ICA Group Pty Limited v MK River Pty Limited

[2007] NSWSC 145

CITATION:	ICA Group Pty Limited v MK River Pty Limited [2007] NSWSC 145
HEARING DATE(S):	13, 14, 15, 16, 17 and 30 November 2006
JUDGMENT DATE :	2 March 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Windeyer J at 1
DECISION:	Judgment on cross-claim. Order that second cross-defendant repay first cross-claimant’s loan plus interest. Second cross-claimant’s claim for declaration of fiduciary duties rejected.
CATCHWORDS:	CONTRACTS – Proposed joint venture to develop property – Whether joint venture memorandum void for uncertainty – Rights arising from failure of joint venture to materialise – Where proposed joint venture party lent money to joint venture company – Whether agreement for interest on loan existed – Where moneys were re-borrowed by lending party at high interest rates – Order for loan and interest to be repaid – Interest to be calculated at court rates compounded monthly - EQUITY – Fiduciary duties – Negotiations for joint venture which did not materialise – Whether property held on trust for proposed venture parties – Negotiations based on false representations - EQUITY – Maxims – Lack of clean hands – Joint venture negotiations arising through false representations
CASES CITED:	Cadman v Horner (1810) 18 Ves 10; Coal Cliff Collieries Pty Limited v Sijehama Pty Limited (1991) 24 NSWLR 1 Kettles and Gas Appliances Limited v Anthony Hordern and Sons Limited (1934) 35 SR(NSW) 108 Meyers v Casey (1913) 17 CLR 90 Official Trustee in Bankruptcy v Tooheys Limited (1993) 29 NSWLR 641 United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 Viscount Clermont v Tasburgh (1819) 1 Jac & W 112;
PARTIES:	ICA Group Pty Limited (First Plaintiff/First Cross Defendant) Lumina (South Yarra) Pty Limited (Second Plaintiff/Second Cross-Defendant) MK River Pty Limited (First Defendant/First Cross-Claimant) Walter Percival Edwards (Second Defendant/Second Cross-Claimant)
FILE NUMBER(S):	SC 4494 of 2005
COUNSEL:	Mr M Ashhurst with him Ms S Sloane (Plaintiffs/Cross-Defendants) Mr P Hayes, QC wtih him Mr F Kaylk (Defendants/Cross-Claimants)
SOLICITORS:	Levitt Robinson (Plaintiffs/Cross-Defendants) KQ Lawyers (Defendants/Cross-Claimants)

- 30 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

FRIDAY 2 MARCH 2007

4494/05 ICA GROUP PTY LIMITED & ANOR V MK RIVER PTY LTD & ANOR

JUDGMENT – on cross-claim

Outline

1 This case is about a proposed joint venture which did not come to fruition. It concerns the rights arising, not of its failure, but as a result of the failure to come to fruition.

What does the case show?

2 It shows that solicitors should not get involved with their clients in property deals and neither should their employees.

Parties and people

3 The proceedings are on the cross-claim. The proceedings on the originating process, being an application to set aside a statutory demand, have been concluded.

The parties

4 MK River Pty Ltd (MK River) is the first cross-claimant. Mr. Edwards and Mr Kyriackou are two of its directors. I will refer to them by their surnames. It appears to be trustee of some trust under which both Edwards and Kyriackou are beneficiaries.

5 Edwards is the second cross-claimant. He is a solicitor and he employs Kyriackou as office manager. He holds, or held, certain intellectual property or an interest in certain intellectual property upon certain trusts first to secure his fees, and second for a company Matarol Pty Limited (Matarol). His title is or was held subject to the rights of first and second chargees.

6 ICA Group Pty Limited (ICA) is a company engaged in property development. Its directors are Mr Adam Huxley (Adam) and Mr Robert Huxley (Robert), but Robert has little part in its decision making. These two people are the sons of Mr Greg Huxley (Huxley), a consultant to ICA. While that may be his position, the fact is that he is authorised to and does make many of the decisions for ICA and he was the person most involved in this particular matter on behalf of the Huxley interests or on behalf of ICA.

7 Lumina (South Yarra) Pty Limited (Lumina) is a company incorporated on 7 March 2005. Its directors are Adam and Robert.

8 Mr Brian Cully (Cully) and his son, Mr Wesley Cully, were either directors of Matarol or persons involved directly as shareholders of Matarol.

Facts as to property

9 Matarol was, up to 2006, registered proprietor of property 2-6 Murray Street South Yarra (the property). That property was subject to a first mortgage to Owenlaw Pty Limited (Owenlaw) and a second mortgage in favour of numerous lenders. In addition to the mortgage over the property, both lenders had registered charges over the assets of Matarol.

10 In December 2005 Owenlaw as mortgagee exercising power of sale sold the Murray Street land together with whatever rights were available to it under a tripartite agreement entered into between Owenlaw, Matarol and the architects for the development. The purchaser under the mortgagee sale was a Mr Baird. It seems that he was in fact a person organised by the Cully interests and a person who never had the funds available to enable him to pay the deposit let alone to complete the purchase.

11 Although the evidence is not quite clear, it seems that a deposit cheque for $400,000 was paid by MK River to the vendor or its agents. The purchase price was $4,562,000 but the deposit was reduced from 10% to $400,000. It was known to Cully, Edwards and Kyriackou that the cheque in payment of the deposit would not be met. They had taken the precaution of having a company W E Streamline Pty Limited that was controlled by them, attend the auction to become the under-bidder. According to Kyriackou that somehow gave that company, as under-bidder, a right to enter into a contract at the same price as the original highest bidder if the sale to that bidder fell through. While I do not think there was any basis for this it does seem likely that the mortgagee would have been prepared to sell to W E Streamline on the same terms as it sold to Baird, other than a requirement for a full 10% deposit.

