Hawthorne v Harris, P.W
[1995] FCA 181
•28 FEBRUARY 1995
CATCHWORDS
CONTRACT - Second applicant loaned money to second respondent - no written document as to repayment of moneys executed - whether agreement that repayment would be "when funds available" means such moneys were repayable by the second respondent on demand, or if such moneys were payable only if and when the second respondent had profits available to it - agreement void for uncertainty - second applicant entitled to demand repayment at any time.
Corporations Law
Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1993) 11 ACSR 1 Applied
Handbury v Nolan (1977) 13 ALR 339 Applied
Winks v WH Heck & Sons Pty Ltd [1986] 1 QdR 226 Applied
In the matter of Combined Security Systems & Designs Pty Ltd
Sydney Hawthorne & Anor
v Patrick William Harris and Maureen Anne Harris & Anor
QG 3026 of 1994
Drummond J
Brisbane
28 February, 1995
IN THE FEDERAL COURT OF AUSTRALIA ) No. QG 3026 of 1994
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
IN THE MATTER of COMBINED SECURITY SYSTEMS & DESIGNS PTY. LTD.
(ACN 062 187 071)
BETWEEN: SYDNEY HAWTHORNE
First Applicant
AND:PLASTEC AUSTRALIA PTY. LTD.
ACN 010 271 048
Second Applicant
AND: PATRICK WILLIAM HARRIS and
MAUREEN ANNE HARRIS
First Respondents
AND:COMBINED SECURITY SYSTEMS & DESIGNS PTY. LTD.
ACN 062 187 071
Second Respondent
MINUTES OF ORDERS
JUDGE MAKING ORDER: Drummond J
DATE OF ORDER: 28 February, 1995
WHERE MADE: Brisbane
THE COURT DECLARES THAT:
Since the second applicant's demand of 1 July, 1994 for repayment of loan moneys, there has been a debt due and owing by the second respondent to the second applicant.
THE COURT ORDERS THAT:
On the second applicant's application, the second respondent be wound up pursuant to s. 459P the Corporations Law.
Ross Andrew Duus and Neil Edwin Summerson of Ernest & Young, Accountants, official liquidators, be appointed the liquidators of the second respondent.
The second applicant's costs be taxed and reimbursed in accordance with s. 466(2) the Corporations Law.
The first applicant's application for winding up of the second respondent pursuant to s. 260 the Corporations Law is dismissed, with no order as to costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) No. QG 3026 of 1994
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
IN THE MATTER of COMBINED SECURITY SYSTEMS & DESIGNS PTY. LTD.
(ACN 062 187 071)
BETWEEN: SYDNEY HAWTHORNE
First Applicant
AND:PLASTEC AUSTRALIA PTY. LTD.
ACN 010 271 048
Second Applicant
AND: PATRICK WILLIAM HARRIS and
MAUREEN ANNE HARRIS
First Respondents
AND:COMBINED SECURITY SYSTEMS & DESIGNS PTY. LTD.
ACN 062 187 071
Second Respondent
Coram: Drummond J
Date: 28 February, 1995
Place: Brisbane
REASONS FOR JUDGMENT
The first applicant, Mr. Hawthorne, and the first respondents, Mr. and Mrs. Harris, are shareholders in the second respondent, Combined Security Systems & Designs Pty. Ltd.. It was the company by means of which they for a time carried on the business of marketing an invention for the first respondents which they called Exigril. This is a device which enables security screens fitted to domestic and other premises to be quickly unlocked from the inside. The Harrises are the owners of this invention which is the subject of their pending patent application.
The second applicant, Plastec Australia Pty. Ltd., is a company controlled by Mr. Hawthorne. It procured for the second respondent dies needed for the making of certain Exigril components. It also met some of the early establishment and operating expenses of the second respondent and sold to the second respondent materials for use in and for the marketing of the Exigril systems. It claims to be entitled to payment now by the second respondent for all of the expenditure it incurred for that respondent's benefit.
Mr. Hawthorne seeks an order for the winding up of the second respondent on the grounds of his oppression by the Harrises and those associated with them as the majority shareholders. Some 32 acts allegedly done or instigated by those respondents are relied on. The evidence produced by Mr. Hawthorne in support of this particular case is voluminous. It has evoked voluminous evidence in reply from the Harrises. Much expense has been incurred by both sides in filing the affidavit material going to these issues.
