Interactive Network Services Pty Ltd v NPV WA Securities Pty Ltd
[2007] VSCA 282
•10 December 2007
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 2094 of 2004
| INTERACTIVE NETWORK SERVICES PTY LTD (ACN 077 938 679) and JOHN PHILLIP ATHERTON |
| v |
| NPV WA SECURITIES PTY LTD (ACN 089 624 233) |
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JUDGES: | ASHLEY, KELLAM and DODDS-STREETON JJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 1 October 2007 | |
DATE OF JUDGMENT: | 10 December 2007 | |
MEDIUM NEUTRAL CITATION: | [2007] VSCA 282 | 1ST Revision 10 December 2007 |
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Contract – Written loan agreements – Whether second loan agreement was a re-financing of existing loan - Whether transaction under the second agreement was ‘real transaction’ – Whether total failure of consideration in respect of the second loan agreement – Whether subsequent lender discharged the borrower’s liability to the original lender – Appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellants | Mr L Glick SC with Mr P J McCafferty | Nyst Lawyers |
| For the Respondent | Mr I D Martindale SC | Corrs Chambers Westgarth |
ASHLEY JA:
NPV W.A. Securities Pty Ltd (‘WA’) brought a proceeding against Interactive Network Services Pty Ltd (‘Interactive’) in respect of breach of a loan agreement (‘the second agreement’) allegedly made in February 2001 between WA as lender, Interactive as borrower and John Phillip Atherton (‘Atherton’) as guarantor. The breach was the alleged failure of Interactive to make interest payments under the agreement after August 2003.
The proceeding was defended on a number of grounds to which I shall later refer. Interactive also raised a counter-claim in the amount of payments which it had made to WA. Such payments had been made, on their face, for the most part pursuant to the second agreement. But certain of the payments, earlier in time, had been paid to WA on its direction, although on the face of things the same had been payable to NPV Finance Pty Ltd (‘Finance’) pursuant to an earlier agreement (‘the first agreement’) between Interactive and Finance. Interactive pleaded that, for a number of reasons, all of the payments had been made for no consideration.
The claim and counter-claim were tried before a judge of the Trial Division in July 2006. On 3 August 2006 his Honour published reasons in which he found for WA on the claim and against Interactive on the counter-claim. On 9 August his Honour entered judgment accordingly. The amount awarded against each of Interactive and Atherton was $614,910.19.
Interactive and Atherton appealed. Although the Amended Notice of Appeal referred both to the orders on the claim and the counter-claim, and although the grounds were apt to impact upon both orders, the document sought no different order in respect of the counter-claim. On the hearing of the appeal, however, counsel for Interactive did seek relief on the counter-claim. He submitted that, if one or other of the grounds which he pursued was upheld there should be judgment on the counter-claim in the amount of payments made by Interactive to WA. Counsel for WA resisted the making of such an order – even assuming, which he disputed, that a ground of appeal could be made out.
Pertinent Circumstances
The appellants’ case, as finally articulated, was quite confined. Even so, questions arose at the outset whether a particular matter sought to be pursued was within the pleadings, or was in any event consistent with the case agitated by the appellants at trial. Those questions were pertinent to the further question whether the appellants should be permitted to advance their desired case on the appeal.
In the end, counsel for WA accepted that the particular matter did arise on the pleadings. He did so although the Court gave him full opportunity to submit the contrary, and although, as I will later explain, the defence did not clearly expose the issue. He did so, again, despite the issue being no more than touched upon at trial; and thus, in consequence, the learned trial judge not addressing it. He did not submit that the course of evidence would have been any different had the issue been squarely raised. So, in circumstances where resolution of the issue depended, it was said, upon the drawing of an inference, he did not contend that this Court should not consider and resolve it.
In order to give life to the matters which I have just mentioned, and as well to set a framework for the disposition of the appeal, I should set out some of the circumstances of the transactions between the parties, and related transactions. I do so by referring to the detailed reasons for judgment of the learned trial judge.
Although matters relating to the second agreement took centre stage in argument in this Court, what preceded it was not, according to the submissions of both sides, irrelevant. So I begin with what his Honour said in that connection:[1]
[1]I will make use of descriptions of individuals, entities and agreements which I have already adopted in these reasons. I will also describe Strategic Project Marketing Pty Ltd and Strategic Distribution Management Pty Ltd simply as ‘Strategic’, TAJ Walker Pty Ltd as ‘Walker’ and Nu-Pay View Entertainment Pty Ltd as ‘Nu-Pay’. In the case of individuals, after first naming them in full, I will simply use their surnames. To that extent, I will not cite his Honour’s reasons verbatim.
4The first [loan] agreement was part of a series of transactions which were principally, if not exclusively, directed towards generating for Interactive allowable tax deductions and generating for other participants in the transactions commissions, fees and other profits. The second agreement was alleged to constitute a re-financing of the loan made under the first loan agreement.
6The principal participants in the relevant transactions were four individuals, Michael Jarrouge, a director of Finance and WA; Terrence Brain, a director of two related companies named Strategic Project Marketing Pty Ltd and Strategic Distribution Management Pty Ltd (“Strategic”); Charbel Nader, an officer of companies in a group of which the publicly listed company Village Roadshow Limited is the parent (“the Village group”); and Atherton, the second defendant and a director of Interactive. Jarrouge, Brain and Nader gave evidence. Atherton did not.
7In referring to the scheme in question here, in the course of his oral evidence, Brain described the Village group as the “manufacturer”, his companies as the “distributor”, and Finance and WA as the “financier”. That seems to me to be an apt description. What occurred, according to Brain, was that the Village group sought to take advantage of its position in the film industry by offering “film investment products” to investors. These “products” were attractive to investors because of what were perceived to be their taxation advantages. The particular advantages sought to be exploited here were deductions available for expenditure on intellectual property pursuant to s.373‑15 of the Income Tax Assessment Act 1997 and in accordance with s.373‑10 of that Act. In substance, the scheme involved the acquisition of film rights by the investor from a company in the Village group and the licensing of those rights to another company in the Village group. … the arrangements were such that the investor could be confident that it would eventually recover from the Village group the capital cost initially paid. If the investor used its own funds, the “cost” of the tax deduction which it was hoped would be obtained would be the time value of the capital expenditure. If the investor used finance available as part of the scheme, the “cost” of the deduction would be the interest payable, which it was expected would itself be deductible. The arrangements were such that the principal of the loan would be met by the eventual recovery of the initial capital outlay to which I have referred.
8The taxation advantages which were expected were set out in some detail in an advice prepared by a partner of the Melbourne solicitors’ firm … dated 6 June 2000, a copy of which was forwarded to Atherton on behalf of Interactive by Brain under cover of a letter of 7 June 2000. The advantages were set out in that memoranda of advice as nine “propositions”, each of which was separately analysed …
….
“ … the investor will be entitled to amortise the cost of the Film Rights on a straight line basis over the income years ending 30 June 2000 and 30 June 2001.”
….
“ … any interest expenses incurred by an investor upon loan funds used to acquire the Film Rights will be deductible to the investor … in the year in which those expenses are incurred, commencing in the year ended 30 June 2000. … ”
10The deductions which it was expected, or hoped, would be realised resulted from amortisation of the initial capital expenditure over two years. Thus, the deduction for 30 June 2000 would be 50% of the initial capital expenditure with the other 50% available as a deduction in the year ended 30 June 2001.
11Atherton on behalf of Interactive, after discussions and dealings with Brain both personally and through his then accountant …, determined to participate in the scheme. The initial capital investment which he wished to make was the sum of $5m.
12Atherton on behalf of Interactive signed a representation agreement (“the Representation Agreement”) appointing Strategic as its representative and attorney for the purposes of negotiating, executing and acting under two other agreements, being an “Offer to Acquire Film Rights” and a “Distribution Agreement”. Pursuant to the Representation Agreement Interactive agreed to pay to Strategic a representation fee of .75% of the purchase price. The purchase price provided for was the sum of $5m.
13Atherton also signed on behalf of Interactive a document entitled “Offer to Borrow” which was directed to Finance. It is this document which is referred to as the first agreement. There are two versions of the first agreement in evidence. One version bears the date 30 June 2000 in the handwriting of Finance’s director, Jarrouge, in Item 1 of the Schedule on the document’s front page. The other does not. One of the terms of the document, clause 25, reads as follows:
“This contract takes legal effect from the date we accept your Offer to Borrow. We will insert that date in Item 1.”
14The first agreement provided, in clause 2, that Finance would lend Interactive “the amount set out in Item 3 of the schedule”. The amount so set out is $5m. This sum is inserted in handwriting. The handwriting is Brain’s. Jarrouge’s evidence was that when he dated the document this figure was wrong and he knew it was wrong. His evidence was that Finance never agreed to, and never intended to lend Interactive any more than $2.5m, and that he advised Village and Strategic accordingly. The evidence of Nader and Brain was consistent with this evidence. According to the evidence of Nader, the $5m investment was financed as to $2.5m by Finance and as to the balance by some form of vendor finance by the Village group.
