Graf v Flammea
[2021] VSC 149
•30 March 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2017 01498
| PHILIP GRAF | Plaintiff |
| v | |
| FRANCESCO FLAMMEA | Defendant |
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JUDGE: | ALMOND J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3, 4, 8-10, 18 February 2021 | |
DATE OF JUDGMENT: | 30 March 2021 | |
CASE MAY BE CITED AS: | Graf v Flammea | |
MEDIUM NEUTRAL CITATION: | [2021] VSC 149 | First revision 31 March 2021 (Paragraph 60) |
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CONTRACT – Whether amounts directed to be paid by corporate entities associated with the Plaintiff to corporate entities associated with Defendant were amounts lent to the Defendant by the Plaintiff – Whether the Plaintiff is the lender and proper plaintiff where a corporate entity associated with the Plaintiff made the payments – Whether the Defendant is the borrower and proper defendant where the payments were made to corporate entities and not to the Defendant personally.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Marcus J Hoyne | Lennon Lawyers |
| For the Defendant | Mark Ravech | Rotman & Morris |
HIS HONOUR:
In this proceeding, the plaintiff, Philip Graf, seeks to recover from the defendant, Francesco Flammea, money alleged to have been lent to Mr Flammea which has not been repaid.
There is no issue between the parties that amounts were advanced or that the advances had the character of a loan or loans. The fundamental issue for determination is whether the loans were made between Mr Graf and Mr Flammea (as Mr Graf contends) or were made between companies controlled by Mr Graf to a corporate entity, Cruzer Group Ltd (‘Cruzer Group’), or its subsidiary, Webcruzer Australia Pty Ltd (‘Webcruzer Australia’) (as Mr Flammea contends).
Relevant background
Cruzer Group was incorporated in Hong Kong and was owned as to 90% by a company associated with Mr Flammea. The remaining 10% was owned by a third party not relevant to the proceeding. There were two wholly owned subsidiaries of Cruzer Group, being Webcruzer Australia and Webcruzer Ltd.
The business of the group was to develop software which would allow corporations to build websites in a particular way. Continuation of development work on the software depended on external funding, as the Webcruzer entities were not generating any revenue of substance.
In early 2010, Mr Graf was introduced to Mr Flammea by his accountant, Mr Frank Angelico. Mr Graf recalled attending a meeting with Mr Angelico and Mr Flammea. He could not recall what was discussed but assumed they talked about Webcruzer. At that point in time, Mr Graf said he was willing to consider lending money but not taking an equity position.
Mr Graf was unable to remember the details of the discussion which led to payments from a company associated with him (Nemur Rene Pty Ltd (‘Nemur Rene’)) being made to a company associated with Mr Flammea (Mondo Vending Pty Ltd (‘Mondo Vending’)) on 26 March 2010.[1]
[1]Agreed chronology filed 18 February 2021 (‘Agreed chronology’), pp 1-2.
Nevertheless, soon after the initial discussions, a written agreement was entered into between Mr Graf as named lender and Mr Flammea and his son, Mr Paul Flammea, as named borrowers on or about 9 April 2010, whereby Mr Graf agreed to lend $300,000 to the borrowers for a period of six months repayable on 9 October 2010 with interest payable at the rate of 10% per annum (‘Loan Agreement’).
Pursuant to the Loan Agreement, the parties agreed that the amount of $50,000 lent prior to the commencement date of the Loan Agreement formed part of the loan amount of $300,000.
Between 26 March 2010 and 30 August 2010,[2] amounts totalling $300,000, usually in increments of $20,000, were deposited from the Nemur Rene cheque account into a bank account of Mondo Vending or a bank account of Webcruzer Australia.
[2]Agreed chronology, pp 1-3.
Despite terms which required repayment of the full loan amount on the repayment date of 9 October 2010,[3] the loan was not repaid on that day in whole or in part. Similarly, despite terms which required interest to be paid monthly in arrears,[4] no interest was paid during the term of the loan or at all. For reasons which follow, nothing turns on Mr Flammea’s non-compliance with the terms of the Loan Agreement.
[3]Loan Agreement, clause 4.1; CB298.
[4]Loan Agreement, clause 5; CB298.