Although one of the orders sought by Mr. Hawthorne in the winding up petition filed on 30 September, 1994 in respect of his complaints of oppression was that commonly granted in such cases, viz., an order for the purchase by the Harrises of his two shares in the second respondent, Mr. Hawthorne did not serve the respondents with the evidence he intends to rely on to prove the value of these shares until 18 January last. Mr. Hawthorne's expert valued each of the nine issued shares in the second respondent at $4,445. At the first directions hearing in 1994 the Harrises indicated that, depending upon the amount of the valuation, they might consent to an order to purchase Mr. Hawthorne's shares. They repeated that on subsequent occasions and, on the first directions hearing after receipt of Mr. Hawthorne's valuation evidence, 7 February last, the Harrises made an open offer to submit to judgment for an order that they purchase Mr. Hawthorne's two shares in the second respondent at his own valuation. They confirmed at the hearing that this offer remains open for acceptance by Mr. Hawthorne.
Mr. Hawthorne did not, however, accept this offer because it would put an end to his oppression case in which he is seeking, among others, a novel order that the Harrises pay to the second applicant the amount of the second respondent's indebtedness to the second applicant pursuant to s. 260(2)(k) the Corporations Law. The theory here appears to be that this section authorises an order directing oppressing members to pay money due by the company in their control not to the oppressed member, but to a separate entity with which the oppressed member has a connection.
In addition to the oppression complaints of Mr. Hawthorne, the second applicant, as a creditor, also seeks to wind up the second respondent on the ground of its insolvency. The case here does not rely on non-compliance by the second respondent with a statutory demand, rather on evidence said to establish the following: namely, the failure to pay to the second applicant a significant debt; the evidence available from the second respondent's books of accounts and from a chartered accountant; and admissions made by the directors, who include the Harrises.
The amount claimed as now due to the second applicant by the second respondent in the petition is $56,249.70. This includes an amount for interest. The respondents do not dispute that the second respondent is indebted to the second applicant, but the quantum of that indebtedness is in dispute. While the Harrises assert that the second respondent is not insolvent, they do not assert that, if the debt which they agree is owing by the second respondent to the second applicant is presently payable, the second respondent can pay it from its own cash or from cash it can readily raise. The affidavit evidence produced by the applicants and the respondents on this issue of quantum is also extensive. I gave directions designed to encourage the parties to resolve their dispute over the quantum of the second applicant's claim and to agree on the amount of the second respondent's indebtedness to it. The parties have now done that. $48,656.43 is accepted as owing by the second respondent to the second applicant. At the hearing before me the second respondent tended a cheque for $4,505 as that part of the sum which it acknowledges has now become payable. The second applicant did not, however, accept this proffered payment.
When the Harrises confirmed their offer to buy Mr. Hawthorne's two shares in the second respondent at his own valuation at the directions hearing on 7 February, 1995, I ordered that the question whether the debt claimed by the second applicant was presently due by the second respondent be determined as a preliminary issue. On 20 and 21 February, 1995 I heard evidence and argument on this matter. The answer to this question depends in part on whether the amount of the second respondent's indebtedness to the second applicant is not now payable because it was agreed to be payable only from the profits of the second respondent if and when it had profits available to it, as the respondents contended, or whether the amount in question was agreed to be payable if the first applicant should become dissatisfied with the project, i.e., that it was to be repayable to the second applicant on demand, as the applicants contended is the position. Even if the applicants' contention as to the basis on which the second applicant made the moneys in question available for the benefit of the second respondent is rejected, it will still be necessary to determine if those moneys are repayable on demand. If this is the situation, an effective demand for repayment is contained in a letter from the applicants' solicitors of 1 July, 1994.
The sum in question is made up of two elements: firstly, one in respect of costs incurred by the second applicant but repayable to it by the second respondent in respect of the manufacture of plastic injection moulding dies required to make certain components of the Exigril system, and, secondly, one in respect of administration and other expenses incurred by the second applicant in connection with the establishment of the Exigril business also repayable to it by the second respondent.
