Grossberg v New Theme Pty Limited
[2003] VSC 185
•5 June 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 5894 of 2000
| EGON GROSSBERG AND OTHERS | Plaintiffs |
| V | |
| NEW THEME PTY LIMITED | Defendant |
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JUDGE: | Smith, J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11–14, 17-21, 24-28 February, 6 & 7 March 2003 | |
DATE OF JUDGMENT: | 5 June 2003 | |
CASE MAY BE CITED AS: | Grossberg v New Theme Pty Limited | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 185 | |
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Agreement – Joint venture or loan - terms
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M. Heaton, Q.C. with Mr M. Ravech | Fetter Gdanski |
| For the Defendant | Mr I. Waller | Clayton Utz |
HIS HONOUR:
The proceeding
Egon Grossberg, Greta Grossberg, Peter Grossberg and Bella Grossberg have brought proceedings against New Theme Pty Ltd. They seek a declaration that they are entitled to a 10 per cent or a 7.825 per cent interest in the business known as "Skyways International Hotel" (Skyways) which was conducted by the defendant, New Theme Pty Ltd, at 113 Matthews Avenue, Airport West in the State of Victoria. They also seek damages, equitable damages and the taking of accounts or inquiries as to damages and interest.
By order made 17 September 2002, the Listing Master ordered that the question of liability be tried separately and be tried first. This hearing has been conducted pursuant to that order.
The plaintiffs' case
The plaintiffs rely upon an agreement allegedly made in December 1994 and subsequently varied.
They allege in their Statement of Claim that on 20 December 1994, the defendant, New Theme Pty Ltd, agreed to sell to the first and second plaintiffs a 10 per cent interest in the Skyways business for $500,000. They allege that it was a term of that initial agreement that the first and second plaintiffs would obtain a 10 per cent interest in the business on payment of that sum and would be entitled to a share of the net profits of the business in proportion to their percentage interest in the business. They also allege that under the agreement they were entitled to increase their interest in the business in increments of 5 per cent by making a further payment of $300,000 or in an agreed proportionate amount where one per cent was the equivalent of a further $60,000 inclusive of current trading creditors and stock in trade.
They allege that the profits were to be distributed by cash and cheque in the proportions matching the interests of the parties in the business and that the business would pay expenses of motor vehicles in the same proportions. The plaintiffs allege that the agreement was partly oral and partly to be implied and was made on behalf of the defendant by Issam Tabet.
The plaintiffs allege that on the same day, 20 December 1994, the first and second plaintiffs paid to Issam Tabet and Mazen Tabet for the defendant an initial sum of $500,000 – by bank cheque drawn on the National Australia Bank (NAB).
They further allege that on 22 December 1994 the first agreement was discharged and the plaintiffs and the defendant entered into a new agreement incorporating the same terms and conditions as the first agreement with the addition of the third and fourth plaintiffs as contracting parties who would share in the rights originally agreed to be given to the first and second plaintiffs.
Pursuant to the new agreement, the third and fourth plaintiffs, it is alleged, made capital payments totalling $769,534.04 to the defendant thereby acquiring an interest in the business of 12.825 per cent.
In addition, the plaintiffs allege that the first plaintiff entered into an agreement with the defendant in about April 1995 with effect from 20 December 1994 by which the defendant agreed to transfer to the first plaintiff an additional 2.175 per cent in the business in lieu of payment of $130,000 for business advice given by the first plaintiff to the defendant in relation to the purchase of a business "York on Lilydale".
The plaintiffs allege that the defendant paid to them between December 1994 and 7 February 1997 a share of the profits in proportion to their interest in the business, including cash payments of $2,000 per week up to 7 January 1996.
The plaintiffs also allege that on 7 June 1996 and 27 June 1996 the defendant refunded capital totalling $900,000 in two payments, one of $370,000 and the other of $530,000. The result, it is said, was that the interest of the plaintiffs in the business was reduced to 10 per cent or, alternatively, 7.825 per cent, the percentages presently claimed. It is my understanding that the lower figure would be relevant inter alia if a purported release on 27 June 1996 was effective. The defendant, however, has not sought to rely upon that document.[1]
[1]See below para 93(g).
The plaintiffs allege that the defendant has failed to recognise the interest of the plaintiffs in the business, their entitlement to profits and has failed to properly account to the plaintiffs. A constructive trust of their interest in the business is alleged, a declaration sought as to their interest, and common law and equitable damages claimed and accounts sought.
The defendant's case
The defendant denies the plaintiffs' allegations but acknowledges an agreement with the first and second plaintiffs or Brimscombe Management Pty Ltd (Brimscombe), an agreement with different terms. Brimscombe is a company associated with Egon Grossberg.
The defendant alleges that the first and second plaintiffs or Brimscombe agreed to lend it money (initially $500,000) for renovations to the Skyways International Hotel. The loan was to be repayable on demand and interest paid weekly at the rate of 12% per annum. Pursuant to the agreement, the defendant was to execute, by way of security a document conferring on the first and second plaintiffs a 10% share in the business, such security only coming into operation in the event that the defendant was unable to repay the loan. The document was to be held in escrow pending such event.
The defendant admits payment of the amounts alleged by the plaintiffs but alleges that they were paid by the first and second plaintiffs or Brimscombe. It also admits executing a security document on 20 December 1994. The defendant also alleges that it paid interest to the first and second plaintiffs or to Brimscombe in amounts totalling $261,850. It also admits making payments totalling $900,000 on 7 and 27 June 1996 but alleges that they were repayments of loan moneys. The defendant also pleads that on 27 June 1996 the first and second plaintiffs or Brimscombe agreed that interest on the balance of moneys owed would be at the rate of 10% payable weekly.
It denies that the security document ever came into operation and denies any entitlement to equitable relief on the part of the plaintiffs. It is my understanding that the parties do not in this proceeding seek a decision on the issue pleaded as preventing the granting of equitable relief.[2]
[2]Para 18.
The defendant has in the course of the trial acknowledged that there was discussion about the possible purchase of the business by the Grossbergs for $6 million and alleges that, in the meantime, because of cash flow problems, the Grossbergs agreed to supply the defendant with funds while negotiations took place. Its case is, however, that at no time was there any intention of transferring an interest in the business.
The liability issues
The question of liability turns on the following issues:
(a)Whether pursuant to an agreement with the defendant, the plaintiffs acquired an interest in the Skyways business.
(b)If the plaintiffs acquired an interest in the business, what was its size and what were the entitlements attached to it.
I note that the defendant no longer owns the business, it having been sold in September 2002 for $15 million.
The key witnesses to the negotiation of the agreement were Egon and Greta Grossberg and Issam, Mazen and Maher Tabet. Before turning to their evidence, it is necessary to refer to some background evidence, much of which is undisputed.
Background
Egon Grossberg and Peter Grossberg are brothers. Egon Grossberg is a business consultant and entrepreneur. Peter Grossberg is a surgeon. Greta Grossberg is the wife of Egon Grossberg. She is a fashion accessory manufacturer. Bella Grossberg is the wife of Peter Grossberg. She is a dance therapist.
Issam Tabet is a successful businessman who migrated to Australia in June 1971. He left school at 15. In Australia, he initially worked for the Chrysler company but then he and his wife and family bought, worked in and sold some eight or nine small businesses and built up significant assets, a number of which were sold to purchase the Skyways International Hotel business. His son, Mazen Tabet, had worked in the various family businesses including a chicken shop and video shop. In 1994 he was 30 years old and had worked in the hotel and gaming business for about 18 months. He and his father were operating the Skyways International Hotel through the defendant company New Theme Pty Ltd. In early 1994, the directors and principal shareholders were Issam Tabet and Mazen Tabet (the Tabets). There was a minority shareholder, Kerry O'Hare.
In 1994, Egon Grossberg was in partnership with Camille Nahas in an accounting practice conducted under the name of Grossberg and Co. Camille Nahas was providing detailed accounting services to the defendant. Through Camille Nahas, Egon Grossberg was made aware of the fact that the Skyways business was a very profitable business. At the same time he learnt that they wished to buy out the shares held in the defendant by Kerry O'Hare and were in the process of negotiating a purchase of the York on Lilydale hotel complex. As a result, they had a pressing need for finance and a buying opportunity presented itself to Mr Grossberg.
Egon Grossberg was introduced by Camille Nahas to the Tabets, in May or June 1994, at the Skyways International Hotel. Several meetings followed. Egon Grossberg maintained that, in the course of these meetings, he discussed with the Tabets the possibility of he and his wife replacing O'Hare. Negotiations and discussions reached the point where sale of the whole business was discussed. Issam Tabet and Mazen Tabet were prepared to consider selling the business to Egon Grossberg for $6 million.