12 Edwards and MK River were owed a considerable sum of money by Cully and/or Matarol for fees for legal work including court proceedings to try to stop the mortgagee sale in the second half of 2004. Those proceedings were not successful and Owenlaw entered into possession in January 2005. MK River was owed moneys for loans made for valuations and other requirements for the benefit of Matarol.

13 On 24 February 2005 a deed of trust was executed, the parties to which were Cully, Matarol and Edwards. It recited the Owenlaw mortgage, and that Matarol “had obtained approvals, plans, permits and drawings for the redevelopment of the property known as the Lumina project which approvals, plans, permits and drawings are copyright to the company and referred to herein collectively as the intellectual property – the IP”. It went on to recite the moneys owing to Edwards and to MK River and provided in its operative part that Matarol and Cully had agreed to assign and transfer to Edwards their right, title and interest in the intellectual property to be held by him upon trust, first to discharge all liabilities of Matarol and Cully to Edwards and to MK River and second to use any surplus equity in the intellectual property to the benefit of the company, its directors and shareholders. It then provided that Edwards and MK River would use their best endeavours to sell to the successful bidder at auction of the property the intellectual property “which is valued at not less than $1 million”. It further provided in cl 4 of the deed of trust, that:

4. In the event that the Solicitor and MK River is successful in negotiating a Joint Venture agreement with the new purchaser, the Solicitor and MK River agree to divide their benefits of the Joint Venture agreement equally between the Company and Wes Culley after management and administration costs of 1.5% of the construction finance has been paid to the Solicitor and MK River in full and final payment of the legal fees and charges incurred.

14 The trust deed is somewhat strange. MK River is not named as a party but that company executed the deed. At the time it was executed the intellectual property was subject to two charges in favour of the first and second mortgagees of the property but in the case of the first mortgagee subject what is called the tripartite agreement, which allowed Owenlaw as first mortgagee to sell the property with the benefit of a licence to use the architectural plans.

Events in March 2005

15 As Cully and his interests were without funds to provide the 10% deposit on the purchase price of the property he was about to lose the value of all the work and money he had put into the site in obtaining development approval. His accountant Mr Armstrong had been in touch with Huxley of ICA in 2004 about a proposal to lend on a second mortgage on the property which proposal did not proceed. In early March he got in touch again asking for a loan of deposit funds, originally of probably only $200,000 as consideration for a 50% share in the project of developing the Murray Street property.

16 There were a number of telephone calls, email and fax exchanges on 3 and 4 March 2005. Huxley received, in part from Cully and part from Edwards’ office, copies of a loan facility offer by Capital Finance Limited dated 12 January 2005 and a Landmark White valuation of the property of June 2004, probably updated to November 2004. The Capital Finance offer was subject to various conditions including updating again of a valuation and its assignment by the valuer to Capital Finance together with the requirement that there be pre-sale contracts with prices up to a total of $8,464,000. The finance offer was for “re-finance of land and construction of the building.”

17 Huxley in an email to Edwards on 3 March 2005 asked for confirmation of the finance arrangements, details of W E Streamline Pty Limited, details of pre-sales and other information including information as to which consultant had been paid. I accept that he originally thought that Kyriackou was a solicitor and at one stage he probably thought he was the same person as Edwards but that no longer matters. Paragraphs 8, 9 and 16 of that letter of 3 March 2005 are as follows:

8. If ICA proceeds it will be on the basis that your Mr Edwards and your firm confirm without reservation that 50% of the equity and voting shares have been issued validly and fully paid to ICA Group and/or .its Nominee. Further you will confirm that there exists no option or obligation to any third party to take up any shares.

9. ICA's nominee will become a Director and in fact, Managing Director of WP Streamline Pty Ltd with a casting vote. Wally Edwards will continue to hold 50% of the shares in WP Streamline Pty Ltd as nominee for third parties and will remain as a Director.


Other than the percentage fee discussed above, there is no other arrangement or entitlement with Wally Edwards or any third party as to profit share, fees etc.
…
16. Not by way of being negative, however, we will require a charge over the remaining 50% of shares held to cover:

a) The period in which monies advanced by ICA remain outstanding. b) In the event of a material false or misleading disclosure or representation by any party to us in relation to this matter, then in that event we reserve our rights to take the remaining shareholding without further obligation to WP Edwards (other than their agreed costs) and Brian Kelly or any other party.

18 Kyriackou replied on the same date giving further details of the finance. The letter included the following:

Capital Finance had approved the construction funds and was ready to settle this deal on the 31st of January 2005.

The first Mortgagee (OwenLaw Mortgage Managers) decided that it would not hand over discharges and would not confirm settlement venue and decided to exercise his power of sale 2 days prior to settlement.

What then happened was that CFAL decided to with draw their facility on that basis.

We had tried everything that you could think of but because the loan facility had come to an end they allowed our client Matarol Pty Ltd a right to damages but not to an injunction.

Our client had organised interested parties to attend the auction and had successfully bought the property back.

As stated to yourself yesterday Mr Edwards did not want to get involved in this transaction unless their was confirmed funds in one of the office accounts that he holds this did not happen their for that is why we can allow the purchaser to rescind the Contract on the basis that we had picked on a technicality that allows the purchaser to rescind.

It is obvious that Mr Culley does not want this to occur because of the profit that is left in at the end of it and also that $750,000,000 worth of creditors have been paid.

Further I will add that if someone puts up the initial deposit to enable settlement to proceed it should be a stand alone project. For example if this transaction happens today as discussed the Purchase is $4562000,000. The Value of the Land is $6300,000 their for the Loan to Value Ratio should be 75% of end realisation therefore your land component initial advance should stand at $4725000,000.

After the property settles because of Matarols input you still are entitled to get the initial draw downs on construction which should be in excess of $500,000.