The parties never executed a written document containing the terms on which they agreed. Their agreement, therefore, has to be spelled out from all the relevant evidence, written and oral, insofar as that evidence is accepted as reliable. See Handbury v Nolan (1977) 13 A.L.R. 339 at 346 per Stephen J. The conduct of the parties subsequent to the time when it is said the agreement in question was concluded is relevant for this purpose of identifying just what were the terms on which the parties reached agreement. See Winks v W.H. Heck & Sons Pty. Ltd. [1986] 1 Qd.R. 226 at 238 per Thomas J.
Mr. Hawthorne describes the initial relationship with the Harrises, which operated until late October 1993, in this way. He says that in about March 1993 he was approached by a Mr. Michael Bourke, who was then employed by the second applicant, who told him that the Harrises had a window security system and that they were looking to develop and market it. Mr. Hawthorne says he had discussions with Mr. Bourke in which they identified an arrangement to take to the Harrises. If they agreed to it, the Harrises would grant to the second applicant the marketing rights to the Exigril system and would be paid by the second applicant a royalty based on the number of Exigrils sold.
He says that the arrangement agreed to by the Harrises involved the second applicant being responsible for the costs of developing and of producing the necessary dies to make Exigril components and the Harrises being responsible for buying those dies from the second applicant and paying for them progressively, whereupon the component dies would become the property of the Harrises, once fully paid for. He says that this early arrangement involved a further agreement that if the relationship broke down, the second applicant would be entitled to payment of the costs of developing and manufacturing the dies upon 90 days' notice to the Harrises and that in reliance upon that arrangement, the second applicant proceeded to incur the costs of developing and manufacturing the dies and in establishing arrangements for the marketing of the Exigril system. Mr. Hawthorne then says that in or about early October 1993 Mr. Bourke told him that he wanted to arrange a meeting between Mr. Hawthorne and the Harrises to discuss forming a new company to take over the second applicant's role.
The meeting of 28 October, 1993 at Mr. Hawthorne's home attended by the Harrises and Mr. Bourke, all of whom gave evidence, is of critical importance. I am unable to accept any of the witnesses as wholly reliable on essential matters.
So far as Mr. Hawthorne is concerned, he showed himself, in my opinion, to be ready to overstate the facts when he thought that might be to his advantage in the litigation. For example, he asserted in oral evidence that the initial arrangements with the Harrises for payment to him on 90 days' notice of moneys expended by the second applicant on the dies if the relationship broke down was in writing, in a letter sent by the second applicant to the Harrises organisation, GenTech Services. Mr. Hawthorne placed emphasis on this alleged letter saying that the reason he was not prepared to agree on 28 October, 1993 to any deferment of his right to demand repayment of funds expended on the Exigril system by his company was that he already had the benefit of a term entitling him to repayment of all such moneys on 90 days' notice. He said this was why he insisted on 28 October, 1993 on the right to demand repayment of such moneys at any time, if he became dissatisfied with the project. He said:
"There's a statement which we sent back to GenTech Services to say that even if the [second applicant] had the patent rights, had paid all the money out, the conditions were that I would have the right to demand my money back in 90 days. Now that 90 days which I claimed then was when I had a lot of protection ... [T]hat was the basis on which I said that I've got no control, I've already spent the money, if things weren't going right, and I voiced my opinion at the time, that I wasn't happy with the arrangement, but accepted it, but if things weren't going right I would have the right to demand my money back ... [W]hat I said at the meeting was my money was to be paid back on demand if I thought things weren't going right."
The document ultimately produced in response to the respondents' call for the second applicant's copy of this letter does not answer Mr. Hawthorne's initial description of it. It is only a page of a note prepared by Mr. Bourke in mid-1993 when Mr. Bourke was seeking to put together an arrangement for the production and marketing of the Harrises' Exigril with Mr. Hawthorne's capital. I prefer Mr. Bourke's evidence to Mr. Hawthorne's here. Mr. Bourke said:
"This document is prepared by myself with - for ideas of Plastec Australia and GenTech Services possibly coming to some marketing arrangements.
Can you recall when it was prepared?‑‑‑I would say that I prepared that before there was any agreement ever cemented in place because it was to formulate ideas."
In his first affidavit, Mr. Hawthorne asserts that there are inaccuracies in the recording of highly significant matters in the minutes of the meeting of 28 October, 1993. These minutes were prepared by Mrs. Harris and a copy was promptly given to Mr. Hawthorne. I reject his equivocations about whether he read these minutes. I think it is likely he did read them soon after they were prepared. There was no complaint from him about their accuracy until the litigation erupted, although he was present at most of the company meetings up till 15 July, 1994 and received a copy of each set of minutes soon after they were prepared, from Mr. Bourke.