Egon Grossberg maintains that Issam Tabet told him that if he provided $500,000 quickly then they would give him a 10 per cent interest in the business at a discount of $100,000 together with an option to purchase a further interest in the business at the rate of $600,000 per 10 per cent interest. Egon Grossberg says he accepted that proposal subject to finance being arranged. These matters are disputed.
Egon Grossberg also gave business advice to the Tabets in July and August 1994 concerning the purchase of the York on Lilydale property and business.
In about October 1994, Egon Grossberg met with the manager of the South Melbourne branch of the National Australia Bank (NAB), Pina Simari. He sought a loan to purchase the business of Skyways International Hotel. He claims that he also arranged to put up his wife's home at 22 Omar Street, South Caulfield to secure the borrowing of $500,000 to acquire an initial 10%. He says that Pina Simari was familiar with the business and thought it a terrific business.
On 16 November 1994 Egon Grossberg faxed a handwritten document to Pina Simari which set out details for the purchase of Skyways. It was in his handwriting and contained the following:
"(1) Purchase price $8,7000,000.
(2) Stock including (coins $180,000) – (approximately).
(3) Deposit - $1,000,000 – per agreement.
(4) Transfer equity in properties controlled by Grossberg
12 Carters Avenue Toorak – rented offices;
20 Carters Avenue Toorak – rented showroom per agreement.
(5) Settlement 28 November 1994.
(6)Purchaser (Egon Grossberg) to purchase 100% of shares in New Theme P/L.
(7)All licences to remain with New Theme P/L."
The document purported to bear the signatures of Egon Grossberg and Issam Tabet and Mazen Tabet. Item (3) had originally referred to a deposit "paid". The word "paid" was crossed out and the initials "IT MT" put below it. The fact that a purchase price of $8.7 million was mentioned to the NAB is confirmed by a letter from Pina Simari dated 18 November 1994 in which she refers to it and expresses reservations about it. I note that there appears to have been another handwritten document purporting to be executed by Egon Grossberg also dated 16 November 1994 in which the purchase price is said to be $6,000,000 including stock and I note that the application for finance was for an amount in the order of $5.5 to $6 million. I am satisfied that at that time, the parties were in fact contemplating a price of $6 million not $8.7 million.
In late November or early December 1994, Egon Grossberg spoke with his brother, Peter Grossberg and told him that he had decided to acquire an interest in the business of Skyways International Hotel.
Mazen Tabet introduced Egon Grossberg to another manager of the NAB, Andrew Vines, manager of the Stock Exchange branch, the branch where the Tabets had their business accounts. Egon Grossberg successfully negotiated a loan of $500,000 through Andrew Vines secured over his home which was his wife's property. Interest was charged at 10.55%.
It seems that on about 18 December 1994 he telephoned his brother, Peter, and told him that he and his wife were going to purchase a 10 per cent interest in the Skyways business for $500,000. Egon and Peter Grossberg say that Egon Grossberg also suggested to Peter Grossberg that there was an opportunity for him to acquire an interest in the business at the rate of one per cent for $60,000 and advised him that he should take advantage of the opportunity. As a result, on 19 December 1994, Egon Grossberg received two cheques from his brother. One was a cheque in the sum of $90,465.96 and the other, a bank cheque for $209,534, the latter in favour of Peter Grossberg's wife Bella, endorsed by her in favour of the defendant.
On 20 December 1994, Egon and Greta Grossberg met with Issam and Mazen Tabet and handed them a cheque for $500,000 and entered into an agreement, the terms of which are in dispute.
On 22 December 1994, Egon Grossberg handed to the Tabets the bank cheque in the sum of $209,534.04, endorsed by Bella Grossberg in favour of the defendant. Later on 30 December 1994 he delivered a cheque for $500,000 to Issam Tabet, again a bank cheque received from Peter Grossberg, this time payable to the defendant. Egon Grossberg says that this was to purchase a further interest in the business on the agreed terms. The $500,000 had been borrowed and there is evidence that the interest charged on that loan was 10.55 per cent.
On 12 April 1995 Egon Grossberg handed a further cheque to Issam Tabet this time in the sum of $60,000. He maintains that this was paid to purchase a further interest in the business for Peter and Bella Grossberg. He initially said that this amount came from funds previously received by him on 19 December 1994 from Peter and Bella Grossberg totalling $90,465.96. He said that he used some of these funds to meet his legal expenses with the agreement of his brother and his brother's wife. I am satisfied that there was no express agreement – at best an understanding. His evidence of the source of the funds for the 12 April 1995 cheque was shown to be incorrect. A letter from NAB showed that funds were raised separately in April 1995 and a cheque drawn on his wife's account which was paid directly to the Tabets. The interest rate charged by the NAB was again 10.55%.
The plaintiffs' case is that as a result of these payments, as at 12 April 1995, Egon Grossberg and Greta Grossberg had acquired a 10 per cent interest in the business and Peter and Bella Grossberg had acquired a 12.825 per cent interest in the business. Egon Grossberg also maintains that, in about November 1994, he and Issam Tabet discussed the provision of an additional percentage interest in the business on the basis of the value of the work that he had done for the York on Lilydale acquisition of $130,000. This was equivalent to 2.175 per cent. Egon Grossberg also gave evidence that in April 1995 after payment of the $60,000 Issam Tabet told him that their interest in the business was now 25 per cent. These matters are disputed.
The events of 1995 appear to have been affected by the fact that the defendant entered into negotiations in January or February 1995 with its landlord for a new lease giving it longer potential tenure than it had under its existing lease but the landlord required, in return, a right of first refusal in respect of the business in the event that the defendant attempted to sell it. The issues were not finalised in writing until February 1996. This matter and the search for a way to avoid capital gains tax on the sale of the business to the Grossberg interests explains much of the conduct of the parties in 1995 and 1996. The sale of the business was also made difficult by the terms required by the NAB before it would finance the Grossberg interests.
Relations appear to have broken down in late 1995 and early 1996. By about June 1996 it would appear that the sale proposal had been abandoned and some $900,000 was returned to the Grossberg interests.
The agreement of 20 December 1994 – plaintiffs' evidence
Egon and Greta Grossberg gave evidence that on 20 December 1994 they attended Mr Vines, the NAB Manager, signed all necessary documents including mortgage documents and received a bank cheque for $500,000. They say they then drove to the Skyways premises where they met with the Tabets. They went into the restaurant with Issam Tabet and Mazen Tabet. They say that the agreement was confirmed – in particular that the $500,000 would acquire 10 per cent interest being a discounted amount for that interest. They confirmed that any other amount paid would acquire an interest on the basis that $6 million represented 100 per cent of the business. Egon Grossberg says they shook hands on the deal. He also said that Issam Tabet said he wanted the agreement put in writing and confirmed that they could buy additional interests in the business when they were ready. He confirmed that the proposal was that a $60,000 investment in the business would represent a one per cent share in the business.
Egon Grossberg gave evidence that he then wrote out the terms of the agreement reading the passages out as he wrote them. He said that Issam Tabet and Mazen Tabet both said that what he was writing was correct. He said that when he had completed writing the document he read it from the beginning and then asked if they agreed with it and whether they were prepared to sign the agreement. Issam Tabet and Mazen Tabet indicated their agreement. He said that they then each signed. Egon Grossberg says that Issam Tabet then asked Mazen Tabet to call in his brother Maher Tabet (also known as Michael). There followed a conversation between Issam Tabet and Maher Tabet in Arabic, following which Maher Tabet signed the document also. Greta Grossberg then handed over the cheque for $500,000.
There is disagreement about the content of the document and how it is that the plaintiffs can only produce a copy of the alleged document. The defendant also challenges the authenticity of that copy. Egon Grossberg said that there was some discussion about who would keep the original. In the end he said the Tabets kept it.
The copy document relied upon by the plaintiffs contains the following:
"We Egon and Greta Grossberg (Grossberg Trust) hereby accept a 10 per cent interest in the business known as Skyways International at 113 Matthews Ave, Airport West from the Tabet family (Issam, Mazen and Michael Tabet) and which business is owned by New Theme Pty Ltd. The 10 per cent is represented by $500,000 and which is hereby tendered by bank cheque drawn on National Australia Bank – Stock Exchange Branch. Further purchases can be made in amounts of 5% but which will represent $300,000 – or any agreed proportionate amount where 1% is equivalent to $60,000 – inclusive of current trading creditors and stock in trade."
Egon Grossberg says that there was then discussion about the possibility of Peter Grossberg and Bella Grossberg taking up an interest in the business on the terms previously discussed. He maintains that Issam Tabet said they would be happy for them to acquire an interest in the business on those terms.