15Clause 2 of the first loan agreement required that the loan be used for the purpose stated in Item 4 of the Schedule. Item 4 stated that purpose to be “The acquisition of the Film Rights”.
16The repayments required were purportedly set out in item 6. Item 6 read as follows:
“55 monthly payments and a further balloon payment in the 55th month to coincide with the payment of revenue to investors.”
17Jarrouge’s evidence was that this description of payment dates and amounts was “incomplete”.
Pausing, that description was surely apt. The amount of the monthly payment, the first date for payment, the amount of the balloon payment and the day of the month on which payments were to be made were all left unstated.
Returning to his reasons, the learned judge set out in full certain provisions concerning security, set‑off and application of the loan funds which were contained in the first agreement. Thus:
DIRECTION
You authorise us to pay the amount lent to you directly to Vendor pursuant to the Offer to Acquire Film Rights.
MORTGAGE OF RIGHTS AS SECURITY
If we make the Loan to you, as security for your obligation to us under this Offer to Borrow, you:
·mortgage and charge to us all of your interest, rights and entitlements, now and in the future in the Film and the Film Rights; and
·mortgage and charge to us all legal and other rights you have in connection with the Distribution Agreement, including your share of the Distribution Guarantee and Net Proceeds and any and all Securities (or any proceeds therefrom).
…
DIRECT ALL REVENUE PAYMENTS TO US
You agree to direct to us all payments that may be payable now or in the future to us including the Distribution Guarantee and Net Proceeds such amounts if paid before the dates for the repayment of the Loan as specified in item 6 are to be deposited in an account in your name (but controlled by us) and cannot be withdrawn by you until the repayments specified in Item 6 are made. We will be able to draw amounts from these accounts to make the payments specified in Item 6 and to meet any other fees or costs which we are entitled in accordance with this Offer to Borrow. The account will accrue Interest at a rate which we will nominate from time to time.
…
RIGHT OF SET-OFF
We can apply and/or set off (at our option and without notice) any credit balance in any account that you or the guarantor has with us, and/or any amount we may owe to you, towards any amount payable or owing to us under this contract, if there is an amount of money due to us under this contract, and/or if you have failed to pay an amount of money when it was due for payment under this contract.
…
POWER TO DEAL WITH SECURITY
In relation to any Security provided by the Distributor to secure the payment of the Distribution Guarantee there is no restriction on our ability to exercise any of our rights under this contract and you hereby irrevocably:
(a)appoint us as your attorney with full power to do and refrain from doing all things which in our unfettered discretion we deem necessary or desirable in connection with the Security including, without limitation:
·nominating the type and nature of any Security as we in our unfettered discretion decide (including without limitation security issued by us) to be issued by the Distributor pursuant to the Distribution Agreement (‘Nominated Security’); and
·exercising any and all of your rights (in our unfettered discretion) pursuant to the Distribution Agreement including the nomination of the type and nature of Security to be provided by of [sic] the Distributor.
…
If the Nominated Security is something other than an unconditional and irrevocable promise to pay issued by a bank holding a banking licence under the Banking Act (Commonwealth) (“Bank”), then, subject to Clause 36.3
·we may not exercise any rights to recover money owing under the contract until the latest date specified in Item 6;
·we must satisfy our remedies for recovery of the money owing under the contract out of the proceeds of the Nominated Security before seeking to recover same from you and, where applicable, the guarantor;
·we hereby indemnify you and where applicable the guarantor against any liability or loss arising from and any cost charges and expenses incurred by you and, where applicable, the guarantor, in connection with a default in payment under any Nominated Security.
…
Notwithstanding anything else in this Clause 36, we are always entitled to exercise all of our rights and powers in relation to recovery of all Interest Charges, break costs and all other Establishment Fees, costs and expenses payable by you to us under this contract at any time.
…
REFINANCE EXECUTE NEW DOCUMENTATION
You agree and acknowledge that we may in our unfettered discretion accept this Offer to Borrow subject to a further requirement that you re-finance the Loan Amount in whole or in part and repaying to us that part of the Loan Amount refinanced. We will notify you in writing of this requirement. You agree to co‑operate in good faith and do all things necessary to assist us to ensure that the refinancing is completed, including without limitation executing such further documentation as we may reasonably require.”
I pause again for a moment. Clause 48 of the agreement was the refinancing clause which, on WA’s pleaded case, explained a letter dated 19 January 2001 which it sent to Atherton, that letter culminating in the making of the second agreement.
I return to his Honour’s reasons:
19Annexed to the first agreement [was] a document headed “Irrevocable Direction and Notice” which [was] signed by Atherton on behalf of Interactive … The direction and notice authorises the payment of all money due to Interactive in relation to the licensing of the film rights to Finance. The document as signed by Atherton referred to a loan of $500,000. Jarrouge altered that figure, without reference to [Atherton], by crossing out $500,000 and writing in $2,500,000.
20The first agreement provided for payment of an establishment fee. The establishment fee payable was 1.5% of the loan amount. According to an exhibit tendered by consent setting out the payments made by [Interactive … ] an amount of $37,500 was paid on 1 July 2000. The evidence was that this was the establishment fee. $37,500 is 1.5% of $2,500,000.
21Pursuant to the Representation Agreement, Brain, on behalf of Strategic which was in turn acting on behalf of Interactive, executed a document entitled “Offer to Acquire Film Rights”. The “vendor” named in that document was a company in the Village group, incorporated in the British Virgin Islands, named Walker. Relevantly, the Offer to Acquire Film Rights provided:
(a)for the acquisition of 17% of the exhibition rights of a film named “Red Planet” … for a purchase price of $5,000,000.
(b)that Walker warranted that it had the right to transfer the film rights.
(c)that Interactive as purchaser agreed to co-operate in the commercial exploitation of the film and acknowledged that the “most expedient way” to do this was to enter into a “Distribution Agreement”.
(d)that Walker had the option to reacquire the film rights upon the expiry of 12 months for the sum of $1.
22Brain, on behalf of Strategic which was acting in turn on behalf of Interactive, licensed the film rights to another company in the Village group, also incorporated in the British Virgin Islands, named Nu‑Pay, pursuant to an agreement entitled “Distribution Agreement”. This agreement relevantly provided for:
(a) the licensing of the film rights to Nu-Pay.
(b)the payment by Nu-Pay to Interactive, as licensor, of a licence fee.
23The licence fee was payable, subject to a provision of no present relevance, on or before the last day of the 55th month succeeding the date of execution of the Distribution Agreement. Thus the licence fee was payable on 31 January 2005. The amount of the licence fee was the subject of a number of provisions suggesting the possibility of recovery of an amount referrable to the earnings of the film but, more significantly, the agreement provided for a “Distribution Guarantee” which could not be less than “an amount equal to 1.01 times the Effective Nominated Cost”. The “Effective Nominated Cost” was defined to mean “the purchase price of the film rights as defined in the Offer to Acquire Film Rights”. I indicated earlier that the scheme was such that the investor could be confident of recovering the initial capital outlay. The basis for this confidence was the obligation to pay (at least) 1.01 times the purchase price of the film rights on 31 January 2005.
24The Distribution Agreement contained the following term in clause 5.3:
“(a)Subject to Clause 5.3(b) the Distributor hereby warrants and undertakes to maintain net tangible assets equal to 1.5 times its minimum payment obligations under this Agreements [sic] and other like Agreements and will provide audited accounts on a six monthly basis to the Representative showing the satisfaction of this requirement.
(b)As an alternative to compliance with Clause 5.3(a) the Distributor may elect in its sole and unfettered discretion to provide security to the Licensor for its minimum payment obligations under Clause 3 of this Agreement. The security may be by way of any unconditional and irrevocable instrument issued by any Bank holding a banking licence under the Banking Act (Commonwealth) or such other security that may be nominated by the Licensor and agreed to by the Distributor exercising its sole and unfettered discretion.”
His Honour’s description of the transactions comprehended by the offer to acquire film rights and the Distribution Agreement[2] was of importance at trial. The appellants’ case focused on the propositions that the entire arrangements were a sham, and that no loan had ever been made.
[2]Particularly, in the latter case, the distribution guarantee.
Then his Honour described the circumstances in which matters came together – so far as they did – by 30 June 2000:
25As is the hallmark of transactions of this kind, there was considerable pressure to finalise the transactions before 1 July 2000. Jarrouge agreed to proceed with what was described as a “blind settlement” whereby he would accept loan applications from all of the proposed investors without completing credit checks and without arranging in advance the re-financing of the proposed borrowers with more traditional lenders, as was his ordinary practice. …
26 The transactions were settled in the following way:
(a)Finance drew a counter cheque bearing the date 30 June 2000 in favour of Walker for the sum of $6,260,000. Jarrouge’s evidence was that Nader suggested using a counter cheque. Neither Nader nor Jarrouge proffered an explanation for the use of a counter cheque. Finance did not have funds in its account sufficient to meet this cheque if it had been presented. The credit balance in its account at that time was approximately $10,000.
(b)Nader on behalf of Walker wrote a note on the cheque acknowledging its receipt. He dated this note 30 June 2000.