(All documents quoted in this judgment are set out as they are without correction).

19 The statements as to the reason for withdrawal of finance were not true. In fact Capital Finance had withdrawn its offer on 28 January 2005 as pre-conditions had not been met including those conditions which related to pre-sales. The solicitors for Capital Finance had said on 24 January that in their view none of the pre-sale contracts satisfied the requirements. It was also not true that finance was arranged but not bedded down. Any indicative offers were on the basis of refinance not on the basis that finance was required for the purchase price on a mortgagee sale.

20 Edwards also replied on the same day by fax which included the following:

I understand that documents have been forwarded to you which cover the issues addressed in the FINANCE matters:

I confirm that I will be acting as Trustee for other parties and a percentage fee based upon gross turnover has been agreed.

With regard to WE Streamline Pty. Ltd. I confirm that upon payment of the initial $200,000 with a further $200,000 to be remitted within 7 days of this date, W E Streamline will appoint you (or your nominee) as a director with myself as purchaser of the property. It should be noted that W E Streamline has been in existence for more than 3 months but has not operated nor does it have any bank accounts of other books and records.

Point 8 of your e-mail is confirmed without reservation that 50% of the equity and voting shares have been issued to ICA Group and/or its nominee and that I will remain as a director. There are no options or obligations to any third parties to take up any shares.

It is unlikely that that was true. The shares would not have been issued by then.

21 Copies of other documents were forwarded to Mr Greg Huxley including a schedule of unpaid consultants which included architects and a copy of the contract of sale to Mr Baird. As I have said the deposit under that contract was $400,000. The contract contained cl 7.2 as follows:

7.2 At settlement the Vendor shall assign to the Purchaser all its rights under the "Tripartite Deed Extending Licence in Copyright Of Plans And Specifications ” dated 16 July 2004 to the Purchaser. A copy of this Deed is attached to the Vendors Statement. Such assignment shall be prepared by the Purchaser at the cost of the Purchaser.

22 Huxley sent another fax to Kyriackou on 4 March which included the following:

During the day I received 3 bundles of material. Firstly a letter from WP Edwards confirming shareholding and arrangements with respect to payment of the second traunche of the deposit.

Secondly, a background letter form WP Edwards enclosing various documents.

Thirdly, a fax from Brian Cully enclosing a valuation.

I spoke briefly to Steve Armstrong last night after our meeting with our client. I appreciate from those discussions the terrible urgency that this project faces and whilst sympathetic to that position, having regard to the fact that we received this application so very late, and we still, seem to have such fundamental gaps in the material provided as against what we have been told, we simply do not see how we can meet your timetable.

Having said that, we would like on some basis to be able to proceed and/or assist you.

Cutting through the detail, lets look at the primary issues: -

1. We understood that WP Edwards had in place all finance. It was approved, not conditional and for that they were to receive 2.5% of gross turnover.

We have no confirmation of arrangements with WP Edwards, nor do we have any confirmation of finance to either settle the purchase of the site or undertake construction. There appears to be an unsigned brokers appointment agreement setting out terms and conditions upon which the broker is engaged to secure finance.
This need not be, a problem, because, our office can more than likely arrange the finance. However, we cannot make that assessment based upon what we have and further, it is not what we’ve been told.

23 Huxley sent to Kyriackou a further fax which included the following:

Michael, lets have a contingency plan.

I know that this is frustrating but lets deal with it in a sensible way. It can probably only be done with your help, particularly bearing in mind that you've put into place a strategy for a backup buyer. Lets use that to our advantage - this will give me the time to get everything finished this afternoon so we're ready to go.

Let me set out what my thoughts are: -

1. Contact your other agent lets use them now and use the opportunity to bring in a brand new company- I’m happy for you to arrange the company or our Directors can arrange it form Sydney.

2. Have your agents say they are acting under constructions of ICA Group in Sydney.

3. Your agent negotiates with the mortgagee and agrees to the same price - maybe offer a little bit extra price, deposit 5%. Rather than $4.5M make it $4.55M but on a 5% deposit.

4. The agent arranges for the mortgagee to send by PDF file (or overnight courier to our office in Sydney) the contract with a commitment that that contract will be executed tonight/over the weekend and air freighted back to Melbourne so that it is with the mortgagees no later than say 1 pm Monday.

5. 5% deposit to be transferred direct into the trust account of the mortgagee.

6. In this regard WP Edwards/WP Rivers to pay 50% of the deposit into Trust and ICA will transmit 50% into Trust - on the same basis that ICA reimburses WP Rivers within the week.

7. WP Edwards, Solicitors, as solicitors for both ICA (in respect to this transaction) and on behalf of the new company prepare a Deed of Trust for the new company and its Directors to sign and guarantee that it holds. 50%; of the new profit of the 2-6 Murphy Street, South Yarra project in Trust for Mr WP Edwards acting as a Trustee.

You have the weekend to reaper these documents - they will be executed by the ICA Directors over the weekend and again loaded into an airfreight bag so that you have them first thing Monday.


8. The mortgagees going to the agent this afternoon wont expect the buyer to be sitting there. They're there simply to have the backup buyer agree to buy and agree to get the contract signed. What the agent needs to do is maybe get it on a 5% deposit - maybe squeeze a little bit more.

9. In this regard, to give the transaction some legitimacy - give the agent Adam Huxley's details: 02 8904 9555 (he is a Director of the company) and have them ring him first and line it up so that they can be seen to be ringing him whilst the mortgagees are ringing him etc.

Michael, the advantages of this are that if there has been any doubt over the existing company in the eyes of the mortgagees that is eliminated. There is a new buyer. The agent, if he's any good (and you've chosen him, so presumably you've done that because you're comfortable) can negotiate hard etc under your direct control.