According to Egon Grossberg either before or after the drafting and signing of the document, there was discussion of the way in which profits would be distributed. According to Egon Grossberg, Issam Tabet said that they would be distributed by a weekly payment on account in accordance with the proportionate share in the business and said that between them they would take out $10,000 per week by cheque and $8,000 per week in cash. He said they would also receive by cheque a proportional entitlement on a monthly basis on what they spent on their cars. Egon Grossberg says that he said that the payments by cheque would be treated as management fees. He said that Issam Tabet said that O'Hare and the Tabets had taken out profits as management fees.
Greta Grossberg gave similar evidence about the sequence of events on 20 December 1994. She, however, claimed that she had suggested that the agreement should be put down on paper although Issam Tabet also suggested it. Asked why she wanted that when she had been prepared to enter into the transaction without the documents, she said she thought that it was a sensible thing to do. I note also that she said they insisted that the Tabets keep the original and that Mazen Tabet made photocopies and gave her a copy. She maintained that there was discussion about weekly drawings along the lines mentioned by Egon Grossberg and was challenged on the basis that she had not mentioned drawings to cover motor vehicle expenses in her witness statement. She agreed that she had neglected to mention it.
The agreement of 20 December 1994 – the defendant's evidence
Mazen Tabet and Issam Tabet gave evidence of the events of 20 December 1994.
Their evidence was that they went to the offices of Grossberg and Co and met with Egon and Greta Grossberg. Mazen Tabet said the meeting was at midday. They said that they were given the cheque as a loan. They said that Issam Tabet said that the Grossbergs should have some sort of security and would leave it up to them to decide what they wanted. They said that Egon Grossberg then drew up a document and explained its contents to them as being in substance that he and his wife would have the security of a 10 per cent interest in the business of Skyways in the event that things went wrong and the Tabets were unable to repay the $500,000.
They denied that there was any reference to the purchase of further increments and said that the possibility existed of further loans only. They said that they all signed the document that Egon Grossberg had drawn up. They denied that Maher Tabet was called in and said that he could not be called in to sign the document because he was at the Skyways premises in Airport West and they were at the office of Egon Grossberg in Toorak. They said that there was then a discussion about who would retain the original of the agreement. They said that they insisted on the Grossbergs retaining the original. They also said that they did not themselves retain a copy of the document.
They denied that there was any discussion about the division of profits by sharing of the weekly drawings of $10,000 per week by cheque or $8,000 per week in cash and denied any discussion about the payment of car expenses. Mazen Tabet, however, acknowledged that the practice of the Tabets had been to draw $10,000 per week out of the gross receipts and put that money into the Skyways Business Management Account. He also accepted that the payments that were made subsequently by cheque to the Grossbergs or Brimscombe came out of the same $10,000 which the Tabets had been paying into the Business Management account.
Asked how any further payments from the Grossbergs would be secured, he said he did not know but assumed by the same document. Both Mazen and Issam Tabet denied that there was to be any incremental increase in the security if further money was advanced.
As to the document relied upon by the plaintiffs as the 20 December 1994 agreement, exhibit G1, they said that they were sceptical about it. They accepted that the signatures looked like their signatures. But Issam Tabet said that it did not look like the document he signed. Both he and Mazen Tabet said in their witness statements that they could not say that the exhibit was the document signed by them on 20 December 1996. Both said in evidence that it did not record the agreement reached.
Maher Tabet denied signing the document but acknowledged the presence on it of a signature similar to his signature. He denied that he played any role in the running of the business at the time. He said he was just working at that time in the bistro.
Credibility of Egon and Greta Grossberg
It would be unsafe to rely upon the evidence of Egon Grossberg in the absence of support from other reliable evidence. A number of matters reflect badly on his honesty.
He knowingly allowed people to assume he was a qualified accountant when he was not. It also emerged from his own evidence that he was not troubled about making false statements to banks about the actual purchase price of a business for which he was seeking finance, or about assets, or about the current status of his attempt to purchase the business if that would put pressure on the bank.
He was also not troubled by arrangements in which payments were claimed in the accounts of the defendant to be management fees as a device to siphon off profits in a way that was tax-deductible but which could not in fact be justified. He was also prepared, in the middle of 1995, to be a party to an artificial scheme to create a selling expense in the form of agent's commission on the sale of the Skyways business to his interests by introducing a company, Keyport Proprietary Ltd, nominally controlled by his wife, as agent and agreeing that that company should receive a commission of $0.95 for every $1,00 over "the business value", a value to be established by a valuation. There was no evidence as to what was to happen to any such commission. It is inconceivable, however, that it was intended that such commission would remain in the hands of the Grossbergs. The purpose was to introduce a cost associated with the disposition of the capital and so evade capital gains tax. Counsel for the plaintiffs and the defendant, understandably, did not explore this issue. I note also that for the sake of securing at least an 80 per cent interest in the business, Egon Grossberg was prepared to enter into that agreement on the basis that he and his associates had no interest in the business at a time when, if the evidence led on behalf of the plaintiffs is to be believed, they held a 25 per cent interest. As he frankly put it, the documents did not accurately reflect the interests held by the family in Skyways.
". . . but we signed them, and they were accurate for the purpose that we wanted them to be accurate for: to facilitate the whole deal"
In addition, I am satisfied that he was well aware and happy with the situation that the money provided by the plaintiffs were recorded in the books of New Theme as loans. He claimed ignorance of the financial statements of New Theme. In my view it is inconceivable that he was not aware of the content of those financial statements. He was, and is, not a person who would prepare such statements or concern himself closely with detail. On the other hand, he was, and is, someone who would make sure he kept up-to-date with the latest information available about a business in which he was investing.
He was shown to be in error in his account of the use of the funds provided by Peter Grossberg in December 1994 and the source of the $60,000 paid in April 1995 to the Tabets. He maintained his position despite his inability to explain what he did with the money until presented with bank documents which showed that the $60,000 was paid from his wife's sources and that he had spent all of Peter Grossberg's payment on other matters. He gave an explanation, which became more elaborate as he was questioned, about how he came to fax the 16 November 1994 document, Exhibit G6, to the NAB. He was originally adamant that that document had been signed at the Skyways International Hotel. This was said in spite of the fact that the original document was in his possession and was the document used in the fax sent to the NAB from his office. When produced, he acknowledged his error. These instances showed his fallibility, his willingness to create an explanation and his lack of concern when shown to be wrong. I do not think it significant, however, that Exhibit G6 was not dealt with in his witness statement. It was not then of direct relevance.
Finally, I note that Egon Grossberg was the subject of adverse credit findings in a matter in the Federal Court concerning the existence of a charge in his favour over the assets of one of his former companies which had gone into liquidation. The published reasons of the Court indicate that the judge did not accept his evidence and did not accept the authenticity of alleged company minutes. In making those findings, the Court stated that it relied upon the fact that witnesses who could have confirmed the authenticity of the minutes were not called. Egon Grossberg was cross-examined about these matters in the present case and gave evasive answers. Asked about the reason why those witnesses were not called, he said that he had pressed his lawyers to call the relevant evidence but they had said it was not necessary. I find it most unlikely that such advice would have been given. His solicitor in that case was Mr Fagenblat. Mr Fagenblat was called in these proceedings but was not asked to give evidence about these matters.
Greta Grossberg appears to be a very loyal wife She was prepared to mortgage the home she had inherited from her late husband and entrust that money to Egon Grossberg. Her relationship with Egon Grossberg appears to be one in which she would do what her husband asked her to do and do it without question. Her evidence of the events of 20 December 1994 matched that of Egon Grossberg and there exists a legitimate concern as to the extent to which her memory may have been affected if only by discussion with Egon Grossberg. I am satisfied, however, that she gave her evidence honestly and do not accept the defendant's arguments suggesting deliberate manipulation by her of her evidence. Nonetheless, it would be unwise to rely upon her evidence without other reliable supporting evidence. On some aspects where she has been criticised, the explanation probably lies in her reliance upon what Egon Grossberg has said in the past.
Credibility of Issam Tabet and Mazen Tabet
Mazen Tabet and Issam Tabet also lack credibility. They also appeared to have no discomfort about the creative dealing and creative accounting to which I have referred in my comments on Egon Grossberg. In relation to the fictional agency agreement, I accept the evidence of Peter Douros, the solicitor at Feingolds who was attempting to look after their interests, that he urged them not to go ahead with the proposal, partly because of the agency proposal, but that they did not then accept that advice.
I am also satisfied that they are incorrect in their assertions that they visited the offices of Egon Grossberg on 20 December 1994 but that they did not visit those offices on 16 November 1994. This seemingly trivial evidence was in fact important because they sought to rely upon it to cast doubt upon the authenticity of the handwritten document dated 16 November 1994 and purportedly signed by them, for the sale of the business to Egon Grossberg for $8.7 million (a false price) and to cast doubt upon the authenticity of the document relied upon by the plaintiffs, Exhibit G1, purporting to be executed by them on 20 December 1994.
