Foxgold Pty Ltd v Paterson - [2005] SADC 27

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
FOXGOLD PTY LTD v PATERSON
Judgment of His Honour Judge Clayton
30 March 2005
CONTRACTS
Defendant found liable on oral agreements to repay to the plaintiff moneys advanced to a business conducted by the defendant's husband and moneys paid to creditor to discharge a mortgage over defendant's home.

FOXGOLD PTY LTD v PATERSON
[2005] SADC 27
Background

The plaintiff is one of a number of entities under the control of Mr John Algar of Western Australia. The defendant is the wife of Mr Peter Paterson, who at the relevant time was the shareholder and director of a company called Patte Nominees Pty Ltd which operated a business in South Australia known as the French Bakery.
Many years ago Mr and Mrs Paterson and Mr Algar were acquaintances as a result of their employment in Western Australia by a company which operated service stations. Mr Algar introduced Mr and Mrs Paterson to Mr Kimberley Baker, who is an accountant in Perth. Mr Baker had previously provided accounting advice to Mr Algar and his companies and became the accountant for Mr and Mrs Paterson.
Shortly after it commenced business in mid 2002 Patte Nominees trading as the French Bakery experienced financial difficulties. Those difficulties were caused by problems with a machine called a divider and perhaps by other reasons which were not explored in evidence.
Mr Algar gave evidence that by Monday 16 December 2002 suppliers of goods to French Bakery had withdrawn supply and the business had ceased trading. Although Mr Paterson disputed that, it is common ground that by December 2002 Patte Nominees was in serious financial difficulty. In a space of about six months it had accumulated creditors totalling approximately $110,000 to $120,000.
In early December 2002, Mr Baker informed Mr Algar of the predicament and on 15 December 2002 Mr Algar travelled to Adelaide. At that time Mr Algar had not seen Mr and Mrs Paterson for a number of years.
On Monday 16 December 2002, Mr Algar and Mr and Mrs Paterson had discussions and Mr Algar obtained information about the financial status of Patte Nominees Pty Ltd from Ms Spicer, an employee who kept the company’s books. There is a dispute as to the sequence of the events of that morning. There is also a fundamental dispute between Mr Algar on the one hand and Mr and Mrs Paterson on the other hand as to the substance of conversations on 16 December 2002, which is critical to the outcome of this action. I will return to consider the detail of the conversations later.
The difference between the parties is that Mrs Paterson disputes that there was any request to Mr Algar to pay creditors or any undertaking to repay monies to him either from the proceeds of sale of the house or at all, however Mrs Paterson does agree that she put her home on the market to raise funds to help with the financing of the business.
On the important issue there is no common ground between the parties and the resolution of the case depends upon their credibility. In these circumstances I have looked for corroboration of the respective cases in the evidence of other witnesses or contemporaneous documents.
Following the discussions on 16 December 2002, the plaintiff and other companies under the control of Mr Algar made payments to suppliers of Patte Nominees and that company was able to continue the business of the French Bakery. All payments were ultimately transferred internally to the plaintiff.
Mrs Paterson was neither a shareholder nor director of Patte Nominees, but did work in the business supervising the activities in what was known as the garlic room. There was a contest as to the extent of her actual involvement, but on my findings that contest is inconsequential.
Mrs Paterson was the owner of a substantial home in which she and Mr Paterson resided. Although the home was charged to secure borrowings in respect of the business Mrs Paterson had significant equity in the property.
As part of the background there was evidence that Mr Algar and Mrs Paterson had never enjoyed a particularly cordial relationship. Mr Paterson and Mr Algar appear to have been on better terms, but the evidence does not make the extent of their friendship clear. I mention that matter because it raises the question, why did the plaintiff advance approximately $200,000 with no written agreement and no undertaking by the defendant to pay interest to persons whom he had not seen for many years and with whom he was not particularly friendly? The defendant says that Mr Algar was motivated by self-interest; that is, he saw an opportunity and wanted to acquire an interest in the business of the French Bakery for himself. I return to consider the question of self-interest later.
The payments on behalf of Patte Nominees came to an end on about 16 March 2003 when Mrs Paterson refused the plaintiff’s request to formalise the arrangement. When Mr Algar stopped further advances the business of Patte Nominees Pty Ltd trading as French Bakery ceased. The business was recommenced a couple of weeks later by a company called Datatech (WA) Pty Ltd which acquired the business name French Bakery and the use of the equipment in the bakery. Datatech was under the control of Mr Algar and Mr Baker was a Director. Mr and Mrs Paterson continued to work in the business, but the extent of their full involvement was not made clear. When the business was recommenced Patte Nominees was the lessee of the premises and owned the plant and equipment. Further debts were incurred. The trading of French Bakery after 16 March 2003 is only relevant insofar as it helps to throw light on the events which are the subject of this action. The plaintiff does not claim the further sum of $40,000 which it paid after the business had been revived. Mrs Paterson had made it clear that her guarantee in respect of payments had been terminated.
One matter, which is not in dispute, is that payments were made by entities associated with Mr Algar. With the expectation of some relativity minor accounts for airfares and accommodation, and a payment of $72,594.62 to Cash Resources Australia Pty Ltd, the payments were made to the suppliers of goods and services for the purposes of keeping the business of Patte Nominees operating. Cash Resources Australia Pty Ltd is a factoring company and the payment to that company was subject to a separate arrangement which must be considered in its own right.
There is a fundamental difference between the evidence of Mr Algar and his in house accountant, Mr Morais, on the one hand and the evidence of Mr and Mrs Paterson on the other. Evidence was also given by the external accountant, Mr Baker, but for reasons which I explain later his evidence did not advance the matter.
On the evidence of Mr and Mrs Paterson no arrangement to make a loan to facilitate the payment of suppliers was arrived at on 16 December 2002, but on that day Mr Algar and Mr Paterson entered into a partnership. On the evidence of Mr Algar, he made payments to creditors in return for a promise by Mrs Paterson to repay the monies from the sale of her house.
One significant aspect of the plaintiff’s claim is its size. The amount claimed is just over $200,000. On 16 December 2002, at the time of the discussion on which the plaintiff’s claim is based, the creditors of Patte Nominees were assessed to be in the vicinity of $110,000 to $120,000. The plaintiff did not satisfy those pre-existing debts, but arranged to make ongoing payments to suppliers to ensure the continuation of production. Accordingly, on 16 December 2002 there was no accurate estimate of the amount that the plaintiff might be required to pay. Although the period during which the plaintiff might be required to support Patte Nominees had not been identified, Mr Algar seems to have had a figure of $20,000 to $30,000 in mind. Accordingly, Mrs Paterson could not be expected to have had a precise idea of the amount that might be involved. The extent of her authorisation of payments is a matter which requires consideration.
Although the parties were aware of the payment of $72,594.62 to Cash Resources Australia Pty Ltd on 16 January 2003, Mr Algar was surprised when at the end of February 2002 he learnt that the debt had grown to about $200,000.
The evidence of Mr Algar
Mr Algar gave his evidence of the relevant events in a clear and logical way. He said that after speaking to Ms Spicer, the book-keeper at French Bakery, he requested a meeting with Mr and Mrs Paterson away from the business premises over a cup of coffee. He wanted to speak with them privately. They agreed to travel to a coffee shop at Nile Street Glenelg. The plaintiff’s case depends upon a relatively short conversation.
Mr Algar said that he told Mr and Mrs Paterson:
“Peter and Gail. I have been at the bakery. I’ve had a list of accounts that are required to be paid, they total approximately $120,000 and I am unable to ascertain the full extent of what is outstanding. Based on that information my opinion is that the bakery is insolvent and it should not continue to trade, because if you do trade it will be credit, you would be in breach of company law … you have two options.”
Mr Algar said that the first option was to voluntarily appoint a receiver to wind up the company which he estimated would cost about $20,000. The second option was to “…sell your house to continue trading. In this way you will be taking ownership and responsibility of your own actions and decisions, and you will be taken seriously”. Mr Algar said he looked at Mr Paterson who said, “I wish for the bakery to continue to trade” and he then looked at Mrs Paterson who said, “I will sell the house”. Mr Algar then replied, “On that basis I will help you and loan you monies to be repaid from the sale of the house”. Mrs Paterson looked at Mr Algar and said, “Yes I will sell the house to repay monies that were loaned to the bakery”.
Mr Algar gave evidence that Mr Paterson told him that the bakery had stopped trading because suppliers would not supply them, they could not bake any bread, could not commit to the orders they had and were unable to pay wages. There was an urgency about paying immediate creditors to enable the bakery to trade. Mr Paterson requested Mr Algar to contact the suppliers so that products could be purchased and sent to the bakery so that they could manufacture bread for sale.
Mr Algar said that he told Mr Paterson that if he wanted him to contact the suppliers it was conditional on all outstanding amounts owing to other suppliers/creditors being paid because Mr Algar was using his position and his name. Mr Algar said he wanted to be taken seriously. Mrs Paterson replied, “Yes the other creditors will also be paid from the sale of the house”.
I mention in passing that the house has been sold and there is no question of specific performance of any agreement to sell. The proceeds of sale are held in trust and the question is whether Mrs Paterson should be required to pay to the plaintiff the amounts which it paid to suppliers of the plaintiff and Cash Resources Australia Pty Ltd.