As events transpired, Mr Graf continued to make further payments after his accountant, Mr Angelico, said that Mr Flammea needed more money to keep the business going. Mr Graf did not volunteer any explanation as to why he continued to facilitate the making of payments other than to say that Mr Angelico asked him to continue making them. Mr Graf was shown an email sent to him from Mr Angelico on 7 September 2010, referring, among other things, to the prospects of the Webcruzer product. The email said ‘...it will just take off. There is a huge market over there…’ (referring to China). The email also made reference to the prospect of a sale of a percentage share to fund the next stage.[5] Despite being reminded of this context, Mr Graf did not elaborate on the reasons why he continued to advance funds despite not having been repaid the original loan under the Loan Agreement, other than to say that the company still needed money and he kept paying amounts whenever Mr Angelico suggested that amounts were needed.
[5]Email from Frank Angelico to Philip Graf dated 7 September 2010; CB313.
On the same day as the email (7 September 2010), apparently in response to the request for funds, Mr Graf’s company, Nemur Rene, deposited $7,000 into the account of Mr Flammea’s company, Mondo Vending, and $3,000 into the account of Webcruzer Australia. Further deposits, each of $20,000, continued to be made throughout October, November, and early December into the accounts of Mondo Vending or Webcruzer Australia.
By 7 December 2010, Nemur Rene had provided funds totalling $450,000 ( $150,000 in addition to the original $300,000 loan under the Loan Agreement). At no time were any repayments made by Mondo Vending or Webcruzer Australia either by way of principal or interest.
Shortly after 2 December 2010 (the exact date is unknown ), Mr Graf, Mr Angelico and Mr Flammea met at Plumpton to view some land. Mr Graf had a poor recollection of what was discussed at the meeting, but in essence recalled that Mr Flammea indicated the location of a one acre parcel of land by pointing it out generally across undeveloped farmland and said that if he and Mr Angelico invested in the company he would ‘throw the land in’.
The land in question was an acre of land forming part of a larger landholding in Plumpton, which was intended to be subdivided and once subdivided, developed for housing.
Mr Graf understood that Mr Flammea had an option to purchase the land for an agreed price subject to the land being subdivided. According to Mr Graf, he made no commitment to invest at that stage. During December 2010, Mr Graf’s company, Nemur Rene, continued to provide financial support to Webcruzer Australia by providing a further $40,000 to the company in two $20,000 instalments.
In early January 2011, Mr Graf, Mr Angelico, Mr Angelico’s son-in-law Adam and Mr Flammea met at Mr Graf’s house in Cowes on Phillip Island, during which they negotiated terms which were reduced to writing in a short form Memorandum of Agreement (‘MOA’) dated 14 January 2011 which is reproduced as follows:
PREAMBLE
Mr Francesco FLAMMEA is the principal of the Webcruzer group which requires immediate Capital Funding in order to continue Trading and meet ongoing commitments.
The parties agree that substantial funding has already been provided however more Funding is required in order to reach a breakeven point in Trading.
Mr Francesco FLAMMEA has an interest in a parcel of land in Plumpton whereas subject to a Plan of Subdivision being Granted, Mr Flammea has the option to purchase one acre at a set amount of $120,000.
WHEREAS IT IS AGREED AS FOLLOWS
Mr Philip GRAF and his associate companies to continue funding for the said period as set out in the attached schedule. Any Funds derived by Webcruzer in a Trading capacity will be deducted from Mr Grafs commitment. The intent of this agreement is to ensure the company is assured of the sums outlined in the schedule to meet its ongoing commitment.
In consideration of the above commitment Mr Flammea will assign his Option to purchase the land situate at Lot 1, 9 City Vista Court, PLUMPTON to Mr GRAF. Mr GRAF will then assume the responsibility of the payment of the Option Fee of $120,000 in return to Title of the said Land.
Mr Graf and/or his associated nominated companies will receive an immediate entitlement of 20% of the equity in Webcruzer Ltd (Incorporated in Hongkong).
All previous Funding paid before the date of the attached Schedule shall be deemed the Funds paid in by MR FLAMMEA.
This memorandum is subject to each of the Parties ageing to having a Qualified Legal Practitioner prepare the necessary documentation which is on the basis of this Agreement.
