Golden Horizon Finance Co Ltd v Financial and Energy Exchange Limited (ACN 122 086 284)

[2016] NSWSC 593

Supreme Court

New South Wales

Medium Neutral Citation:	Golden Horizon Finance Co Ltd v Financial & Energy Exchange Limited (ACN 122 086 284) [2016] NSWSC 593
Hearing dates:	4 to 6 May 2016
Decision date:	12 May 2016
Before:	Ball J
Decision:	1.   Judgment for the plaintiff in the sum of $3,992,217.59. 2.   Defendant to pay the plaintiff’s costs of the proceedings.
Catchwords:	CONTRACTS - loan agreement - action to recover money advanced by lender - whether agreement was expressly or impliedly varied – whether there was an estoppel by convention – no issue of principle
Cases Cited:	Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267 Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226 Grundt v Great Boulder Proprietary Gold Mines Ltd [1937] HCA 58; 59 CLR 641 Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190 MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 Moratic Pty Ltd v Gordon [2007] NSWSC 5 Whittet v State Bank of New South Wales (1991) 24 NSWLR 146
Category:	Principal judgment
Parties:	Golden Horizon Finance Co Ltd (Plaintiff) Financial & Energy Exchange Limited (ACN 122 086 284) (Defendant)
Representation:	Counsel: P Reynolds (Plaintiff) SJ Philips (Defendant)   Solicitors: Clayton Utz (Plaintiff) MWA Law (Defendant)
File Number(s):	2015/224489
Publication restriction:	None

Judgment

Introduction

1. In this proceeding, the plaintiff, Golden Horizon Finance Co Ltd (GHF), sues the defendant, Financial & Energy Exchange Limited (FEX), for $3,151,437.10 plus interest from 31 December 2013 at the rate of 8.5 percent per annum said to be owing by FEX under a loan agreement dated 22 March 2013 between GHF and FEX (the Consolidated Loan Agreement). By cl 3.1 of the Consolidated Loan Agreement, the amount owing under it was due to be repaid by 31 December 2013. FEX has made no payments under the agreement.

2. In response to GHF’s claim, FEX contends that the agreement was varied so that the amount due under it was not repayable until one of the following events occurred:

1. a capital raising by FEX by way of initial public offering (IPO);

2. the entry of a new investor sufficient to enable FEX to repay the loan;

3. the return by FEX of funds formally held in escrow; or

4. the conversion of the loan to equity in FEX at the agreed price of $0.86 per share.

Alternatively, FEX relies on a conventional estoppel to the same effect.

Background

3. FEX is an Australian public company that was incorporated in 2006 for the purpose of establishing a derivatives market in competition with the market operated by the Australian Stock Exchange. For that purpose, it required an Australian Market Licence (AML). FEX’s Executive Chairman is Mr Brian Price.

4. GHF is a company incorporated in the British Virgin Islands and is controlled by Mr Jinhua Ren, a wealthy Chinese national. Mr Ren does not speak English.

5. On 21 July 2009, GHF and FEX entered into a Share Subscription and Cooperation Agreement (the Subscription Agreement) and an Escrow Deed. Under the terms of the Subscription Agreement, GHF agreed to subscribe for 23,255,000 ordinary shares in FEX for a total price of $20 million (which equates to approximately $0.86 per share) in two tranches. The first tranche of 2,325,500 shares was issued and the subscription price for them was paid shortly after the agreement was entered into. The balance of the subscription price was to be held by Computershare Investor Services Pty Limited in accordance with terms of the Escrow Deed. The second tranche of shares was to be issued and the balance of the subscription price paid from the amount held in escrow at the time when FEX was issued an AML. However, under cl 2.5 of the agreement, GHF was entitled to have the amount held in escrow returned to it at any time after the “Cut-Off Date” (defined in the agreement to be 30 June 2010 or, if GHF elected, 31 December 2010).