(c)Nader then endorsed the back of the cheque with an instruction to pay Finance and signed that endorsement on behalf of Walker. He returned the cheque to Jarrouge.
27 The cheque has never been presented.
28There is in evidence a covering letter for the cheque signed by Jarrouge and addressed to Nader. The letter refers to the total of the cheque, being $6,260,000, and says that this amount is referrable to a specified list of investors, one of whom is Interactive for the sum of $2,500,000.
His Honour then analysed various explanations given in the evidence for the fact that the counter cheque was endorsed by Nader, on behalf of Walker, and returned to Jarrouge. All of the explanations, in one way or another, identified the return of the cheque as pertaining to the distribution guarantee.
I go again to his Honour’s reasons:
35The documents signed by and on behalf of Interactive provide for an acquisition of film rights for a total sum of $5,000,000. It is clear that whatever Finance’s obligations at that time may have been, the sum which Finance in fact advanced (assuming for present purposes that there was an advance ) was the sum of $2,500,000. This is clear from the manner in which the total sum of $6,260,000 was calculated, from the establishment fee paid by Interactive, and from the subsequent interest payments which were made by Interactive.
36According to the evidence of Nader, $5,000,000 of film rights were acquired by Interactive, and the additional $2.5m not financed by Finance was financed by way of short term finance by the Village group. In late 2001, after the Australian Tax Office had indicated that it intended to audit these transactions, Nader’s superior, Zeigler, signed a letter on behalf of Walker which bears no date and which reads as follows:
“In accordance with the offer to acquire film rights of 30 June 2000 Atherton acquired a 17% interest in the ‘Red Planet’ project for $5,000,000. Of this amount, $2.5 million was received, with an agreement to fund the balance of $2.5 million for an interim period.
As at 31 July 2000, a minimum guarantee amount of $2.5 million was paid, which was applied against the interim funding previously provided. This minimum guarantee extinguishes all of Atherton’s entitlements in respect of 50% of his 17% interest in the ‘Red Planet’ project.
As a result Atherton has a net interest of 8.5% in ‘Red Planet’ on a continuing basis in accordance with the agreement.”
37The transaction referred to in the first paragraph of the letter is consistent with the documents which are in evidence. Nader maintained in evidence before me that the transaction referred to in the second paragraph of the letter did happen. It is referred to in correspondence but is not otherwise reflected in the documents in evidence before me.
His Honour noted evidence that in July 2000 Atherton had sought to increase Interactive’s film rights acquisition, that Jarrouge would not provide additional finance through his companies because he was not happy with Interactive’s creditworthiness,[3] that for a period Interactive was not making interest payments, and that–
Jarrouge began making demands for payment, not in the name of Finance, but in the name of WA. The explanation for Jarrouge doing so lay in his evidence … that he treated the obligation as one owed to WA from 1 July 2000.
[3]A number of credit searches were put into evidence. They revealed that there had been default judgments against Atherton and three companies of which he was a director.
There was, the learned judge recorded, continuing complaint by Jarrouge that Interactive payments were outstanding until 6 November 2000, when Interactive paid an amount of nearly $81,000. Thereafter, his Honour said, Interactive made payments of interest, and penalty interest, until July 2003.
The latter statement was true as far as it went. It did not reveal, however, that on 22 November 2000, 19 December 2000 and 2 January 2001 demands had to be made that defaults in payment be remedied.
His Honour next noted that in the period November 2000 to June 2001 there was discussion between Jarrouge, Brain and Nader concerning the ‘release’ of an amount purportedly returned to Finance which was in excess of the usual security deposit. Eventually the parties agreed upon the matter in which the accounts between Finance and Walker would be settled, and a final payment was made in late May 2002.
Then his Honour addressed the second agreement. I return to his reasons:
47. On 19 January Jarrouge wrote on the letterhead of WA to Atherton. The letter relevantly read as follows:
“We are pleased to inform you that your application to borrow has been finalised and refunding for your participation in the Red Planet has been internally arranged. Pursuant to clause 48 of our Offer to Borrow, we request that you execute the enclosed loan documentation.”
What was enclosed was an “Offer to Borrow” in exactly the same terms as the first loan agreement save for the following:
(a) The lender was WA.
(b) The loan amount was $2,500,000.
(c) Item 6, payment dates and payment amounts, read as follows:
“48 monthly payments of $23,958.33 commencing 15 February 2001 and a repayment of $2,500,000 on 31 January 2005.”
The date which was eventually inserted on this document (presumably again pursuant to clause 25) was 27 February 2001. This document is the second agreement.
According to the evidence of Jarrouge, the second agreement addressed three matters which he wished to address in relation to the first loan agreement. The first was the identity of the lender. The second was the loan amount. The third was the payment dates and amounts.
The loan agreement was executed by Atherton on behalf of Interactive and was separately executed by him as the guarantor. An irrevocable direction and notice, referring to a loan of $2,500,000, was also executed by Atherton.
The learned judge summarised the interest which Interactive had paid, and to whom, as follows:
According to an agreed schedule of payments made, the total sum paid by Interactive to Finance and WA is $935,783.63. Of that sum $52,500 was paid to Finance and $883,283.63 was paid to WA. Jarrouge sought payment to WA during the period when the transaction was governed by the first agreement. $206,202.69 was paid prior to the date of the second agreement and $729,580.94 was paid after that date.
The total of the payments made, his Honour noted, closely approximated the amount allowed as a deduction for the year ended 30 June 2000 in the compromise of a dispute between the Australian Taxation Office and Atherton. He accepted that it no doubt involved compromises and concessions on both sides.
I should add the following. The compromise was embodied in a Deed of Settlement dated 2 June 2006. The tax dispute was therefore settled only shortly before trial of this proceeding. Further, Schedule 1 of the Deed specified that what was to be allowed was a deduction for interest paid or payable in respect of the tax year ended 30 June 2000. The amount of interest specified was only compatible with Interactive contending that its interest payments to WA had properly been paid in respect of the acquisition of film rights.
The issues at trial and on appeal
In written submissions which formed part of his closing address at trial, appellants’ counsel contended that WA’s case must fail, and his clients’ case must succeed because –
(a)There was no loan made within the meaning of the First Loan Agreement, therefore there were no obligations for the plaintiff to take over in relation to the Second Loan Agreement;
(b)The Second Loan Agreement as drafted does not give rise to enforcement of the relevant obligations:
(i)The prescribed purpose of the Second Loan Agreement (being to acquire film rights in Red Planet), was a purpose which was impossible to fulfil at the time the agreement was entered;
(ii)The events which transpired between the parties did not come within the terms of the Second Loan Agreement – the agreement obliged the financier to lend the money not to provide financial accommodation; and
(c)The whole transaction encompassed by the various agreements identified above was a sham, the hidden transaction (if one need be found to exist) being to generate “real money” to ensure those promoting, financing and operating the scheme were paid.
Counsel developed those submissions, both in writing and orally. Later I will refer to what he said. But what I have said is enough to explain the broad scope of the attack on WA’s case at trial.
On the appeal, the learned trial judge having found – as I shall explain in a moment - that the arrangements were not a sham, and that a loan of $2.5 million had been made at the outset, the appellants’ abandoned the first and third aspects of their attack; and abandoned several aspects of the attack on the second agreement which had been made at trial. Of six grounds of appeal set out in the amended notice of appeal, only two were ultimately pursued. They were that the learned trial judge erred -
4.Further in light of grounds 2 and 3 above, … in failing to find that no consideration passed from the Respondent to the Appellants for the loan agreement dated 27 February 2001.[4]
5. In finding that the loan agreement dated 27 February 2001 was in the nature of a refinance or reworking, as such findings were against the weight of evidence.
[4]As the appeal was argued, the reference to grounds 2 and 3 may be ignored.
Counsel submitted that the thrust of those grounds were summarised in this paragraph of his written submissions:
… the trial judge fell into error … by failing to find, contrary to the evidence, that the second loan agreement was not a re-financing and that there was not a total failure of consideration in respect of the second loan agreement.
Counsel indicated at the outset that he wished to argue that no loan was made and no financial accommodation was provided to Interactive, for which reasons there was a total failure of consideration on the part of WA. He later clarified what he wished to argue, saying that his clients contended that WA had not made a loan, nor provided any refinancing, directly or indirectly, to Interactive. Accepting that WA could have paid out Finance, there had to be a real transaction whereby an existing liability was discharged. It was not something that could be done in the mind of one person – that is, the mind of Jarrouge, principal of both Finance and WA.
Later in three reasons I will describe the submissions which counsel advanced in greater detail. For the moment, nothing more need be said.
The reasons for judgment at trial
In light of the confined matters argued on the appeal, it is unnecessary to refer to all the findings which were critical to the decision of the learned trial judge. Nonetheless it is desirable to set out some of what his Honour said. I begin with his expressed understanding of the issues which required resolution:
5The defences, as summarised in the defendants’ final submissions, were as follows:
(a)There was no loan made pursuant to the first agreement and accordingly nothing was refinanced in the loan agreement.
