able to establish his right at a trial". (680)

His Honour referred then to the decision of the Court of Appeal in Locabail International Finance concluding that the court had not intended to fetter judicial discretion by laying down any rules which would have the effect of limiting the flexibility of the remedy:

"Just as the Cyanamid guidelines for prohibitory injunctions which require a plaintiff to show no more than an arguable case recognise the existence of exceptions in which more is required... so the guideline approved for mandatory injunctions in the Locabail case recognises that there may be cases in which less is sufficient." (682)

In Businessworld Computers Pty Ltd v. Australian Telecommunications Commission (1988) 82 ALR 499, Gummow J. saw the reasoning of Hoffmann J. as "consistent with what is to be gleaned from consideration of the historical development of this remedy" (503) and eschewed the requirement of a "high degree of assurance" as a matter of principle regulating the grant of interlocutory mandatory injunctions. A similar view was expressed by Spender J. in Carson v. Minister for Education (Qld) (1989) 25 FCR 326 at 338.

The fact that a court may need to be persuaded in many, if not most cases, that an applicant for an interlocutory mandatory injunction has a strong claim for final relief can be seen as no more than a particular application of the general rules governing the grant of interlocutory injunctions. An applicant for such relief must demonstrate a serious case to be tried and that the balance of convenience favours the order sought. The two criteria are, however, interdependent. A strong case may be required where the balance of convenience is markedly in favour of the respondent. A mandatory injunction will require some positive step to be taken and if that step be irreversible then the damage or inconvenience suffered as a result may also be irreversible. A strong case will therefore more often be required to overcome the balance of convenience in favour of the respondent.
To a degree this point is academic in the present case, for although, in a final sense there may still be a serious case to be tried, it could not be described as strong. I repeat the qualification voiced at the beginning of these reasons, that all views expressed about the case at this stage are provisional and formed on the basis of contested affidavit evidence. Subject to that qualification, I consider that there is on the face of it an inherent improbability about some aspects of the applicants' case as it presently appears from the affidavit material. In particular, the assertion of a major and open ended commitment by BLEC to provide ongoing funding does not sit well against the absence of any direct expression of that commitment in contemporaneous or subsequent writings. The absence of any substantial written complaint of failure by BLEC to honour its alleged representations is also a factor which bears upon the question whether such representations were made. That absence may be set against the positive comment by MacPherson in his letter to Nelligan of 30 November 1990 where he expressed his belief that "...the current positive trend of achievement by Everdure Pty Ltd will soon justify the wisdom which BLEC has shown in its support for Everdure". Of course that may be explained as a politic comment made in the context of ongoing negotiations. There was also correspondence from BLEC to the Small Business Development Corporation which made very positive statements about Everdure and which may possibly be viewed in a similar light. In addition, there was internally consistent evidence of BLEC's system of assessment of advances on a transaction by transaction basis which, if true, would be difficult to reconcile with the kind of open ended commitment alleged by Everdure. These are matters which will no doubt be tested fully at trial, but taken together with the evidence to which reference has been made, they do not support the view that Everdure's case could be described as strong albeit it is serious.
In the context of a direction for an expedited trial, which can be brought on within a month, the balance of convenience in relation to the prohibitory relief sought may favour Everdure but not sufficiently in my view, to warrant the grant of that relief. A fortiori with respect to the mandatory relief sought which would involve a payment of a substantial sum of money to Everdure by BLEC, the balance of convenience is in favour of BLEC. In light of all these matters therefore, the claim for interlocutory relief will be dismissed.

[1991] FCA 505

15 AUGUST 1991