6. Prior to GHF’s initial investment in FEX, Mr Larry Luo interpreted for Mr Ren. After that time, Mr Ren took an office in the premises leased by FEX (for which Mr Ren or GHF paid rent) and FEX employed Mr Jian (Henry) Yu, who had known Mr Ren for some time. One of Mr Yu’s duties was to interpret for Mr Ren and from then he rather than Mr Luo did most of the interpreting for Mr Ren, although on occasions Mr Luo continued to be involved. In late 2013, Mr Ren and Mr Yu had a falling out for reasons which are not fully explained in the evidence. However, on occasions, Mr Yu continued to attend meetings between Mr Ren and Mr Price as an interpreter for them. In addition, on occasions from late 2013, Mr Jaijun (Jerry) Hu, who worked for companies associated with Mr Ren, attended meetings between Mr Ren and Mr Price and interpreted for them. Both Mr Yu and Mr Hu gave evidence. Mr Luo did not. He died several years ago.

7. Under cl 5 of the Subscription Agreement, GHF was entitled to subscribe for additional shares before the second tranche of shares was due to be issued. The subscription price for those shares was to be paid from the amount held in escrow and there was to be a corresponding reduction in GHF’s obligation to subscribe for the second tranche of shares at the time an AML was issued to FEX.

8. On 10 November 2009, GHF gave an early subscription notice for 5,232,559 ordinary shares in FEX and a total of $4,500,000 was released from the amount held in escrow in payment for those shares. At the same time, GHF and FEX entered into an agreement by which FEX granted GHF an option to acquire 6,000,000 ordinary shares in FEX for an exercise price of $1.00 per share.

9. It appears that sometime in about May 2010, Mr Price approached Mr Ren for a further advance from the amount held in escrow and Mr Ren suggested that that advance occur by way of a loan. Mr Price was not happy with that suggestion and on 23 May 2010 Mr Price sent Mr Luo an email in which he said:

As I have expressed to you in person it is a concern that Mr Ren seeks to vary the escrow agreement to anything but ordinary equity at $0.86. We want to be reasonable and not appear overly negative but there is a big difference between equity and debt from a regulatory perspective. GH must clearly understand that FEX operates regulated markets and has minimum capital requirements to fulfil corporation’s law obligations. Mr Ren must understand this and know that any cash calls whatsoever is deferred or payment made in shares at the originally agreed $0.86 per share. Otherwise FEX cannot agree to anything other than equity.

The email goes on to propose wording to be included in the loan agreement making it clear that the obligation to pay interest and repay the loan was deferred “if and for so long as the payment may create a circumstance where the Company is unable to satisfy regulatory requirements …”.

10. There is a question whether that email came to the attention of Mr Ren. Mr Ren denied that he saw the email. However, the likelihood is that Mr Luo, in accordance with the request made of him, passed its contents on to Mr Ren.

11. On 14 June 2010, GHF and FEX entered into a Loan Agreement by which GHF agreed to lend FEX the sum of $1,000,000 (the First Loan). Under cl 2.1 of that agreement, the loan was to be repaid by 15 September 2010. However, cl 5.1 relevantly provided:

Unless previously agreed to in writing by the Parties, if at close of business on the Repayment Date the Loan has not been repaid to the existing Escrow account (or other Escrow account if existing account is unable to accept funds), the Lender has the discretion to:

a.   Extend the repayment of the loan to a later date as decided by the Lender; or

b.   Call upon Schedule 3 of the Share Subscription Agreement between the Parties to be issued; or

c.   Be transferred NSX shares to the value of AUD$1,000,000 …

12. The circumstances in which the agreement came to be entered into are not clear from the evidence. The agreement did not include a term of the type suggested by Mr Price in his email dated 23 May 2010. The reference to “Schedule 3 of the Share Subscription Agreement” is a reference to the form of Early Subscription Notice attached to that agreement. Although subclause b. is far from clear, it appears that it was intended to permit GHF to subscribe for additional shares as repayment for the loan. The reference to “NSX” in subclause c. is a reference to NSX Limited, a publicly listed company which operates a securities exchange. It is not clear how many shares FEX held in NSX at the time or the worth of those shares. The evidence is that in the financial years ended 2013 and 2014 FEX held 39.1 percent of the shares in NSX. GHF (or another company associated with Mr Ren) was also a substantial shareholder in NSX at the time. The loan of $1 million was advanced from the money held in escrow.