(b)In any event, the second loan agreement did not give rise to any enforceable obligations as its prescribed purpose was a purpose which at the time could not possibly have been fulfilled and because WA did not lend money as it was required to do pursuant to the terms of that agreement.
(c)The various interrelated transactions of which the first agreement and the loan agreement form a part are all a sham masking the true transaction (if it is necessary to establish a hidden underlying transaction), which was to generate “real money” for the purpose of payment to those promoting, financing and operating the scheme.
That statement of issues broadly corresponded with the issues identified by the appellants’ counsel at trial.
In resolving those issues his Honour said this:
57Tax arrangements of the kind in question typically involve elements of artificiality and elements of façade. This is because whilst the commercial objective is to generate tax deductions, the furtherance of that objective is seen to be assisted by the creation of documents suggesting some other commercial objective. Such transactions also often involve “flexibility” in relation to documentation, including backdating or other purportedly retrospective alterations. In this context, the separate issues of:
• whether the transactions were a “sham”,
• whether the obligations were indeed performed, and
•whether the transactions were what they purported to be, in the sense that they were of the character which gives rise to the tax benefits sought,
can become confused.
62In this proceeding the defendants take the defence that no loan was in fact advanced by the lender. Their position is similar to that taken by defendants in other proceedings where, in the course of tax minimisation schemes, round robin transactions were undertaken by virtue of which sums purportedly advanced by lenders return at the end of the round robin to those same lenders …
Acting upon what had been said by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd,[5] his Honour concluded that Finance had loaned Interactive money pursuant to the first agreement:
66But just as in Equuscorp, Finance applied the money lent as required by Interactive in payment of the purchase price to the extent of $2,500,000. The fact that Walker or other companies in the Village group determined to return that sum to Finance the same day, pursuant to arrangements between them and Finance, however they are characterised, does not alter that position. The transactions might result in the conclusion that the tax consequences desired were not achieved, but they do not result in the conclusion that no loan at all was made, unless the transactions were indeed a sham, which is a separate issue.
67The transactions at settlement, although perhaps accurately described as “artificial”, were consistent with the agreements made, as explained by Nader and adopted by counsel for WA, and, whilst the transactions were cash neutral for Finance on the settlement day, Finance or WA did subsequently pay substantial sums to Walker or at its direction. The sums so paid were agreed and calculated in a manner not inconsistent with the formal written agreements.
[5](2004) 218 CLR 471, 486–487, [46]–[48].
Then his Honour addressed the second agreement, though very shortly. He said this:
68I reject the defences based upon the proposition that the second loan agreement was ineffective. What was put in that respect was that the purpose was misdescribed in that it was said to be for the acquisition of film rights when, assuming Finance had made a loan, it was a refinancing.
69In my view nothing can turn on any such error, even if it is properly described as an error. Atherton was advised in writing that the transaction was a refinancing. On behalf of Interactive and on his own behalf as guarantor he agreed to it.
70It was also suggested that Finance had no right to require the refinancing pursuant to clause 48 of the first loan agreement. This is irrelevant. Whether it had the right to require it or not, Interactive and Atherton agreed to it.
By so disposing of the matter, his Honour addressed the first aspect of what he had noted as being the second defence pursued at trial – that is, the argument that the second agreement did not give rise to any enforceable obligation because its prescribed purpose was not one which at the time could have been fulfilled. His Honour evidently concluded that the true nature of the agreement, as disclosed by consideration of the objectively ascertainable circumstances, was compatible with the language of the offer to borrow dated 27 February 2001.
But the question arises whether his Honour’s reasons fully addressed what he had noted as being the second aspect of the second defence pursued at trial – that the second agreement did not give rise to any enforceable obligations ‘because [WA] did not lend money as it was required to do pursuant to the terms of that agreement.’ To that question I will return later in these reasons.
His Honour thereafter dealt at length with the matters relied upon by Interactive and Atherton to show that the overall scheme, including the two agreements, was a sham. Several of the matters relied upon were relevant to the second agreement. His Honour described some of the propositions advanced for the appellants, and his response in each instance, as follows:
73…
The fact that Jarrouge in his own mind, and in his own records, treated the loan as one owed to WA: Jarrouge did not thereby betray an intention not to create a contract between Finance and Interactive.
…
The existence of the second loan agreement, which (it is said) “served no apparent purpose”: The second loan agreement served the purpose of addressing the three deficiencies which Jarrouge saw in the first loan agreement and to which I have referred.
I should also refer to this passage in his Honour’s reasons:
79 …
(a)I am satisfied that Jarrouge did intend that the first agreement and the second agreement should have legal effect. Jarrouge did not intend that Finance would undertake an obligation to lend $5m under the first agreement, but he did intend it to lend $2.5m, and it did do so. The second agreement accurately reflected the loan made.
(b)The conduct of the parties to the two agreements is only consistent with a conclusion that they did intend that the agreements would have legal effect. Jarrouge pursued the recovery of interest on the $2.5m advanced and Interactive paid substantial sums for interest on that basis. The settlement with the Australian Taxation Office is not inconsistent with this position.
(c)Atherton has chosen not to give evidence of his intention. An affidavit which he swore in the Federal Court proceeding was tendered before me. That affidavit is not consistent with a conclusion that he and his company did not intend to create relationships of borrower/guarantor and lender with Finance and WA.
The pleadings and the conduct of the trial
I noted earlier that questions arose on the hearing of the appeal whether the matters which the appellants wished to argue were within the pleadings or had been raised at trial; and I mentioned the concession made by respondent’s counsel. This is a convenient point at which to say why, in my opinion, the concession was rightly made; whilst at the same time to note the substantial differences in the way in which the appellants addressed the second agreement at trial and then on appeal. I begin by referring to the pertinent pleadings.
2G.On or about 19 January 2001 pursuant to clause 48 of the first loan agreement [Finance] notified [Interactive] that [Finance] required [Interactive] to re-finance the amount of $2,500,000 advanced pursuant to the first loan agreement.
Particulars
Letter dated 19 January 2001 from [WA] on behalf of [Finance] to [Interactive].
2H.Further or alternatively, by the said letter dated 19 January 2001, [Finance] requested [Interactive] to re-finance the amount $2,500,000 advanced pursuant to the first loan agreement by executing and returning an Offer to Borrow in the form enclosed with that letter, thereby inviting [Interactive] to offer to do so.
2I.… between 19 January 2001 and 27 February 2001 [Interactive] as borrower and … [Atherton] as guarantor executed an Offer to Borrow … and forwarded it to [WA].
2J.On or about 27 February 2001 [WA] accepted the.. Offer to Borrow.
2K.Upon acceptance … an agreement was made between [WA] as lender, [Interactive] as borrower, and [Atherton] as guarantor..
6.On or about 19 January 2001 [WA] made a loan or provided financial accommodation to [Interactive] in the sum of $2,500,000 (the “loan”).
Particulars
The sum of $2,500,000 was credited to [Finance] and applied in discharging [Interactive’s] obligations to [Finance] pursuant to the first loan agreement.
[Interactive’s] obligations to [Finance] pursuant to the first loan agreement were discharged and refinanced by the plaintiff in accordance with clause 48 of the first loan agreement.
These matters are to be inferred from the following facts and circumstances:
(a)[Finance] and [WA] wanted to re-finance the loan advanced under the first loan agreement and to do so using the second Offer to Borrow, as is evident from the letter dated 19 January 2001;
(b)The second Offer to Borrow was forwarded to [Interactive] and [Atherton] for that purpose as is evident from the letter dated 19 January 2001 and the minutes of meeting between Mr Brain and [Atherton];
(d)The second Offer to Borrow was not a request for an additional loan of $2.5 million or any other sum from [WA] in addition to the loan of $2.5 million under the first loan agreement, but was a request for re-financing the first loan agreement;
(e)As at 19 January 2001 [Interactive] was required to pay a further 48 monthly interest payments of $23,958.33 under the first loan agreement;
(f)The second loan agreement provided for the payment of those 48 monthly interest payments of $23,958.33;
(g)[Interactive] and [Atherton] executed the second Offer to Borrow and sent it to [WA] in the circumstances set out in paragraphs (a) to (f) above;
(h)[Interactive] commenced to pay and thereafter did pay 30 of 48 monthly interest payments of $23,958.33 under the second loan agreement; and
(i)[Interactive] ceased paying the remaining 48 monthly interest payments of $23,958.33 under the first loan agreement.
I go to the Amended Defence and Counter-Claim. Like the Statement of Claim, it was amended in the course of the trial so as to accord with the case as run.
Relevantly, the appellants –
· Pleaded that the scheme (as indicated by 24 specified matters) was a sham; that the first and second agreements were (as demonstrated by 11 particularised matters) an integral part of the scheme; and that the first agreement was in consequence void. [2AB, 2AC, 2AD[6]]
[6]This, and the numbers which follow, refer to the paragraphs of the amended defence and counterclaim.