The schedule referred to in the first paragraph of the operative provisions is headed ‘Webcruzer Funding’ and sets out a list of dates and instalment amounts totalling $735,000 commencing with a payment of $40,000 on 22 December 2010 (pre-dating the MOA) and concluding with a final instalment of $10,000 on 24 June 2011.
In substance, under the MOA, Mr Graf agreed to continue funding Webcruzer group to the extent of $735,000 in consideration of receiving an immediate entitlement to 20% of the equity in ‘Webcruzer Ltd (incorporated in Hongkong [sic])’[6] and the benefit of the option to purchase the land at Plumpton (by payment of a fee of $120,000 subject to a plan of subdivision being approved). The parties were informal in their descriptions of the Webcruzer group entities. There is no incorporated ‘Webcruzer group’, and there is no evidence that Webcruzer Ltd was incorporated in Hong Kong. It is likely that the reference to Webcruzer Ltd being incorporated in Hong Kong is a misdescription of Cruzer Group, which was incorporated in Hong Kong.
[6]MOA; CB574.
Reference is made to the parties having a qualified legal practitioner prepare the necessary documentation. It is common ground that no further documentation was prepared.
Consistently with the terms of the MOA, Mr Graf continued to facilitate the funding of Webcruzer Australia. Instalments were not always paid in the prescribed amounts on the prescribed dates but the total amount set out in the schedule of $735,000 (including amounts which had been paid on 22 December 2010, pre-dating the MOA but included in the schedule attached to the MOA) was paid by 3 June 2011, prior to the specified end date for the payment of instalments under the MOA of 24 June 2011.
In purported furtherance of his obligations under the MOA, Mr Flammea took steps to arrange for the transfer of a 20 per cent shareholding in Cruzer Group. No–one took issue at the time with the fact that the relevant documentation related to the holding company Cruzer Group and not Webcruzer Ltd (as it was described in the MOA).
In June 2011, Mr Graf nominated Glenhoya Investments Pty Ltd as transferee of the shares in Cruzer Group. Subsequently, Mr Flammea requested the relevant share registry in Hong Kong to transfer two shares in Cruzer Group from World Resource Management Ltd to Glenhoya Investments Pty Ltd. The transaction was documented by minutes of a meeting of the board of Cruzer Group, which resolved to transfer two shares from World Resource Management Ltd to Glenhoya Investments Pty Ltd and to issue a new share certificate to the transferee.[7]
[7]CB429B.
Subsequently, the transfer was documented by a SOLD note signed by the transferor, World Resource Management Ltd, and a BOUGHT note signed by the transferee, Glenhoya Investments Pty Ltd.[8] The transferor and transferee also signed an instrument of transfer of the shares in Cruzer Group.[9]
[8]CB429D.
[9]CB429F.
In purported furtherance of the obligations with respect to the option over the Plumpton land, Maria Flammea (Mr Flammea’s mother) assigned her rights under the option. On 17 January 2011 and 24 January 2011, Mr Graf appointed Maria Flammea to sign the contract of sale for the Plumpton land as undisclosed principal.
Originally, Mr Graf alleged that the agreement evidenced by the MOA failed for want of consideration and sought recovery of the funds paid pursuant to that agreement. This aspect of Mr Graf’s claim was abandoned at trial and properly so in light of the evidence outlined above which demonstrated that there been no failure of consideration.
The only issues remaining in dispute concerned payments made after the commitment to pay up to $735,000 under the MOA had been discharged by performance.
Additional payments
Between 6 June 2011 and 1 November 2013 (after the agreed amount of $735,000 in financial support under the MOA had been provided), Mr Graf made further payments into the Webcruzer Australia account by procuring his associated entities Nemur Rene, Building Research Analysis Pty Ltd, Practical Owner & Builder Pty Ltd and Buildsafe Independent Housing Group Pty Ltd to deposit additional funds totalling $761,850.
Mr Graf contends that, properly analysed, these advances were personal loans from himself (rather than loans from the various corporate entities that were the source of funds) to Mr Flammea (rather than to Cruzer Group or Webcruzer Australia).