13. On 30 September 2010, GHF subscribed for an additional 5,000,000 shares in FEX at an issue price of $0.50 per share. Again, the purchase price for those shares was paid out of the amount held in escrow.

14. On 30 September 2010, FEX also made a bonus issue of shares to GHF of 3,767,441 ordinary shares for nil consideration.

15. FEX did not obtain an AML by the Cut-Off Date and, on 12 July 2011, the balance of the amount held in escrow was released to GHF. According to Mr Price, that followed a request by Mr Ren at a meeting on 11 July 2011 for the release of the funds. Mr Luo also attended that meeting. At that time, Mr Price says that Mr Ren said:

Don’t worry. The escrow funds will be returned after the licence is granted. After this is done, it won’t be a problem, once you get the licence I’ll return the funds.

Mr Ren, on the other hand, denies that he said those words. According to him, he simply requested that the funds be released.

16. On 28 September 2011, GHF agreed to lend FEX an additional sum of $1,147,096.34 in connection with a takeover bid by FEX for NSX (the Second Loan). Clause 2.1 of that loan agreement provided:

Money lent to the Borrower by the Lender must be repaid by the Borrower on the earlier of the 30th of November 2011 or receipt by the Borrower of the 3rd instalment funds as defined under the Subscription Agreement between the Borrower and Australian Mining Group Ltd. (Repayment Date).

17. On 22 March 2013, GHF agreed to lend FEX an additional $617,761.43 pursuant to the Consolidated Loan Agreement. Clause 1.1 of that agreement provides:

The Borrower acknowledges that the Lender will lend AUD617,761.43 (being HKD5,000,000 at an exchange rate of 8.0937) to the Borrower and roll forward the First Loan balance of AUD1,237,644.17, interest inclusive; and the Second Loan balance of AUD2,533,672.67, interest inclusive; for a combined new loan of AUD3,151,437.10.

18. By cl 2.1 of the Consolidated Loan Agreement, FEX also granted GHF an option to acquire 6,000,000 ordinary shares in FEX at an exercise price of $0.50 per share. Clauses 3.1 and 3.2 are in the following terms:

3.1   Money lent to the Borrower by the Lender must be repaid by the Borrower by 31 December 2013 (Repayment Date).

3.2   At the option of the Lender the outstanding balance of the loan may convert to equity at an issue price of $1.00. Should an issue of shares take place at an amount less than $1.00 then the conversion of debt to equity may take place at the lower issue price.

19. The interest rate under the agreement was fixed at 8.5 percent per annum.

20. Clause 6.1 provides:

In the event of default the Lender will have recourse against the assets of FEX including shares held in NSX Limited.

21. FEX obtained an AML in early April 2013.

22. Following the granting of the licence, there were discussions between Mr Ren and Mr Price about attracting further investors in FEX and it appears that both Mr Ren (in China) and Mr Price were involved in looking for additional investors. There was a further meeting between them on 3 December 2013. Mr Yu also attended that meeting. Mr Price says that at that meeting there was a conversation to the following effect:

Ren:   “I am moving to Canada. I am still very focused on my investment in FEX and am very confident that I can help with an investor.”

Price:   “Again, because we don’t yet have an investor willing to invest to pay the loans and FEX has not yet had an IPO, FEX does not have the cash to pay any loan amounts back yet and we are going to have to extend the duration of the loans again. What we can do is to convert the loan amount at a 20% discount to the IPO price, if you want that option.”

Ren:   “Yes, I will again extend the time to repay the loans. If we find a new investor or have the IPO the loans will need to be repaid if I want it.”

Price:   “Yes that’s fine. If there is a capital raising event, and the incoming investor agrees to an investment where loans can be repaid, then you can choose to either have the loans paid out or accept the offer of conversion at $0.86c per share.”

Ren:   “Okay. I’ll also keep working on the IPO. I am currently talking to a lawyer in China about a potential China IPO for FEX. I will keep you informed.”

Mr Ren disputes that version of the conversation. Mr Yu did not give any evidence concerning the meeting.