As I have mentioned Mr Algar gave his evidence in a clear and logical fashion. It was so clear and concise that with the benefit of hindsight it might be thought to have been well rehearsed. Of course, that is not a reason to reject it. The general credibility of Mr Algar is tarnished by the fact that he was prepared to make untrue statements in letters which he directed his accountant, Mr Morais, to send to Mr and Mrs Paterson for the purpose of putting pressure on the defendant. Again, I do not regard that as a reason to reject his testimony. However, there are more specific considerations which I refer to below.
Mr Algar explained his failure to document the arrangement on the basis that he had known Mr and Mrs Paterson for over 20 or 30 years and “the amount that I could see to be advanced to them to continue trading until the business had turned around was approximately $10,000 to $20,000”. That estimate did not involve paying the existing debts, which totalled about $120,000, but only related to the amount required to ensure that production could continue.
Shortly after the meeting on 16 December 2002 Mrs Paterson gave Mr Algar a gift of a small white bear to which was attached the wings of an angel. She also gave him three photographs, which included one photograph of Mr Algar and Mr Paterson sitting together in a motel room, which has the words “to (sic) special men” written on the rear. In addition she gave Mr Algar a note of thanks for “everything you have done for Peter”, told Mr Algar that he was “Very Special” and wrote, “You said you were the wind beneath Peter’s wings. All I can say you have the golden wings”. Hence the golden wings on the toy bear.
Mr Algar said that he spoke to Mr Paterson about finalising the factoring arrangement because of its unprofitability and that he had a belief that the value of the debtors that the company would be required to purchase back from the factor was around $20,000 to $25,000. When he came to deal with the factoring company he was advised that Mr and Mrs Paterson also needed to pay out a loan of $50,000 secured by a mortgage over Mrs Paterson’s house.
In January 2003, Mr Algar arranged for Mr Morais, his group accountant, to travel to Adelaide to reconcile the amount owing to Cash Resources Australia Pty Ltd and to put in place accounting procedures to complete a BAS statement due at the end of September 2002. Mrs Paterson invited Mr Morais to stay at her home.
Mr Morais was instructed to open a loan account in the name of Foxgold and to send regular statements to Mr and Mrs Paterson at their home fax number. Mr Algar said that statements were sent by Mr Morais to Mrs Paterson every three to four weeks.
During January 2003, Mr Algar spoke to Mr and Mrs Paterson. He spoke with Mrs Paterson about the bakery business and spoke with Mr Paterson about repairs being carried out to prepare the house for sale.
Exhibit P1-31 is a facsimile, which Mrs Paterson forwarded to Mr Algar on 30 January 2003 in connection with some job descriptions. It is evidence of dialogue between Mr Algar and Mrs Paterson and is relied upon to establish the involvement of Mrs Paterson in the management of the business.
Mr Algar gave evidence that he had been continually asking Mr Paterson regarding the sale of the house and the return of the loan to the point where Mr Paterson said, “Ask Gail yourself, she will be in the garlic room this morning.” Mr Algar did ask Mrs Paterson what was happening with the sale of the house and the return of the loans. She looked at him and said, “John, you don’t have to worry about your money, your money will be paid on the sale of the house.” and Mr Paterson said, “I told you so, John, I told you so.”
Mr Algar said he spoke to both Mr and Mrs Paterson in February 2003 and discussed the progress of the sale of the house. She told him that the sale of the house was being handled by Mr Paterson.
Towards the end of February 2003 Mr Algar was concerned with the lack of progress with the sale of the house and the escalation of the debt and he sought legal advice. On 6 March 2003 his solicitor emailed a message suggesting he obtain “a formal charge and guarantee by the wife”.
I do not know what instructions were given to the solicitor, but I mention in passing that it would have been illogical to request a further guarantee from Mrs Paterson if she had already given the oral guarantee referred to by Mr Algar in his evidence. May be something more formal was required, but that is not made clear. It was that advice which gave rise to facsimile messages of 7 March 2003 and 11 March 2003 from Mr Morais to Mr and Mrs Paterson which are the subject of my earlier comments about Mr Algar’s willingness to misstate facts for the purpose of placing pressure upon Mr and Mrs Paterson.
The facsimile messages of 7 and 11 March resulted in Mrs Paterson advising Mr Algar that she would not be responsible for any further advances. That in turn caused Mr Algar to decide that no more funds would be provided to the French Bakery without a guarantee.
Exhibit P1-46 is an invoice to Foxgold Pty Ltd, dated 31 March 2003, from French Bakery. It evidences the sale of the plant in the garlic room for a sum of $5,000 plus GST. Mr Algar said that notwithstanding its date the invoice was in fact prepared in the second to last week of April. The invoice was backdated because Patte Nominees had ceased trading at the end of March. The money was paid to Patte Nominees by Algar Burns Pty Ltd, one of Mr Algar’s companies, on 16 May 2003.
Exhibits P1-52 and P1-53 are invoices for $11,000 and $22,000 respectively from French Bakery to Foxgold. They also relate to the plant and equipment of the French Bakery. These invoices were never paid by Foxgold and Foxgold never received the plant and equipment. The current whereabouts of the plant and equipment is not known by Mr Algar. Mr Algar said that the invoices had been prepared to protect Mr Paterson. Although they were never presented to any creditor of Patte Nominees they are an indication of a propensity to engage in misleading conduct and they reflect poorly on the business morals and creditability of both Mr Algar and Mr Paterson. The transaction which the invoices purport to evidence was a sham.
On 23 April 2003, Mr Algar requested an agent to transfer the trading name of French Bakery from Patte Nominees Pty Ltd to Datatech (WA) Pty Ltd, another of his companies. Accordingly, plant of French Bakery had been transferred to the plaintiff, the trading name had been transferred to a company under the control of the plaintiff and Datatech was involved in the operation of the company from the time that it recommenced business in April 2003. Apart from evidence that the plaintiff lost a further $40,000 conducting the business, the evidence does not reveal precise details of the acquisition of the business by Datatech or the actual conduct of the business after April 2003. What the evidence does reveal is that Mr Algar or companies under his control ended up with the business. It is difficult to reconcile the reality of the situation after April 2003 and Mr Algar’s evidence that he did not want Foxgold to be involved in a bakery (T87-6). Perhaps he distinguished between Foxgold and other companies under his control.
On 15 September 2003, Mr Morais signed a letter from the plaintiff to Mr and Mrs Paterson. That letter also made false statements about requirements of Foxgold bankers. The letter concludes with the statement that the assistance which was given and the money loaned to fund the business and repay Cash Resources was conditional on the sale of the house which was agreed to by both Mr and Mrs Paterson. Mr Algar said that he instructed Mr Morais to falsely say that he had received advice from his bankers to put pressure on them, Mr and Mrs Paterson.
Mr Algar then made an offer to purchase Mrs Paterson’s house himself. He wrote to Mrs Paterson again on 16 September 2003. Saying:
“From my perspective, going back to last December was to help you and Peter to get out of your current mess, restructure the bakery and turn it into a profitable business. At the time we had two options, shut the bakery down and appoint an administrator or restructure the business and keep trading with a review at the end of March.
In the view of the cash position I made it very clear to both of you over a cup of coffee that the only way I would get involved would be for you to sell your house to pay all the outstanding accounts and to repay all monies I would advance. The decision by yourself and Peter was to continue with the understanding that your house would go onto the market towards the end of January 2003…”
The offer by Mr Algar to purchase the house reflected its value. The proposal was that the purchase price would be satisfied in part by a credit for the monies claimed to be owing. Mr Algar subsequently learnt from Mr Paterson that Mrs Paterson was not interested in the offer and he then proceeded to take action for the recovery of the loan.

The letter of 16 September 2003 was the first document alleging the arrangement upon which the plaintiff’s claim is now based. A question arises as to why it took so long for the allegation to appear in written form, particularly having regard to the existence of earlier correspondence in which it would have been appropriate to refer to the alleged arrangement.
Datatech operated the French Bakery business from April until August 2003 (T142). Mr Paterson did not act as manager of the business after April and had no role to play. Mr Baker was also a director of Datatech which was acquired by Mr Algar as a shelf company.
The plaintiff did not explain the reason for Datatech taking over control of the business in April 2003.
A deficiency in the evidence is the lack of any insight into the cash flow of Patte Nominees. While the debts were being factored by Cash Resources, Patte Nominees should have had an income stream from the factor. After the factoring arrangement was terminated Patte Nominees should have had an income stream from its sales. The overhead of Patte Nominees seems to have been met by the payments from the plaintiff. There is no evidence as to what Mr Paterson did with the income which must have been received during the time that the plaintiff was paying the overhead between 16 December 2002 and the end of February 2003.
As to the circumstances in which the factoring arrangement with Cash Resources came to an end, Mr Algar says that he arrived at a joint decision with Mr Paterson, the debt was reconciled by Mr Morais, the payment approved by both Mr and Mrs Paterson and then the payment made.
A payment of $72,594.62 was made on 16 January 2002. In cross-examination it was suggested that the money was paid because of Mr Algar’s annoyance over the fact that he was snubbed by the manager of Cash Resources. Mr Algar denied the suggestion and said, “Why would one do that? It doesn’t make sense.”
In cross-examination is was suggested to Mr Algar that neither Mr nor Mrs Paterson was involved in relation to the amount to be paid to Cash Resources and that it was his doing and his doing alone. It was put that he decided to make payment without consultation with Mr or Mrs Paterson.