As to the 16 November 1994 matters, Mazen Tabet and Issam Tabet both deny executing the document in 1994 and visiting the Grossberg offices then. They assert that there was no discussion of a purchase price of $8.7 million until late in 1995. This was their position when defendant's counsel cross-examined the plaintiff's witnesses, presumably on the Tabet's instructions. The cross-examination was not that they did not sign the document but that they did not sign it in 1994. They were faced with the problem, however, that the original document was faxed to the NAB in 1994. Their final positions were that Issam Tabet denied signing the document because his signature normally contained some Arabic and this one did not. He did not, however, elaborate. The signature appears similar to others. Mazen Tabet said it did not look like his signature. Later he said that it did but the other was not that of his father. He maintained that he did not sign it on 16 November 1994 but could not explain how his signature got there. It is clear, however, that the document was executed on 16 November 1994, because the executed document was faxed to the National Australia Bank that day. The signatures are similar to those of Mazen Tabet and Issam Tabet on other documents. The Grossberg & Co receptionist's diary also records at 10.54 that day a message from Mazen Tabet asking that Egon Grossberg call "asap" and a message received at 2.36 asking Mazen Tabet "to ring Skyways as soon as he arrives", suggesting that the people at Skyways were expecting him to call at the offices of Egon Grossberg. There is an "appointments" entry, "E.G. -> Mazen Tabet", suggesting that at 3.00 pm Egon Grossberg had left to meet with Mazen Tabet but that is not inconsistent with Mazen Tabet arriving and then departing with Egon Grossberg to conduct their discussions elsewhere.
As to the alleged 20 December 1994 document, the diary kept by the receptionist employed at the office of Egon Grossberg records a morning phone call from Mr Vines, the bank manager, and the fact that Egon and Greta Grossberg, in the afternoon, were intending to go from Toorak into the city to the bank and to continue on to Skyways from the bank. It also records them as being at Skyways later in the afternoon. I note that there is an entry in the writing of Egon Grossberg elaborating on their movements that afternoon but I do not rely upon that entry. The defendant relied upon evidence of the then accountant at Skyways, Jholl, about comings and goings at Skyways on 20 December 1994 which he interpreted as indicating that Mazen Tabet had gone to the office of Egon Grossberg and there collected the cheque for $500,000. The events he describes, however, are not inconsistent with the Grossbergs going to Skyways with the cheque. It also seems far more likely that that is what occurred. There is no dispute that the Grossbergs had to collect the cheque from the Stock Exchange branch of the National Australia Bank. No reason has been advanced as to why they would have returned to the Grossberg offices and summoned the Tabets to attend instead of simply continuing on to Skyways. While the Tabets were clearly in need of money, they were the owners of the business and it was the Grossbergs who were taking the initiative in the deal.
As to the involvement of Maher Tabet, the defendant argues that he was never involved in the Skyways business and accordingly would not have been involved in the agreement. Issam and Mazen Tabet, however, conceded that there was a time in 1995 when they had considered giving him an interest in the business. That concession, depending on the time aspect, raises the possibility that he would have been involved if at the time the document was signed they had in mind that he would soon have an interest in the business. I have come to the conclusion, however, that both Issam and Mazen Tabet were being less than frank in their evidence because the company records show that Maher Tabet was a minority shareholder in the business in 1994. Issam Tabet denied any knowledge of these matters. That evidence is not believable. I note that the registered office of New Theme was the Airport West address and the defendant has not led any documentary evidence to contradict the official record.
I am satisfied that the Tabets have together created their evidence on these matters in an attempt to discredit Exhibit G1. The contemporaneous records and a consideration of the circumstances and probabilities strongly support the plaintiffs' evidence of the sequence of events, the documents and their signing. I will return to the issue, however, of the terms of the agreement.
Generally, Mazen Tabet gave evidence about relevant matters without apparent discomfort but refused to make any concessions no matter how awkward the position he found himself in, even when confronted with very persuasive evidence. Issam Tabet's general approach was to portray himself as the unsophisticated migrant who did not understand much, and was not involved in the detail of transactions and left it all to Mazen Tabet. He also relied upon an inability to recall. I came to the conclusion that in these matters he was dissembling.
If the question as to the agreement and its terms rested solely on the evidence of Egon and Greta Grossberg and Issam and Mazen Tabet, I would prefer the Grossbergs' account, although with some hesitation. In reaching a conclusion on these matters, however, there is other evidence to be considered. I will consider first the evidence of other witnesses and then documentary evidence.
Other witnesses – plaintiffs' case
The plaintiffs rely on the evidence of Peter Grossberg and his wife. They too have demonstrated strong loyalty to Egon Grossberg and a continuing high degree of trust in him. They too have a lot of stake in the case. Their evidence needs to be approached with care.
They cannot give evidence directly as to the formation of the agreement and their knowledge of the agreement is primarily dependent upon what they were told by Egon Grossberg. They did, however, after providing the money attend the Skyways premises and meet with Issam Tabet and Mazen Tabet on a number of occasions. This applied particularly to Peter Grossberg. I am satisfied that on each of those occasions they assumed they had an interest in the business and acted accordingly. I am also satisfied that on one occasion Bella Grossberg offended Issam Tabet by behaving as if she was the owner and not him. Having observed them both in the witness box I can well imagine her behaving in that way and him being offended. Her evidence, however, does not advance matters greatly because of her reliance upon both Egon and Peter Grossberg.
As to Peter Grossberg, he was not as careful and precise in his evidence as he could have been but I am satisfied that despite his loyalty to his brother and his interest in the dispute he was a truthful and reliable witness. I accept his evidence that at his first meeting with Issam Tabet in January 1995 the latter assured him that his investment was safe and that he would never lose his house. Counsel for the defendant argued that there must be some doubt about this evidence because Peter Grossberg acknowledged that when he and his wife visited on the second occasion they went to the foyer and asked for Issam Tabet. It was argued that this was inconsistent with someone who had a substantial interest in the business. It was put that his explanation of an alleged lack of confidence in recognising him should be rejected together with his evidence of the above admission. I am, however, satisfied with the explanation and that the conduct described is the sort of polite conduct I would have expected of Peter Grossberg in the circumstance. He was criticised for the shortness of his witness statement and the absence of significant factual matters such as the plan to buy the whole business, the cash payments received from Egon Grossberg, being shown the sale agreement of 20 December 1994 and of the alleged attempt by the Tabets to reduce their share to 16.5 percent. I, however, accept his evidence that he saw his statement as a summary and accept his evidence as to the omitted matters.
I also am satisfied that Peter Grossberg was involved in meetings in the boardroom and the restaurant at the premises in relation to the running of the Skyways business. His evidence was that at least at one of those meetings there was discussion of issues such as the accounting for the business, who would manage the day-to-day operations of the business and the division of profits. I accept that he and Egon Grossberg had input into discussions as to signage, asphalting of the car park, painting of columns and on several occasions he was taken to review the refurbishment of the gaming room and introduced to contractors. It is true that in his witness statement he said that the latter occurred with Issam Tabet and Mazen Tabet. When it was brought to his attention that Issam Tabet was not in the country at that time, he accepted that his recollection of the presence of Issam Tabet could not be correct.
There was one witness who appeared to be neutral – Con Julius. He gave evidence of occasions when the fact of one or more of the Grossbergs having an interest in the business was discussed in the presence of one or more of the Tabets. He said that Egon Grossberg was introduced to him by Mazen Tabet as their partner at a time when asphalting work was being done. He also referred to an occasion when he and his wife were dining in the restaurant as were the four Grossbergs. He was told that they were partners in the business in the presence of Issam Tabet. Later that night as he was leaving he spoke with Issam Tabet who referred to Egon Grossberg as a silent partner in the business.
His evidence emerged in a somewhat disjointed fashion but he appeared to be genuine and much of the detail emerged in cross-examination. He was a man of a few words and was inclined to give the result of a conversation not its detail. He was criticised by counsel for the defendant on the basis that he gave evidence of matters not in his witness statement and that there were inconsistencies with his witness statement. As to the former, they are not surprising having regard to the way the statement was prepared by phone and fax. As to the latter, in some instances he corrected inaccuracies and others were not really inconsistencies. The points raised highlight the dangers of witness statements for witnesses who do not read the document with the same care as the lawyer who cross-examines on them.
Other witnesses – defendant's case
The defendant placed particular reliance on the evidence of an officer of the NAB, Pina Simari. It was put that her evidence was that Egon Grossberg told her that approximately $1.2 million had been paid to the Tabet family as a deposit and as a sign of good faith pending finalisation of negotiations and documentation. She maintained in her statement that Egon Grossberg did not tell her that he or any of his family had purchased a share or interest in the Skyways business.
She also gave evidence that her belief throughout discussions and negotiations with Egon Grossberg was that the Tabet family through New Theme held a 100 percent legal and beneficial ownership in the business. She also maintained that at no time was she told by Egon Grossberg that he or any members of the family had received money from New Theme or the Tabets as a result of owning a share or interest in the business.