Michael there is nothing in this suggestion designed to keep WP Edwards out of the equation. I am pushing as hard as I can to get this wrapped up today and unfortunately I am in the midst of another Friday settlement, which is only making this that much harder. I would like to assist Brian; we do a lot of business with Allworths and for that reason we’d like to help out; and the director that has spoken to the agents down there, whilst of the view that the values are a little lower than the valuer has used, is comfortable.

24 The vendor mortgagee refused to proceed on a 5% deposit. Adam and Robert went to Melbourne on 5 March and met Edwards and Kyriackou. Cully was also present for a time. There were discussions about the proposal. Cully showed the Huxleys various plans and contract documents. There is some dispute as to the extent of the documents which were shown but I think little really turns on that. The matters of value and interest were of course the architectural plans and drawings, engineering plans and drawings, development approval and the like. Although there is some dispute about the actual conversations I find that Kyriackou said that he could get Capital Finance to fund the deal and that he had fallback contacts at the Bank of Queensland and from a lawyer if necessary. I also find that he said the intellectual property belonged either to Matarol, Cully or Edwards so that the benefit of this would be available. Edwards confirmed that he was entitled to the intellectual property pursuant to the trust deed which he produced.

25 It is apparent that there was a good deal of imprecise talk at the meeting. It is also apparent that there was a great deal of urgency and that Edwards and Kyriackou, and no doubt Cully, were doing their best to put matters in the best light possible in an attempt to retain something from the project. I am satisfied that by the time the meeting concluded it was envisaged there would be a new company formed to purchase the property as a joint venture vehicle, that the consideration that ICA would bring to the joint venture was the payment of the full deposit but that $200,000 of the $456,200 would be required to be paid by MK River for a period of seven days, after which it would be repaid by the ICA interests. It was accepted that the consideration that the Edwards interests would bring would be the intellectual property. It was also envisaged that the moneys paid for the deposit by ICA would be refunded on settlement of the land transaction out of settlement moneys which would be available based, I think, on the Landmark White valuation. It is not certain but it might have been discussed that Edwards would be entitled to the value of the intellectual property as a first draw down but, so he said in evidence, as part of his share of any profit.

26 All of this is somewhat uncertain as conversations ranged over 50% of net profit and 50% of shareholdings in a joint venture company. In any event, towards the end of the meeting a memorandum of agreement was prepared by Edwards and was signed. It is in the following terms:

MEMORANDUM OF AGREEMENT


This Memorandum of Agreement is made the 5th day of March 2005 between ADAM HUXLEY of Milsons Point in Sydney New South Wales representing an entity (the New Entity) to be advised of the First Part; WALTER PERCIVAL EDWARDS of Suite 721/1 Queens Road Melbourne in the State of Victoria as Trustee for Matarol Pty Ltd. (Matarol) of 2 - 6 Murphy Street, South Yarra Victoria and Lumina Developments Pty. Ltd. (Lumina) C/- Allworths Accountants of 39 Market Street, Sydney New-South Wales of the Second Part: WHEREAS Matarol was the registered proprietor of land situate and known as 2 - 6 Murphy Street, South Yarra (the Property) AND WHEREAS Owenlaw Mortgage Managers Pty. Ltd. (Owenlaw) are the First Mortgagee of the Property AND WHEREAS Owenlaw has sold the Property as Mortgagee in possession to the New Entity; AND WHEREAS Matarol has plans and contracts for the development and reconstruction of the Property with Lumina, which plans and developments are copyright and are being adopted by the New Entity and are assigned to the Second Party as Trustee:

NOW THIS AGREEMENT WITNESSES:

1. In consideration of the New Entity providing the deposit funds for the purchase of the Property from Owenlaw (subject to a short term bridge for the deposit funds of $200,000 Two Hundred Thousand Dollars from MK River Pty. Ltd.) which funding is acknowledged by Adam Huxley as the consideration for the joint venture in the development of the Property.

2. And on the basis that construction funds are in place and obtainable through MK River Pty. Ltd. for the development of the Property.

3. And in consideration of Matarol and Lumina appointing the Second Party as Trustee for Matarol and Lumina for the purpose of the development of the Property.

4. The First Party will sign the Contract for the Sale of the Property from Owenlaw to the New Entity and that the parties agree to joint venture the development of the Property.

5. That the parties agree to do all things necessary and sign formal documents to give effect to this Memorandum of Agreement.

27 The fact the intellectual property was subject to two prior charges was not disclosed. That would not have mattered had the proceeds of the mortgagee sale provided sufficient funds to pay out those charges. As to the charge in favour of Owenlaw that is the position. As to the charge in favour of the numerous chargees there was a shortfall of about $600,000. In fact Cully as a guarantor under that charge was made bankrupt by the chargees upon failing to satisfy the guarantee. In addition to this while the terms of what is called the tripartite agreement did allow Owenlaw to sell with the benefit of the plans, copyright in them remained with the architects. It was certainly not with Matarol, although there might have been an implied licence for it to use those plans had it paid for them.

28 It was not true that construction funds were in place and obtainable through MK River. There was considerable dispute as to whether construction funds included funds required for the purchase of the land so far as the proper construction of the memorandum of agreement is concerned. I find that they did. It was not suggested ICA was to put up or provide those funds. It does not really matter. The fact is that funds were not in place and obtainable through MK River nor Capital Finance nor the Bank of Queensland, nor through solicitor’s finance to fund the construction let alone the purchase.

29 The document was, of course, a preliminary one – a kind of agreement to agree, but clearly on the basis that Edwards held the intellectual property and MK River had construction funds in place. Neither was correct.