It was suggested that the first time that a total debt of the order of $190,000 was indicated to Mr Paterson was on or about the 28 February 2003. Mr Algar said that was not correct and that he knew that Mr Morais was talking to Mr and Mrs Paterson on a daily basis and he assumed that Mr Morais kept them informed. I refer to the evidence of Mr Morais later.
Mr Algar was asked questions as to whether there was a proposal that the business French Bakery would be conducted on the basis that Mr Paterson would have a 50% interest and Mr Algar would have a 50% interest (T226). He said, “There was no business, no business ever there to do anything with. No business”, and such a proposal was never made to him by Mr Paterson or by him to anyone. He said Mr Baker looked at options on what could happen, but there was never any discussion to form a business. He said Mr Baker did not do that because he (Mr Algar) requested him to do so, but that he just did it. Initially Mr Algar denied that Mr Baker gave him information along the lines suggested. However when confronted with Mr Baker’s memorandum of about 6 January (exhibit P1-20) and it was suggested that the memorandum was received by him, read by him and considered by him, Mr Algar responded, “Not considered. It was just his opinion” and then asked why did he provide you with that information, his response was “You ask Mr Baker. He was concerned regarding his client and these were some of the options, based on what possibly could happen. It’s just one option to consider.” I do not accept that evidence by Mr Algar.
The refusal by Mr Algar to acknowledge the clear meaning of exhibit P1-20 is significant. It demonstrates a refusal by him to acknowledge that as early as 6 January 2003 he was contemplating the acquisition of an interest in the business. That evidence by Mr Algar colours all of his other evidence. There is evidence that companies associated with Mr Algar did acquire an interest in the business.
I do not accept Mr Algar’s glib dismissal of the memorandum as a matter of Mr Baker looking at every opportunity for Mr and Mrs Paterson. He said that the proposal in the memorandum was “Just one option. He gave me an option that he put forward.” He gave no evidence to explain the circumstances which led to the “option”. Mr Algar’s evidence did not explain the existence of the note and is only capable of an interpretation which is adverse to the plaintiff’s case.
Another matter which indicates that Mr Algar’s interest in the business extended beyond helping out friends in a time of difficulty is the fact that he had discussions with the landlord of the premises and carried out a process of due diligence to consider whether Foxgold should purchase the property from which the business was conducted.
I do not accept Mr Algar’s evidence that he did not consider acquiring an interest in the business. His unreliability on that topic casts doubt on his evidence generally. I am not prepared to accept his evidence unless it is reliably corroborated.
If the plaintiff’s case depended solely on the evidence of Mr Algar I would not be able to find that the plaintiff had proved its case.
The small passage of the evidence upon which the plaintiff’s case relies is to be contrasted with the balance of Mr Algar’s evidence, which is vague and unsatisfactory. For example, Mr Algar’s fobbing off of questions by suggesting that the cross-examinator ask Mr Baker indicates that he was not open and frank with the court. Exhibit P1-20 contained reference to the possibility of Foxgold owning the building. It is unlikely that Mr Baker obtained that information from any source other than Mr Algar. I find that exhibit P1-20 is a reflection of discussions that Mr Algar had with Mr Baker prior to 6 January 2003.
Mr Algar’s explanation that he acquired an option to purchase the property because Foxgold is a large investor in property in Broome, Karratha, Brisbane and Western Australia is not an answer to the inference that Mr Algar was considering an arrangement such as that described in exhibit P1-20.
Patte Nominees went into liquidation on 26 August 2003. On 1 September, the liquidator wrote to Mr Algar referring to his “recent purchase of the business known as ‘French Bakery’ from the company” and requesting him to forward copies of the documentation. On 12 September, Mr Algar wrote to the liquidator saying, “I refer to your letter of 1^st September and advise that I did not purchase the business know (sic) as ‘French Bakery’”. As I have mentioned there was evidence of the sale of plant and equipment by Patte Nominees to Foxgold. Also the name “French Bakery” was transferred from Patte Nominees to Datatech. In the circumstances, the statement to the liquidator in Mr Algar’s letter of 12 September 2003 that he did not purchase the business known as “French Bakery” is at best cute and at worst misleading and dishonest.
At least in respect of exhibit P1-20, Mr Algar has not been open with the court. He made false statements in letters to Mr and Mrs Paterson. He gave a misleading answer to the liquidator. There are many gaps in the evidence which he gave to the court. Fundamentally he has not explained a logical reason for paying $200,000. For that reason I have reservations about accepting the evidence of Mr Algar on the critical question of what was the nature of the arrangement reached on 16 December 2002.
When confronted with the letter of 12 September 2003 the reply of Mr Algar was:
“That’s in the name of John Algar, that’s addressed to John Algar, which I didn’t do that, and, subsequently, they wrote back to me and asked whether Datatech did and I wrote in the affirmative.”
The liquidator replied challenging the contents of the letter of 12 September with a letter of 19 September 2003 (exhibit P1-73). The liquidator said, “… I’ve been advised that you purchased certain assets pursuant to a sale agreement executed by you and the Director …”. Mr Algar’s reply is not in evidence. His oral evidence was that he wrote in the affirmative and he said that he advised, “That Datatech bought that, and I sent copies of the registration. They asked me whether John Algar had bought it and I said ‘No’. In fact the invoices suggested it was Foxgold which bought the plant.”
The evidence of Mr Baker
Mr Algar’s accountant, Mr Baker, gave evidence. It would appear that Mr Algar and Mr Baker had a close association over a number of years. In early December 2002, Mr Paterson told Mr Baker that Cash Resources had declined to provide further financial support and required repayment of the existing debt. That led to Mr Paterson approaching Mr Algar, who indicated that he was prepared to lend money to Mr and Mrs Paterson.
Mr Baker was asked about exhibit P1-20. He said the document came into existence on 6 January 2003. He was asked why he prepared the document and he said:
“Because John was contemplating or wondering whether if it would be of any benefit to Peter and Gail if he bought the premises that the bakery was in. He was trying to work out whether that would be any benefit if he took over the actual property and, in that way, it could possibly assist Peter and Gail.”
He denied that Mr Algar ever told him that he was proposing to acquire a financial interest in the French Bakery. That answer is inconsistent with the plain terms of the document, which discusses the creation of a new business structure which would operate the business of the French Bakery owned as to 50% by Mr Algar’s interest. His answer established that Mr Baker was an evasive and unreliable witness. His evidence contained other examples of unreliability. I am unable to rely upon the evidence of Mr Baker for the purpose of deciding any of the issues in the case. Counsel for both parties acknowledged that the evidence of Mr Baker was of little assistance. His unwillingness or inability to assist is established by the fact that he said he could not recall the answer to many of the questions asked of him.
After questioning, Mr Baker said that he learnt about the “thought” described in the memorandum of 6 January (exhibit P1-20) from Mr Algar. That is contradictory with the evidence of Mr Algar, who sought to distance himself from any suggestion that he had contemplated acquiring an interest in the business. Mr Baker said he first learnt of the possibility that Mr Algar may acquire equity in the business in about January.
After contacting his office in Perth, Mr Baker was able to produce the draft management accounts which were enclosed with a letter of 6 December 2002 to Mr Ciccoletta of Cash Resources. The draft accounts showed that the business was making a loss of $3,727 per week, but estimated that with new equipment there could be a weekly profit of $1,987.
If the expected profit was of the order of $2,000 per week, Mr Baker’s figures did not justify the weekly payments advanced by the plaintiff during the period from 16 December 2002 to early March 2003. The case just does not make sense.
Mr Baker’s evidence was that he could not say whether he had given the information in the draft management accounts to Mr Algar. I find it remarkable that Mr Baker, the long-standing accountant for Mr Algar’s businesses, should have introduced Mr Algar to Patte Nominees but not pass on the most critical information.
The evidence of Mr Morais
Mr Defino Morais is a trained charactered accountant, who is the group accountant for Mr Algar’s group of companies. He provided information to Mr Baker to enable him to prepare the groups taxation returns.
Mr Morais said that Mr Algar told him about the financial difficulties with the French Bakery and that “we would have to fund and support French Bakery”. Mr Morais opened a loan account in the trading books for Foxgold. He received invoices from French Bakery with a request for payment, arranged for Mr Paterson to approve the invoices, made the payments from which ever of the companies in the group had funds and then made an entry in the intercompany account. He said he communicated with Mr and Mrs Paterson concerning the payments that were being made. He said he faxed copies of the statements to them once every month with a minimum of 20 days. The evidence does not make it clear how many statements were dispatched during the period when the bulk of the debt was being incurred in January and February 2003.
Mr Morais gave evidence about the Cash Resources account. Whilst on holidays he was requested to come to Adelaide to help Mr Paterson out. He stayed at the Paterson’s family home. He said that on the evening of 14 January 2003 Mrs Paterson cooked a special Indian meal for him. After dinner Mr Paterson went to bed and he and Mrs Paterson were watching television. Mr Morais said that Mrs Paterson said to him, “I do not how much you are aware of this or how much you know. We won’t be having this house for very much longer … We have agreed to sell this house and repay John.” To which he replied, “I’m aware of it.” That conversation is replied upon as an admission, which corroborates the evidence of Mr Algar as to the arrangement alleged to have been made on 16 December 2002 at the coffee shop.
Mr Morais said the following morning Mrs Paterson told her husband that she had mentioned selling the house. Mr Paterson said that there were a few repairs which were required before the house could be put up for sale. Mr Paterson explained what the repairs were. He took the conversation to be corroborative of what Mrs Paterson had said the previous evening.