Despite the case Mr. Hawthorne sought to make out that the second respondent was established behind his back by the Harrises and Mr. Bourke, these minutes show that Mr. Hawthorne knew at the outset of the meeting that the second respondent had already been set up, and they also show that he himself identified the main purpose of the meeting as to determine whether the second respondent should be established as, in effect, the vehicle for a joint vehicle between himself and the Harrises. His own evidence to which I have referred indicates that prior to the meeting of 28 October, 1993 he was told by Mr. Bourke about this proposal. I accept Mr. Bourke's evidence that he told Mr. Hawthorne of the establishment of the second respondent prior to the meeting of 28 October, 1993.
Despite the case Mr. Hawthorne also sought to make out that he had reached firm agreement on 28 October, 1993 with the Harrises for the unconditional transfer by them to the second respondent of their patent rights in respect of the Exigril system for 10 years and that that transfer was what was to provide the quid pro quo for the Harrises taking a share in the second respondent, the minutes are in direct conflict with the claim Mr. Hawthorne now makes in this regard. They contain the following passage:
"Pat and Maureen [i.e., the Harrises] made it quite clear that Exigril patent would remain in their names and not belong to `Combined' [i.e., the second respondent] as it was designed long before any association with the existing business were made. Sid [i.e., Mr. Hawthorne] suggested it become the property of `Combined'. This was not accepted. This was to be stated in any agreement drawn up."
Mr. Hawthorne's testimony here is also contradicted by the terms of the licence agreement of 6 June, 1994 under which the Harrises, as the owners of the patent rights, granted only a licence to the second respondent to manufacture and market the Exigril system, which licence was for an indefinite period, terminable on three months' notice. Mr. Hawthorne now says of this licence agreement:
"When it was handed to me, I looked at a couple of pages and commented to the effect that it did not seem right to me and I wanted solicitors to look at it but asked the Harrises to sign it as an act of good faith. They had not, to that point, signed any document securing the rights of the company with respect to the Exigril system ...
It is in my opinion, from a business point of view, quite an unsatisfactory agreement drawn heavily in favour of the Harrises and it is in my opinion from the point of view of a reasonably objective businessman an unacceptable agreement which does not accord with the agreement in fact reached with the Harrises. The agreement reached with the Harrises was that the right to the Exigril system would be granted by them to the Company [i.e., the second respondent] for ten (10) years with the Company paying the Harrises a royalty of $2.00 for each Exigril sold by the Company."
Mr. Hawthorne does not, however, suggest that he took the document to his solicitor for advice when he received his copy of it soon after 6 June, 1994 and he appears to have made no complaint that the licence agreement failed, in a major way, to reflect what he now says was the agreement reached with respect to the transfer to the second respondent of the Harrises' intellectual property rights in the Exigril system on 28 October, 1993, at least until he filed his first affidavit in these proceedings. He does say in respect of a denial by Mrs. Harris that she confirmed what is now Mr. Hawthorne's case here:
"Maureen Harris made this statement [i.e., the confirmatory statement] on the 28th day of October 1993. Patrick Harris confirmed it at the meeting of 6 June 1994. It is recorded in the tape recording of the conversation referred to in my Affidavit sworn the 18th day of January 1995."
But the transcript Mr. Hawthorne exhibited to his affidavit does not provide, in my view, anything like unequivocal support for what Mr. Hawthorne now says was the agreement reached on 28 October, 1993 with respect to the transfer of the patent rights to the second respondent.
In reaching my conclusions on what was in fact agreed with respect to the second applicant's entitlement to repayment by the second respondent of moneys expended by it in respect of the Exigril system, I place much more reliance on the contemporaneous documents and, in particular, the minutes of the meeting of 28 October, 1993, than on what Mr. Hawthorne has to say about the events in question.