30 The Huxley interests arranged the incorporation of Lumina on 7 March 2005. The directors are Adam and Robert, each of whom holds one share. Fifty shares are held non-beneficially by Kwok Wah (Australia) Pty Limited and 48 beneficially by the same company. This only came to light towards the end of the trial when Huxley was trying to explain that this was in accordance with paragraph 16 of his email o 3 March 2005, at which stage upon my asking a question a company search of Lumina was put into evidence. There was no novation of the Memorandum of Agreement to Lumina. W E Streamline Pty Ltd, the company originally intended to purchase the property, was not heard of again.

31 Contracts were dated 7 March 2006. They were exchanged, I think, on 8 March 2006, due to some delay in obtaining the deposit funds. In fact the contract was signed by Adam and Robert when they were in Melbourne and prior to the company being formed. The name of Lumina as purchaser was then inserted by Edwards or Kyriackou. The contract did provide for the vendor to hand to Lumina, as purchaser, copies of all plans and specifications held for the proposed development, correspondence in relation to planning permits and for an assignment by the vendor to Lumina to its rights under the tripartite agreement.

32 Adam said in oral evidence that after the meeting on 5 March he considered that the parties would move towards entering into a joint venture agreement. In fact he prepared the first draft of such an agreement called a development agreement on 10 March 2005. This was a document apparently taken in part from an earlier joint venture to which ICA was a party. As well as Lumina, ICA, Cully, Edwards, and Kwok Wah (Australia) Pty Limited are named as parties. Apart from providing for loan funds from ICA and for ICA to have 50% of the development profit it has no real bearing on the matter. It was quite inadequate. It did not on its face provide any benefit at all for the Edwards interests.

33 Almost immediately after exchange Huxley began to make inquiries about other finance without much success at the start. He and Kyriackou arranged for a letter to be sent to the valuer at Landmark White stating that the intellectual property was not acquired from the mortgagee at the mortgagee sale and that arrangements had been made for Lumina to acquire it together with access to pre-sales contracts and existing billing contracts for a figure of about $2 million which figure would be funded from progressive cash flows. What this amounts to, I think, was a dishonest manoeuvre to attempt to get the valuer to increase the valuation, but as both sides were party to it little more turns on it.

34 Huxley was busy preparing funding proposals to various accountants and brokers, at least from the middle of April 2005. Kyriackou was by then getting annoyed and sending correspondence about failure to repay to MK River the sum of $200,000 which it had provided towards the deposit moneys, he eventually saying that if it was not repaid immediately then MK River would have to re-borrow at an interest rate of 5% per month from about 8 April. No satisfactory and firm approvals were obtained which could have brought about settlement by the due date.

35 In May 2005 Edwards put forward a revised development agreement. This was never signed and it was admitted it was not entered into. At one stage it was suggested the parties contracted on its terms but that is no longer suggested.

36 Whether as a result of representations made as a result of the misleading letter or not a new valuation was obtained from Landmark White dated 10 May 2005 for a land value of $5,550,000 and a completion value of $25,940,000. Various indicative offers were received from the Bank of Queensland, and from LM Investments Management Limited on behalf of Permanent Trustee Australia Limited, none of which was sufficient to fund the purchase price for the land or even the purchase price for the land less the deposit which had been paid. Huxley was by now making frantic efforts to obtain additional funding on second or third mortgage at very high rates of interest.

37 The vendor had purported to rescind once on 10 May and again on 7 June but had finally agreed to an extension of time pursuant to which settlement took place on 8 July 2005, the amount paid on settlement being $4,497,704. That figure included some penalty interest and GST. Under none of the mortgage instruments or other financial instruments under which loan funds were obtained was Edwards, Kyriackou or MK River a party as debtor or guarantor. On the other hand guarantees were in general required under the loans entered into and under the proposed loans from at least Adam and Robert and ICA.

38 Up to the date of settlement and then after that time there was acrimonious correspondence usually between Kyriackou and Huxley about the failure of the Huxley interests to repay the $200,000, less $24,000 which had been paid. The problem was that MK River was having to pay interest of 5% per month on that figure, although the evidence of Kyriackou is that when he told Huxley of this position Huxley agreed to cover that interest so far as the $200,000 was concerned. There is conflicting evidence about this. Huxley admitted that he was told of the 5% but said that he never agreed that ICA would pay it. Kyriackou said that he did. Neither witness can really be relied upon. However, in this particular matter I prefer the evidence of Kyriackou.

39 By the end of July 2005 relations between the Huxley interests and the Edwards interests had become very tense, but there was still communication. Even on 22 July Adam, in a letter to Cully said, “If the foregoing is not acceptable we suggest that the ongoing participation of various parties insofar as the project is concerned be reassessed.” While it is true to say that the Huxley people always thought that Cully retained some interest, that letter would not suggest to the recipient that the Huxley interests had already decided to take the whole venture on themselves. That, however, is what Huxley said in answer to a question which I asked. On 22 July 2005 Kyriackou sent to Adam and Robert a document as follows:

ATTENTION :Adam Huxley & Robert Huxley &(Lumina South Yarra & ICA Group of ) FAX No: [phone] Date 22nd July 2005
Writer MICHAEL KYRIACKOU

Re: MEMORANDUM OF AGREEMENT DATED 5TH MARCH 2005

DEFAULT NOTICE
Dear ; Adam and Robert Huxley.

I advise that you are in Default pursuant to the Terms and conditions of the Memorandum of Agreement dated the 5°i March 2005.

The Moneys outstanding to MK River Pty Ltd to the 13th August 2005 is $310,000. Less $ 24000 already payed to reduce your debt leaves $286000 outstanding.

You have also made a commitment to Purchase the intellectual property for $2000,000 that was assigned to Edwards on the settlement to Lumina South Yarra, this has not occurred.