As I have mentioned, it is common ground that Mrs Paterson had decided to sell her house. What is in issue is whether Mrs Paterson had agreed to pay part of the proceed to the plaintiff in reimbursement of payment made on behalf of Patte Nominees. The corroboration of Mr Algar on this critical issue therefore depends upon whether Mrs Paterson used the words “and repay John” or not in the conversation after the curry meal.
Mr Morais gave evidence of events on 15 January 2003. First with Ms Spicer, the accounts clerk at French Bakery, he went to the offices of Cash Resources who provided him with a summary of what needed to be paid. He and Ms Spicer checked the figures against their own records and worked out a payout figure. Mr Morais showed the document to Mr and Mrs Paterson and sent a fax to John Algar. The fax was exhibit D7. The typed document shows a total payout due to Cash Resources of $82,274.60, but the typed document is amended in hand by allowing a credit of $10,679.98 to arrive at a net amount due of $72,594.62. That evening Mr Morais spoke with Mr and Mrs Paterson. He told them that a payout had been agreed. He showed exhibit D7 to Mr and Mrs Paterson.
On the following day, after they finished reconciling the Cash Resources account, he helped Ms Spicer to reconcile the BAS statement for the last quarter of 2002. He said that at about 3 o’clock in the afternoon he spoke to Mrs Paterson in the bakery. He said she asked, “How did it go?” and he replied, “Yes, it all went well and we have come up with the final figure that we need to pay.” He asked, “What do you want me to do?”. Mr Paterson said, “Yes we have to pay.” or “Have to pay it mate.” Mr Morais then spoke to Mr Algar, sent him a fax and sent him the figures to arrange the necessary transfer of funds.
Mr Morais also gave evidence that during the time that he stayed with the Patersons, he discussed his summary of the payments that were being made. On the night of 14 or 15 January, Mr Paterson said that he had not received a statement which Mr Morais had arranged to be sent to him from Perth, although Mr Morais had reservations about that because he claims that he had heard the facsimile machine ring during the night. When Mr Morais raised the matter, Mr Paterson suggested that the fax was out of paper. The following day Mr Morais called his office in Perth and asked his assistant to fax the statements to the home facsimile machine again. When he went home that evening Mr Morais saw the statements on the facsimile machine. He said he discussed with Mr and Mrs Paterson the amounts that were on the statement. The statement is at pages 23 and 24 of exhibit P1. He said, “I sat down with Peter and Gail discussing the payments which were made out to Foxgold, Algar Burns and YOUR ASP.” He explained, “I discussed all the transactions that took place between the three companies and that money loaned to French Bakery to all the suppliers.”
If that evidence is correct then at least by 16 January 2003 Mrs Paterson had been fully informed as to the progress of the debt that she would be required to pay.
Mr Morais wrote to Mr and Mrs Paterson on 7 March 2003.
The letters requested a charge and a guarantee. Mr Morais said that guarantee was sought from Mrs Paterson. He was asked why she was required to give a guarantee if she had already agreed that the house was to be sold and the proceeds to be deducted from the sale of the house. His answer was:
“That was early January that she had promised John, and she told me as well when I visited Adelaide, but it didn’t happen and the cash flow was getting tighter and tighter at my end, so I found the need to pursue these actions.”
That answer does not completely explain why a guarantee was necessary if Mrs Paterson had already made a promise which was the equivalent to a guarantee (T393-17).
Mr Paterson contacted Mr Morais and advised that his wife did not understand the letter. He then forwarded a further letter (exhibit P1-41) dated 11 March. That letter was also composed by Mr Algar. He spoke to Mrs Paterson once or twice following the letter. There was an invoice which required payment and Mr Morais rang the bakery. The phone was answered by Mrs Paterson, who told Mr Morais “I am not responsible for any more funding for the bakery.” Mr Morais said that the business ceased to operate when Mrs Paterson “stopped taking ownership of any payments”.
On 4 September 2003, Mr Morais faxed a summary of payments made on behalf of French Bakery by Foxgold Group (exhibit P1-60). The original was also sent by mail on 4 September. The document was addressed to Peter and Gail Paterson and was said to be a summary of money paid as of April 2003. Mr Morais did not hear from anybody following the transmission of the document.
On 15 September, at the request of Mr Algar, Mr Morais wrote to Mr and Mrs Paterson (exhibit P1-66). The letter contained false statements about the position of the bank and sought a firm commitment as to the sale of the house and repayment of the debt. Mr Morais never received a response to the letter.
Mr Morais said that in December 2002 he saw the draft management accounts relating to the French Bakery which had been prepared by Mr Baker. They were given to him by Mr Algar, who asked him to review them. He did that, but did not learn anything from the draft accounts; nor did he reach any conclusion, although he did say to Mr Algar that the business was not looking good. At the request of Mr Algar, he carried out a sales and costs assessment.
Mr Morais denied that Mr Algar discussed with him the possibility of business structure in relation to the bakery which was owned 50% by Mr Algar and his interest and 50% by Mr Paterson. Nor did he discuss the possibility of a company associated with Algar owning real estate in South Australia.
In cross-examination Mr Morais stood by his evidence that Mrs Paterson told him that she had agreed to sell the house to repay John and that he discussed the figures with Mrs Paterson.
The evidence of Mrs Paterson
Mrs Paterson gave evidence that she had no role in relation to the supervision and financial affairs of the bakery, and no role in relation to the payment of accounts. Her only role was working in the garlic room. She said the only information she had about the operation of the business was that Mr Paterson was not getting his money in as quickly as he should have been getting it in and she knew about Cash Resources.

Mrs Paterson said that at the time of the purchase of the French Bakery debts of about $400,000 were secured against her house. Some of that related to the purchase price of the French Bakery. She could not be accurate, but thought about $200,000 was borrowed for the purchase of the French Bakery.
Later, further funds were required from Cash Resources. At that time, around September 2002, she saw a solicitor in relation to her husband’s request to provide security to Cash Resources. She was not keen to do that, but after speaking with the solicitor did allow funds to be borrowed against the house.
She became aware that Mr Paterson was speaking with John Algar, who was going to advise and try and sort things out.
She gave evidence of a day on which her husband told her that they were going for a coffee with Mr Algar. She said that on the way to the coffee shop she asked where they were going and Mr Algar said jokingly, “Just shut up, sit back. All will be revealed when we get there.”
They arrived at the coffee shop at about quarter to one. They stayed 20 to 30 minutes. Mr Algar reported that Mr Paterson had told him what was happening at the bakery. He said something like, “Your incoming and your outgoings, your outgoing should be what you’re earning. That should be your income for the year.” He said he could not understand why it could not be turned around and that he had people who could do that “with no cost to you. It has to be done with love. It has to come from the heart.” She said Mr Algar said, “My advice to you would be to sell your house, get yourself out of debt, perhaps even rent for twelve months, but your heart has to be in it.” Mr Algar then turned and looked at Mr Paterson and said, “Is your heart in this Peter?” to which Mr Paterson replied affirmatively.
Mrs Paterson said that she did not say anything in the course of the discussion. Nothing was said about her giving her house as security for money which was to be loaned. The only other thing that she could recall being said was that Mr Algar “was going to be wind beneath his (Mr Paterson’s) wings.” They then went back to the bakery.
Mrs Paterson said that night she and her husband had an argument when Mr Paterson asked what she thought about Mr Algar becoming his partner. She said her response was “Great! I’m out of it.”
On a later occasion she saw Mr Algar at the airport and gave him the bear, photographs and note. She acknowledged that it was a thank you note for helping her husband. Her understanding was that Mr Algar was “to sort out the book work and restructure the business.”
Mrs Paterson gave evidence of the occasion on which she provided the Indian meal for Mr Morais. She denies that her husband left her alone with Mr Morais. She said that they discussed her home, that Mr Morais said it was a beautiful home and that she told him that she was going to sell it. However, she denied saying that she was going to sell the home to pay Mr Algar.
She denied being shown any document at her home by Mr Morais. She denied any discussion with Mr Morais in relation to a document which showed figures owed to Foxgold or companies associated with Mr Algar. She denied any discussion with Mr Morais in relation to the amounts owing to Cash Resources. She denied being provided with a payout figure for Cash Resources and denied being provided with information relating to the debt payable to Cash Resources. She denied being provided with a copy of D7 by Mr Morais and denied seeing the document. She denied having a payout figure raised by Mr Morais relating to the Cash Resources debt.
As to the figure of $72,594.62 shown in exhibit D7, Mrs Paterson denied having a discussion with Mr Morais in relation to that figure or any figure similar to it. She denied having a conversation with Mr Morais at the bakery at 3.00 pm on 16 January and said she did not work that day.
Mrs Paterson said in March 2003 her husband raised the topic of providing security over the house. She said that Mr Paterson said that Mr Algar needed some security for what he had put into the bakery. She asked what he meant and Mr Paterson said that Mr Algar wanted some security. She replied, “I thought he was your partner.” She did not agree to provide security.
Mrs Paterson acknowledged that in January 2003 she had plans to sell her house and after paying the debts to purchase another less expensive property which would be freehold.
Mrs Paterson received Mr Algar’s letter of 16 September 2003 (exhibit P1-69). She said that prior to receiving the letter she did not understand that it was suggested that she had agreed with Mr Algar to sell her house and repay all monies that he might advance in relation to the French Bakery. She said that she never agreed to do that.