It is put for the defendant that there is nothing in the contemporaneous notes or memoranda directly involving Pina Simari which referred to or suggested that the Grossbergs had acquired an interest in the Skyways business. The plaintiffs, on the other hand, emphasise that she has no contemporaneous record of being told that the Grossbergs had paid money as a deposit and a sign of good faith.
The absence of any record on her part may reflect the fact that she was concerned with the funding of the purchase of the whole business not a part of it and until the application for funds to purchase the entire business was approved, and documentation then had to be prepared, Pina Simari did not need to record whether or not the plaintiffs had an interest in the business. Pina Simari asserted that the fact of the acquisition of an interest was fundamentally relevant to the banks consideration of the loan proposal because it affected the bank's securities. It was no doubt directly relevant to Andrew Vines who was directly concerned with the NAB's securities over the defendant and he considered it. The moneys provided by him, however, were used to repay money owed by the Tabets to the NAB. In the meantime, the NAB acquired additional security from the Grossbergs. Thus its security position was protected in the interim. Whether the Grossbergs had an interest was a fact not immediately relevant for Pina Simari because the application was effectively for the whole of the purchase price and it never advanced very far. The issue would have affected the documentation and organisation of securities once the deal was approved. Her own memos reveal she was aware in May and July 1995 that more than $1,000,000 had been paid.[3] That fact and a lack of documentation were brought to her attention in an internal memo of 14 August 1995. Her own internal memo of 19 July 1995 reveals her belief that $1.1 million of the purchase price had already been paid and money given by the Grossbergs to the Tabets for refurbishment under "an internal verbal agreement." The contemporary documentations suggests that she and officers, other than Vines, were aware that there was an ongoing relationship between the plaintiffs and defendants but did not direct their attention to its precise nature.
[3]Memos of 5 May 1995, 2282, 19 July 1995, 2320 and 27 July 1995, 2324.
The plaintiff relies on the evidence of Egon Grossberg that he had informed Pina Simari of the interest in the business. In addition, Egon Grossberg said that he initially applied to Pina Simari to borrow the first $500,000 but she did not respond and he was introduced to Andrew Vines by the Tabets. I have, however, been unable to find any supporting documentary evidence of such an application to Pina Simari. All Egon Grossberg's letters to her appear to have related to the purchase of the whole of the business.
Plainly, she has relied upon her notes and she could not be expected to remember unrecorded details of what would have been one among many clients and transactions. In the absence of any specific references in her notes, it is hardly surprising that she has given the evidence that she has.
It seems most unlikely, however, that Pina Simari was not made aware at the time that Egon Grossberg claimed an interest in the business. There is clear evidence that Egon Grossberg told Andrew Vines of the acquisition of an interest. It is also clear that Andrew Vines spoke with Pina Simari on 16 December 1994, because there is a handwritten note to that affect on the memorandum kept by him which recorded the intended acquisition of a 10 percent equity by the Grossbergs. There is also an internal NAB memo of Vines of 19 April 1995 relating to the further borrowing of Greta Grossberg to increase the interest in the business. It records that she and her husband then held a 10% interest.
Alternatively, bearing in mind the parties' concern about capital gains tax and the concern about the right of first refusal of the landlord, it may well be that for much of the relevant period the policy was adopted by Egon Grossberg and the Tabets of not revealing details as to the precise nature of their agreement and its consequences. Thus there is another explanation for a lack of knowledge on the part of Pina Simari of any Grossberg interest consistent with the plaintiffs' case. Until the capital gains tax issues and the right of first refusal issues were resolved, it would be consistent with the personalities and other conduct of the participants that they would have deliberately kept such facts as secret as possible. This would also explain why she was aware that $1.1 million had been paid over by the applicants but did not record the fact that they also had an interest. It does not follow, however, that they did not have an interest.
The defendant also relies upon the evidence of Brian Sleiman of a conversation with Egon Grossberg which he alleged occurred in late January or early February 1995. He said that Egon Grossberg told him that he had lent $1.2 million to the Tabets family and then talked to him about him, Sleiman, purchasing an interest in the business. I do not accept that at the suggested time, Egon Grossberg would have contemplated letting anyone else into the transaction. If a conversation did occur, I think it likely that it occurred sometime later, probably after it was clear that the proposal would not proceed if the Tabets had to provide a guarantee for $1.2 million and the Tabets were trying to treat the funding provided as a loan. I note, however, that Mr Sleiman is in the Tabet camp, as is Mr Jholl, they being in business partnerships with the Tabets.
The defendant relies upon Camille Nahas' evidence about the capital provided being a loan. I accept the plaintiffs' submissions that he contradicted himself about how the money came to be treated as a loan. The defendant also relied upon his evidence that the management fees were interest payments. I do not accept that evidence. Camille Nahas is plainly embittered by his association with Egon Grossberg and is dependent upon the Tabets as clients. The extent of his commitment to the Tabets' cause is demonstrated by this evidence. It involves an accountant who was responsible for finalising the books of account of the business accepting a false categorisation of these payments in the financial records. Further they were plainly not amounts payable as interest and were a device for distributing profits in tax deductible form as management fees.
I do not in any event regard him as a witness who can be relied upon in this case. The truth of the matter, I am satisfied, is that it was decided to "treat" the money as a loan in the company's financial statements but not regarded as such in reality as between the Tabets and the Grossbergs.
The defendant relied upon the evidence of Douros, in particular, his assertion that the proposed Deed of Sale was accurate, that his understanding at all times was that the Tabets where the owners of the Skyways business and that the Grossbergs did not have an interest in the business at any time. Emphasis was also placed on his evidence that it was essential if there was to be a rollover scheme as required by the bank that there have been no change in the ownership of the Skyways business. As to the latter point it provided yet another reason for concealing the interests of the Grossbergs. As to his recollection of the facts as to ownership, I am satisfied that he gave his evidence honestly but he has reconstructed the past and the errors in the reconstruction are revealed by the brief he prepared and the notes of his conversation with Camille Nahas[4], documents which can only be satisfactorily explained on the basis that he was informed by Nahas that the Grossbergs had an interest in the business and that it was 23 percent.
[4]See below.
Other evidence relevant to the agreement and its terms
The parties referred to a great deal of documentary evidence which it was said supported their respective positions as to the terms of the agreement. I propose to address specifically those that seem to me to warrant discussion. For example, I did not derive assistance from statements of the position of the parties in documents that came into existence after the dispute arose where they are consistent with the positions currently adopted.
An important piece of evidence relied upon by both sides is the treatment of the money provided by the plaintiffs and the drawings in the accounts of New Theme after 20 December 1994. The transaction was treated as a loan in the balance sheet but there was no record of any interest being paid to the Grossberg interests. Rather, most payments were drawn on account of profits, a categorisation not in dispute, and shown in the cost payments journal as management fees. This was consistent with the way drawings of $10,000 per week had been dealt with by the Tabets prior to any agreement with the Grossbergs in that they were paid into a "Business Management Account". I have no reason to doubt the evidence of Jholl that the way he treated the drawings after 20 December 1994 was determined by Mazen Tabet and Egon Grossberg. The drawing each week of $10,000 and its distribution as management fees to the Tabets by payment to the "Business Management Account" and the Grossberg interests were a re-direction of profit back to the owners of the business. Camille Nahas, who was clearly in the defence camp, accepted that those payments were a re-direction of profit. Mazen Tabet also acknowledged that the payments to the Grossberg interests of "management fees" came from a split between them and the Tabets of the customary weekly drawing from profits of $10,000.
After 20 December 1994, the Grossberg interests received a percentage of the drawings of $10,000. In the early stages it is difficult to discern a pattern but a pattern of individual payments emerged in which they received 20 per cent and 24 per cent and finally, from April 1995, 25 per cent of $10,000 for many weeks until January 1996 when the parties were in clear dispute. Thus they were treated as being entitled to receive a weekly share of the takings, that share being 25 per cent of $10,000 of those takings. Further, the amounts paid during that period, including some miscellaneous payments recorded in the journal, never amounted to 12 per cent of the sums allegedly lent. They were always less than 12 per cent of the sums allegedly lent. I note also that Jholl who was for some time in charge of the defendant's books, said in evidence that he was never told of an interest rate. He also said that the amounts were determined each week by Mazen Tabet and Egon Grossberg. His books, however, suggest a pattern of predetermined payment subject to occasional change.
In January 1996 the amounts provided increased for a time to $4,500. This appeared to coincide with the parties being in dispute. It is clear that, by the end of 1995, relations had broken down between the Tabets and Egon Grossberg and that the Tabets were looking for a way out of the arrangement. Why the payments increased is not clear. But while the parties were still in an on going business arrangement, it is clear that the Tabets were prepared to split their weekly drawings of $10,000 from takings with the Grossberg interests on a 75%/25% basis from April 1995 onwards after the final Grossberg payment of $60,000 in April 1995. This is strong evidence that the Grossberg interests were seen by the Tabets to be then entitled to a 25 per cent interest in the business.