· Admitted that the first agreement contained terms including the refinancing requirement terms. But denied that such terms had legal effect. [2B]
· Denied that Finance paid Walker $2.5 million on 30 June 2000 pursuant to the first agreement; and said that the purported payment of $2.5 million was part of the scheme and a sham. [2C, 2CB]
· Denied that the alleged payments of $2.5 million effectuated a loan by Finance to Interactive under the first agreement. [2D]
· Denied the making of an agreement between Finance and Nu-Pay concerning the provision of security.[2E]
· Denied that the payment by Walker to Finance of $6.26 million on 30 June 2000 was in part the provision of a security deposit under a Distribution Agreement made between Interactive and Nu-Pay. [2F]
Concerning Finance’s letter of 19 January 2001, pleaded the following:
·2G …
a. The matters alleged in paragraph 2G are denied;
b. The letter has been misquoted; and
c.There was no refinancing within clause 48 of the First Loan Agreement.
2HThe letter speaks for itself, but otherwise the matters alleged in paragraph 2H are denied.
· Admitted execution of an offer to borrow between 19 January and 27 February 2001, and that the same was forwarded to WA. [2I]
· Admitted WA’s acceptance of such offer. [2J]
· Denied that thereby the second agreement was made; and further alleged that the second agreement was part of the scheme, and a sham. [2k, 2KA]
· Admitted, substantially, the terms of the alleged second agreement; although not in the case of Atherton, in respect of whom the ‘do not admit’ formula was used. Stated that the loan was to be for the sole purpose of acquiring film rights in ‘Red Planet’. [4]
· In response to WA’s plea that on or about 19 January 2001 it made a loan or provided financial accommodation to Interactive in the sum of $2.5 million, pleaded the following:
6.a. They deny that on or about 19 January 2001 [WA] was obliged to provide financial accommodation for [Interactive];
b.They further deny that on or about 19 January 2001 the Plaintiff loaned [Interactive] $2,500,000 or any sum;
c.They say that –
i.no sums were actually loaned by [WA] to [Interactive];
ii.no sums were actually paid by [WA] to [Finance] for [Interactive] to discharge a (purported) loan effected under an agreement dated 30 June 2000;
iii.no sums were actually loaned to the [Interactive] by [Finance] under an agreement dated 30 June 2000;
iv.at all material times [WA], by reason of the knowledge of its common director, Jarrouge, was aware of the matters set out in (i) and (ii) and (iii) above; and
v.in these circumstances, (unknown to [Interactive and Atherton]) the transaction alleged in paragraph 6 thereof did not take place.
d.They otherwise deny each matter alleged in paragraph 6.
and
6A.To the extent that the particulars in paragraph 6 contain material allegations, those allegations are denied.
· Admitted making monthly payments to WA, but denied that such payments were made pursuant to the second agreement. [7]
· Denied any liability – as principal and guarantor respectively – to make any payment to WA. [10, 11]
By its counter claim, Interactive pleaded that amounts paid under the two agreements, totalling in all $898,317.13, had been received by WA to its benefit, and had been paid for no consideration. In the event, WA was said to be liable to Interactive in that amount as money had and received; or else it was liable (for different reasons) in the amount of $25,000 or $50,000.
WA filed a reply. I need not refer to much of its detail. It took issue with the appellants’ pleas that the first agreement was not intended to create legal relations, that the agreement was part of a tax minimisation scheme and that the scheme was a sham. There were a number of aspects to the last-mentioned denial. It also put in issue the appellants’ plea that the second agreement was a sham. Then, with respect to the alleged refinancing of the loan made by Finance, it pleaded the following:
2.As to paragraph 6(a) and paragraphs 6(c)(i) thereof, [WA] says that [Interactive and Atherton] were obliged to accept a re-financing of the [Finance] loan pursuant to clause 48 of the first loan agreement, alternatively, [Interactive and Atherton] agreed to make the second Offer to Borrow pursuant to [WA’s] invitation to do so, as alleged in paragraphs 2H and 2I of the further amended statement of claim.
2A.As to paragraphs 6(c)(ii) thereof, [WA] refers to paragraph 6 of the further amended statement of claim and the particulars given thereunder.
3.As to paragraph 6(c)(iii) thereof, [WA] refers to paragraph 2D of the further amended statement of claim.
Finally, [WA] admitted receipt of the entirety of the amount of $898,283.63 from Interactive; and it pleaded that it had been entitled to receive the same:
7.It admits receipt of the payments in the total sum of $898,283.63 from [Interactive] as set out in exhibit D-2 (amended) and says exhibit D-2 was replaced by exhibit D-2 (Amended) (T161) and otherwise denies the allegations in paragraph 15.
The matters pleaded by paragraphs 2AB, 2AC, 2AD, 2B, 2C, 2CB, 2D, 2E, and 2F of the defence went to the first and third of the issues agitated by the appellants at trial which I identified at [25]. Each of them impacted upon the second agreement, but not in a way that was pursued on appeal.
Then it is necessary to consider the matters pleaded by paragraphs 2G, 2H 2I, 2J, 2K and 2KA of the defence. It was there admitted, in substance, that an offer to borrow had been executed and accepted. It was denied that what occurred was a re-financing within clause 48 of the first agreement, or that an agreement had thereby been made. It was asserted that the transaction was all part of a sham. Of the matters put in issue, nothing[7] remained on the appeal.
[7]Although there was reference to deficiencies in the letter of 19 January 2001.
Paragraph 4 of the defence raised a matter which was agitated at trial, but which was specifically abandoned on the appeal: that is, that the prescribed purpose of the loan was for an impossible purpose – the acquisition of film rights which had already been acquired. That point was the subject matter of sub-paragraph (b)(i) of the appellants’ submissions at trial, noted at [25] above.
Then it is necessary to consider paragraph 6 of the defence. Subparagraphs b, c i and c iii focused upon two propositions. First, that there had been no loan at the outset, so there was no obligation upon Finance for WA to take over in January 2001. Second, that whatever transaction there had been in early 2001, it was not a loan by WA to Interactive. The second, but not the first of those propositions was in a way pursued on the appeal.
I go to subparagraph c ii. It focused upon no sum having been ‘actually paid’ by WA to Finance – this being, as I perceive it, a plea that there was no evidence of a transaction whereby WA made a payment to discharge Interactive’s loan from Finance. At least to an extent, the subparagraph put up and then knocked down a straw man. For it was not WA’s case that a cheque or cash had changed hands between it and Finance; or that the alleged transaction was reflected by an electronic banking transaction.
The subparagraph was, however, arguably capable of wider application, so as to stand as a denial that there had been provision of an accommodation in any form which had the effect of discharging a liability of Interactive to Finance. Accordingly, I consider that a submission to that effect was within the pleadings.
Counsel for the appellants submitted that the issue just mentioned had been addressed in the evidence and in submissions at trial. In my opinion it is clear that it was not comprehended by the issues outlined at trial by counsel which I noted at [25].
Counsel also referred to other paragraphs of the written submissions.[8] I think it is clear that they did not raise the issue.
[8]The submissions to which he referred were as follows:
24. The Second Loan Agreement brought by the plaintiff to the surface in respect of the series of alleged transactions relevant to this proceeding. The reasoning for the existence of the Second Loan Agreement is controversial. It has been described by Mr Jarrouge both as a refinancing of the First Agreement and also as a correction of the clearly incorrect terms of the unstamped First Loan Agreement.
25.Examination of the face of the Second Loan Agreement indicates, relevantly, that:
(a)It documented a loan for 2.5 million between the plaintiff and the first defendant (not the provision of financial accommodation);
(b)The sole purpose of the loan was to acquire the film rights in the film Red Planet;
(c)The loan monies must not be used for any other purpose other than the acquisition of the film rights – clause 13.1;
(d)The plaintiff was directed by the first defendant to pay directly to the purported vendor of the film rights the amount of the loan – clause 29;
(e)The Distribution Agreement is expressly referred to – clauses 31 and 36; and
(f)The terms of the agreement supersede all prior representations, arrangements, understandings and agreements between the parties and sets out the entire and exclusive agreement and understanding between the parties – clause 49.
26.The plaintiff has sued based upon the terms of the Second Loan Agreement. The defendants submit that the Second Loan Agreement ought be interpreted contra proferentem. It was the plaintiff who prepared the Second Loan Agreement, and it was the plaintiff who presented the second Loan Agreement to the defendants.
27.On the evidence it is clear that:
a)No loan of $2.5M was ever made pursuant to the Second Loan Agreement, at most it was an internal refinancing between two NPV group entities;
b)The loan was not and could not be for the purpose of acquiring the film rights – those rights had, supposedly, already been acquired, charged as security to NPV Finance Pty Ltd and licensed to Nu-Pay view Entertainment Pty Ltd pursuant to the Distribution Agreement; and
c)There was no money paid to the purported vendor of the film rights.
Counsel referred, further, to oral submissions advanced at trial. I have studied the passages to which he referred. As I see it, in all that was said there were only two sentences of any relevance:
It is pleaded in the particulars to 6 that the loan was discharged. There is no evidence absolutely that the first loan was discharged and insofar as it was refinanced, it was an internal arrangement not done pursuant to clause 48.1 or 48 at all and that is before you get to the question of whether or not you can rely upon the first loan agreement.