23. In early January 2014 Mr Ren and Mr Price met at the Bourke Street Bakery in Potts Point. Also present at the meeting were Mr Ren’s son, Tom, who was aged about 18 at the time, and Mr Hu. According to Mr Hu, Mr Ren told Mr Price that the loan was due to be repaid on 31 December 2013 and asked that it be repaid immediately. Mr Hu gave evidence that Mr Price replied “I am working on it and will pay it immediately”. Mr Ren gives evidence to the same effect. On the other hand, Mr Price denies that version of the conversation, although he does say that he said “I am working on investors to obtain further funding”.

24. On 25 January 2014, Mr Hu sent an email to Mr Price attaching a letter in Chinese and English. The English version in part said:

Until 23 January 2014, the Borrower hasn’t repaid the principal of loan and pay interest to the Lender. The Borrower must repay the principal and pay the interest (including the interest from 1 January 2014 to Actual Repayment Date) to the lender before the end of January 2014.

The Lender reserves the right to take further steps.

25. Initially, Mr Price denied that he received that email. However, it is plain from an email chain between him and Mr Hu that he did and that he asked Mr Hu if Mr Hu was free to speak about the email over the telephone. When giving evidence, Mr Price said Mr Hu called him and that they did not discuss the letter of demand, although he eventually accepted that he may have called Mr Hu. However, it is plain from the email chain that Mr Price called Mr Hu and the purpose of the call was to discuss the demand. According to Mr Hu, Mr Price agreed that FEX would repay the loan.

26. It appears that Mr Ren and Mr Price met on four further occasions. Two meetings were in 2014 – one on 13 March 2014 and the other on 1 August 2014. Mr Yu also attended both meetings. Nothing of significance appears to have been discussed apart from the need for FEX to raise additional capital. Mr Ren says that at both meetings he asked for the loan to be repaid. Mr Price denies that he did so.

27. There were two further meetings between Mr Ren and Mr Price in 2015. There is some dispute concerning when the first meeting occurred. However, the likelihood is that it occurred on 1 April 2015. That conclusion is consistent with notes taken by Mr Price at the meeting. Mr Yu also attended the meeting. At the first meeting, Mr Ren raised the possibility of an IPO in China. According to Mr Yu, “Mr Ren said specifically that any money raised should start to launch the business as soon as possible and should not be used to repay any creditors”. Mr Yu says that both Mr Ren and Mr Price agreed to that proposal. Mr Ren denies that version of the conversation. His evidence is that, consistently with the approach that he took at each meeting, he asked for the loan to be repaid. He says in his affidavit evidence that Mr Price said that he was having a meeting with an investor from the Middle East “who will invest money into FEX”. Mr Ren also says that Mr Price offered to sell FEX’s shares in NSX and also agreed personally to guarantee the debt owed by FEX. Mr Price denies that version of the conversation. But he does not suggest that Mr Ren said that any money raised should not be used to repay creditors, and his notes do not record any statement to that effect.

28. The second meeting occurred on 4 May 2015. At that meeting Mr Ren, using a whiteboard, outlined in some detail what would be involved in a capital raising in China. Mr Ren says that he also asked Mr Price what strategy he (Mr Price) had in place to raise funds for FEX and that Mr Price replied “We need to identify investors for FEX, are you able to assist with that?” During the course of the meeting, Mr Price disclosed that NSX would be making a rights issue. As I have said, FEX held 39.1 percent of the shares in NSX. Mr Ren was also a substantial investor in NSX and it appears that he considered that the rights issue would be contrary to his interests.

29. That evening, Mr Ren sent Mr Price an email which in translation relevantly reads as follows:

Nonetheless while I am travelling around in China to try my best to promote FEX and during the period that I have initiated 4 meetings with you since November 2014 to discuss FEX and NSX business issues including the latest meeting held today for us to sit together to discuss the China funding market and the grafting of NSX into a better holding vehicle in order to raise the fund for business development purpose, you have never mentioned the right issue of NSX to me.

What I cannot comprehend is that I lent money to FEX. Instead of repaying the loan to me, FEX used my loaned money to subscribe in the rights issue of NSX at a lower price to dilute my shareholding in NSX! Brian, if you are my friend, you will not do this and you cannot do this to me.