Mr Flammea contends that none of the sums of money advanced during the relevant period were advanced to him.[10] Furthermore, that the advances were made, not by Mr Graf, but by corporate entities associated with Mr Graf to corporate entities associated with Mr Flammea.
[10]Amended Defence to Second Further Amended Statement of Claim filed 11 December 2020 (‘Amended Defence’), [6] and [7]; CB18.
There are therefore fundamental questions as to the identity of the lender and the identity of the borrower which require determination.
Identity of the lender
I shall deal first with the identity of the lender.
In support of the submission that Mr Graf is the lender, Mr Graf relies upon:
(a)evidence he gave to the effect that he sourced funds to make the payments from whichever company had funds available and that the funds provided constituted director’s loans from those entities to Mr Graf which Mr Graf on-lent to Mr Flammea;
(b)Mr Flammea’s admission in his defence that payments made pursuant to the MOA ($735,000) were made by Mr Graf,[11] yet the funds provided immediately after that time are said to be supplied by another entity.
[11]Amended Defence, [5AC]; CB17.
In opposition to the proposition that Mr Graf is the lender, Mr Flammea relies upon:
(a)discovered bank documents which show that all of the advances were made by corporate entities associated with Mr Graf as opposed to Mr Graf personally;
(b)a submission that in the absence of evidence to establish that these corporate entities made the advances on Mr Graf’s behalf, the Court should conclude that the corporate entities are the proper plaintiffs and that Mr Graf has no standing to bring the proceedings in his own name;
(c)a submission that there is no reliable evidence to establish that Mr Graf had standing to bring the claim; and
(d)Mr Graf’s evidence that his ‘best guess’ was that the advances were recorded as director’s loans in the accounts of his corporate entities is insufficient to satisfy a court, particularly in the absence of the failure by Mr Graf to discover the accounts of the corporate entities to establish the asserted director’s loans.
Analysis – identity of the lender and proper plaintiff
The evidence in support of Mr Graf’s contention that he was the lender (and therefore the proper plaintiff) and not his corporate entities needs to be considered in the following context.
It became obvious from Mr Graf’s evidence that he availed himself of the use of funds in whichever company had money available when the need arose for funds. His attention was drawn to the fact that during the course of the relevant events he made payments from different companies. When asked how he came to decide which company was going to make the payment, he replied ‘I had money in the account’. Further, Mr Graf gave evidence that he did not know how the payments would be recorded in the accounts of the various companies, but that it was his best guess that they would be recorded as director’s loans. When asked for company financial statements, he said he could not find the accounts of the relevant entities although he had searched for them.
When assessing the primary recollections, some allowance must be made to take into account the considerable effluxion of time from the date of the events in question – from 2011 through to 2013 – to the time of the trial in 2021.
Second, it is not uncommon for a significant degree of informality to attach to individuals and their corporate proprietary entities. In some cases, individuals regard the assets of their entities as indistinguishable from their own assets. It is not fatal to Mr Graf’s position on this issue that he was unable to say with certainty how the advances were recorded in the accounts of the relevant companies. He admitted he did not know and gave what he describes as his ‘best guess’ that the monies would be recorded in the relevant company accounts as director’s loans. However, this is intrinsically a question of accounting treatment and secondary characterisation.
Of more significance in my view is the statement in Mr Graf’s evidence concerning his entitlement to money in the relevant company accounts. Company searches show that Mr Graf was a director and sole or substantial shareholder of each of the companies at the relevant times. I am prepared to infer, and do infer in each case from the course of conduct, that when Mr Graf directed each entity to make the relevant payments into the Webcruzer Australia account, the entity was doing so on behalf of Mr Graf. In my view, he was directing the use of money to which he prima facie asserted an entitlement, which gives him standing to sue. I find that Mr Graf is the lender and therefore the proper plaintiff.