In the event, although in my opinion the principal issue which the appellants wished to argue on the appeal was far from clearly articulated by the defence, and although it was scarcely agitated at trial – which was dominated by arguments about sham, the argument that there was no loan at the outset, and to a lesser extent by a number of arguments concerning the second agreement which were not pursued on the appeal – counsel for WA was in my opinion correct to concede that the issue was alive on the pleadings, and was able to be agitated on the appeal.
I should add this. In argument it was submitted, in effect, that the learned trial judge had understood the issue to have been one requiring his determination. That was to be discerned from his identification, as a matter for his determination, of the proposition that the second agreement did not give rise to any enforceable obligations ‘because [WA] did not lend money as it was required to do pursuant to the terms of that agreement’. Then it was submitted, in effect, that having understood the issue to be one requiring his determination, his Honour had simply failed to deal with it. But I should think that his Honour was referring, in the quoted passage, to the submission that the agreement, in terms, required a loan by WA to Interactive for a stated purpose; and that there had been no such loan. I doubt that it had anything to do with the two sentences in counsel’s oral submissions to which I referred a few moments ago. So understood, his Honour, once having concluded that all parties understood the transaction to be a re-financing, was apparently satisfied that such a re-financing had taken place.
The likely explanation why the learned judge did not address the matter shortly raised in oral submissions is, I think, that at trial it was virtually ignored. There was evidence touching the point. It was adverted to by counsel on the appeal. But it emerged in the course of random cross-examination, or cross-examination apparently directed to other issues. It is entirely consistent with this hypothesis that his Honour dealt at length with the issues of ‘no loan at the outset’ and ‘sham’ – issues which dominated the trial - the one before and the other after he dealt with the second agreement; but that he dealt scarcely at all with argument directed to the second agreement.
In all, whilst counsel for WA was right to make the concessions which he did, analysis of what was agitated at trial shows that the argument which occupied centre stage on the appeal was a sideshow at trial. To my mind, regardless of the merits of the matter raised, the sequence of events emphasises the opportunistic character of the case which was advanced on the appeal.
Appellants’ submissions
I have already mentioned, in some instances specifically, in other instances glancingly, arguments advanced at trial which were not persisted in for the appellants on the appeal. The ‘no loan at the outset’ and ‘overall sham’ arguments were not pursued. Neither did the appellants rely upon the argument that the second agreement was not the outcome of a refinancing requirement under clause 48 of the first agreement because clause 48 did not say anything about internal refinancing. Again, counsel specifically abandoned the argument, advanced at trial, that WA must fail because the purpose stated by the offer to borrow was unachievable, and he appeared to concede that the claim should not fail because the intention of the parties, objectively ascertained, was not that a loan should be made to Interactive, but rather that WA should provide Interactive with re-financing or an accommodation.[9]
[9]Counsel did contend, however, that the purported exercise of the requirement to refinance, communicated by the letter of 19 January 2001, was defective in several respects.
Against the background of what was not argued, counsel’s principal submission was a narrow one: that there was just no evidence that any refinancing, or provision of an accommodation, took place. There was no documentation as between WA and Finance to show such a thing, there were no accounting records of Finance or WA evidencing such a transaction, there was no communication by Finance to Interactive which informed it that the latter’s liability under the June 2000 agreement had been discharged. On the other hand, there was documentation which showed that Jarrouge had an understanding of events which was at odds with the second agreement operating as WA claimed that it did.
Inconsistently, as I perceive it, with counsel’s concession that WA would have been entitled to succeed if it showed there to have been a refinancing or provision of accommodation, counsel referred to what was said by the High Court in Equuscorp Pty Ltd & Anor v Glengallan Investments Pty Ltd.[10] He referred also to the reasons for judgment of Edmonds J in Raftland Pty Limited as Trustee for the Raftland Trust v Commission of Taxation.[11]
[10](2004) 218 CLR 471, 482–483, [31]–[33].
[11][2007] FCAFC 4, [45]. The High Court granted special leave to appeal in this matter on 21 June 2007.
As I understand it, the proposition advanced in reliance on Equuscorp and Raftland was that the offer to borrow which was executed in early 2001 stood for what it said it was – that is, the complete repository of the agreement between WA, Interactive and Atherton; and, as a corollary, that the agreement at least required a loan by WA to Interactive, though not a loan for the stated purpose. I do not see how that proposition could stand with his concession, in substance, that WA should have been entitled to succeed if there was evidence that the loan by Finance to Interactive had been discharged, whether by a loan or by re-financing, direct or indirect, to Interactive’s benefit.
Counsel for the appellants also argued – and here he addressed an argument advanced for WA – that the transaction in early 2001 could not be characterised as a novation, or something akin to a novation. He submitted that novation was not pleaded and that in any event the contract as pleaded required the discharge of the debt owed by Interactive to Finance.
One consequence of the principal argument advanced by the appellants was - assuming the argument to be correct - that the wrong plaintiff had sued. Accepting that the first agreement had involved the making of a loan, and that it was not part of a sham, it would follow – subject to the possible availability of a limitation defence, subject potentially to argument as to the textual adequacy of the agreement, and subject to possible defences which I shall later mention – that Interactive remained liable to Finance. Presumably neither Atherton nor Interactive was much worried about the prospect of being sued by Finance, the former because of the potential issues to which I have just referred, the latter because he was not a guarantor of Interactive’s liability.
I turn to the submissions advanced on behalf of WA. Counsel submitted that:
· The second agreement reflected the re-documentation of a defective first agreement which had never been stamped.
· Both parties intended that both the June 2000 and January 2001 agreements should be binding.
· Objectively assessed, there was no room for argument what each party intended to get from the respective agreements. As to the second of them, the intent of each party, objectively ascertained, was that there was to be a refinancing, the consequence of which was to be that WA became the creditor in lieu of Finance. It was not contemplated that new funds were to be advanced. The purpose clause was an irrelevant restriction. The borrower would not call for funds and the lender would not advance any. Further, the film rights were the same in each instance. There was no question of the acquisition of additional film rights. WA did not nominate a security under clause 36.1 of the second offer to borrow. Security had already been provided to Finance. The application of the security was a matter for internal reconciliation between Finance and WA.
· It was open to the Court to examine the objective circumstances in order to determine the purport of the second agreement. Especially that was so where the parties knew that the literal terms of the agreement were impossible to perform and did not accord with what they wanted to do.[12] So examined, the agreement made in early 2001 was for a refinancing of Interactive’s loan from Finance.
[12]Counsel cited Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989, 997, Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 350 (Mason J), Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 462, Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98, 114-115 (Lord Hoffmann) and Chitty on Contracts, (29th ed), Vol 1 12-113.
· Finance and WA was each the alter ego of Jarrouge. The two companies had one directing mind. There was no question of the one company not knowing what the other was doing.
· The circumstances that there were no correlative journal entries which showed a discharge – by moneys flowing from WA - of the liability of Interactive to Finance, and that there were late-made entries in WA journals which purported to show that WA had been the lender from 1 July 2000, were a ‘a bit of a red herring’.
· From July 2000 WA had assumed liability to pay the distribution guarantee, regardless that Nu-Pay had looked to Finance in that connection.
· The conduct of the borrower – until July 2003 – and of WA was only consistent with the implementation of the refinancing.
· If and insofar as it was contended for the appellants that there had been no refinancing because the loan to be made was not for the purpose of acquiring film rights, the contention failed because the refinancing was of the transaction governed by the first agreement.
· The transaction could properly be characterised as a novation, ‘or something equivalent to or akin to a novation’.[13] Whilst the documentation had been ‘clumsy’, the objectively intended effect had been achieved. That effect did not depend upon the nomination clause in the 2001 offer to borrow,[14] upon which WA did not rely.
· As to the counter-claim, if WA had not yet discharged Interactive’s liability to Finance, the second agreement nonetheless remained on foot. It had not been discharged by breach or frustration.[15] For that reason the counter-claim for money had and received was unavailable.
[13]Citing Caltex Ltd v Federal Commissioner of Taxation (1960) 106 CLR 205, 220 (Dixon CJ); also Commercial Bank of Tasmania v Jones [1893] AC 313, and Bailey, ‘Novation’ (1999) 14 Journal of Contract Law 189.
[14]Clause 19.2.
[15]Counsel cited Baltic Shipping Company v Dillon (1993) 176 CLR 344, 355-356 (Mason J).
Disposition of the appeal
For the reasons which follow, I consider that the parties agreed in early 2001 that the loan which had been critical to effect the acquisition of film rights, such loan having been made by Finance to Interactive, was to be refinanced by WA in place of Finance, the liability of the latter to Finance being discharged by WA. I further consider that the evidence tends in favour of a conclusion that Interactive’s liability to Finance was so discharged. It follows, in my opinion, that the appeal should be dismissed.
The meaning of the second agreement
The principal submission advanced for the appellants was that WA’s claim must fail because there had been no loan or re-financing, directly or indirectly – no ‘real transaction’ – whereby Interactive’s liability to Finance had been discharged. For reasons already discussed, it sat ill with that submission to also contend, as the appellants did, that the second agreement – purpose aside – was to be found in the 2001 offer to borrow (‘the 2001 offer’); the consequence presumably being that such agreement required a loan by WA to Interactive, a loan which was not shown to have been made.