The defendant argues, however, that it has demonstrated through its Schedule of Interest Payments[5] that the amounts paid to the Grossbergs through Brimscombe between December 1994 and June 1996 were consistent with the agreement that it alleges -- that is a loan with interest payable at 12 percent per annum. It further argues that, thereafter, the payments were consistent with interest at an agreed new rate of 10 percent on $500,000. The argument is put that it is inconceivable that over such a period the amounts paid could, by coincidence, coincide with a commercial rate of 12 percent and later 10 percent as a result of reverse engineering by Mazen Tabet after the event.
[5]Exhibit NT 17.
I take a different view. The exercise has all the appearance of "reverse engineering". If the agreement was for 12 percent interest payable weekly, and the payments in fact being made weekly, why was not the precise amount paid and why was there no issue throughout the entire period about a constant shortfall in the payment of interest? The amounts paid did not equate with the alleged interest rates and were erratic.
As to the running totals, payments of 12% interest were behind for the period to the end of April 1996 but a flurry of payments in April, May and June 1996 brought the amounts paid to a total of about $600.00 in excess of the interest payable. From then to February 1997, during which time the defendant claims the agreed interest rate was 10%, there was again an erratic performance with no "interest paid" until 21 August 1996 and erratic payments thereafter resulting, according to the calculations, in an overall overpayment as at 14 February 1997 of $418.36.
Clearly the Tabets agreed to the regime of payments and it could not have occurred without their approval. There are matters that are not explained and I am inclined to the view that neither side has been prepared to tell the whole truth. But the financial statements and records strongly support the proposition that the capital advanced was artificially characterised as a loan and otherwise not treated as a loan. They also strongly support the proposition that the Grossberg interests were treated by the Tabets in 1995 and up to January 1996 as having an entitlement to share in moneys taken from profits in percentages that reflected the increases in their interest in the business. In addition, additional payments were made, usually monthly, in 1995 ranging from $1,000, rising to $1,200 in April and to $1,250 in July. The plaintiffs' case is that these represented their agreed share of car expenses. The defendant has no satisfactory explanation for them. I will return to that issue.
As to benefits for either party in this arrangement, there was the characterisation of the capital advances as a loan thereby concealing any disposition of assets and, therefore, liability to capital gains tax. Treating the situation as a loan in the balance sheet also concealed a disposition of part of the business at a time when the defendant was renegotiating its lease by offering the landlord a right of first refusal. As to the weekly payments some tax was saved by distributing the moneys in a tax deductible way. There may have been a tax advantage in paying the management fees to Brimscombe if, as Jholl claims he was told, it had tax losses.
On proper analysis, the above conduct of the parties in relation to weekly drawings strongly supports the plaintiffs' claim that they acquired an interest in the business by agreement with the Issam and Mazen Tabet.
Documentary evidence relied on by the plaintiffs
(a) Bank documents
The plaintiffs rely upon a number of bank documents which record the acquisition of a 10 per cent interest in the Skyways business in late 1994[6] by Egon and Greta Grossberg and the purchase of interests in the business by Peter and Bella Grossberg.[7] These documents have been admitted into evidence for all purposes. Care needs to be taken in assessing what weight to attach to this evidence, however, because the relevant statements arise directly or indirectly from Egon Grossberg. In the end, however, I think it unlikely that Egon Grossberg would have been lying to the person who was the Tabets' bank manager, Mr Vines, about acquiring a 10% interest in their business and unlikely that he would mislead his wife and brother and sister-in-law. However chequered may be Egon Grossberg's dealings with other businessmen, banks and the tax and other authorities, there was nothing that I could discern from his wife and brother and sister-in-law to suggest that he had done anything dishonest to them in the past or was likely to do so.
[6]Court Book 675/6, Exhibit G24, Court Book 1925/7.
[7](NT 10)
As to Exhibit G24, Vines' internal letter of recommendation, the defendant suggested that the reference to a "10% equity interest in New Theme Pty Ltd" showed an attempt on the part of Egon Grossberg to mislead the NAB, necessary, it was suggested, because the NAB would not want to see its security reduced – as would occur if part of the underlying asset was sold. But the document itself reveals that the NAB had discussed what was to be done with the proceeds to reduce the facility provided by the bank for the purchase of York on Lilydale.[8] Thus the net security position of the bank was protected.
[8]G24
I note that counsel for the defendant sought to make something of the failure of the plaintiff to call Vines. But it seemed to me that Vines was a witness as much, if not more, in the defence camp.
(b) Douros notes
The plaintiffs also rely upon notes taken by the solicitor, Peter Douros, in the middle of 1995 and a brief for advice prepared by him. At that time, Douros was the lawyer in the firm of Feingolds who was involved in the Skyways sale transaction along with a partner, Mark Fagenblat. I accept that he was working under the supervision of Mr Fagenblat, but I am also satisfied that he was expected to attend primarily to the Tabets while Mr Fagenblat attended primarily to the Grossbergs. Douros was in contact with the Tabets at this time and with Camille Nahas, the accountant partner at Grossberg & Co who attended to the accounting details of the Skyways business.
On 6 June 1995 (Court Book 1532/3) he recorded information obtained while speaking to Camille Nahas, namely "- 1.2m for 23 per cent". As to that, it would appear that Douros obtained information for the brief from Nahas. It would not be surprising that neither would be aware of an additional deal done by Egon Grossberg and Issam Tabet over the $130,000 consultancy fees. Camille Nahas sought to explain this note in his evidence as a reference to the cost base for the purpose of capital gains tax relying on another Douros note[9] which referred to $1.2 million as 100 per cent of the cost base. In that document, however, there was no mention of that amount being 23% of anything. At that time it so happened that the cost base for the Tabets, assuming further capital expenditure of some $700,000, was likely to total $1.2 million. I do not accept the explanation of Nahas. I accept the evidence that this file note records information obtained for the brief to Professor Marks being prepared by Douros and that the 23 percent reference refers to what Camille Nahas then believed to be the extent of the interest in the business held by the Grossbergs.
[9]Exhibit G33.
The fact that the reference to 23 per cent in the earlier note was a reference to what Camille Nahas believed to be the Grossbergs' interest in the business is confirmed by the fact that the following appeared in the brief to Professor Marks for tax advice prepared by Douros on 6 June 1995.
"Mr Egon Grossberg is eager to acquire the majority, if not all, of the Skyways business. In this regard, he has advanced a sum of $1.2M to New Theme P/L to secure a 23 per cent share in the Skyways business. This transaction is undocumented. Mr Egon Grossberg wishes to advance further monies to New Theme P/L to complete his acquisition of the Skyways business."
Douros attempted to explain the passage as relating to a proposed transaction. This appeared to be his attempt to argue away the significance of this instruction. While the brief sought advice for a proposed transaction, the quoted instruction, however, clearly points to an existing situation which Douros believed had not been formally documented. It points to the solicitor who was dealing with the Tabets having the understanding that the Grossberg interests effectively held a 23 per cent interest at that time in the Skyways business. Further, the conference attended by the relevant people with Professor Marks went ahead on that basis.
Finally, the plaintiffs refer to an undated diary note of Douros[10] to the following effect:
[10]G31.
"Sam
$48,000 each 1%
25%
---------------------
now worth
$60,000 for each further 1%"
The note records a telephone conversation with Issam Tabet. It has not been possible to date it but Douros suggested that it was likely that it was prior to his diary notes of 1 December 1995. It points, inter alia, to Issam Tabet informing Douros of a 25 per cent interest in the business and to the arrangement that there be increments of $60,000 for a further 1 per cent. Douros has no recollection of the conversation and Issam Tabet was not cross-examined on it. We are, therefore, left with a cryptic note which could, for example, be a note of Issam Tabet telling Douros what Egon Grossberg was indicating. It is not a piece of evidence on which I rely.
(c) Batten documents
The plaintiffs rely on a letter dated 27 February 1995 from Searle Batten, a solicitor at Feingolds to Mazen Tabet. This letter was written shortly after a meeting undertaken to resolve the legal effect of a change of owner of the premises. At that meeting an agreement in principle had been reached between the Tabets and the landlord which would give an effective extension to the term and give to the landlord a right of first refusal to buy the Skyways business in the event that the Tabets attempted to sell it. In this letter, it is difficult to escape the conclusion that the author believed that Mazen Tabet was well aware of information that they did not want to reveal to the landlord and the defendant has not been able to suggest any information which might be awkward and ought not to be revealed to the landlord other than the fact that the Tabets had already sold an interest in the business. The defendant relies on Douros' evidence that the matter was a non-issue, but in this I believe he was mistaken.