She did not contact Mr Algar on receipt of the letter of 16 September 2003 and assert that the allegation was incorrect. She said that she did not know what it was all about.
Mrs Paterson said that prior to receiving the letter she did not know that it was claimed that Foxgold had paid out monies of that magnitude. At that time, September 2003, her house was on the market. She had tried to sell by auction in June. The letter of 16 September 2003 contained an offer by Mr Algar to purchase the house. Mrs Paterson was not prepared to sell because she did not owe him the debt which Mr Algar wanted to set off against the purchase price.
Foxgold lodged a caveat. Mrs Paterson consulted a solicitor on 24 October 2003. Her solicitor wrote to the plaintiff’s solicitor denying any agreement.
Mrs Paterson said that when Mr Algar came to Adelaide she did not realise that there was a cash flow problem in the business. That contradicts her other evidence that her husband had a problem getting money in. It also fails to acknowledge the reality of the situation.
Mrs Paterson distanced herself from any involvement in the business. When cross-examined about her statement on the evening of 16 December 2003 that “I’m out of it”, upon been told of a partnership between her husband and Mr Algar, she explained that she meant she was out of the garlic room. She gave a convoluted answer (T472), which did not advance the case. She stopped working in the bakery in July 2003.
When cross-examined about the critical conversation at the meeting at the coffee shop on 16 December 2002, Mrs Paterson said that Mr Algar said everything in one long sentence, that he said he had the people and “my advice is to sell your house, get yourself out of debt, maybe even rent for twelve months”. She said she was in shock, just sitting there and never said a word. She just sat there and did not ask one question because “it wasn’t my business … I had nothing to do with it”. She said, “there was no mention of loans at all or me selling my house and paying John back any money, none whatsoever.” She said after returning to the bakery she got her belongings and went home crying.
Mrs Paterson said the first that she knew that Mr Algar had lent money to the bakery was when he paid the Cash Resources debt. The first that she learned of that was when Mr Algar returned after a meeting at Cash Resources. She said, he was red as a beetroot, flopping all around the office and he said something like “fix them up” or “I paid them out”. She said she did not know that he was going to Cash Resources and she asked, “What did you do” and Mr Algar said, “I paid them (Cash Resources) out”. That night she asked her husband what had happened and he said, “John did a banana” or words to that effect and he paid them out.
That evidence of Mrs Paterson cannot stand alongside of the evidence of Mr Morais.
When asked how could the business survive without Mr Algar putting in money she said, “I can’t tell you that. As far as I’m concerned I did not know how much the bakery was in debt or owed or I didn’t know nothing, and no money was suggested. Why would I say ‘I’m saying yes to a loan or loans’ when I didn’t know how much things would be?” That answer encapsulates her defence.
Mrs Paterson denied that she was told on an ongoing basis how much money Mr Algar had paid to support the bakery. She said she was not told on any regular basis and knew nothing about the business.
Mrs Paterson said that when she received Mr Algar’s letter in September 2003 requesting payment of $214,000 which was claimed to be owing, she said to her husband “This is nothing to do with me. Why has this man done this?”
She said she first found out that Mr Algar was putting money into the bakery in June 2003 when she learned that her husband was being paid $500 a week.
The evidence of Mr Paterson
The version of the events of 16 December 2002 of Mr Paterson varies from that of Mr Algar. He said they met at the Hyatt Hotel at approximately 8.30 and went to a café in the Hyatt Hotel where they had a meeting of about two hours duration. Mr Algar ate during the meeting. A number of matters relating to the business were discussed and Mr Algar enquired, “wouldn’t bother you if the house was sold” to which Mr Paterson said it had nothing to do with him. They left the Hyatt Hotel and travelled to the French Bakery in Mr Paterson’s car arriving at about 11.00 am. Mr Algar was given a tour of the bakery and introduced to staff members. Mr Algar spent some time in the office with Ms Spicer, the book-keeper.
He said he, Mrs Paterson and Mr Algar then went to the coffee shop at Glenelg arriving at approximately 12.20. They remained about half an hour and returned to the bakery. His recollection of the conversation was that Mr Algar said, “With the financials, it would be best to sell your house” and “Sell your house, get yourself out of the shit, and rent for twelve months.” Reference was made to the payment of over $3,000 a month that had to be made to the Rock Building Society and Cash Resources.
Mr Paterson denied that anything was said to the effect that Mr Algar or any entity associated with him would loan money to make payments for the French Bakery with the money being secured over the house.
The trio returned to the bakery and Mr Algar spent another half an hour or so with Ms Spicer to get more financial information.
He said that at about two or three o’clock, Mr Algar and he returned to the coffee shop. Mrs Paterson had gone home. He said that Mr Algar asked, “What would you think of me becoming your partner?”, that Mr Algar said, “Can you do what you’re told? Most can’t.” He said his response was “Yes, I would be honoured.” and “You know I can.” They returned to the bakery. Mr Paterson said that night his wife was upset because she would have to sell the house. He said he told his wife, “John is now a partner” to which she replied, “Well I don’t want nothing to do with the place” or words to that effect.
Mr Paterson said he collected Mr Algar from the Hyatt Hotel at 8.00 am the next day, they discussed his wife’s reaction to the partnership and Mr Algar said that Mr Paterson needs his wife’s support in the garlic room.
Mr Paterson said after those events Mr Algar made arrangements for the payment of outstanding accounts in relation to the French Bakery, and a process was put in place. Later when asked whether a process was put in place for the payment of accounts he said, “I’m not quite sure about the process, but the payments certainly started to get paid.” and that the accounts started to get paid after Mr Paterson gave Mr Algar information on the urgent ones that needed paying. Mr Paterson said he had no part to play in the process other than to provide the information; invoices were sent to Perth, a payment authority slip was issued by the Perth office and Mr Paterson authorised the request for payment.
It was a very handy arrangement. Mr Algar paid the bills of the French Bakery and there was no obligation to repay. Mr Paterson would argue that the payments were a capital contribution to the new partnership.
So far as the Cash Resources payment was concerned Mr Paterson gave evidence of an appointment with the manager of Cash Resources. His understanding was that Mr Algar and he were going there because of “something to do with the reconciliation.” They met a woman, not the manager. When he was told that the manager was not there Mr Algar asked the woman to get the manager on the phone. He said what happened was “Spectacular actually. There was an exchange, I don’t know what was said, it was quite loud and at the end of the conversation there was something about reconciliation, ‘you reconcile or we would reconcile’ and the phone was smashed down.” Mr Algar said something like “Nobody does that to me” and they returned to the bakery.
Mr Paterson gave evidence of the visit by Mr Morais to Adelaide. The purpose of the visit was to reconcile the Cash Resources account and to carry out some general accounting work. Mr Paterson denied that while Mr Morais was staying at his house he saw any documents which set out information in relation to payments made by Mr Algar or his companies. He also denied any discussion with Mr Morais about payments made or the amount of any payments made by Mr Algar or his companies.
Given Mr Morais’ position and the reason for his trip to Adelaide, I am not able to accept that evidence of Mr Paterson.
Mr Paterson said his arrangement with Mr Algar was that they were partners. He said that so far as the payments were concerned there was no question of repayment (T570-17). He thought that because Mr Algar was a partner he was “bank rolling” the operation until they got it going and Mr Algar would get his money back because he was a partner. That was his belief from the time when the payments commenced.
No steps were taken to have a partnership agreement prepared and Mr Paterson did not tell his accounting advisers such as Mr Baker that he had formed a partnership.
Mr Paterson said he never received information about the amounts which had been paid in a schedule form, although he did receive exhibit D11, which is a schedule of payments to 28 February 2003 which shows an indebtedness of $192,606.79. He said D11 was the first he received in writing. He said the first information which he received about the indebtedness was a phone call from Mr Algar.
Mr Paterson denied that he approved the amount which was paid to Cash Resources (T575).
Mr Paterson agreed that he received the letter dated 7 March 2003 from the plaintiff (P1-40) and said he contacted Mr Morais and requested more information. He then received the letter dated 11 March 2003, which he discussed with his wife, who indicated she was not prepared to provide the charge and guarantee requested in the letter. He telephoned Mr Algar and told him “Gail’s not prepared to sign anything. It was nothing to do with her”. That led to the phone call in which Mr Algar gave an instruction that the French Bakery had to be closed down. Mr Paterson did that. The last trading day was 18 March 2003.
Exhibit P1-46 is a tax invoice dated 31 March 2003 in the amount of $5,500. It purports to record the sale of the equipment used in the garlic room from French Bakery to Foxgold. Mr Paterson said he prepared the invoice at the direction of Mr Algar sometime in May 2003 and it was dated 31 March 2003 because they were Mr Algar’s instructions.
Exhibits P1-52 and P1-53 are tax invoices in the sums of $10,000 plus GST for part of the equipment listed in a schedule, and $20,000 plus $2,000 GST for a divider that was used in the business. Those invoices were also prepared at the request of Mr Algar.
The sum of $5,500 referred to in P1-46, the garlic room equipment, was paid to Patte Nominees. No payment was made in respect of the other invoices, P1-52 and P1-53, until August 2003.
Patte Nominees went into liquidation in August 2003.
Mr Paterson showed the letter of 15 September 2003 (P1-66) to his wife and spoke to Mr Algar. He said, “Well. We got no result in March. She still doesn’t want to know anything about any of this” and suggested that Mr Algar write direct to Mrs Paterson. That caused Mr Algar to write the letter of 16 September 2003 (P1-69).