Para 2 of the Agreement Dated the 5th March 2005 it states that M K Rivers Pty Ltd was to organise Finance for that property, let me say this MK River Pty Ltd had organised Finance from the Bank of Queensland for Lumina South Yarra in which ICA acknowledged that through correspondence, also MK River Pty Ltd had organised finance for Matarol Pty Ltd Through Ash Morgan with LM Investments which you have now settled with.

We have through the period honoured the agreement that was executed on the 5th March 2005 and further have also given ample assistance at your request.

In that agreement and in particular para 3 you acknowledge clearly that Edwards is the Trustee for Matarol Pty Ltd, also it is clearly acknowledged through your Internal correspondence.

I did not want it to come to this but through your actions and your failure to communicate you have given me no alternative.

Let me say that the Laws in Victoria do not require us to get Judgement prior to issuing a Statutory Demand under Sections 459 E.

I have given yourselves and Greg Huxley ample opportunity to resolve this matter on a number of occasions in which you have not responded to any of my messages via fax & telephone.

In lite of your recent communications to Mr Culley faxed letters dated 21st & 22nd July 2005, in which initiated my response to yourselves requesting you to withdraw certain comments that were in your fax dated the 21st July 2005 by no later than 3pm the 22nd July 2005, leaves no alternative but to recall all Moneys owed to MK River in the amount of $286000. And that all Moneys owed to W,P Edwards in the amount of $2000,000.

In view .of the breakdown in our relationship we do not wish to proceed any more as a joint venture partner pursuant to the Memorandum of agreement dated the 5th March 2005 . The property situated at 26 Murphy Street South Yarra be immediately listed for Auction.

Take note that if you do not respond to this fax by no later than 2 PM Monday the 25th July 2005 I will be issuing a Statutory Demand on ICA and Lumina South Yarra.

40 On 26 July 2005 MK River and Edwards served a statutory demand requiring payment of the sum of $2,286,000, $2 million being for the intellectual property and the $286,000 for the deposit loan plus interest. On 15 August 2005 the plaintiffs in this action commenced proceedings to set aside the statutory demand. As I have said that claim eventually succeeded. After some procedural skirmishes with some incorrect documents the present cross-claim was begun.

Pleadings

41 Under the pleaded cross-claim Edwards and MK River claim that it was agreed that MK River would advance $200,000 in respect of the deposit for a term of one week. It is also pleaded that at the meeting of 5 March 2005 an agreement was entered into, which was partly oral and party in writing as comprised in the memorandum under which (a) ICA would procure the company as a special purpose joint venture company; (b) that company would enter into the contract for sale of the property; (c) MK River would advance the sum of $200,000 to the joint venture vehicle for a term of one week; (d) ICA would provide the balance of the funds for the deposit; (e) the joint venture vehicle would acquire the intellectual property from Edwards for the sum of $2 million to be paid on completion of the purchase of the property by the joint venture vehicle; (f) that ICA and Edwards would share equally in the property and the project subject to terms otherwise agreed between them; (g) that the joint venture agreement would be subject to a detailed development agreement which the parties might enter later; and, (h) that Edwards would hold one half of the issued shares in the joint venture vehicle and be one of two directors of the joint venture vehicle. There is then set out the establishment of the company, payment of the deposit, the nomination of Lumina as the purchaser company, the advance of the $200,000 and it is pleaded in paragraph 15(a) that these matters were either pursuant to the joint venture agreement or if not, if the joint venture agreement was not binding so as to create a 50/50 joint venture, then those things that were done were in furtherance of a proposed joint venture in terms of the joint venture agreement. It was then pleaded that Lumina had entered the contract pursuant to the joint venture agreement or on the common understanding of the parties that it was so acting and that Lumina holds its interest in the property on trust for Edwards in terms of the joint venture agreement. Presumably what that means is that it holds a one half interest in the property for him. There are alternative claims that Lumina entered into the contract on trust for ICA and Edwards as joint venturers equally and further in the alternative that Lumina and ICA owed to Edwards a fiduciary duty not to divert any interest in the property to their own benefit or to prefer their interest to the Edwards interests, and that in breach of those fiduciary duties ICA has failed to cause shares in Lumina to be issued to Edwards or to have him appointed as one of the directors and has diverted the project to itself. There is a further claim in respect of the $200,000 but there is now no dispute about it only on interest payable on it. In fact I would have thought that this claim was against ICA rather than Lumina as pleaded, but it is admitted as pleaded. The cross-claimants plead that Edwards has delivered the intellectual property and is ready willing and able to execute any further assurance to perfect such delivery.

42 There is a further claim that if all else fails and Lumina does not hold the property on trust for Edwards then it holds the property on trust for MK River as to that proportion in which it has contributed the deposit moneys. This claim can be disposed of immediately. It was never suggested that MK River was contributing to the purchase price. What it was doing was lending to ICA or Lumina $200,000 to enable the full deposit due under the contract to be paid. It was a loan and not a payment of part of a purchase price.

43 The defendants (a) deny that Edwards as trustee for Matarol was owner of the intellectual property; (b) say that some of the intellectual property remained with the consultants as it had not been paid for and in the case of the architects was subject to the tripartite agreement and in the alternative it was subject to registered fixed charges. They admit the memorandum of agreement but deny any other terms of any agreement. They deny that the memorandum of agreement constituted the joint venture agreement and say it was an agreement to agree in the future on the terms of a joint venture agreement on as yet unspecified terms and say that in any event it is void for uncertainty or if not and is enforceable then it included conditions precedent that funds were available to acquire the property and construct the project and that Edwards as trustee was able to assign the intellectual property. They say in addition that the advance of $200,000 was made to Lumina not ICA and that any continuation of discussions for a proposed joint venture were on the basis of misrepresentations by the cross-claimants as to holding the intellectual property and having construction funding in place, but neither was true. In answer to the fiduciary obligation the cross-defendants say that the cross-claimants were precluded from enforcing any fiduciary obligation through what is described as disentitling conduct and the misrepresentations referred to including the fact that the parties having the benefit of the second charge could not be repaid out of the settlement moneys. So far as this matter is concerned I asked Edwards when he was recalled as to how that matter was proposed to be attended to and he said that he thought that those second chargees would wait and that they would be paid out of the joint venture funds prior to distribution to the joint venturers. On that basis it would seem that the venture was less attractive to ICA than it would have been had that charge not existed.