Although the latter contention, as the appellants conducted the matter, should be characterised as a subsidiary argument, logically it should first be resolved. What did the parties agree to do? Not until that question is answered can consideration can be given to the question whether WA performed its part of the bargain.
I described at [66] my conclusion as to the nature of the second agreement. These are my reasons for that conclusion.
Courts should strive to give effect to the perceived – not subjective – intention of the parties to an agreement. That has been said to be particularly so in the case of commercial contracts.[16]
[16]See Hillas & Co Ltd v Arcos Ltd (1932) 38 Com Cas 23, 39; The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437 (Barwick CJ); Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-996; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461 [22].
In the present case, objectively ascertained, there could be no doubt that what the parties intended to do in early 2001 was to enter into a legally binding agreement by which, in lieu of Interactive being indebted to Finance for $2.5 million, it became indebted to WA in that amount, due allowance having been given for payments of interest made in respect of the period July 2000 to January 2001. Negatively, it was not intended, on objective analysis, that WA lend Interactive an additional $2.5 million for the acquisition of film rights or for any other purpose. The positive intention was ascertainable at least from the following considerations:
· The fact of the first (loan) agreement.
· The making of the loan by Finance in consequence of the first agreement.
· The execution of the Representation and Distribution Agreements.
· The deployment of the loan in the acquisition of film rights in ’Red Planet’.
· The payment of interest on the loan.
· The absence of any request by Interactive for further loan moneys current as at January 2001.
· The utter improbability that Interactive would have wished to seek further loan moneys for the acquisition of film rights in ‘Red Planet’ in early 2001. It was objectively the fact that the film had proved to be a flop, and informed opinion held that things would get no better. There were in evidence minutes of a meeting attended by Atherton, Brain and another investor in Brisbane on 6 February 2001.[17] The minutes make it clear that this was prior to the 2001 offer being executed. They also show that Atherton and the other investor expressed ‘grave concern’ at the ‘poor box office performance of Red Planet’, that it was reported that executives of the Village Group were of opinion that, whatever was done, the film would be ‘a box office disaster in Australia’, and that it had been ‘mercilessly reviewed’.
[17]AB 419–420.
· Atherton’s acknowledgment, in early February 2001, before he signed the offer to borrow, that he had received ‘loan documents from the original financier which appeared to assign all or part of the original loan to another entity’; his being advised by Brain that ‘the original Offer to Borrow conveyed this right to the lender’; and his being assured by Brain that, as the latter understood the contract, ‘the terms of the original loan could not be increased’.[18]
· The fact that Interactive had proved to be an unreliable debtor, and Jarrouge had been unable to arrange any level of external funding for it subsequent to 30 June 2000.[19] That circumstance, known to both parties, made it entirely unlikely that an additional loan would have been sought or, if sought, granted.
· The letter of 19 January 2001 which accompanied the offer to borrow. For all its deficiencies, to which I will refer in a moment, it identified the purpose of the intended transaction as a ‘re-funding’ which had been ‘internally arranged’. Consistently with that purpose, it revealed, as did the offer to borrow itself, that Interactive was to be given credit for the interest payments which it had already made.
[18]Matters revealed by the Minutes of meeting attended by Brain, Atherton and Jones (another investor) on 6 February 2001. AB 419-420.
[19]Interactive seems to have been one of only two investors in ‘Red Planet’ for whom Jarrouge was unable to obtain any external funding.
The letter of 19 January 2001 was in error in that it -
· Was addressed to Atherton, not Interactive.
· Was headed ‘loan approval’. No loan was being sought.
· Referred to an application to borrow being finalised. There was no such application on foot.
· Referred to clause 48 of ‘our’ offer to borrow. It was written on WA letterhead, but the reference must have been, by intent, to clause 48 of the June 2000 offer to borrow which has been made to Finance.
· Referred to material gleaned from the non-existent application, and required the production of a driver’s licence and other material for identification purposes - that in respect of an existing client.
Some of the errors seem likely to have been attributable to the fact that the letter was in part an adoption of a pro forma which Jarrouge used when he had arranged external funding for an existing client.[20] That is an explanation, but not an excuse for part the language of the letter.
[20]See, for example, letters from WA to Paul Fredericks dated 18 August 2000 and to John and Marjorie Ward dated 28 August 2000. AB 320, 322.
For all that, in the two key respects which I earlier identified the letter conveyed the true intent of the proposed agreement: that it was to be an internal re-funding – that is, of the existing loan; and that credit was to be given for interest payments already made. Clause 48 of the first agreement, I add, to which the letter referred, was concerned with re-financing the loan amount, in whole or in part.
I pause to make this observation. The patent errors in the letter of 19 January 2001 reflected the fact, speaking generally, that the quality of the documentation produced by Finance and WA – presumably at the instance of Jarrouge as the guiding mind of those companies – was extremely poor. Some of the problem was perhaps attributable to documentation produced in haste. This, for example, might explain the offer to borrow dated 30 June 2000, which arguably misstated the loan amount and did not state the amount of the monthly payments of interest, the commencing date for payments, the day of the month on which payments were to be made or the amount of the final balloon payment. Again, almost certainly as an oversight, it did not specify Atherton as a guarantor.
But not all the inapt documentation could be excused as being the consequence of undue haste. In the period between October 2000 and January 2001 a number of documents – faxes and letters – were sent to Atherton and/or Interactive – on WA letterhead.[21] The documents, for the most part, stated a requirement by WA that overdue loan payments be made by cheque to it as payee, or by transfer into its bank account. It is unrealistic to imagine that these documents evidenced WA acting as the agent of Finance and on its behalf directing that payments past due to Finance be made to WA. They rather reflected the fact that Jarrouge, in a simplistic way, thought of WA as the ‘real’ lender in that period,[22] even though he understood that Finance was the lender of record, and that Finance and WA were separate legal entitles.
[21]Sometimes, to show carelessness added to apparent misunderstanding, the letterhead read ‘NPV WA Securities Pty Ltd’.
[22]In his evidence, he said repeatedly, in substance, that from 1 July 2000 he had thought of WA as the lender.
I return to my consideration of the meaning of the second agreement. I reject the contention that the 2001 offer to borrow, by speaking of a loan of $2.5 million by WA to Interactive, and by its references to the acquisition of film rights, was intractably at odds with the second agreement being construed as providing for the internal re-financing of the existing loan. It follows that the concluded agreement did not carry a meaning remote from the meaning of the agreement which, objectively ascertained, the parties intended to make.
Counsel for the appellants specifically conceded, as I have earlier said, that WA was not precluded from successfully suing on the second agreement because the stated purpose of the loan – the acquisition of film rights – was impossible. That concession itself showed acceptance that the offer to borrow did not mean, literally, what it said.
Once that concession was made, much that was arguably inapt in the offer to borrow fell away. The stated purpose of the loan fed at least into clauses 1, 2, 12, 27, 29, 30, 31,36 and 38.[23] Remove the necessity for the one, and the others fell away.
[23]Clause 38 was notable also for Interactive agreeing to appoint a representative of Finance - not WA – to be its proxy at meetings of investors. No doubt this was a careless transposition from an earlier document.
But in any event, I think that most of the clauses to which I have just referred, although on their face prospective in character, should be regarded as a clumsy attempt to ensure that WA succeeded to such rights as Finance already held under the concluded transaction.
There is then the description of the intended transaction as a loan. It was in the nature of a label for what the parties were agreeing to do. I do not think that it is necessary to decide whether or not it could be made to fit a re-financing of the existing loan, or the provision of an accommodation. The affixing of a label will not stand in the way of determination, by orthodox methods, of the true nature of an agreement.[24]
[24]Ansett Australia Holdings Ltd (Subject to Deed of Company Arrangement) and ors v International Air Transport Association [2006] VSCA 242, [88] (Nettle JA). The High Court has granted leave to appeal in that matter, but the principle stated by his Honour is, I think, unexceptionable.
In my opinion, nothing said in Equuscorp[25] in the passage cited by appellants’ counsel stands opposed to the conclusion which I have reached. There, the investors sought to argue, in the face of written agreements, that their true agreements with the other party were wholly oral, were different in content, and had been reached prior to the execution of the written agreements. That was not WA’s case.
[25](2004) 218 CLR 471.
Neither, in my opinion, could anything be made of the cited passage in Raftland,[26] in which Edmonds J simply set out a submission made by counsel. WA advanced its case on what it submitted was the proper construction of the offer to borrow.
[26][2007] FCAFC 4.
For the sake of completeness, I should add this. In my opinion it is not decisive whether or not the second agreement be treated as flowing from an exercise of Finance’s right under clause 48 of the first agreement. The reference to clause 48 in the 19 January letter, on the other hand, was one matter bearing on the objectively ascertainable intention of the parties when they entered into the second agreement.
Discharge of Interactive’s liability to Finance?