Identity of the borrower
The plaintiff submits that, properly analysed, the loans were made to Mr Flammea and not to Cruzer Group (or any other Webcruzer entities). He relied on the following matters:
(a)prior payments (under the Loan Agreement and the MOA) were made to Mr Flammea personally;
(b)payments were made into the same bank account (the account of Webcruzer Australia) before and after June 2011;
(c)the payments under the Loan Agreement and the MOA were predominantly for the purpose of funding the Webcruzer group, which remained the position after 2011;
(d)Mr Graf’s evidence that if he had been asked to put the money into the account of Mr Flammea, he would have done so;
(e)the parties knew that Mr Graf did not want his monies to be put into a ‘big black hole’,[12] so it is unlikely that he would have kept funding the Webcruzer group;
(f)the distinction between Mr Flammea and his corporate interests was not something which was of concern to the parties in 2011;
(g)Cruzer Group was ‘largely invisible’ to the parties – it is not mentioned in the MOA (where the reference is to Webcruzer Ltd), and appears not to have been mentioned until the transfer of shares was to occur;
(h)the notations on the bank deposits were ‘Loan Flammea Angelico’; and
(i)between about March 2010 and November 2013, Mr Flammea and his family used the bank account of Webcruzer Australia for their personal purposes, by direct withdrawal of cash or payments for personal items directly from the Webcruzer Australia account or by transfers to Mondo Vending. This is consistent with the monies being loans to Mr Flammea.
[12]Email from Frank Angelico to Frank Flammea dated 9 August 2010; CB306.
Mr Flammea submits that Mr Graf has not proven his case on the balance of probabilities and it would be erroneous to draw the inferences for which Mr Graf contends, which in all the circumstances would be glaringly improbable.[13]
[13]Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550, [43] (French CJ, Bell, Keane, Nettle and Gordon JJ).
Analysis – identity of the borrower and proper defendant
Mr Graf relies heavily on indications of continuity in the facts. In particular, the fact that payments under both written agreements were made ‘to Flammea personally’; that the payments were made into the same Webcruzer Australia bank account both before and after June 2011; and calling in aid the fact that the predominant purpose of making the payments after June 2011 was the same.
Mr Graf does not rely on any (written or oral) agreement for the additional payments but upon alleged requests by Mr Flammea for sums of money, the making of advances in response to the requests,[14] and the acceptance by Mr Flammea of the sums of money with the Court being asked to derive the objective intention by inference from the circumstances of the requests and subsequent performance.
[14]Second Further Amended Statement of Claim filed 12 December 2019, [6]; CB5.
These elements of continuity require closer examination to see whether they give rise to the inferences for which Mr Graf contends.
There is no doubt, properly analysed, that the payments made under the Loan Agreement were loans made to Mr Flammea personally. The character of the payments was established beyond doubt by the terms of the Loan Agreement, which not only defined Mr Flammea as the borrower, but provided for a commencement date, a defined loan amount, a term of six months, a repayment date, and a rate of interest.
The fact that payments made under the Loan Agreement were directed by Mr Flammea to be made by Mr Graf into the Webcruzer Australia bank account does not affect the character of the advances as a loan made to Mr Flammea (and not to Webcruzer Australia).
The payments made under the MOA, properly analysed, were not loans made to Mr Flammea personally. The MOA payments (including previous payments) were consideration for the purchase of a 20% equity share and the option to purchase the Plumpton land. The payments were never required to be repaid. Indeed, in the event that ‘Webcruzer’ generated funds from trading, the obligation to make the payments ceased.
The fact that Mr Flammea directed that the payments due under the MOA be paid into the account of Webcruzer Australia is consistent with the statement in the Preamble of the MOA that he ‘…is the principal of the Webcruzer group which requires immediate Capital Funding in order to reach a breakeven point in Trading’, but this direction does not affect the character of the payments.
The additional payments (in total $761,850), being the payments in dispute, were made voluntarily in response to Mr Flammea’s requests. Mr Graf submits that ‘the payments kept being requested and kept being made in precisely the same way as they had under the Loan Agreement and the MOA’ and that ‘in effect, nothing changed’.
Whilst it is true to say that the mechanics of the payments into the account proceeded in the same way, it is not correct to say ‘in effect, nothing changed’.
In fact, much had changed. First, the payments were no longer being made pursuant to an agreement between the parties and no agreement is alleged. Under the terms of the MOA signed on or about 14 January 2011, Mr Graf or his associated nominated companies had acquired a right to receive ‘an immediate entitlement of 20% of the equity in Webcruzer Ltd (incorporated in Hong Kong)’.