The plaintiffs also rely upon a memorandum dated 18 August 1995, of Searle Batten to Fagenblat and Douros in which, amongst other things, he wrote the following:
"Can the timing of Grossberg's involvement be used to make this clause operative from this time onwards (i.e. date of executing the lease not the date of the round table conference when Issam Tabet agreed to give a right of first refusal, bearing in mind that Grossberg had already had some involvement at that time)."
The concern appears to have been whether the existing interest of the Grossbergs in some way triggered a right of first refusal which had been provided to the landlord at least in the informal agreement back in February 1995 between the Tabets and their landlord. Thus it would seem that within Feingolds, which was acting for both the Tabets and the Grossbergs, and in a situation where one of the solicitors was addressing the interests of the Tabets, it was accepted that the Grossbergs had an interest in the business of Skyways.
In response, the defendant relied on the evidence of Douros that this was a non-event, and that the Grossbergs did not have an interest at that time. The fact remains, however, that at that time, Batten, a solicitor working with him, had a contrary understanding. The defendant also emphasises the use of the word "involvement" rather than "interest", but unless an interest had been sold, there was no potential clash with the purported grant of the right of first refusal. It is likely that the word "involvement" was used to avoid stating the nature of the interest.
The defendant also criticises the plaintiff for not calling Batten but Batten was for a time the solicitor on the record in these proceedings for the defendant and could not be said to be in the plaintiffs' camp.
(d) Nahas notes
Another document relied upon by the plaintiff is a file note made by Camille Nahas containing a number of calculations. In particular it recorded the following:
"Profit Distribution 942,946.68 @ 16.55
E.G. = $155,586.20
Less received $4500 x 30 = $135,000.00
420,586.20"
The plaintiffs' counsel submitted that, accepting Camille Nahas' evidence that he was not advised by Egon Grossberg of any interest in the business until June 1997, he could only have received the above information from the Tabets. The information recorded relates to the profit of the Skyways business for a period of seven months ending 31 January 1996 (1 July 1995 to 31 January 1996). The reference to 16.5% is consistent with evidence given by Egon Grossberg and Mark Fagenblat of conversations towards the end of 1995 in which Issam Tabet allegedly said that the renovations had cost more than anticipated and that the Grossbergs had not made any contribution and accordingly their 25 per cent interest would be reduced to 16.5 per cent. The plaintiffs' case is that Egon Grossberg protested and did not accept the decision.
The document shows a calculation of the balance owing for a 16.5 per cent share of the profit over the period of seven months ending 31 January 1996. The amount received is calculated by reference to 30 weeks, a seven month period, and $4,500, the amount that Egon Grossberg gave evidence was distributed each week, $2,500 by cheque and $2,000 by cash. I will return to the cash entitlement issue.
I do not accept Camille Nahas' evidence about not being advised by Egon Grossberg of any interest until 1997. I am satisfied that he was advising Douros in 1995 that there was a Grossberg interest in the business to the extent of 23 per cent. As a result, however, it cannot be assumed that it was not Egon Grossberg who had Camille Nahas do the calculation. In fact, it seems to me that it is more likely that it was Egon Grossberg rather than the Tabets who asked Nahas to do the calculation. To that extent, I accept Nahas' evidence. Egon Grossberg would have been more interested in finding out what the reality of a reduction to 16.5 per cent would mean so far as profit share was concerned. Thus this evidence should be treated as a piece of evidence founded on statements made by Egon Grossberg. Nonetheless, it lends support to his evidence and that of Mark Fagenblat that in late 1995, Issam Tabet stated that he proposed to reduce the Grossberg interest from 25 per cent to 16.5 per cent. This follows, I suggest, from the fact that the document appears to be a contemporaneous document and that there does not appear to be any other explanation for the relevance of a figure of 16.5 per cent.
For the defendant it is said that it is curious that Egon Grossberg should be doing such a calculation if he had rejected the reduction to 16.5%. I suggest, however, there is nothing curious in Egon Grossberg checking the financial implications of any such reduction. On its face it appears to be an innocent document and it did not then advance a case. While it is now self-serving, it would not have been at the time. It, therefore, has some probative value.
(g) Release
The plaintiffs also rely upon a document drawn up and signed by Egon Grossberg on 27 June 1996 which on behalf of Brimscombe Management Pty Ltd, forgave
"the moneys outstanding and owing in relation to the management and consultancy fees charged to New Theme P/L by Brimscombe Management P/L".
It is common ground that this document was drawn up and signed and that the monies referred to were in fact the $130,000 which Egon Grossberg claimed was owing for work he did assisting the Tabets in purchasing York on Lilydale. It was this sum that Egon Grossberg claims was the subject of the agreement to confer a further 2.175 per cent interest in the business on Egon Grossberg. The document does not refer to the existence of a dispute about an interest, it merely refers to a debt. It was drawn up by Egon Grossberg. He said that the Tabets required him to provide the document before they would pay the money, that they paid on 27 June 1996. Thus, while it confirms his evidence that he maintained an entitlement to fees in the above amount for work done in relation to York on Lilydale, it does not confirm his evidence that there had been an agreement to increase his interest in the business to an extent commensurate with the fees outstanding. In the end, therefore, it detracts from rather than supports the plaintiffs case. I am satisfied, however, that it was drawn and executed in the circumstances he has described.
Documents relied on by the defendant
(a) Grossberg letters
The defendant relied upon a fax from Egon Grossberg to Pina Simari of 9 February 1995. Emphasis is placed upon the sentence that the Grossbergs were concerned that "our monies are going to be refunded and that we will lose Tabets as clients". The defendant argues the use of the words "monies...refunded" clearly revealed that at that time he regarded the monies as lent and therefore liable to be refunded.
It seems to me that the defendant is reading too much into this letter. A businessman could refer to monies being refunded in circumstances where money had been invested but was likely to be repaid. In this context, similarly, counsel is reading too much into Jholl's evidence that Egon Grossberg told him that they were "getting our money back" and the reference to "monies owing" in the letter from Egon Grossberg to Andrew Vines of 17 May 1996. That same letter referred in any event to the disbanding of a "joint venture" between Brimscombe and the defendant.
(b) Deed of Sale: agency agreement
Next, the defendant relies upon the proposed Deed of Sale and the selling agency agreement drawn up in the middle of 1995 and, in particular, the references to the business being owned 100 percent by the Tabet interests. It is put that both Egon and Greta Grossberg signed the agreements and raised no issue about the accuracy of the statements. It is also said that none of the lawyers involved believed that the documents were inaccurate.
With respect, this argument ignores the realities. Attention had been given to the question of re-structuring the transaction with a view to avoiding or minimising capital gains tax. One then finds a deed of sale of only 80 percent of the business coupled with a fictitious agency agreement. For the scheme to work, it was necessary for the parties to proceed on the basis that the vendors were holding a 100 percent interest. Clearly Egon Grossberg and the Tabets were people prepared to contemplate fictitious agreements and one should not be surprised if they were prepared also to contemplate fictitious assumptions for such agreements. In my view, it would be dangerous to rely on the statements as to ownership set out in these documents.
(c) Financial statements and Grossberg's knowledge
Next the defendant relies upon the financial statements of New Theme and Egon Grossberg's knowledge of them and their treatment of the moneys advanced as a loan. He, of course, denied any knowledge of them and any part in the decisions as to how to the monies advanced by the Grossbergs should be recorded. As I have indicated I do not accept his evidence as to his ignorance. But again, I see the argument as unrealistic. As Jholl said, the instruction was to "treat" the money as a loan. He was not told that it was a loan. In view of the concern about the capital gains tax implications and about the right of first refusal, and in view of the willingness of the participants to engage in artificialities and fictions, including the creation of false expenses one should approach the categorisation of funds as loans with some scepticism. That scepticism can only be increased when it is found that no interest is recorded in respect of the "loan". In the end no weight should be attached to this treatment of the funds.[11]
[11]The reference in document Court Book 2064, a file note of Nahas, to "paid as loan" is explicable on the same basis.
(d) Letter of Peter Grossberg
Reliance was also placed upon the letter, Exhibit G 11, from Peter Grossberg to the NAB which referred to an issue of the "settlement of the loan to Skyways". His explanation that his expression was careless and that he should have referred to the settlement of the dispute with Skyways is described as "weak". I think the argument is over stated. He could have said in the letter "settlement of the loan re Skyways". The letter was not drafted by a lawyer. It could well be a slip. On the other hand, if deliberate, as the defendant's submissions state, it indicates, at most, that by December 1997 he was accepting that the money had been lent. At that stage, however, it is reasonably clear that the defendant was insisting that the monies advanced be treated as a loan and so the statement may reflect no more than an acceptance at that stage of that position.