I go to the appellants’ principal argument. Although it was advanced as a submission that, viewed as a refinancing agreement, there was nothing to show that WA had discharged Interactive’s liability to Finance, the true question for appellate purposes is somewhat different. It may be formulated as follows: Did WA prove that it gave consideration for the second agreement in the form which it pleaded – that is, by discharging Interactive’s liability to Finance? I earlier expressed my conclusion that WA had done so. These are my reasons for so concluding.
First, although Jarrouge exhibited a minimal understanding of relevant legal principle, he knew that Finance was the lender of record as at 30 June 2000. He also knew, as he said in cross-examination, that its liabilities and those of WA were different. This implies an understanding on his part that Finance and WA were distinct legal entitles.
Second, it is clear that the 2001 offer to borrow identified WA as the new lender, and that in respect of the amount originally lent by Finance. There being no suggestion, for reasons which I have explained, that the loan amount was to be doubled, and the letter of 19 January 2001 having spoken of ‘refunding’ having been ‘internally arranged’, it is clear that Jarrouge – and thus both WA and Finance – intended that WA should become the lender of record. It could only assume that position if Finance ceased to do so.
Third, in mid 2001 or thereabouts Jarrouge caused journal entries to be made in the books of WA which purported to show that WA had loaned $2.5 million to Interactive on 1 July 2000. This was consistent with Jarrouge’s simplistic view that WA had been, because he had intended it, the ‘real’ lender from that day. It was submitted for the appellants, in effect, that the 2001 agreement could not have brought about a discharge of the liability of Interactive to Finance because as Jarrouge saw it Finance had never been the lender. I do not agree with that submission. In the first place, Jarrouge’s evidence suggests that he knew enough about the distinction between Finance and WA as legal entities to realise that WA and Interactive had to execute documentation in order to make legal what he considered to be the reality of the situation. In the second place, although the WA journal entries reflected Jarrouge’s perceived reality rather than the legality of the position prior to the second agreement being made, the journal entry was plainly consistent with Interactive not being liable to Finance at least after the second agreement was executed. Suppose that Finance had brought this proceeding, suing on the first agreement. It would have been met by the second agreement as understood in light of the objective circumstances, by the fact that interest payments had been made to WA – not at Finance’s direction – for a period of nearly two and a half years from February 2001 – and by the journal entries.
Fourth, appellants’ counsel relied on the absence of correlative records in the accounts of WA and Finance which would confirm the discharge of Interactive’s liability to the latter by WA. That there was such an absence is not in doubt. But I consider that the WA journal entries, given their defects, are consistent with there being an arrangement between WA and Finance by which Interactive’s liability to Finance was discharged. It may be said, with some justification, that the combination of those entries and Jarrouge’s doubtful ability to fully grasp legal detail make such a conclusion uncertain. But in the end, the matter is one of probabilities, of determining whether, in a commercial setting, the parties achieved what, objectively, they intended.
Fifth, the absence of full documentation was unsurprising, even if it left a good deal to be desired. Jarrouge can be criticised for want of legal understanding, for confusing his perception of reality with legal reality, and for the simplistic inaccuracy of the WA journal entries. It may also be said that, as between Finance and WA, various matters – for instance, concerning the distribution guarantee – required adjustment; and that no documentation was revealed to demonstrate that such adjustment had been made. But the question remains whether, though with imperfections, there was evidence in writing or by conduct which justified an inferential conclusion, on the balance of probabilities, that WA discharged Interactive’s liability to Finance; and in my opinion there was.
Sixth, there was no evidence that, after February 2001, Finance ever made a request for payment pursuant to the first agreement. That does not of itself demonstrate that Finance’s liability under the first agreement had been discharged by WA. It may also be said that, even before February 2001, WA – not Finance – had made requests for payment to it of interest overdue under the first agreement. On the other hand, it is to be remembered that the early requests were made against the background that, as Jarrouge simplistically regarded it, WA had been the ‘real’ lender from July 2000.
Seventh, it is apparent that Jarrouge did intend to make WA the lender of record, as well as being (as he perceived it) the ‘real’ lender. It is noteworthy that he had the second but not the first agreement stamped. To operate in a sensible way, the second agreement required both that a liability arose in favour of WA, and that Interactive’s liability to Finance was brought to an end. The appellants’ case called for a conclusion, in substance, that Jarrouge had failed to establish that he had done what common sense suggests that he would have done as a sequel to preparation and execution of the second agreement.
Eighth, appellants’ counsel sought to make a good deal of Jarrouge’s evidence that he had intended from the outset to use WA as the lender for the ‘Red Planet’ loans, that from as early as August 2000 he had transferred moneys referable to the ‘Red Planet’ investment from Finance’s bank account to WA’s bank account, that in his mind he treated WA as interchangeable with Finance from 1 July 2000, that WA became a ‘contracting party’ in the present case from 1 July 2000, and that from ‘day one’ WA took on the obligations and debts of Finance. I consider, however, that the witness consistently drew a distinction between his perception of the reality of WA’s involvement on the one hand, and on the other hand the need to document WA’s involvement by ‘re-finance’ documentation.
Ninth, I think it is also significant that subsequent to the making of the second agreement WA, not Finance, made a considerable number of substantial payments to Strategic, and Walker in respect of Interactive. That seems to me to highlight the probability that the only extant debtor/creditor relationship between Interactive and a Jarrouge company from early 2001 was the relationship created by the second agreement. I note also evidence given by Jarrouge to the effect that all the financial dealings with respect to the ‘Red Planet’ investment went into WA’s taxation returns. Even assuming, which I do, that this extended to the period before the making of the second agreement, it is nonetheless inconsistent with there being an extant debt as between Interactive and Finance after February 2001.
Other Matters
I should shortly mention three matters.
First, not all the matters which have led me to infer that WA did discharge the debt owed by Interactive to Finance were particularised by WA in its statement of claim. But counsel ranged well beyond the particularised matters in their submissions whether the inference critical to the WA’s success should or should not be drawn. Further, it is said that where a plaintiff’s pleaded cause of action remains the same, a variation between particularisation of that case and the evidence will not disentitle the party to a verdict based on the evidence even in the absence of amendment of particulars.[27] Here, as it turned out, there was a deal of unparticularised evidence which bore upon the critical inference. I leave open the question whether the pleading in paragraph 6 of the statement of claim was, in any event, a matter for particulars.
[27]Dare v Pulham (1982) 148 CLR 658, Leotta v Public Transport Commission of New South Wales (1976) 9 ALR 437.
Second, I have earlier noted that there was argument whether the transaction which took place in early 2001 should be characterised as a novation. Argument against the agreement being so characterised centred on the proposition that, according to WA’s pleaded case, the first agreement was discharged by performance – that is, by WA paying out Interactive’s debt to Finance – rather than by contractual agreement.[28]
[28]See Caltex Limited v Federal Commissioner of Taxation (1960) 106 CLR 205, 227 (Fullagar J), 240 (Taylor J), 250 (Menzies J). Dixon CJ, 220, was of a different opinion.
Counsel for WA seemed to agree that there was a conceptual difficulty in pressing the novation – or ‘akin to a novation’ – argument. He accepted that if a first agreement is discharged by performance then usually there is not a novation. But he
argued that if, contrary to his clients’ pleaded case, it was concluded that Interactive’s liability to Finance had been discharged, but not by performance, then the transaction might be characterised as a novation.
Because, on the view I have taken, there was discharge of the first agreement by performance, the novation question – as the matter was argued – ceased to be a live one. Third, the conclusions which I have reached have depended on the case as pleaded and argued. The pleadings were a careful attempt to fit events into a legal framework. That said, WA’s case was articulated, pertinently, on a fairly narrow basis. An alternative view of the circumstances which might have permitted characterisation of the relevant transaction as a novation was not pleaded. Perhaps WA might have pleaded also, in the alternative, that the consideration which it gave should be taken to have been its agreement to hold Interactive and Atherton harmless in the event of suit by Finance. So it might be said, although in my opinion it has not in the end availed the appellants, that the case as pertinently pleaded was not unfavourable from their standpoint.
Orders
I would dismiss the appeal.
KELLAM JA:
I have had the considerable benefit of reading the draft judgment of Ashley JA.
For the reasons given by Ashley JA I agree that in early 2001 the parties reached agreement that the loan of $2.5 million between NPV Finance Pty Ltd and Interactive Network Services Pty Ltd was to be refinanced by NPV WA Securities Pty Ltd. Viewed objectively,[29] there is no doubt that at that time the intention of the parties was to enter into a legally binding agreement to that effect, giving credit for
payment of interest which had been made to NPV Finance Pty Ltd during the period 30 June 2000 and January 2001. Furthermore, for the reasons given by him, I respectfully agree with Ashley JA that NPV WA Securities Pty Ltd did give consideration for the agreement by discharging Interactive’s liability to NPV Finance Pty Ltd.
[29]Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165, 178-9.
DODDS-STREETON JA:
I have had the great advantage of reading the reasons prepared by Ashley JA. I agree that the appeal should be dismissed for the reasons stated by his Honour.
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