From that point on, Mr Graf, through his nominated entity, was interested in the ‘Webcruzer group’ as an investor. Having committed himself to paying up to more than $1 million (the original $450,000 and instalments totalling up to $735,000 set out in the schedule to the MOA in the event that Webcruzer was unable to generate its own funds from trading activities), there was, objectively, a considerable incentive to protect that investment.
At that point, Mr Graf had relinquished any right to sue on the Loan Agreement for recovery of the $300,000 advanced, for any interest which had accrued on that loan or for the additional $100,000 advanced. Mr Graf had relieved Mr Flammea of the obligation to repay principal and interest by converting those rights into part of the purchase price for equity. That itself was a major change in the rights and relationship of the parties which took effect in January 2011.
A related major change involved taking on an obligation to pay up to $735,000 ‘to ensure the company is assured of the sums outlined […] to meet its ongoing commitment’[15] and then fulfilling that obligation by progressively providing the funds.
[15]MOA; CB574.
It is correct to say that there was continuity in the mechanics of the payments in that they generally followed a request for more funds by Mr Flammea to Mr Graf via Mr Angelico, as a result of which additional funds were paid into the same Webcruzer Australia account with the same deposit notation ‘Loan Flammea Angelico’. Despite this continuity, the legal landscape had fundamentally altered once Mr Graf became entitled to 20% of the equity. From that point onwards, he had a direct and vital interest in ensuring that his ever increasing exposure to the group was not jeopardised.
It is necessary to specifically address the reliance by Mr Graf on the fact that the notation on the bank deposits remained throughout ‘Loan Flammea Angelico’ without any complaint or issue being raised.
It is significant that Mr Graf did not purport to attach any particular significance to the notation on the deposits. It became evident from cross-examination that Mr Graf well understood the acquisition of equity was a purchase transaction rather than a lending transaction. He agreed that after the loan amount pursuant to the Loan Agreement had been fully advanced, he just carried on using the same description every time he made a transfer whether it was with respect to a loan or not.
Consistent with this evidence, and subsequent to the signing of the MOA, Mr Graf caused more than 20 payments to be made into the Webcruzer Australia account on each occasion using the same deposit description despite these transactions, on any view, having nothing to do with any loan between himself and Mr Flammea or Mr Angelico.
It is obvious to me that the deposit description is no more than an artefact of the first transaction, arguably reflecting the subjective views of Mr Graf of the obligations reflected in the Loan Agreement. No weight can be attached to it for present purposes. Nor is it an admission by Mr Flammea.
Mr Graf submitted that Mr Flammea’s failure to complain or raise an issue with respect to this matter was objective evidence as to the fact that loans were being made to Mr Flammea. In my view, a reasonable person in the position of the parties, knowing the above history, would attach no significance to the description.[16] Further, the reasonable person would recognise that the controlling mind of a barely solvent company without a revenue stream and desperate for cash to pay wages and other existential expenses, would have little time to focus on nuances of Mr Graf’s deposit description, let alone raise any complaint about it. In such circumstances, the probabilities are that those controlling the company day to day would have simply been grateful to accept the funds allowing the company to stay afloat. For these reasons, the failure to take issue with Mr Graf’s deposit description is of no significance.
[16]Pico Holdings Inc v Wave Vistas Pty Ltd (2005) 214 ALR 392, [55] (Gleeson CJ, McHugh, Gummow, Hayne, and Heydon JJ).
Mr Graf gave evidence that if he had been asked to put money into the account of Mr Flammea, he would have done so. This evidence was self-serving and hypothetical and I do not accept it lends any weight to Mr Graf’s case. On the contrary in my view, in circumstances where Mr Flammea had not repaid loan money previously advanced when it fell due for payment, nor any interest, it is highly improbable that he would have done so.
I do not accept Mr Graf’s submission that it is unlikely that he would have kept funding Webcruzer Australia at the time and in the circumstances that funds were being deposited into the company’s account. It is clear that there were relentless entreaties from Mr Flammea via Mr Angelico to Mr Graf for continued funding for urgent working capital requirements. The communications were coupled with forecasts of imminent success coupled with the threats of imminent catastrophe (such as inability pay wages or loss of staff) unless funds were provided urgently.