In cross-examination, Mr Paterson volunteered that Mr Baker was trying to arrange a franchise system. He referred to a proposal that there would be ten franchises created throughout Australia at $300,000 per franchise. That evidence was never elaborated on.
In cross-examination, Mr Paterson maintained the position that at the meeting at the coffee shop on 16 December Mr Algar said nothing at all about providing assistance “Not at thing. Not a word.” He also maintained that when he signed invoices and asked Mr Algar to pay them he did that because Mr Algar was his partner.
Mr Paterson did not accept that any payments had been made at his request. He suggested the payments were made because “That’s the system put in place by Delfino and John. My assumption is that because he’s a partner and once the bakery was profitable he would get his money as a partner.” He said, “I never asked John for one dollar or $200,000”, but agreed that he requested him to pay invoices. He did not know that the debt had reached $192,000 until the end of February 2003, but agreed that he did know that Mr Algar paid $70,000 odd to Cash Resources in the middle of January.
Mr Paterson said that although nothing was said about the money that was being paid, he understood it had to be repaid when the bakery got on to its feet (T618). It was suggested to Mr Paterson that he understood that the payments were a loan by Mr Algar and he said:
“Well, that’s the only way I could think you bank roll it would be to get the thing fired up, make money, take out what he’s got and we’ve got a partnership on even keel.”
He denied that he knew it was a loan. He said it was not mentioned as a loan and that no one mentioned a loan.
He was at pains to point out that he never asked for the money, but he requested it through the channels that had been put in place. He claimed there was a difference.
Mr Paterson denied that his wife had personally agreed in his presence to repay John Algar from the sale of her house.
The Report as to Affairs of Patte Nominees Pty Ltd (in liquidation) shows that as at 24 August 2003 Foxgold Pty Ltd was a debtor of the company for an amount of $33,000 which had been owing for more than 120 days. That debt presumably relates to the invoices for $22,000 and $11,000 respectively.
Mr Paterson agreed that in March 2003 he understood that Mr Algar claimed that he was owed $200,000 and that he wanted to be paid from the proceeds of the sale of the house. He said he did not make it clear to Mr Algar at that time that they were not prepared to pay because Mr Algar could not make his wife responsible simply by writing a letter. It did not occur to him to reply denying liability.
There are many internal inconsistencies in Mr Paterson’s evidence. He did not provide a clear and consistent explanation for the fact that the payments were made to creditors. His theme appears to be that he had asked Mr Algar to speak to creditors, but did not ask Mr Algar to pay the creditors, that on the afternoon of 16 December 2003 a partnership arrangement was reached and “after that payment started happening …”. Mr Paterson was at pains to deny any suggestion that he requested Mr Algar to pay the creditors. He suggested that the payments were made to creditors because that was the arrangement that Mr Algar made with them.
Mr Paterson denied that he had been told about the arrangement by Mr Algar on 16 December 2003 and said that the direction came from Mr Morais sometime before 27 December 2003. He also said he did not know the arrangements.
Mr Paterson’s evidence is so confused, contradictory and improbable, that I am not prepared to rely upon it for any purpose.
He could not recall that before Mr Algar returned to Perth Mr Algar told Mr Paterson that the creditors had agreed to hold their current debt provided that invoices for product thereafter were paid. That arrangement was the very basis upon which Patte Nominees was able to keep trading. To suggest that he did not recall the arrangement defies belief.

Mr Paterson specifically denied that Mr Algar had agreed to fund on a short term the future operation of the French Bakery so that it could continue to trade upon Mrs Paterson’s undertaking to sell her house and repay him.
As to the alleged partnership, Mr Paterson said he never discussed the terms of the partnership with Mr Algar, that they never discussed their respective capital contribution or the profit sharing arrangement, or how the business should be managed. Mr Paterson just thought that Mr Algar would have been running it.
As to the satisfaction of the Cash Resources debt, Mr Paterson knew that a payment would have to be made to Cash Resources and that the payment was coming from Mr John Algar and that Mr Morais told him the amount of the payment before it was paid, but he denied that Mr Morais told Mrs Paterson the amount of the payment. I do not accept that evidence. It was a crude attempt to quarantine Mrs Paterson from an obligation to repay the amount paid to Cash Resources to satisfy the debt.
An analysis of the transaction
Mr Algar said that at the time of the meeting in the coffee shop it was his understanding that the weekly losses which were being incurred by the business were $2,000 a month. He had made that estimate after making enquiries of Mr Paterson and Ms Spicer. He said he was under the impression that his support would only be needed for about a month. Exhibit P1-32/33 shows that between 17 December 2002 and the end of February payments totalling $174,884 were made by or on behalf of the plaintiff in respect of the ongoing overhead of Patte Nominees. That includes the sum of $72,594 which was paid to Cash Resources. The payments made by or on behalf of the plaintiff to ensure supply over a period of approximately seven weeks totalled in excess of $100,000. There is no evidence as to what happened to the income from the sale of bread. The payments of the order of $15,000 per week are inconsistent with what Mr Algar said his understanding of the business was.
Who retained the benefit of the receipts from the sale of bread? Why should Mr Algar have continued to make payments of the order of $15,000 per week if he did not pay the existing creditors which totalled about $120,000, but only ensured supply to enable the business to keep trading? The evidence just does not make sense. If Mr Algar really believed that the weekly losses were of the order of $2,000 a month, why did he subsidise the business at the rate of about $15,000 a week for seven weeks?
As at 16 December 2002 when Mr Algar believed that the total creditors were $110,000 to $120,000, there was also the Cash Resources debt. The total creditors of Patte Nominees were therefore well in excess of $120,000. In those circumstances why should Mrs Paterson have used about $200,000 of the equity in her house to satisfy the debts of business that had creditors amounting to more than $120,000. There is no evidence of any proper analysis of the desirability of using Mrs Paterson’s money to prop up an ailing business.
Additionally, if Mr Algar thought that the losses of the business were about $2,000 per month and that he would only be required to support the company, for about a month, he clearly had an incorrect impression of the amount that he was undertaking to pay. There is no reason why on 16 December 2002 Mrs Paterson had any indication that over $200,000 would be paid to creditors or Patte Nominees and that she would be required to reimburse that amount from the sale of her house. The Cash Resources matter is a separate debt and must be considered separately. On Mr Morais’ evidence, Mrs Paterson was given regular statements of the payments to creditors, but it is unclear what statements she had been given prior to the end of February 2003. Statements after the monies were paid would have been of little use to her. Exhibit P1-23, which Mr Morais said he showed to her on about 16 January 2003, showed a total of $64,070. Even if Mrs Paterson was given schedules of the payments, nobody seems to have drawn her attention to the fact that the payments which were being made were far in excess of what Mr Algar at least had expected. Between 16 January 2003 (P1-24) and 3 February 2003 (P1-33) the debt grew from $64,070 to $174,884. Part of that increase was the payment of $72,594 to Cash Resources. Leaving out the Cash Resources debt there was an increase of about $38,000 in two weeks.
There was no agreement to pay interest and no definite agreement to repay the advance by a specified time. The defendant’s counsel submitted that the arrangement defies common sense and can only be explained on the basis that Mr Algar was motivated by personal interest.
Identifying the dispute
None of the witnesses was satisfactory and the evidence diverges on many issues. Some things are clear and I am able to make the following findings:
(1)As at 16 December 2002 the business of the French Bakery was in financial trouble.
(2)On 16 December 2002 Mr Algar had a meeting with Mr and Mrs Paterson at a coffee shop at Glenelg. As a consequence of a meeting between Mr Algar, Mr Paterson and Mrs Paterson on that day, Mrs Paterson decided that she would sell her house to assist the business with its difficulties.
(3)At that time Mrs Paterson’s home was charged with a mortgage to secure a debt to Cash Resources Australia. The debt related in part to advances related to the French Bakery.
(4)Following the meeting on 16 December 2002 companies associated with Mr Algar did make the payments which are sought to be recovered. The payments were made for the benefit of Patte Nominees. The payments were not made to the existing creditors of Patte Nominees, which as at the middle December 2002 totalled $110,000 to $120,000, but were the payments required to keep the business running.
There are two discreet disputes. First, did Mrs Paterson agree to sell her house to repay to Mr Algar the monies which he agreed to advance to allow the business to continue. Secondly, did Mrs Paterson agree to the payment which was made to discharge her obligation to Cash Resources. If not, there is a question of whether the plaintiff is entitled to recover that payment on the basis of unjust enrichment.
There are other subsidiary disputes which I discuss below. They include the factual question of whether Mrs Paterson understood the full extent of her potential indebtedness.
On the defendant’s case there is an issue of whether the payments made by Mr Algar, with the possible exception of the payment to Cash Resources, were capital contributions made by Mr Algar as a partner of Mr Paterson or whether they were loans made to French Bakery and/or Mrs Paterson on behalf of the plaintiff.
So far as the Cash Resources payment is concerned there is an issue of whether that payment was approved by Mrs Paterson.
The credibility of the witnesses
For reasons for which I have discussed I do not accept the evidence of either Mrs Paterson or Mr Paterson. They were not convincing witnesses. There are many internal inconsistencies in their evidence. They were unable to provide a clear narrative of the events which occurred, in particular the circumstances that led to Mr Algar making substantial payments for the benefit of their business. They were unimpressive and not persuasive. Their evidence does not explain the incontrovertible fact that Mr Algar or his companies had advanced approximately $200,000 in the space of a little more than two months. There is no objective corroboration of their evidence and their evidence is inherently improbable.