Claim for return of $200,000 plus interest

44 The plaintiff’s pleaded claim is against Lumina. It is admitted as such. There is therefore no doubt that there should be judgment for MK River against Lumina for $200,000 less the sum of $24,000 paid. Why this has not been paid I do not know. In any event the only question is as to interest.

45 It is clear that there was no agreement for interest when the original short term loan arrangement was made. Kyriackou told Huxley on 3 April 2005, that to meet various commitments he would have to borrow short term. Later that day he told Huxley that he could get money but “they are looking at a rate of 5% per month”. He said that Huxley in response said, “If ICA has to pay that money so be it.” He said that at a meeting attended by Adam, Huxley, himself and Edwards on 5 April Huxley said, “Things have been delayed on settlements. We don’t have a problem paying you 5% per month interest on the money we owe you. Can you leave it until settlement?” Kyriackou said he agreed to that.

46 The evidence of Huxley was that he had not said the words attributed to him. He said that Kyriackou had agreed to wait until settlement for the return of the $200,000. On this issue as between quite unsatisfactory witnesses, I considered the evidence of Kyriackou to be the more convincing. There is no doubt that Huxley was used to paying what, to the ordinary observer, would be extortionate rates of interest. However, this does not really assist MK River because the claim for interest is against Lumina. Whatever was agreed or not agreed by Huxley was not an agreement made on behalf of Lumina but on behalf of ICA. Secondly, while there is some evidence that Huxley checked the borrowing rate which Kyriackou said he was paying there is no evidence of the actual rate paid or the period during which it was paid. However, the frenzied finance circles in which these parties were operating, in my view, makes simple interest at court rates an insufficient recompense for the loss by MK River. I conclude that interest should be allowed at court rates but compounded monthly from 17 March 2005.

Contract Claim

47 I turn now to the memorandum of agreement. It is of course true that it was prepared in haste. However, there are obvious problems with it including the following:

A. All three recitals are untrue. At the time it was executed Matarol was still registered proprietor of the property; Owenlaw had not sold the property to the new entity; and Matarol may have had plans and contracts for the development but it did not hold the copyright and insofar as the intellectual property said to exist was the property of Matarol it was subject to two charges and any assignment to Edwards must have been subject to those charges.

B. The new entity (eventually Lumina) was to provide the deposit funds. Unless it was recognised Lumina as a new entity was a Huxley company, such provision could hardly be the Huxley consideration for the joint venture.

C. On its strict reading, clause 4 means that Lumina as the new entity and Edwards would be the joint venture parties. That was never intended.

D. The agreement was said to be signed by Adam representing ICA which is not a party to the agreement. Nor for that matter is Matarol, yet Cully signed for it.

48 It is I think clear that while a joint venture was intended no one understood the basis on which the matter would go forward. It was not really an agreement to negotiate on terms as it is far too vague for that. See: Coal Cliff Collieries Pty Limited v Sijehama Pty Limited (1991) 24 NSWLR 1.

49 Various views were put forward as to what might have been the basis upon which Lumina became purchaser of the company. Huxley said at transcript page 226 that ICA was advancing 50% of the deposit as a loan in return for 50% of the profit share and that the Edwards interests would have 50% of the profit share. However the evidence is clear that subject to a short term loan from MK River the ICA interests were to advance 100% of the deposit as consideration for a 50% share, and at least in the Huxley eyes would be entitled to a return of that amount on settlement. The Edwards interests were to provide the intellectual property as consideration for their share. There were varying views expressed as to whether this was consideration for 50% or whether its value would be repaid as the deposit was intended to be repaid. Counsel for MK River eventually stated that the claim was that the value of intellectual property, said to be $2 million, was to be repaid in priority but as part of the Edwards 50% share of the profits. The actual claim for judgment for $2 million has been abandoned.

50 I have concluded that the memorandum of agreement is so vague and uncertain as to be unenforceable and void for uncertainty. It would be impossible to enforce clause 5. I should add that in any event the cross-claimants have terminated the agreement if it were enforceable and on that basis their only remedy would lie in damages for breach of contract. There is no evidence of any actual damage apart from failure to repay the $176,000 and I think this is a clear case if there were any breach of contract the damages would be nominal. There would be no basis to direct a reference to an Associate Judge to determine the question of damages.

Claim for breach of fiduciary duty

51 I find and it is admitted, at least by Adam, that the ICA interests and the Edwards interests were negotiating for a joint venture to develop the property.

52 I find that whatever else was agreed or not agreed the negotiations or arrangements were made on the basis of the representations in the memorandum of agreement as to ownership of the copyright and other intellectual property in the hands of Edwards and as to construction funds being in place and obtainable through MK River for the development of the property and that construction funds included purchase funds. It was the basis of the Capital Finance proposal but not necessarily of the Bank of Queensland proposal put forward. I consider that development included not only construction but purchase of land. No party suggested that ICA interests were to provide more than the deposit. The Edwards interests had no funds whatsoever to pay for the land. They did not have the funds to pay the deposit.

53 Neither representation was true. Edwards did not own or control the intellectual property. He could not bring it to any joint venture at least unless he could provide $600,000. In fact he said that the second chargees would be paid out of drawdowns before profit sharing by the joint venturers. Construction funds were not in place and obtainable through M K River. That company never arranged the settlement or construction funds. In a letter from W P Edwards office dated 10 March 2005 it was said that “through our company” – presumably MK River – “we have arranged the following facilities to provide both settlement moneys … and construction facilities”. This was untrue. Edwards was not in a position to bring either the intellectual property or the required funding to the proposed joint venture.