There were very few direct communications between Mr Graf and Mr Flammea, as Mr Angelico was generally the intermediary. However, an email sent by Mr Graf to Mr Flammea on 3 October 2013 tends against the suggestion that the funds were loans to Mr Flammea.
In this email, omitting formal parts, Mr Graf states:
…
Your continued refusal to support Webcruzer & expect the small shareholders (PG, FA) to fund your company when you are, as your email explains – unable to manage the company – allowing it to be in a position to close down is bordering on gross incompetency.
Outside of the huge investment to purchase our shareholding, we (PG, FA) have contributed about $1 million this means your contribution would be $4 million. I will have FA verify the figures, if you have not contributed your share then your shareholding will be diluted.
…Your failure to act in the interests of minority shareholders … is deeply upsetting to us.[17]
…
[17]CB486.
There were further emails to the same effect dated 22 November 2013. In two emails sent on that day, Mr Graf wrote:
…it is us, small shareholders who have carried the funding of your majority interest, & quite frankly I am sick of it, pull your financial weight & YOU put your money into our company.
…
I am talking about the Extra money that I & Frank have put in, way above our commitment for our 10% shareholding.
And way above a call for extra funds based on our shareholding.
You have not contributed anywhere near the % as per your shareholding!
And I await your contribution.
Evidence of the parties’ post-contractual conduct is not admissible for the purpose of construing the provisions of a written contract. But when there is no written contract the evidence is admissible for the purpose of determining whether a contract was formed, who the parties to the contract are, and whether a particular term should be inferred.[18] In this case, there is some evidence of contemporaneous conduct. For example, the request and response to request for funds in October 2013 and the email referred to above dated 3 October 2013. There is also some evidence of Mr Graf’s ‘post-contractual conduct’ in the emails referred to above dated 22 November 2013. Both are admissible for the purpose of determining the parties’ to the loan contract.
[18]Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Pty Ltd [2015] VSCA 286, [133] and [134], (Warren CJ, Kyrou and McLeish JJA).
When these emails were brought to Mr Graf’s attention during cross-examination, he spoke of his frustration, about writing emails in the heat of the moment, but was ultimately unable to explain his use of such language. Rather, he was evasive and resorted to statements to the effect that he did not understand the question. I found this part of Mr Graf’s evidence wholly unconvincing.
In addition, it seems to me that the premise advanced by Mr Graf of contributing funds proportionate to one’s shareholding accords with the notion of one shareholder advancing funds to the company wanting the contribution to be matched by other shareholders. The reference to dilution of shareholdings (on the asserted basis that Mr Flammea (through his corporate entity) had not contributed his proportionate share of funds) makes little sense if the additional advances are merely loans to Mr Flammea.
Further, there are no contemporaneous emails that refer to the making of a further loan to Mr Flammea. There is no loan documentation, unlike the loan documentation accompanying the Loan Agreement made in April 2010. There are no express terms of the purported loan to Mr Flammea and no interest rate was agreed upon. The parties had previously documented a loan agreement and could easily have adapted the terms to accommodate additional advances if that was the intention. Given these circumstances, it would be odd if there were to be undocumented additional personal loans made to Mr Flammea. But the absence of documentation, of any formal agreement, of any nominated term or of any requirement to pay interest is explicable if the transaction is in truth an interest free shareholder’s loan to a company, in which the lender has a substantial interest, a strong motivation to protect a prior investment, secure in the knowledge that all of the amounts advanced to the company would be ultimately brought to account and reflected in its financial statements in due course.
In my view, Mr Graf had an additional motivation for making the relevant payments. It is reasonable to infer that Mr Graf was led to believe that his continued financial support of the Webcruzer group would result in the value of Mr Graf’s interests in the Webcruzer group increasing very significantly. For example, in an email dated 7 September 2010 addressed to Mr Graf, in the context of providing an update on the Webcruzer group’s expansion into China, Mr Angelico said ‘[t]rust me Phil this is BIG!!!!!!!’.[19] Additionally, under cross-examination, Mr Flammea provided the following depiction of the mood in the Webcruzer group at the relevant time:
‘…let me explain what the dynamics was of the business. We were always one – one week away or one contract away from not being millionaires but from being billionaires. The – the feeling in the company was that, ah, when funds did come in, they would – we wouldn't be worried about the small millions…’[20]
[19]CB313.