I do not accept the evidence of Mr Baker. He was most unhelpful. Whether that was a consequence of the fact he found himself entwined in a dispute between two clients does not matter. The simple fact is that his evidence is of no assistance to the court.
There is a problem with the evidence of Mr Algar. So far as his evidence on the critical issue of Mrs Paterson’s undertaking on16 December 2002 to repay the advances out of the proceeds of sale of the house is concerned, his evidence was clear, authoritative and persuasive. He had learned his lines well, but the relatively short passage of evidence upon which the case depends is not consistent with the rest of his evidence. Fundamentally he asserted that the arrangement was a loan and he denied Paterson’s assertion that there was a partnership. However, Mr Baker’s note of 6 January 2003 makes it quite clear that Mr Algar was more than a lender of money and that he had considered acquiring equity in the business. Notwithstanding the clarity of the document of 6 January, Mr Algar stubbornly refused to accept that he ever had any interest in acquiring equity in the business. When his denial of an interest in acquiring equity in the business is considered in the light of the fact that his companies did acquire the business name and plant of French Bakery, his denial and therefore his evidence as a whole must be treated with caution.
If the evidence of Mr Algar was the only evidence, I would find that the onus of proof had not been satisfied: because if I cannot be prepared to accept Mr Algar on the peripheral issues I would be reluctant to accept his evidence on the basic issues.
There are many things about the case which just do not make sense. For example, if the business had lost $110,000 to $120,000 in the space of six months, why were the parties anxious to introduce further funds to prop up an ailing business without a proper assessment of the prospects of the business. Why did Mr Algar pay approximately $130,000 (being the total debt less the CRA debt) between 16 December 2002 and early March 2003 for the purpose of ensuring the supply needed to keep the business afloat. None of the dealings between the parties were properly documented. There is no evidence of any financial analysis which supported the introduction of further capital.
Most fundamentally the arrangement upon which the plaintiff relies is not evidenced by any document until Mr Algar’s letter to Mrs Paterson of 16 September 2003 where he said, “I made it very clear to you both over a cup of coffee that the only way I would get involved would be for you to sell your house to pay all outstanding accounts and to repay all monies I would advance.” Even that statement does not allege that Mrs Paterson gave a commitment. That has to be implied.
In a case where contemporaneous documentation is likely to provide the best evidence of the transaction it is significant that in the letter of 7 March 2003 signed by Mr Morais, but drafted by Mr Algar, it was proposed:
“Charge and a guarantee, but this would be protected as a caveat on the house. In the charge it will clearly state the amount of the guarantee that would extent toward the amount of loan taken...”
The explanatory letter of 11 March 2003 states:
“The banks propose to have a charge and a guarantee from Peter and Gail and this would be protected as a caveat on your house…”
While it is accepted that the letters inaccurately report the position of the bank, the fascinating question is why should Foxgold seek a guarantee from Mrs Paterson if she had already provided what was effectively a guarantee at the meeting in the coffee shop on 16 December 2002.
The answer to these issues may simply be that because of their friendship and mutual trust the parties never saw the need to formalise the arrangement reached on 16 December 2002.
There is one further piece of evidence, the evidence of Mr Morais. His truthfulness is tarnished by the fact that he had been prepared to write to Mr and Mrs Paterson in terms which he knew to be incorrect, because that was what Mr Algar had requested him to do. However, he gave his evidence in a clear and convincing way and his evidence is corroborated by the documents and the objective facts. It is significant that he readily acknowledged the falsity of the statements in the letters which he sent at the request of Mr Algar.
I accept the evidence of Mr Morais.
The Cash Resources payment
The payment to Cash Resources was separate from the arrangement reached in December 2002.
Mr and Mrs Paterson gave evidence that Mr Algar was irritated when the general manager of Cash Resources, Mr Ciccoleta, did not attend a meeting, that he was infuriated with rage, stormed out of the meeting and unilaterally arranged to pay out the Cash Resources debt in a fit of pique.
The defendant’s evidence is inconsistent with exhibit P1-19, a draft letter from Mr Paterson to Mr Ciccoleta. The letter was prepared by Mr Algar for Mr Paterson to send to Mr Ciccoleta. It contains a formal request to terminate the factoring facility and evidences Mr Paterson’s involvement in the termination of the factoring management. The draft is dated 31 December 2002. The meeting at which Mr Algar is said to have become angry occurred in January 2003.
The circumstances suggested by both Mr and Mrs Paterson are inconsistent, not only with the evidence of Mr Algar, but also with the evidence of Mr Morais, whose evidence I accept.
The evidence of Mr and Mrs Paterson attempts to distance themselves from a payment which resulted in Mrs Paterson being relieved of a debt of the order of about $72,000 and a charge over her property.
Whatever the Cash Resources debt was in January 2003 Mrs Paterson was responsible to Cash Resources for that debt.
There is no dispute that the debt was paid by or on behalf of the plaintiff following negotiations carried out by Mr Morais with Cash Resources, which are evidenced by exhibit D7.
Mrs Paterson acknowledges that she knew that Mr Algar had paid out the Cash Resources debt. She knew that the Cash Resources debt was secured by a loan over her home, but says that she did not know what the amount of the debt was and that she did not request Mr Algar to make the payment. That is, Mrs Paterson is prepared to accept the benefit of the payment made by Foxgold to extinguish her debt, but seeks to avoid the repayment. When asked whether she thought the payment was a gift, she said she did not think anything of it. She said she was not pleased that the mortgage was discharged! She ultimately resorted to a claim that she did not understand.
Mrs Paterson is a business woman. She has been involved in businesses for many years and is not naïve. I do not accept her feigned ignorance. One can only interpret her claimed inability to understand as a device which she has adopted in an attempt to avoid her responsibilities.
Whether Mr Algar came to Adelaide and was offended when the manager of Cash Resources did not attend a meeting or not is inconsequential. What is clear is that Mr Morais came to Adelaide in January 2003 and reconciled the Cash Resources debt. That is evidenced by D7.
I accept the evidence of Mr Morais, that after he had received exhibit D7 from Cash Resources, he had a conversation with Mr and Mrs Paterson in which he said, “We have agreed on the figure to payout and get out of the clutches of Cash Resources and what do we need to do now” to which Mr Paterson said, “Have to pay it mate.” Following that Mr Morais arranged for a payment to be made from Western Australia which satisfied the debt which was secured by the mortgage over Mrs Paterson’s home.
I specifically reject the evidence of Mr and Mrs Paterson on the topic of the payment to Cash Resources.
On these facts there was either an express request by Mrs Paterson for the payment to be made or alternatively her consent can be inferred from the fact that she was present and heard the discussion which resulted in a payment being made on her behalf. It is therefore unnecessary to consider the claim based on unjust enrichment.
I find that the pay out due to Cash Resources was negotiated by Mr Morais in Adelaide on 16 January 2003 at $72,594.62 as evidenced by exhibit D7, that the amount was agreed between Mr Morais and Mr and Mrs Paterson who both agreed that the payment should be made. A cheque was then drawn on the account of Algar Burns Pty Ltd and ultimately debited to the plaintiff.
In my opinion the plaintiff is entitled to recover from Mrs Paterson the amount that was paid to Cash Resources Australia, namely, $72,594.62.
The advances made to suppliers on behalf of Patte Nominees
The plaintiff’s claim, is based on the pleadings in paragraph 6 of the Statement of Claim that “…the defendant told Algar that if Foxgold loaned money to Patte, the defendant would be responsible for the payment of the money and to do so would put the House on the market towards the end of January 2003 and repay all funds loaned by or on behalf of Foxgold out of the proceeds of the sale of the House (“the Guarantee”).” The contract is pleaded as a guarantee. In paragraph 7 it is alleged that in reliance upon these representations and in consideration of the guarantee Foxgold agreed to advance funds to Patte to enable it to continue to trade.
The primary obligation depends upon the dealings between Mr Algar and Mrs Paterson. The evidence of Mr Morais can do no more than to corroborate what had been agreed between Mr Algar and Mrs Paterson or be evidence of an admission by Mrs Paterson that there was an agreement.
The claim depends upon a few words said to have been spoken by Mrs Paterson. It is alleged Mr Paterson said, “I wish for the bakery to continue to trade”, Mr Algar looked at Mrs Paterson, who said, “I will sell the house” and Mr Algar said, “On that basis I will help you and loan you monies to be repaid from the sale of the house.” Mr Algar said Mrs Paterson looked at him and said, “Yes, I will sell the house to repay monies that were loaned to the bakery.”
On one interpretation of the words “I will help you and loan you monies…” indicates a loan to Mrs Paterson. Those words could also be interpreted as a guarantee of a loan to Patte Nominees. This is a classic case where a note or memorandum which satisfied the Statute of Frauds might have resolved the claim, but the Statute of Frauds no longer applies.
In like vein the defendant has not raised the defence of undue influence in the way that it was applied in Yerkey v Jones (1939) 63 CLR 649 and Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 408.
The contract therefore depends upon the factual issue of whether Mrs Paterson said, “Yes, I will sell the house to repay monies (…) loaned to the bakery” or words to that effect. If she did, what was the legal effect of those words?