I adopt the same approach of relying on those documents, rather than on the affidavit and oral evidence of Mr. and Mrs. Harris. My reasons for having reservations about the reliability of their testimony include the following: Mr. and Mrs. Harris attempted to maintain that the share applications dated 25 October, 1994 and typed up by Mrs. Harris were wrongly dated and had nothing at all to do with the decision, recorded in the minutes of meeting of the day before that, 24 October, 1994, to dilute Mr. Hawthorne's interest in the second respondent. Although it may never have been acted on, that decision recorded in the minutes of 24 October, 1994 is obviously embarrassing to their defence to the oppression claims by Mr. Hawthorne. The evidence of both Mr. and Mrs. Harris here lacks credibility. Further, Mr. Harris, like Mr. Hawthorne, is I think prepared to make confident statements that, if true, will assist his case, but which are unjustified. By way of example I refer to the contradiction in the minutes of a meeting of 11 January, 1994 of Mr. Harris's assertion in paragraph 10 of his first affidavit that it was quite wrong of the applicants to seek repayment by the second respondent of certain legal fees, and to his assertion in paragraph 41 of that affidavit that Mr. Hawthorne was wrong in saying it was agreed at the 28 October, 1993 meeting that monthly reports of the second respondent's activities would be provided to Mr. Hawthorne, an assertion also contradicted by the relevant minutes of meeting.
I accept the minutes I have referred to as the best evidence of what took place at the important meeting of 28 October, 1993. In identifying just what it was the parties then agreed upon, I also regard the subsequent minutes of meetings, at which both Mr. Hawthorne and the Harrises were present, as of considerable assistance. The minutes of the meeting of 28 October, 1993 contain the following:
"Sid brought to the attention the main reason for the meeting - To determine whether a Company in the name of COMBINED SECURITY SYSTEMS AND DESIGNS should be established and what benefits would there be if it were established. This Company was a combination of Plastec Australia Pty Ltd and GenTech Services ... It was felt that all costs would come out of this Company when funds were available. i.e. Dies, videos, all printing of brochures and other advertising material. Commissions and promotions. The cost pertaining to the experiments and making up of models for the Licensed Fabricators."
The second applicant had by then already incurred substantial costs in procuring the dies needed to produce the Exigril components. The reference in these minutes is thus to some costs already incurred and to other costs to be incurred in the future on further dies and various promotional and other expenses. Although the language of these minutes is, on one view, tentative, i.e., where it is recorded "it was felt", I think the minutes here record an agreement that was then reached between the applicants and the respondents. The difficulty is to identify what they were referring to when they agreed that repayment of the costs incurred by the second applicant with respect to the Exigril system would be due by the second respondent "when funds were available".
The second respondent's income was envisaged at this meeting to come from two main sources. Firstly, from the sale by the second respondent of licences to others to make and sell Exigril systems to consumers and, secondly, from the sale by the second respondent to its licensees of certain Exigril components made with dies produced by the second applicant for the second respondent. This is what in fact occurred, although at least up to the outbreak of the litigation, the costs of establishing the second respondent in business proved to be greater, and the income received less, than I think the parties all expected in October 1993. The second respondent appears to have commenced operations with little in the way of working capital. The problems thereby caused emerged almost immediately the second respondent commenced trading. It was the main subject of discussion at the meeting of 15 February, 1994, at which Mr. Hawthorne and the Harrises both agreed to provide substantial equity funding to the second respondent.
In addition to agreeing, on 28 October, 1993, on the basis on which the second respondent would reimburse the second applicant for costs expended by the second applicant for the benefit of the second respondent's business operations, the parties also agreed on how the income from the sale of the licences was to be dealt with. The minutes contain the following:
"It was decided on that the licence fee would be $5000 per licence, per fabricator, and is to be paid over a period of 2 years. It was suggested that each Licence Fee would be used as follows:-
1.Die costs $ 250
2.Commission $ 500
3.Promotions $1500
4.Plastec share $1000
5.GenTech share $1000
6.Combined $ 750
$5000".