[20]T397.3.
Mr Angelico was called as a witness in support of Mr Graf’s case. He was unable to offer much insight into the October and November 2013 emails (referred to above), though he acknowledged finally, only after a long delay and having the question put a second time, that the reference to dilution of shareholding was inconsistent with the proposition that the transaction was a loan to Mr Flammea. I found him to be an unsatisfactory and evasive witness. On the issue in dispute, his evidence was unhelpful to Mr Graf.
Further, some reliance was sought to be placed on the characterisation of loans in the “Report to Creditors by Administrators” dated 15 April 2014[21] as supportive of Mr Graf’s case until it emerged in evidence given by Mr Tramontana, an accountant, that the entry relied on recording a loan related to M & F Flammea, Mr Flammea’s parents and had nothing to do with Mr Flammea.
[21]CB505.
In my view, the identity of the borrower is the recipient of the funds, Webcruzer Australia, alternatively, the holding company Cruzer Group. There was some evidence from Mr Flammea to the effect that Webcruzer Australia was merely a service company for the purpose of paying wages and ‘organising things’, with the loan monies intended to go to Cruzer Group and be recorded in the accounts of Webcruzer Australia as a loan from Cruzer Group. I accept that the funds advanced may have been more conveniently recorded as a loan from the holding company to the subsidiary, rather than as a loan directly to the subsidiary, but nothing turns on this. The group of companies failed before commencing to trade.
From beginning to end, investment in the so-styled Webcruzer group was a highly risky endeavour because it consisted of advancing funds to a barely solvent entity without a revenue source and without security. Nevertheless, the risk was taken perhaps because of the holding out by Mr Flammea persuasively, and over several years, the lure of substantial wealth once the group had completed its software development and began to trade. Mr Graf submitted that personal drawings from the Webcruzer Australia account or transfers to Mono Vending were consistent with the monies being loaned to Mr Flammea. In my view, they are equally consistent with drawings in lieu of wages or director’s loans to be reconciled later. Accordingly, this does not assist Mr Graf’s case.
For completeness, I do not accept there was a collateral agreement as postulated by Mr Flammea: that the explanation for Mr Graf continuing to bankroll the Webcruzer group beyond the $735,000 set out in the MOA was because he had made a collateral agreement in late November or December 2010 during which he agreed to provide up to $1.5 million of further funding if that amount was required to ensure that the Webcruzer group had sufficient working capital to commence commercial trading.
Such an agreement seems to me to make a little sense read in the context of the operative provisions of the MOA documented and signed in January 2011, which required the provision of the $735,000 styled as ‘Webcruzer funding’ to be provided in full if ‘Webcruzer Ltd’[22] had not been able to generate funds itself. Had the Webcruzer group entities commenced trading, the obligation to continue to make the scheduled payments ceased. If the parties had in fact agreed that Mr Graf would continue to fund the Webcruzer group by up to $1.5 million prior to the documentation of the MOA in January 2011, there seems to be no reason why the figure of $1.5 million would not have been inserted in the MOA instead of $735,000.
[22]As styled in the MOA.
I note that the alleged collateral agreement has never been pleaded and seems to have been first characterised as a collateral agreement during the trial. I am not persuaded there was such an agreement. Mr Graf had very vague memories of the events at the November or December 2010 meeting, which he frankly acknowledged but he did deny agreeing to provide funds of up to $1.5 million. If there was any discussion about the provision of further funds up to $1.5 million, I find the discussion went no higher than an expression of hope or expectation falling short of agreement or the meeting of minds.
Viewing the evidence objectively, I am satisfied that the identity of the borrower is the corporate recipient of the funds, being one or other of the entities of the Webcruzer group. It is not necessary, for present purposes, to determine which entity.
It follows that Mr Flammea was not the borrower of the additional advances, and is not, therefore, the proper defendant.
Accordingly, Mr Graf’s claim cannot succeed and must be dismissed. I will hear counsel on the question of costs.
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