…

In conclusion, please arrange either for FEX to immediately pay back the loan due to Gold [sic] Horizon or immediately stop the rights issue of NSX which will consequently dilute my shareholding in NSX. We can discuss together on NSX’s funding issue and make a concerted solution to address this issue.

30. On 6 May 2015, Clayton Utz sent a formal letter of demand to FEX demanding repayment of the principal of $3,151,437.10 together with interest of $600,133.15.

Credibility of the witnesses

31. Before addressing the issues in the case, it is necessary to say something about the credibility of the witnesses.

32. I did not find any of the witnesses to be particularly credible. Each in one sense or another had a personal interest in the case and that interest appears to have affected their evidence. Mr Price came across as argumentative and it is apparent that his recollection has been affected by what he sees as the justice of FEX’s case. The clearest example of this is the evidence he gave in relation to the demand made by GHF in January 2014. As I have said, his initial position is that he did not receive the demand, when clearly he did. Subsequently, he said that he did not contact Mr Hu about it, when the likelihood is that he did, which is something that he eventually conceded.

33. Mr Ren was at a disadvantage because he does not speak English and was not familiar with Australian court processes. That disadvantage was exacerbated by the fact that it was apparent that the official interpreter was struggling to interpret financial terms. Nonetheless, it is difficult to accept some of Mr Ren’s evidence. To some extent at least, Mr Ren saw his role as an advocate for GHF. At one stage, he stood up in the witness box and started to address the court on the merits of GHF’s case. In addition, some of his evidence was not plausible. For example, it strikes me as implausible that Mr Ren was as insistent as he says he was about demanding repayment of the money and yet he did nothing to recover the loans until after the meeting on 4 May 2015. In addition, I find it hard to accept the evidence he gave in cross-examination that it was not because of his unhappiness with the NSX rights issue that he demanded immediate repayment of the loans after that meeting. Similarly, I find it hard to accept evidence given by Mr Ren that he did not receive any financial statements for FEX, despite his request to see them. There were audited financial statements of FEX for the financial years ended 2013 and 2014. In the normal course of events, it is to be expected that those statements would be sent to shareholders, including GHF; and, in the normal course of events it is to be expected that Mr Ren would look at them if he was interested in them. It is possible that Mr Ren did not look at the financial statements because he knew about FEX’s financial position from other sources. However, what I find difficult to accept is that the financial statements would not have been made available to him if he had wanted to see them. Similarly, if he really wanted to see them and they were not provided to him, I find it difficult to accept that he would not have repeated his request.

31. Mr Hu was employed by companies associated with Mr Ren and on occasions performed the role of an assistant to Mr Ren. He came across as someone who saw it as part of his role to support his employer. It is difficult to accept his clear evidence that at each of the meetings he attended Mr Ren asked for the loans to be repaid when he could remember nothing else about the meetings.

32. Mr Yu has had a falling out with Mr Ren. Although he continues to be employed by FEX, he did not provide an affidavit and gave his evidence in chief orally. He maintained that he only acted as an interpreter and had no involvement in the case. But, as I have said, he continues to be employed by FEX and his title (Group Executive – China Region) suggests that his role is something more than that of an interpreter. Moreover, the evidence is that he rang Mr Hu about two weeks before the hearing and told him that GHF should settle the case or that it might find itself in trouble with the Australian Taxation Office, which suggests that his role with FEX is substantially more than that of an interpreter. He had prepared a précis of his evidence which he took into the witness box and on occasions sought to refer to it. It was apparent that when he was not permitted to do so his recollection was not as good as it seemed.

33. Against that background, the evidence given by the witnesses must be treated with considerable caution and the issues in the case must be determined largely by reference to the documents and what is inherently likely having regard to what the documents say.

The express variation

37. The defence based on a variation of the contract is put in two ways. First, FEX contends that there was an express variation of the contract. Second, it contends that there was an implied variation.

38. The defence based on an express variation depends on Mr Price’s account of the conversation on 3 December 2013. I do not accept that account or that it supports the pleaded variation. There are a number of difficulties with it.

39. First, it was not corroborated by Mr Yu, who was also present at the meeting.

40. Second, Mr Price’s evidence of the conversation is not consistent with subsequent events and, in particular, the demand made orally by Mr Ren in early January 2014 and in writing by Mr Hu on 25 January 2014.