I take this to record the parties' agreement that the second respondent's funds generated from the sale of licences were to be used, first of all, to reimburse the second applicant for its own costs of producing the dies to the extent of $250 from the proceeds from the sale of each licence. The agreement was that "all costs would come out of this Company", i.e., the second respondent, "when funds were available," i.e., dies, videos, and so on. The agreement as to the application of the income from the sale of each licence was, I think, supplementary to this main agreement, to ensure that from funds available to the second respondent from this particular source, the applicants could expect to recoup from the start of business operations part, at least, of the applicant's costs of producing the dies. But the minutes of meeting record that the parties apparently accepted that the market for the sale of licences would not be a never-ending source of funds and that they might sell only 100 licences at most. The invoices numbered 1 to 5 and all dated 22 December, 1993 which were sent by the second applicant to the second respondent for its die costs soon after the agreement was reached on 28 October, 1993 totalled $34,787. A further amount of $1,075 for die costs was invoiced by the second applicant to the second respondent on 28 February, 1994. The figure now agreed as having been expended by the second applicant on die production for the second respondent is $34,966. The sale of 100 licences would only produce $25,000 for the second applicant in respect of the die costs. The parties could not therefore have anticipated that the second applicant could confidently expect to recoup the whole of its expenditure on dies from that particular source, at the rate of $250 per licence sale. I reject Mr. Harris's evidence that the agreement then reached was that the licence fees were to be the sole source of recovery by the second applicant of its costs of producing the dies.
It is implicit, in my view, in the agreement of 28 October, 1993 that the second applicant was to be entitled to recoup the full amount of the moneys expended on dies and other costs of establishing the second respondent's business, even if the sale of the licences turned out to generate insufficient funds to do that. The generality of funds available to the second respondent was the agreed source of the moneys necessary to repay the second applicant in full, although as licences were sold, the second applicant was to receive $250 from each in part payment of the indebtedness owed to it in respect of die costs.
Moreover, the parties' agreement, recorded in the minutes of meeting of 28 October, 1993 as to how the proceeds of sale of each licence was to be applied, indicates that each of Mr. Hawthorne and the Harrises were not to await the generation of profits to receive income for themselves from funds available to the second respondent; each $5,000 received by the second respondent from a sale of the licences was to be applied firstly in part reimbursement of costs incurred by the second applicant in respect of dies, and then, as to the next $2,000, in payment of certain of the second respondent's operating costs. The next lot of $2,000 was to be split equally between Mr. Hawthorne's company, the second applicant, on the one part, and the Harrises on the other. This last mentioned disbursement of the second respondent's funds from licence sales appears to be by way of drawings by each of the second applicant and the Harrises against the dividends they hoped to receive from profits. The only other payment they were each to receive was a small payment from the sale of each lot of Exigril components to licensees, designed to recoup their costs of producing those components. The question of Mr. Harris being entitled to a salary for his work on behalf of the second respondent only arose later on. Of each $5,000, only $750 was to go into the second respondent's general funds.
I have no doubt that the parties on 28 October, 1993 intended to create a legal relationship by the agreement they then reached, and that one element of this relationship was the determination of the second applicant's entitlement to recovery from the second respondent of the substantial sums it expended on the establishment of the second respondent's business. It is not disputed by the respondents that these moneys must be characterised as loans by the second applicant to the second respondent. The only dispute is as to the terms as to repayment on which the second applicant made these loans.
I reject Mr. Hawthorne's evidence that it was agreed that he would be able to demand repayment of costs incurred by the second applicant in respect of dies produced by the second respondent, and in respect of others of the second respondent's costs met by the second applicant, if he were not satisfied with the way the project was proceeding. I think it is unlikely that Mr. Hawthorne raised this matter at the meeting on 28 October, 1993. The minutes are silent in this regard, although they do record a number of suggestions by Mr. Hawthorne then made, some of which were agreed to by the Harrises and some of which were rejected by them, including Mr. Hawthorne's suggestion that the second applicant rather than the second respondent should be responsible for the promotion of the Exigril system, and his suggestion that the Harrises' patent rights be transferred to the second respondent. The minutes also record the optimism of the parties and that "there was a good relationship between the [parties]" then, which they "felt sure" they could maintain. I do not think Mr. Hawthorne adverted at the time to the possibility that he might become disenchanted with the project.
However, I think the parties' agreement with respect to how receipts from the sale of licences were to be disbursed shows that they intended that the company's funds, i.e., its trading receipts, and any other moneys received by it on its own behalf, as opposed to its profits, if any, were to be the source of recoupment by the second applicant of the moneys it expended in respect of the second respondent's business. It was agreed that the second applicant would recover its expenditure on the second respondent's establishment costs and that this would be another outgoing which the second respondent had to meet before any profits would be made. That this is what the parties intended on 28 October, 1993 is, I think, supported by Mr. Harris' own statement recorded in the minutes of 15 February, 1994 prepared by Mrs. Harris when the protagonists were confronted with the second respondent's urgent need of substantial operating funds. Mr. Harris, in the context of discussion in which he asked Mr. Hawthorne to inject $30,000 into the business, to be met by the counter-suggestion of Mr. Hawthorne that the Harrises themselves provide this sum, said this:
"... Pat stated Sid's investment of $50,000 was going to be paid back in full, plus interest (at the going Bank rate at this time) if he wanted, and as soon as money became available in the Combined account, before anyone received any dividends."