(e) Tax returns – Egon Grossberg
The defendant also sought to rely upon the statement of assets and liabilities of Egon Grossberg in his 1997 tax return. I regret to say that I am not prepared to draw any inference from the contents of Egon Grossberg's tax returns.
(f) Request for repayment
The defendant also submits that the request for repayment of $900,000 in June 1996 by the plaintiff was consistent only with the repayment of a large portion of monies held as a loan. It was submitted that the plaintiffs have never properly explained or justified their assertion that what was sought and obtained was an adjustment profits. It is put that at that stage profits sufficient to justify such a payment had not been achieved.
The plaintiffs have not argued that, as between them and the defendants, the monies represented in fact a return of profits. Their position is that amongst themselves they have regarded the monies as a return of profits. For the purpose of their dispute with the Tabets, however, they have accepted that it is a return of capital and have adjusted their claim accordingly. As to the other aspect of the argument, the request for the payment of $900,000 is quite consistent with the plaintiffs claim to an interest in the business and consistent with the withdrawal of capital from the business.
(g) Subsequent documents
The defendant relied also on subsequent documents. As I have said in relation to the plaintiff's material, such documents appear to me to carry little weight.
An interest in the business - the probabilities
I am satisfied on the evidence that the plaintiffs acquired an interest in the Skyways business as a result of the agreement made on 20 December 1994 and later varied. This conclusion is also supported by the probabilities.
It may be said that it would be extremely unlikely that the Grossbergs would have been prepared to provide $1.2 million borrowed at a variable rate of 10.55 per cent and to lend it without any form of immediate security at a rate of 12 per cent and later 10 per cent, as the defendant alleges. Doing so hardly got their "foot in the door". Further, the security alleged by the defendant was only a potential interest of 10 per cent in the business, an interest that would not crystallise until circumstance arose in which the Tabets were unable to repay the money. Thus, there was a real risk that the security the defendant said was given would be worthless; for if the Tabets were unable to repay the money they were likely to be in considerable financial difficulty and, if that were the case, the business would be likely to be worth very little. In considering the likelihood of the Grossbergs entering into such an arrangement, it should also be borne in mind that the bulk of the funds was raised by two mortgages, one over Greta Grossberg's home and the other over Bella Grossberg's home. It is difficult to accept that Greta Grossberg and Peter and Bella Grossberg would have invested such large sums of money and put their homes at risk if their understanding was that the only security they had was that alleged by the defendant. As to Egon Grossberg, it is also difficult to accept that he would have been prepared to accept such security when his long term strategy was to purchase the business itself. He was much better placed if he could acquire a portion of the business and thus make it more difficult for the Tabets to interest other purchasers. He was in a reasonably strong bargaining position at the time because the Tabets were stretched financially. For the Tabets, giving the Grossbergs a partial interest in the business was not a new scenario. They had already had such a partner in O'Hare. In fact the deal offered for a share in the business gave them a substantial profit in that O'Hare's $500,000 had given him a 20 per cent interest whereas they would give the Grossbergs only a 10 per cent interest in the business for the same amount. The offer of $6 million must have seemed like a Tattslotto win bearing in mind that, only a short time before the offer was made, they had received a valuation of the business of $2.4 million. In such circumstances, I doubt that the Tabets would have been insisting on such a tough deal. I have no doubt that the Grossbergs would not have been prepared to accept it.
Conclusion – An interest in Skyways
For the foregoing reasons I have come to the conclusion that there was an agreement between the plaintiffs and the defendant pursuant to which they acquired an interest in the Skyways business on the ratio basis alleged by the plaintiffs and set out in Exhibit G1.
In final submissions, counsel for the defendant submitted that the plaintiffs had failed to establish the entitlement of them all to an interest in the business. It is sufficient to say that the evidence of the documents, conversations, payments and conduct supports the conclusion that as at the date of the $60,000 payment in April 1999, the plaintiffs held an interest in the business. I am also satisfied that it was the individuals who held the interest – Brimscombe was merely used as a vehicle for payments.
The questions that remain are the size of that interest and the terms as to cash and car expense drawings.
(a) Size of the interest?
Accepting the plaintiffs' case as to the agreement, the issue to be resolved is whether the interest acquired was 25% or 22.825%. The defendant can point to some inconsistency in the evidence of Egon Grossberg as to when it was that it was agreed to provide an additional interest commensurate with $130,000. Was it in about April 1995 or was it in 1994? Then there is the evidence of the communications between Camille Nahas and Douros and the statement in the brief to Prof Marks suggesting that, in June 1995, their instructions were that the interest was 23 percent. I have suggested above that they could well have been unaware of the remaining portion. On the other hand, Peter Grossberg gave evidence that he was told by Egon Grossberg in 1994 that they could expect a 25% interest. That evidence was admitted for all purposes. There is also the evidence of Mark Fagenblat that he was present when Issam Tabet told him and Egon Grossberg that the Grossberg interest would be reduced from 25% to 16.5 percent. I have come to the conclusion, however, that he is mistaken in this evidence. Egon Grossberg did not mention such a meeting and there was only one. The likely explanation is that he was told about the event by Egon Grossberg and with the passage of time his memory has changed.
In the end, what is most significant is that the Tabets, from the time of the payment of $60,000 until they were in dispute, treated the Grossberg interests as entitled to a 25% interest in the business by sharing the $10,000 weekly withdrawal of profits with them on that basis. This evidence when considered with the other evidence leads me to the conclusion, on the balance of probabilities, that the agreement was that the Grossbergs with the payment of the $60,000 on about 12 April 1995 had acquired a 25% interest in the business. Prior to that payment, their interest in the business had grown with each payment made in accordance with the agreed ratio. As to when the $130,000 debt was converted to an interest in the business, I am unable to reach a specific conclusion save that I am satisfied that it had occurred by 12 April 1995.
(b) Cash entitlement
Egon Grossberg maintained that it was agreed on 20 December 1994 that cash payments of $2,000 per week would be made and that they were made. He claimed that in May or June 1995 he was shown a green book which recorded the cash payments. Greta Grossberg also said that it was agreed that proportionate cash payments would be made out of a total of $8,000 per week. Peter Grossberg maintained that he received $800 per week in cash from his brother and he started, but did not continue, recording the receipt in a notebook[12]. His evidence was that Egon Grossberg continued to give him $800 per week out of cash that Egon Grossberg told him he had received from the business. This evidence would give some support to Egon Grossberg's evidence except that it is dependent on what Egon Grossberg told his brother, Peter Grossberg.
No other evidence has been forthcoming about any such agreement or that there were any cash withdrawals. Cross-examination of defence witnesses has not elicited support, only contrary evidence. I would not be surprised if there were cash withdrawals and a "green book" as alleged by Egon Grossberg, but on the evidence before me, I am not satisfied on the balance of probabilities that there was an agreement to share cash withdrawals. That conclusion, however, does not detract from my conclusion that the plaintiffs acquired a 25 per cent interest in the business. As a result, if cash was paid out of the funds of the business, they would have had a right to a proportionate share.
(c) Car expenses
Again the plaintiffs rely principally on the evidence of Egon Grossberg. His evidence was that it was agreed in the original December agreement that monthly car expenses would be paid on the same pro rata basis as the other payments. Greta Grossberg's evidence was to similar effect. Egon Grossberg also said that the car payments stopped in December 1995. Peter Grossberg gave evidence that the Tabets said that they would give them $500 for the cars each month, the Tabets themselves taking money out for their cars. Issam and Mazen Tabet denied receiving car expenses and denied any such entitlements for the Grossberg interests.
The plaintiffs' case was that the payments were shown in the cash payments journal and were to be compared with the entries showing drawings to Issam and Mazen Tabet and roughly reflected the percentage interest held in the business. But the payments to the Grossberg interests (payable to Brimscombe) were classified in the journal as "management fees" and additional car lease payments on behalf of Issam and Mazen Tabets were also recorded in and between January and May 1995.
The additional payments to Brimscombe, however, offer some support to the evidence of Egon and Greta Grossberg. Peter Grossberg's evidence also gives some support. While doubts remain, sufficient appears to establish on the balance of probabilities that the parties agreed that there would be monthly drawings intended to cover car expenses and that they would be calculated by reference to the amounts drawn by Issam and Mazen Tabet and the Grossberg interests would have been entitled to receive payment in proportion to their investment in the business. But on the evidence before me it is not possible to reach a conclusion as to the amounts actually involved.
[12]G10 - the diary notes of Peter Grossberg, in which he noted four cash payments of $800 per week received in January 1995.
As I understand the parameters of the debate before me, the foregoing should address the "liability" issue between the parties. I assume that the orders necessary to give effect to these reasons would include an appropriate declaration as to the plaintiffs' interest in the business known as Skyways International Hotel. I will give the parties the opportunity to consider these reasons and address the question of the appropriate orders to be made.
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