41. FEX disputes that Mr Ren made a demand orally at the meeting in early January 2014 and points to the informal nature of the meeting and the fact that Mr Ren’s son was present at the meeting as making it improbable that Mr Ren asked for the loan to be repaid at that time. I do not accept that submission. The evidence that Mr Ren asked for the money to be repaid at that time is consistent with Mr Hu’s subsequent email. Having regard to the close relationship between the parties at the time, it is plausible that Mr Ren raised repayment of the loan informally before asking Mr Hu to send a written demand. It does not strike me as implausible that Mr Ren would do so in the presence of his son.

42. It is not plausible that Mr Ren would agree to vary the loan so that it was no longer repayable on 31 December 2013 and then, shortly after 31 December 2013, ask for it to be repaid. And if that is what did happen, it is to be expected that both at the meeting and after receiving the email, Mr Price would have referred to what he says was an agreement reached on 3 December 2013. In particular, rather than simply asking to speak to Mr Hu, it is to be expected that in his email response Mr Price would have referred to the agreement reached on 3 December 2013. However, he did not do so. Indeed, it was not until these proceedings were commenced that FEX suggested that the Consolidated Loan Agreement had been varied.

43. Third, the parties were careful to document the agreements between them, albeit in simple terms. The agreements were documented at the time that they were reached and typed up by Ms Poppelwell, who worked for FEX. Each of the loan agreements set out when the loans were repayable and sets out how GHF was expected to recover its funds if FEX could not repay. The meeting on 3 December 2013 occurred in FEX’s offices. The circumstances in which the loans would be repaid was an important matter. If the parties agreed to a change in relation to that matter, it is to be expected that they would have followed their normal practice and documented that agreement immediately.

44. Fourth, in the past, when Mr Price asked for an accommodation from GHF, Mr Ren usually asked for an additional benefit, such as the issue of bonus shares or a discount on the agreed issue price. If there really had been an agreement to vary the terms on which GHF would be repaid, it is to be expected that Mr Ren would have sought some benefit it return. However, he did not do so.

45. Fifth, even on Mr Price’s account of the conversation on 3 December 2013 not all the terms of the variation were discussed. The proposal that the loans be repaid by the issue of shares at a 20 percent discount to the IPO price or alternatively at the agreed price of $0.86 is not reflected in the conditions which are said to form part of the agreed variation. In addition, there was no mention of the possibility of returning the money into escrow. Mr Price gives evidence that Mr Ren said that that is what GHF would do at the time GHF gave notice for the money to be paid out of escrow. But on Mr Price’s account, that conversation occurred on 11 July 2011, some two and a half years earlier. It is difficult to see how that condition could become a term of the variation. Moreover, I do not accept Mr Price’s evidence that Mr Ren said that the money would be returned to escrow once the AML was issued. Under the terms of the Subscription Agreement and Escrow Deed, the money held in escrow was to be used to subscribe for shares once the licence was issued. It would make no sense for Mr Ren to say that the money would be returned to escrow under those circumstances. Moreover, if Mr Ren had really said that, it is to be expected that when the AML was issued Mr Price would have asked for the money to be returned to escrow. However, there is no evidence that he did.

Implied variation

46. The case based on an implied variation depends on a variety of conduct during the period from May 2010 to May 2015. Some of the same conduct is said to give rise to a conventional estoppel. It is convenient to make a number of points about that conduct before addressing the cases based on an implied variation and conventional estoppel directly.

47. FEX relies on the email dated 23 May 2010 from Mr Price to Mr Luo and the fact that, to GHF’s knowledge, FEX could not repay the loan without raising additional capital or issuing further shares.

48. As I have said, I accept that the contents of Mr Price’s email dated 23 May 2010 came to the attention of Mr Ren. However, it is clear from the terms of the agreement relating to the First Loan that Mr Ren was not prepared to provide the funds sought by FEX by way of additional capital, notwithstanding Mr Price’s email. Instead, something of a compromise was reached and, if the loan was not repaid by the due date, GHF was given three options. It could extend the time for repayment of the loan. It could be paid by the issue of further shares. Alternatively, it could require FEX to transfer to it shares in NSX to the value of the loan. It may be inferred from what happened that GHF impliedly agreed to an extension of the loan.