54 All of the orders sought in the amended cross-claim proceed on the basis that there is or was a joint venture agreement. As the agreement was at best an agreement to negotiate on terms, these claims must fail. None of the orders sought is appropriate to a claim based upon breach of fiduciary duty. Nevertheless the case was opened as including a United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 type of fiduciary claim. Paragraphs 16B and 16C of the amended cross-claim do plead facts relating to fiduciary duty and breach so that if equitable relief is appropriate an appropriate order should be framed. While an order for the appointment of receiver for the sale of the property and the intellectual property is sought with the proceeds to be divided 50/50 between Edwards and Lumina or ICA (which of the two is not clear) subject to just allowance for moneys expended by Lumina or ICA for maintaining or improving the intellectual property and presumably interest on borrowed funds I do not consider such an order could be appropriate. It is not established that sufficient moneys would be obtained on a sale to pay out the existing mortgagees or to reimburse the Huxley interests for interest moneys, the value of their guarantees and reasonable allowance for what they have brought to the property. And in any event, insofar as Lumina or ICA holds the intellectual property it does so presumably pursuant to the tripartite agreement or through direct acquisition from copyright owners. Any order would have to be for equitable compensation although this would have much the same problems as referred to apart from satisfaction of the claims of mortgagees. Any order for sale would have to be on the basis of the Edwards interests offering to do equity by accepting equal liability as guarantors with the Huxley interests guarantors to lenders to Lumina so as to put them in the same position of risk with Adam, Robert and ICA.

55 The real defence to the fiduciary claim is the defence of lack of clean hands by reason of the conduct pleaded as disentitling conduct in the defence. Not only were the representations made but there is no doubt they were relied upon by ICA in entering into joint venture negotiations. The important original representations were deposit moneys were needed to save a purchase transaction for which funds were otherwise available and for which the intellectual property was available therefore giving what might be described a spring start to a purchaser with those advantages. If these matters were not important matters then their appearance in the memorandum cannot really be explained. There is no doubt the representations had the required immediate and necessary connection to the equity sued upon – Meyers v Casey (1913) 17 CLR 90 - to bring to bear the unclean hands defence. While the doctrine is difficult, misrepresentation has been regarded as conduct which can bring the doctrine to bear. Cadman v Horner (1810) 18 Ves 10; Viscount Clermont v Tasburgh (1819) 1 Jac & W 112; Official Trustee in Bankruptcy v Tooheys Limited (1993) 29 NSWLR 641.

56 It was put by the cross-claimants that the Huxley interests did not rely on these representations, and that shortly after exchange of contracts Huxley commenced inquiries for alternative sources of finance. It is also put that having ascertained from Owenlaw and others, at least in their opinion, that neither Matarol nor Cully nor Edwards was entitled to the intellectual property, the Huxley interests decided to take the proposal to themselves. It is also put that they continued to deal with Kyriackou in connection with loan applications. They asked assistance from Kyriackou in connection with settlement negotiations and the obtaining of some second mortgage funding and that they never complained about the false representations. Perhaps more significantly, while Huxley was writing to various finance brokers stating that “the boys” who had purchased the property were short of funds, he never informed the Edwards interests that the Huxley interests were taking the development to themselves. I should add that none of these matters were addressed in any pleading in reply but certainly they were in evidence.

57 One extraordinary feature of this case is that the highest point the joint venture negotiations reached was that it was intended Edwards would become a director of a purchasing company (Lumina) and almost certainly a 50% shareholder in it. In fact Huxley said that apart from the two shares held one each by his sons the only other shareholder Kwok Wah (Australia) Pty Limited held 48 shares beneficially and 50% non-beneficially by which it seemed he meant on trust. He said that the terms of his correspondence, particularly paragraph 16 of his fax of 3 March 2005 to Edwards gave ICA “a caveat” over those 50 shares. That was nonsense.

58 Kwok Wah (Australia) Pty Limited is not a party. It is not at all clear how its interests in Lumina can be affected by this litigation. Certainly it would not be possible to hold that the 50 shares stated in the ASIC register to be held by it non-beneficially are held on trust for Edwards. As I said earlier all this evidence came towards the end of the case as a result of information volunteered by Huxley. The late tendering of a company search established the fact that Lumina has now changed its name to Embassy (South Yarra). Most of this is irrelevant. What might be thought to be the immoral and improper conduct at least on the part of Huxley can really go only to costs. ICA would not be the first company to take to itself a proposal introduced by another party which expected to retain an interest. The important fact is that the cross-claimants lack clean hands. They brought the joint venture discussions into being through false representations. The defence of unclean hands succeeds.

Costs

59 MK River has succeeded in its claim as to the $176,000 remaining unpaid of the $200,000. Edwards has failed in his fiduciary claim, not so much through the merits of the defendant’s case but the demerits of his own to adopt the words of Long Innes J in Kettles and Gas Appliances Limited v Anthony Hordern and Sons Limited (1934) 35 SR(NSW) 108. From a public point of view none of the parties deserves the slightest sympathy. Bearing that in mind I will hear submissions as to costs taking into account the fact that MK River has succeeded in its claim for repayment of the loan for the deposit and Edwards has failed in his claim under the contract and has failed in his claim for breach of fiduciary duty, but principally as a result of the clean hands defence.

Orders

60 The parties can bring in draft orders at the time costs submissions are made. Those orders should include agreed calculations of interest on $200,000 from 17 March 2005 until payment $24,000 and on $176,000 thereafter in accordance with paragraph 46.

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