In Argyll Park Thoroughbreds Pty. Ltd. v Glen Pacific Pty. Ltd. (1993) 11 A.C.S.R. 1, I held that moneys loaned by the promoter of a company to the company, on terms that the moneys were to be repaid only when the directors felt that the company was in a position to make repayment, in whole or in part, were repayable to the promoter on demand, the agreed term as to repayment being void for uncertainty. I said at pages 3 and 4:
"In Head v Kelk (1963) 63 S.R. (N.S.W.) 340, in a claim for money lent, the plaintiff demurred to a plea in the defence that the money was lent upon the terms and conditions as to repayment that the defendant would be bound to repay the same when he was financially able to do so, and not before, on the ground that the agreement alleged in the plea did not constitute a contract as it was so vague and uncertain as to be unenforceable. The plaintiff's demurrer was overruled. This decision was distinguished in Bailes v Modern Amusements Pty. Ltd. [1964] V.R. 436. That case involved an agreement between a company and a shareholder that a loan by the shareholder would be repaid by the company when the company considered it was in a position to repay it. Sholl J held that that agreement was void for uncertainty. At 441, his Honour said:
`Notwithstanding Head v Kelk and the other authorities referred to, I have come to the conclusion, after careful consideration of the wording of this alleged term, that I ought not to hold it to be valid. Either it is illusory, or it is not sufficiently certain to be enforceable. If it confers on "the company" an arbitrary discretion to determine whether and to what extent (if at all) the moneys are to be repaid, it is an attempt to cut down to an illusory obligation what would otherwise, as I have held, be an obligation to repay on demand. If, however, it is to be understood as imposing an obligation to repay whenever, acting bona fide, the company ... is bound properly to consider itself in a position to repay, nevertheless in my opinion it is still too uncertain to be valid. It appears to me to admit a number of alternative meanings.'
It may be that the true distinction between Head v Kelk and Bailes is that if the question whether the agreed time for repayment has arisen can be determined objectively, then the term will be valid; but, if the agreed time for repayment operates in a subjective way by leaving it to the borrower to decide for himself when, if ever, he will repay, the term will be void as illusory: see Bailes at 440 and cf. Godecke v Kirwin (1973) 129 C.L.R. 629 at 646-6.
...
Although the term as to repayment contended for has gone as an illusory stipulation, there remains an agreement for a loan. In Bailes at 442, Sholl J stated:
`In those circumstances I consider that the term limiting the right to repayment is void for uncertainty, but that in its absence there remains an agreement for a loan.'
The law is that where there is an agreement for a loan and the time for repayment is not fixed by the agreement, any money advanced will be repayable on demand: Bailes at 441 or perhaps, more accurately, without any previous demand. See Chitty on Contracts, 26th ed., at para. 3582."
In my view, a stipulation that loan moneys are to be repaid from the funds of the company "when available" as opposed to being paid from the profits of the company, is void for uncertainty.
If the agreement had been for repayment from profits, it would I think be objectively ascertainable, with sufficient certainty, whether the borrower had made profits in each of its accounting periods to make the agreement enforceable. Under such an agreement, the whole of profits earned in any period would be applied to repay the loan, or so much of the loan as there were profits available in that period, before those profits could be dealt with by way of dividend to the borrower, or by way of reinvestment in the business or otherwise.
But the agreement here is for the loan moneys to be repaid from the funds of the borrower when those funds were available. The parties did not agree that repayment was in effect to be a first charge on all of its funds. It was only a charge on its funds, when available. This element of the agreement is unlike that with respect to how funds received by the company from a particular source, viz., sale of licences, were to be expended in part repayment of these loans. The latter element of the agreement is quite precise in earmarking the first $250 received from each such sale for part repayment of the loans. This element of the agreement seems to me to reflect the parties' recognition that other demands on the company's funds would have to take priority over repayment of the loans from the second applicant if the company were to survive, and that it was to be left to the discretion of the company, i.e., to those controlling it, when the company's funds could be said to be available to be expended in repayment of any part of these loans. No other mechanism was agreed which would enable any particular funds, received by the second respondent from time to time, to be identified in any other way as those to be used to repay, either in whole or part, the debt owed to the second applicant.