49. I do not accept that GHF knew that FEX could not repay the First Loan or the total of the three loans without raising additional capital (from GHF or another investor). In support of the submission that GHF knew those matters, FEX relies principally on its audited financial statements for the financial years ending 2013 and 2014. I accept that GHF, and Mr Ren in particular, were aware generally of the contents of those financial statements. However, I do not accept that those financial statements show that FEX was not in a position to repay the loans unless one of the four conditions contended for by FEX was met. The relevant financial statements are the financial statements for FEX and its controlled entities, which include a number of other companies, including NSX. Consequently, it is not possible to determine the value of the shares FEX held in NSX. It is apparent, however, particularly from the terms of the agreement in relation to the First Loan and the Consolidated Loan Agreement, that the parties contemplated that, if all else failed, GHF could be paid by the transfer to it or the sale of NSX shares. There is nothing in the evidence to suggest that to the parties’ knowledge that was a false assumption.

50. The notes to the accounts suggest that FEX was dependent on continued support from its shareholders. But, apart from GHF and Mr Price or companies associated with him, there is no evidence of who those shareholders are and whether their support would continue if the loans from GHF were repaid. Mr Price gave evidence that, if necessary, FEX would be able to raise the funds to repay GHF and would have been able to do so in 2013. Mr Price’s evidence was contrary to the interests of GHF. It is not obviously false and, in my opinion, it should be accepted.

51. FEX maintains that GHF never made a demand for repayment of the First Loan. However, that is an over-simplification. The agreement in relation to the First Loan specifically contemplated that the repayment date could be extended. In practice that is what happened. However, by the Consolidated Loan Agreement, FEX acknowledged the First Loan and agreed to a new repayment date in relation to it. GHF made a demand for the repayment of the three loans after the date for their repayment fell due. GHF did not pursue that demand. However, in my opinion, the likelihood is that on occasions Mr Ren did remind Mr Price that the loans were owing to GHF. It would be odd for GHF to demand repayment of the loan and then for Mr Ren to say nothing. On the other hand, it is not surprising that GHF did not take steps immediately to recover the loan. GHF had a substantial investment in FEX. Mr Ren says and I accept that he was keen to see FEX become successful. Both he and Mr Price were seeking to attract additional investors. It is natural in those circumstances that GHF did not take formal steps to recover the loan immediately. Mr Ren changed his mind when he thought that FEX had acted contrary to his interests. None of that suggests that Mr Ren or GHF accepted that the loans did not need to be repaid except on the conditions identified by GHF.

52. FEX contends that the Second Loan was made in the knowledge that it could only be repaid from receipt of the third instalment of funds to be paid by another investor and that the parties had no expectation that the loan would be repaid unless those funds were received. I do not accept that contention. It is directly contrary to the terms of the agreement on which the Second Loan was made and, in particular, the requirement that it be repaid on the earlier of 30 November 2011 or receipt by the borrower of the third instalment. If the parties really expected that the loan could only be repaid if the third instalment was received from another investor, they would not have agreed to the terms of the Consolidated Loan Agreement or at least it is to be expected that FEX would object to those terms. However, there is no evidence that it did.

53. FEX also contends that, apart from one occasion (on 25 January 2014), GHF never made a demand for repayment of any of the Loans. I have already dealt with this contention. I accept that Mr Ren first asked for the loans to be repaid in early January 2014. That request was followed by a formal demand in which GHF reserved its rights. As I have said, following that formal demand, it would have been natural for Mr Ren to say something about repayment of the loan on other occasions. However, he was prepared not to take further steps pending the outcome of attempts to raise further capital. In my opinion, that is all that can be inferred from what happened.

54. Against that background, it is possible to turn to FEX’s contention based on an implied variation.

55. I accept GHF’s submission that FEX’s case based on an implied variation must turn on events that occurred after the agreement that it is said to have been varied was entered into. It is difficult to see how the terms of an agreement can be varied by the conduct of the parties that occurred before the agreement was entered into.