As I have mentioned interesting features of the transaction were that no interest was payable, there was no fixed time for repayment, there was no estimate of the monies likely to be involved and there was no limit on the payments. There was no consideration given to the ability of Patte Nominees to repay the monies to Mrs Paterson or the commercial desirability of propping up an insolvent company. Neither the pre-existing debt nor the amount of the ongoing continuing losses of Patte Nominees were discussed. By uttering a few words did Mrs Paterson accept an unlimited obligation?
Although Mr Algar had made enquires with Ms Spicer as to the financial position of the business, there is no suggestion that he was aware of any important information which was not known to Mrs Paterson and should have been disclosed. Mrs Paterson was at pains to distance herself from any knowledge of the trading position of the business. Whether she knew the actual position or not, no argument has been raised that Mr Algar should have made disclosure of information in accordance with the principle in Commercial Bank of Australia Ltd v Amadio Ltd (1983) 151 CLR 447 at 457-458.
The case falls to be determined by the resolution of the factual issue as to whether Mrs Paterson uttered the words alleged. If the issue of fact is resolved in favour of the plaintiff there is then a question of whether Mrs Paterson had given an unlimited guarantee or whether some limit should be placed upon her liability.
The defendant’s argument

The defendant argued that at no time did she request a loan or give a guarantee although it was accepted that Mr Algar had advised her to sell her home. Counsel argued that the payments were made by the plaintiff without the request or consent of Mrs Paterson. So far as the amount of the claim is concerned it was argued that no amount was ever mentioned and that she was surprised that the claim was for as much as it was.
It was suggested that Mr Algar entered into the arrangement out of self-interest. The self-interest manifested itself on 16 December 2002 when on Mr Paterson’s evidence Mr Algar became a partner.
There is another issue as to whether Foxgold is the proper plaintiff, particularly in those cases where the payments were made in the first instance by an entity other than Foxgold.
Counsel for Mrs Paterson submitted the words which were alleged to have been spoken were not sufficient to create a legal relationship.
If the evidence of Mr Algar is accepted, there are other questions which need to be addressed. However, if the evidence of Mr Algar is not accepted then there can be no basis for the alleged agreement.
Counsel for Mrs Paterson argued that on the question of what was said on 16 December 2002 I should look at the background against which the statements were made and the credit worthiness of the parties.
As to the background, I have already expressed my difficulty in understanding what motivated Mr Algar to advance as much money as he did with no proper agreement, no limit on the advances, no requirement for interest to be paid and no firm arrangement for repayment. I have also expressed my difficulty with Mr Algar’s denial that he had no interest in acquiring equity in the business because that is contrary to what is unequivocally stated in Mr Baker’s memorandum of 6 January 2003 and contrary to what eventuated.
While I do not accept either Mrs Paterson or Mr Paterson as reliable witnesses, it does not follow from that that I must accept the evidence of Mr Algar. The plaintiff must still satisfy the onus and prove its case.
There is no document which records any suggestion that Mrs Paterson would repay the monies advanced at the direction of Mr Algar until the letter of 16 September 2003 (exhibit P1-69). By the time that letter was sent the parties had become adversaries and Mr Algar had embarked on the exercise of attempting to recover the monies. As I have mentioned it is telling that earlier letters such as the letter of 7 March 2003 (exhibit P1-40) and the letter of 11 March 3003 (exhibit P1-41) did not assert that Mrs Paterson had agreed to repay the money, but rather requested “a charge and a guarantee from Peter and Gail.”
There is one piece of evidence which has influenced my decision. It is the evidence of Mr Morais which establishes that most payments were approved by Mr Paterson. It establishes that Mr Morais communicated with Mr and Mrs Paterson concerning the amount of the payments that were being made. He faxed copies of statements to them regularly (once every month, with a minimum of 20 days). Importantly, Mr Morais said that after dinner at the Paterson’s home, Mrs Paterson said to him, “We have agreed to sell this house and repay John” (my emphasis). That evidence which I accept corroborates the evidence of Mr Algar as to the arrangement.
To some extent the arrangement is also corroborated by the fact that the payments were made. Patte Nominees was insolvent and unlikely to be in a position to repay the debt. The proceeds of sale of the house was the only likely source of repayment. Mr and Mrs Paterson do not dispute that they had agreed to sell the house following the meeting on 16 December 2002. Agreeing to sell the house to repay Mr Algar is not a substantial departure from their position. Their purpose in selling the house was to raise funds which could satisfy debts, such as those which Mr Algar paid, in particular the Cash Resources debt.
I accept the evidence of Mr Morais that while he was in Adelaide, staying at the Paterson’s home he sat down with Mr and Mrs Paterson and discussed the payments which were made out of Foxgold, Algar Burns and YOUR ASP.
Was there a blank cheque?
The amount which was eventually paid out exceeded everybody’s expectations. If on 16 December 2002 the parties were of the view that $10,000 to $20,000 would be necessary, or even if they believed that $30,000 to $40,000 would be necessary, do the words which were uttered make Mrs Paterson liable for the full amount which was eventually paid. Was it an unlimited guarantee?
The payment to Cash Resources stands alone. I have already found that that payment was authorised by Mrs Paterson.
So far as the other payments are concerned, I accept the evidence of Mr Morais that he gave Mr and Mrs Paterson regular statements.
I find that Mr and Mrs Paterson were made aware that the total indebtedness as at 16 January 2003 was $64,070.92 by reason of Mr Morais’ evidence about exhibit P1-23. I find they did not express surprise about the quantum of the indebtedness and continued to request further payments to suppliers. Indeed that is consistent with each payment being initiated by a request from Mr Paterson. Exhibit P1-32/33 shows a total indebtedness of $174,884.05 as at 3 February 2003.
Accordingly, if the amount paid out by the plaintiff exceeded the amount originally contemplated, Mrs Paterson was aware of the increase and consented to the continuing payments up until her consent was withdrawn in March.
One important piece of objective evidence which is inconsistent with the defendant’s case and consistent with the plaintiff’s case, is exhibit P1-37, the note which Mrs Paterson gave to Mr Algar together with the photographs and bear with golden wings. The letter makes it unequivocally clear that shortly after 16 December 2002 Mrs Paterson was most grateful for what Mr Algar was doing. The note is inconsistent with Mrs Paterson’s evidence to the court. It is inconsistent with her assertion that she did not know what Mr Algar was doing and that she became angry when Mr Paterson told her that he and Mr Algar had become partners.
Findings
I find that on 16 December 2002 at a coffee shop at Glenelg, Mrs Paterson told Mr Algar that she would sell her house, that Mr Algar said, “On that basis I will help you and loan you monies to be repaid from the sale of the house” and Mrs Paterson looked at Mr Algar and said, “Yes, I will sell the house to repay monies that were loaned to the bakery.”
I find that the conversation on 16 December was corroborated by Mrs Paterson’s statement to Mr Morais that “We’ve agreed to sell this house and repay John.”
I find that the parties did intend to create a legal relationship by the words that were spoken. I find that Mrs Paterson agreed to repay the monies which Mr Algar would advance on behalf of the French Bakery from the proceeds of the sale of her house.
I find that Foxgold is the proper plaintiff. Although Foxgold may not have been specifically identified during the discussion on 16 December and some of the payments were made by Algar Burns or YOUR ASP, the identity of the creditor was not a matter of significance. The defendant’s only concern was that the monies should be paid. If Mr Algar chose to make payments from Foxgold or some other companies and then by internal transfers place the debt in the book of Foxgold, that was of no consequence to Mrs Paterson. Documents such as exhibit P1-23 which were given to Mrs Paterson revealed the origin of the payments and Mrs Paterson never raised any objection to the identity of the person who made the payment.
Also the evidence of Mr Morais about exhibit P1-23, which revealed the source of payments, gives rise to an account stated. So did other schedules, such as P1-32, when considered in conjunction with the conversation which Mr Morais said he had with Mr and Mrs Paterson. The letter of 7 March 2003 (exhibit P1-40) stated that the payments were advanced on behalf of Foxgold Group. Although the payments ceased at around that time, Mrs Paterson raised no query about the reference to Foxgold. I accept that plaintiff’s submission that Mr Algar was acting as undisclosed agent of Foxgold.
The defendant’s assertion that the parties did not intend to create legal relations is not borne out by the facts. The transaction was an important business matter.
I reject the suggestion that there was a partnership.
I reject the evidence of Mr Paterson that on 16 December 2002 Mr Algar invited him to be his partner. I reject the evidence of Mrs Paterson that she wanted to be out of the business when her husband told her about the partnership on the evening of 16 December 2002. Her evidence is quite inconsistent with the note and accompanying items which she subsequently gave to Mr Algar. Mr Paterson said there was never any discussion about the fundamental terms of a partnership. There is no independent corroboration of a partnership. The contemporaneous documents prepared by Mr Morais such as P1-23 and the plaintiff’s accounting treatment of the transaction are consistent with a debtor creditor relationship rather than a partnership. While Mr Baker’s memorandum of 6 January 2003 (P1-20) discusses a new business structure it is inconsistent with the existence of a partnership at that time. The memorandum contemplates that the business might be conducted by a new company. There is no evidence of a partnership other than the evidence of Mr and Mrs Paterson, which I reject. There is no evidence that the business of the French Bakery ceased being conducted by Patte Nominees between 16 December 2002 and the end of March 2003 and there is no evidence that the plaintiff received any of the income of the business.
The plaintiff is entitled to judgment for $210,350.35 being the amount funded prior to April 2003 as listed in exhibit P1-61/62.
In addition the plaintiff is entitled to interest. I will hear counsel as to the precise amount of the judgment plus the question of interest and costs.