The stipulation agreed on 28 October, 1993 that the second applicant was to receive $250 from the sale of each licence in part payment of the second respondent's indebtedness in respect of the dies, does not operate, in my view, to defer the second applicant's entitlement to repayment from the second respondent's funds when available. It is only a provision which entitles the second applicant to demand $250 from each lot of licence fees, as part repayment of any amount that may then be outstanding in respect of the moneys expended by the second applicant on dies and other items for the second respondent, upon the sale of each licence.
It is clear that the parties' agreement as to when repayment would be made envisaged that the second applicant could not expect to receive repayment immediately or in the near future and that the first applicant, Mr. Hawthorne, expected in October 1993 that he would have to wait for repayment until the directors of the second respondent, of whom he was initially one himself, considered that the second respondent's funds, i.e., its receipts, could safely be used to repay, from time to time, part of the moneys due to the second applicant. But the parties have now fallen out, and their rights against each other are only those enforceable under the law, which the applicants have invoked.
In my view, the stipulation in question is, at law, an uncertain one. The consequence is that the second applicant was entitled to demand repayment of the loan moneys in question at any time, and in particular on 1 July, 1994, as it chose to do.
I will therefore declare that there has been due and owing by the second respondent to the second applicant, since the demand of 1 July, 1994, the sum of $48,656.43, less the sum of $4,505, if the second applicant has, since the hearing, accepted the second respondent's tender of the cheque for that amount.
Following an admission by the second respondent by its counsel that it was unable to pay this sum to the second applicant, his Honour made an order that the second respondent be wound up on the ground of its inability to pay its debts.
As to costs:
Given the wide discretion that the Court has in relation to costs, it is not appropriate to give the first applicant his costs of the petition insofar as it seeks a winding up of the second respondent on the ground of oppression.
The reasons why I directed that the preliminary issue as to whether the debt claimed by the second applicant from the second respondent was presently due and owing, be dealt with as a preliminary issue have been canvassed in the reasons I have just given. As I mentioned, the second applicant is controlled by Mr. Hawthorne. There is, in my view, sufficient indications in the evidence filed by the respondents on the issue of insolvency to show that the question whether the debt was presently owing was the issue of critical importance, in the sense that a determination of that issue, on the hearing of the second applicant's petition, was likely to bring the litigation to finality, as it has now done. Moreover, the claim made by the first applicant in the oppression proceeding for an order that the first respondents, as oppressing members of the second respondent, pay moneys owing not by them, but by the second respondent, not to the oppressed member, but to another entity altogether, seems to me to be outside the scope of the remedies given by the section and to show that the real intent of the applicants was to seek the money payment orders (together perhaps with orders in relation to the transfer of the patent rights).
There is nothing to prevent a litigant suing on every possible cause of action. But, in my view, successful parties cannot necessarily expect to recover all their costs where they make no attempt to make a sensible assessment of the realistic course to follow to achieve the economical and efficient resolution of their claims, having regard to the matters at the heart of the dispute, and instead mount a range of proceedings and inflict on the respondents the costs and burdens of dealing with that range of proceedings, rather than with a more limited range of issues. This seems to me to be a case which has been made much more complex by the course the applicants elected to follow than was warranted by the issues which were at the heart of the dispute between the parties.
I should also say that my findings on credit and to the effect that the first applicant in October 1993 was then proceeding on the basis that the second applicant could not expect prompt repayment from the second respondent do not justify a conclusion that his oppression case was likely to succeed. It is not possible to make any reliable prediction of the outcome of that particular claim.
For those reasons I will make the order as to costs that I have foreshadowed.
I certify that this and the preceding
26 pages are a true copy of the
reasons for judgment herein of the
Honourable Justice Drummond.
Associate:
Date: 28 February, 1995
Counsel for the applicant: Mr. P.E. Hack
Solicitors for the applicant: Geoffrey M. Lyons &
Company
Counsel for the respondents: Ms. D.A. Mullins
Solicitors for the respondents: Bennett & Philp
Dates of Hearing: 20 and 21 February,
1995
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