56. In this case, the agreement said to be varied is the Consolidated Loan Agreement, which was entered into on 22 March 2013. Shortly after the amount payable under that agreement fell due on 31 December 2013, GHF made an oral request and a formal demand that the amount of the loan be repaid. It then took no formal steps to recover the loan until May 2015. However, that was in a context where GHF had a substantial investment in FEX and both it and FEX were pursuing attempts to raise further capital, including through an IPO. The fact that GHF had reasons for not taking further steps immediately to recover its loan and therefore did not do so cannot amount to conduct that had the effect of varying the terms on which the loan would be repaid, let alone introducing the conditions for which FEX contends. For those reasons, the case based on an implied variation must fail.

Estoppel by Convention

57. An estoppel by convention arises where there is a shared assumption about a particular state of affairs between both parties. The principles were explained in these terms by the High Court in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226 at 244:

Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted on by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying.

58. The common assumption must be communicated by both parties; Grundt v Great Boulder Proprietary Gold Mines Ltd [1937] HCA 58; 59 CLR 641 at 676; and, like other forms of estoppel, the party relying on the estoppel must have placed itself in a position of significant disadvantage if departure from the assumption is to be permitted: MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 at 72. Unlike promissory estoppel, there is no requirement of inducement by either party: Moratic Pty Ltd v Gordon [2007] NSWSC 5 at 37.

59. There is conflicting authority on the question whether pre-contractual negotiations can form an estoppel by convention and on the effect of the parole evidence rule: compare Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190; Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267 (holding that pre-contractual negotiations were admissible) with Whittet v State Bank of New South Wales (1991) 24 NSWLR 146; Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at 542-544 (holding that pre-contractual negotiations were not admissible). However, given the conclusions I have reached, it is not necessary to express a view on that issue.

60. In this case, FEX submits that the essential elements of a conventional estoppel are that GHF knew that FEX had no ability to repay the loan unless one of the conditions it identifies was satisfied and that the parties conducted their affairs on the basis of a common assumption that the loan moneys would not be repaid unless one of those conditions was satisfied.

61. On the findings I have made, neither of those matters is made out.

62. As to the first, the evidence suggests that the parties contemplated that if necessary the loans could be repaid at least in part from the sale or transfer to GHF of the shares FEX held in NSX. There is no evidence to suggest that that was not possible.

63. As to the second, it is not correct that the parties conducted themselves on the basis that the loans would only be repaid if one of the conditions identified by FEX was satisfied. The parties signed three agreements that contemplated repayment of the loans even if none of the relevant conditions was satisfied. After the repayment date under the Consolidated Loan Agreement fell due, GHF demanded repayment of its loans. FEX did not suggest in response to that demand that the parties had operated on the basis that the loans would not be repaid except on the happening of one of the conditions it has identified. It is true that GHF did not then take steps to recover the loans for a period of approximately 16 months. However, that is consistent with the fact that GHF had a substantial investment in FEX and both GHF and FEX were attempting to raise additional capital for FEX. But the fact that GHF was prepared to wait for a period of time while that happened does not demonstrate that it was prepared to wait until one of the conditions identified by FEX was satisfied.

64. Moreover, FEX cannot identify any detriment it will suffer if GHF is permitted to depart from what is said to be the common assumption made by both of them. FEX submits that it will suffer detriment because if GHF is permitted to depart from the assumption there will be a further impairment of its financial position. But that would not be a detriment that arises from a departure from the common assumption. In order for there to be relevant detriment, the common assumption must have caused FEX to act in a way that it otherwise would not have. But in this case, there is no suggestion that FEX acted any differently because of the assumption it is said to have made. It is not suggested, for example, that but for what is said to be the common assumption, it would have borrowed the money on more favourable terms from GHF or from someone else or raised capital that it cannot now raise.

65. It follows that the defence based on a conventional estoppel must fail.

Orders

66. The total amount of interest payable to GHF in accordance with the terms of the Consolidated Loan Agreement is $840,780.49.

67. It follows that the orders of the court are:

1. Judgment for the plaintiff in the sum of $3,992,217.59.

2. Defendant to pay the plaintiff’s costs of the proceedings.

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Decision last updated: 18 May 2016